Tuesday 10 July 2018
[Sir David Crausby in the Chair]
Air Passenger Duty
I beg to move,
That this House has considered air passenger duty throughout the UK.
Good morning, Sir David. It is a pleasure to serve under your chairmanship.
Air passenger duty is a protracted issue that Parliament has had many opportunities to consider since its introduction more than 20 years ago. The fundamental premise of my party’s position on air passenger duty and the thrust of the debates throughout recent decades is the economic barrier and detriment that air passenger duty—it as an arbitrary charge on short-haul and long-haul flights—causes for our economy more generally, for our tourism industry and for connectivity within and outwith the United Kingdom. This is a timely opportunity for the House to consider the impacts of air passenger duty once again.
It would not be a debate if I did not intervene. Air passenger duty was introduced as an environmental tax to try to discourage people from using planes. Does he think it has worked at all in that function?
I am delighted to have an intervention so early and to have it from the hon. Gentleman. The answer is no—it has not worked to protect our environment at all. The Treasury call for evidence published as a result of the confidence and supply agreement states clearly:
“APD is a tax based on the number of chargeable passengers aboard an aircraft taking off from a UK airport, and is the only tax applied on air travel as the government does not apply VAT to airline tickets or levy a tax on fuel.”
Somebody who is interested in the environmental impacts of air travel would suspect that a tax might be attributed to fuel, given that the fuel causes the damage. When the Labour Government considered APD back in 2006, they felt they needed to strengthen the opportunity to protect the environment through air passenger duty. Department for Transport modelling indicated that, even if they were to proceed along the current path, there would not be a stabilisation of emissions until 2040. Does it work as an environmental protection? No, it does not. Does it work as an economic detriment to our country, our economy and our tourism industry? Yes, it does.
I pay tribute to those who have campaigned on this issue for much longer than I have. Northern Ireland has been enriched by the enthusiasm and passion of the campaign from Hospitality Ulster, the Northern Ireland Hotels Federation and the Northern Ireland airports. I have the privilege of representing George Best Belfast City airport in my constituency. We have Belfast International airport, some recreational spaces in Newtownards aerodrome and St Angelo, and the City of Derry airport in Londonderry. Airlines UK, a campaigning body that represents airlines across the United Kingdom, has provided much information. The House of Commons Library and the Tourism Alliance have also been very useful in providing information for this debate.
As I have mentioned, the confidence and supply agreement struck between my party and the Government last year specifically provided for a review of air passenger duty and of VAT on tourism and the hospitality sector. The issue crosses the entirety of our United Kingdom. Other Members here today will want to raise issues that are particular to Scotland and to the northern parts of England. Although this debate covers the whole United Kingdom, I will focus most of my remarks on the impacts of APD and VAT in Northern Ireland.
I congratulate the hon. Gentleman on securing the debate. As he has said, the issue affects other parts of the United Kingdom. A Fair Tax on Flying estimates that, since the measure was introduced, the residents of North Tyneside have paid more than £38 million in APD. Is that fair or commensurate with the economic problems that we face in the north-east when we need to increase our trade and let people go on hard-earned holidays?
The hon. Lady is entirely right. She indicates how APD acts as an economic barrier and a detriment. It curtails growth and success and stands in the way of business from the north of England to the south of England to other parts of the United Kingdom. It stands in the way of leisure pursuits and increases the costs on hard-working taxpayers and their money, whether it is for business or pleasure. She is entirely right. It is a barrier.
My hon. Friend knows that the UK has the highest flight taxes anywhere in the world. We surely need to look at that. Hopefully we are going to be in a post-Brexit situation, so we need to make sure we can attract businesses and more people into the country. Cutting the tax is one way we can do it.
The Minister does not need to be encouraged on the merits of leaving the European Union or indeed on the benefits, flexibility and freedoms that it will give us as a country to chart our own course and to set preferential tax rates that are beneficial and encourage growth, which I think must be a key factor for the Treasury.
I have mentioned the confidence and supply agreement and the call for evidence that was published. I understand that there has been extensive engagement, particularly from Northern Ireland industry, the airlines and all of those affected by this arbitrary tax. The consultation closed on 5 June and we look forward not only to the thoughtful engagement of the Treasury, but to its purposeful response. The issues that it took evidence on are the same issues that have applied to this debate for years. When the Treasury says that it wants to explore the economic impact of APD, it is exploring the same reports that were presented to it in 2011, 2013 and 2015—exactly the same reports carried out using exactly the same modelling—which indicate that scrapping air passenger duty would be a net gain to the UK Treasury. I do not say that superficially, but whenever we stand before a Treasury Minister or try to argue with the Treasury and say, “We want to have this cut for a boost,” they look at you and say, “This will cost us money. If we take from this pot, how will we supplement it in another way?” The call for evidence will show, as every economic forecast has shown, that there is a net economic benefit to the reduction of air passenger duty.
I congratulate my hon. Friend on securing this debate. Does he agree that the major competitor to all of Northern Ireland’s airports—International, City and Londonderry—is the one airport? Dublin Airport has now attracted tens of millions of passengers. It is one of the fastest growing airports in western Europe and it does not lead to APD in the Irish Republic. We need a very competitive industry. Cancelling APD would give our airports a magnificent advantage over Dublin.
My hon. Friend is right. I will come on to those Northern Ireland-specific issues, but first I will touch on the 2013 PricewaterhouseCoopers report. PwC uses—this will mean something to the Minister, and probably a lot to the officials sitting behind him, although it does not mean much to a layman like me—a computable general equilibrium model: exactly the same model that the Treasury uses when considering economic impacts. PwC updated its report in 2015, but the 2013 report was clear: scrap air passenger duty, and the Treasury will gain—not lose and claw back, but gain.
As a country we have gone from getting £343 million per year from air passenger duty in 1999, to £3.9 billion last year, with £4 billion estimated by 2021. When PwC updated its model in 2015, it said that there would be a direct boost to this country’s GDP of 0.5% in the first year, not a loss. How many times do we see newspaper headlines with every political decision that is having a detrimental impact on our GDP? Yet here is a simple and clear way that the Treasury could make a positive and progressive move that would lead to an increase in GDP in the very first year.
PwC said in 2015 that if we had done it that year, by 2020 we would have had 1.7% economic growth. That would have meant 61,000 additional jobs in this country, stimulation of our tourism and hospitality sectors, growth in business, 61,000 more families benefiting from a good income, 61,000 more families not otherwise relying on the state, and more revenue raised in tax than would be lost in abolition. If we can push one message, whether through the consultation, the call for evidence or the plethora of modelling and economic data that has been provided to the Treasury, it must be this: more tax revenue will be raised with the abolition of APD than its retention—an extra £570 million per year, had the decision been taken in 2015. That is not the £4 billion we are hoping to get, but £2 billion on top of that by 2020. That is a 50% increase, and were I a Treasury Minister I would jump at the chance.
Northern Ireland is, of course, close to our hearts. We have to look at the competitive disadvantage in Northern Ireland compared with our near neighbours in the Republic. Travelling from Belfast to Dublin airport is no different from travelling from Manchester to Birmingham. It is only 100 miles, so when someone is considering where to fly from and how much it will cost, the economic attractiveness of flying from Dublin is incredibly strong.
I do not put those figures forward to suggest that the UK tourism industry is in a bad place; it is not—we rank fifth out of 136 nations in travel competitiveness overall. However, on ticket price competitiveness, the Treasury report says we are 135th out of 136 countries. When someone is faced with the attractive economic proposition of travelling 100 miles down the road to Dublin, that is a barrier to growth in Northern Ireland, to additional connectivity, and to greater opportunity for leisure travel. It is frustrating and constraining the economic stimulus that we in Northern Ireland desperately need, and that our businesses crave.
In Northern Ireland we have had an 11% increase in travel, with 17% more air passengers going through our airports over the last five years. That sounds good, as the UK average is 22%, but what are Dublin’s figures? In 2014, the Republic of Ireland scrapped air passenger duty. From 2014 to 2018, the number of air passengers going through Dublin’s airports rose by 47%. That is an additional 9 million travellers, 1.2 million of whom come from Northern Ireland. That starkly illustrates what we are attempting to highlight. On average, 25% of the cost of a one-way short-haul ticket in this country is air passenger duty. It is not small beer; it is a considerable consideration for anyone seeking to travel.
The Northern Ireland Affairs Committee, which I served on during the time of the inquiry, has considered both the reduction and the abolition of air passenger duty, as well as a reduction in VAT. The debate does not focus on VAT but on air passenger duty. However, in our view the two are intertwined, and the Northern Ireland Affairs Committee agreed. The Republic of Ireland cut its VAT rate for tourism and hospitality, bringing it down to 9%. That means, again, that that industry has a competitive advantage. If somebody goes to visit the island of Ireland they will see our hospitality figures, hotel rates and so on with a significant uplift.
When the Republic of Ireland cut its hospitality and tourism VAT, there was a significant benefit to the economy again. For every percentage point dropped—and the rate went down to 9%—there was an increase of 1.7% in employment. That directly led to 4,800 new jobs in the Irish Republic, because it had the courage to cut the VAT associated with hospitality and tourism. The Northern Ireland Hotels Federation and Hospitality Ulster are clear that the economic benefit and growth created in the Northern Ireland economy through that simple reduction could result in 1,100 jobs.
I understand that we have two tax rates for VAT in this country—20% and 5%. We are constrained to those two at the moment, and even if we were not, we might not choose to have three, four or five because of the increase in burden. However, the Northern Ireland Affairs Committee was quite clear that the disparity makes a distinct difference when Tourism Ireland, which is charged with promoting tourism on the island of Ireland under the Good Friday agreement, is promoting Northern Ireland, as opposed to the Republic of Ireland.
I hope that the Minister will not only outline a timetable for considering the Treasury’s call for evidence, but show an earnest desire to take, once thoughtful consideration has been given to the mounting evidence that has been compiled over years, reasonable, beneficial, appropriate steps to stimulate the aviation sector across the United Kingdom, tourism and economic growth in Northern Ireland. I hope that we look at not only the specific calls of the Northern Ireland Affairs Committee on the abolition of APD and the reduction of tourism VAT, but other models as well.
One such model could be a route development fund. We could charge no APD for a three-year window. That would be a good way to test whether or not it is an economic barrier or detriment. There would be no loss to the Treasury on any new route, because it would just not charge for such a route. A route development fund would encourage growth and stimulate the sector to get business destinations, which we crave in Northern Ireland, such as Frankfurt in Germany, France or even transatlantic flights to the United States. We could give a route development fund three years to see whether it makes sense, and whether air passenger duty has been a significant barrier. Allow a route to develop without the threat of air passenger duty, allow it to stabilise and grow, and we believe that fruit would be borne through that sensible policy.
I am grateful to my hon. Friend for securing this important debate. It is a timely opportunity to remind everyone of the important work that is under way in relation to the consultation on APD and VAT in Northern Ireland, which he referred to. He talked about the general issues, but there are two crucial issues that will result in a change for Northern Ireland: first, we are in competition with Dublin airport; and, secondly, Northern Ireland is cut off from the rest of the United Kingdom by the Irish sea, and therefore we are much more dependent on air links. When the Treasury looks at APD, it must conclude that, to make Northern Ireland competitive and to sustain our economy, it must take action to deal with those two issues.
My right hon. Friend is absolutely right about the competition and the constraints put upon us as a region. I could not have put it better. We are set aside by the Irish sea, and we rely on air connectivity. We do not have the choice to search around for off-peak train travel, or to easily jump on a boat, only to find that the bus is not at Stranraer waiting for us. When we look at stimulating our economic growth, we have to recognise that we are at a distinct disadvantage because of the Irish border and the tax duty regime in the Republic of Ireland.
I know that other hon. Members will mention the other devolved regions, which have committed to remove air passenger duty. Whenever a devolved Administration gets into such a discussion with the Treasury, it will ask for the cost to be covered by the block grant. It has had such conversations with Northern Ireland and with the Scottish Government. If there is further devolution, it may have such conversations with the north of England.
The whole thrust of that approach is predicated on loss and on the Treasury not having something it otherwise would have had. If it is successful, Scotland, Northern Ireland or the north-east of England are not allowed to reap the rewards; they go back to the Treasury. We need confidence and optimism in this process. Evidence from across the United Kingdom shows that there are benefits. The Government must recognise our unique challenges and those of other parts of the United Kingdom.
I look forward to hearing what the Minister has to say. I have a Valentine’s poem for him. It was written by Pubs of Ulster—the predecessor to Hospitality Ulster—to one George Osborne in February 2015. I hope it adds a bit of levity to a debate that can be turgid when we get down into the figures. I think pragmatists can see what the answer is.
“Labour is red
Tories are blue
Here’s something important
That you need to do
Our VAT rate is crippling
Our ability to grow
It’s putting off tourists
To other countries they go
Please cut the VAT rate
And help us create
A competitive market
For our beds and our plates
As you know my dear Chancellor
You’re close to our hearts
But elections are looming
And you may depart
So as your last action
Before the big day
Please cut the VAT rate
And you may get to stay!”
That is a little bit of fun, but it lays out the Northern Ireland tourism and hospitality industry’s calls about VAT.
Air passenger duty is clearly a barrier to growth. I trust that the Minister will thoughtfully consider all the calls for evidence. We look forward to hearing a suitable response today and in the weeks to come. I hope that, come the autumn statement, we will be in a position to make some sensible and serious proposals.
It is always a pleasure to follow my hon. Friend the Member for Belfast East (Gavin Robinson), who made a detailed, informative presentation about air passenger duty. I commend him for his choice of tie colour. There is no better colour to wear as we approach 12 July than the one he is showing, not only to Westminster Hall but to the world. Well done to him. I hope he will be wearing the same tie—perhaps not exactly the same tie—in the run-up to the 12th.
I thank my hon. Friend for obtaining this debate and for his detailed presentation. The Democratic Unionist party has been trying to make progress on this issue for many years. He has outlined the facts. He is correct that the stats are sometimes a bit turgid, but they underline the importance of this issue. UK air passenger duty is currently the highest tax of its kind in the EU. That causes us some concern—not because it is about the EU, but because it gives us a comparison across the whole of Europe. The next-highest air passenger duty in the EU is Germany’s, which is half the UK’s. That indicates how far we have to go even to make a small difference. The Minister must respond to that. APD is the highest European aviation tax for short-haul and long-haul flights. For long-haul flights, APD is the highest rate of tax in the world. Again, that illustrates how important this issue is.
Most countries do not have a tax on air travel, and many countries that did have an equivalent tax abolished it due to the negative impact it had on competitiveness, connectivity and the wider economy. They recognised that change was needed. If we need an incentive, we should look at what other countries have done and do likewise.
APD harms UK connectivity, and we are losing out to our European neighbours, particularly in respect of the emerging markets with which the UK should be strengthening its trading relationships after Brexit. We have seen the new flight connections with China advertised in the tube stations; Chinese airlines are trying to build up such connections. That is another part of the world with which we can have connectivity through air flight connections, and we should be looking at that.
My hon. Friend and I were talking before the debate about the figures for our neighbours in the Republic of Ireland. This year, Dublin airport had its highest ever number of passengers—29.6 million. Can we catch up with that? I am not sure we can, but we should at least try to respond in a way that enables us to get some of that passenger potential and retain it for ourselves.
My hon. Friend is outlining the numbers for Dublin airport—it will probably breach the 30 million mark this year—but is he aware that Dublin is constructing an additional runway to take advantage of the nil rate of APD? It is not only getting 30 million passengers; the number will go way up beyond that. Northern Ireland’s hospitality and tourism industry needs a competitive advantage to compete with that.
My hon. Friend always brings intelligent thought to his interventions. I confess that Dublin gives me easy access to the States every year. It is the airport that my family and I use whenever we go on holiday. One of the reasons why we do that is the customs connection. We do our customs clearance in Dublin, and when we get to the far side, we get off the plane, get our baggage, and we are away. With great respect, if we go from Heathrow to New York, we spend an hour in the long customs clearance line.
My hon. Friend points to an important factor, but it has been proved that the single biggest factor that causes people to travel through Dublin airport is price. One fifth of all visitors to Northern Ireland use Dublin airport. The trouble is that many people who arrive at Dublin airport from the States and elsewhere do not, unfortunately, leave the greater Dublin vicinity or southern Ireland. They do not come north; that is the reality. Price is the crucial point. My hon. Friend refers to another important aspect, but air passenger duty means that he and many of my constituents are being directed—almost shown the road—to Dublin airport.
My right hon. Friend clearly states the real issue, which is price. He is absolutely right. I was just saying that one of the other advantages is customs clearance, which probably suits many, but the thing that puts people there first is price. Customs clearance is an incentive but an extra which makes things a wee bit easier. My right hon. Friend is also right about Tourism Ireland needing to ask how better to connect passengers who come into Dublin airport so that they do not stay in Dublin but go north. To be fair, Tourism Ireland does things well when I go every year to the Milwaukee Irish Fest in Wisconsin, but we can and should be doing a lot more. My right hon. Friend is absolutely right about that. First and foremost, people are attracted by price. That can be applied to many facets of life, such as shopping trends or changing shopping practices.
According to a report published by Airports Council International, this year the UK was the only European nation to see a decline in its direct connectivity. That is worrying. If that is happening and a trend shows that, we need to do something positive and constructive about it right away. The reason for our focus on APD is that we believe in Northern Ireland’s ability to compete with the rest of the UK, and any area, to attract and secure global business. Belfast has clearly become the cyber-security capital of the UK and has the potential to do even more than it has so far. Why is that? Look at the reasons to learn how important it is for us to have the APD issue addressed, which would be of advantage to other parts of the UK as well.
In Belfast and other cities in Northern Ireland, global tech names such as Citi or Allstate work in the sector with silicon valley firms such as BDNA, and they are all recognisable. Not only does our highly skilled workforce attract global investment, but our indigenous tech firms such as Kainos, Novosco and First Derivatives grow in size and are becoming global leaders, all in a region of Northern Ireland. We must pay tribute to the Department of Enterprise, Trade and Investment and to the Ministers—when the Assembly was working—for their hard work, which is still delivering today, even though the Assembly is not functioning as it once was—the seeds were sown and the dividends are being paid.
Much of our attraction is the skills base, supported by international-standard research facilities, with education and big business working together. We have the education, the big business, the opportunities, the quality of graduates and all those things together—Northern Ireland again leading the way for the UK to follow. That is how things happen and benefits are achieved.
Northern Ireland is consistently the top-performing region of the UK in national exams at age 16 to 18. The fact is that we have the graduates, and that encourages the investment, which is perhaps why we have done so well. Digital firms want to invest because the skills base is there in Northern Ireland, and still available, because we continue to produce graduates to build above and beyond where we are. We have the highest percentage of qualified IT professionals in the UK and Ireland, with more than 77% holding a degree-level qualification.
I say with respect to the Minister and all other regions, Northern Ireland is leading the way. From a small base of 1.8 million people—although the latest stats tell us we are nearly at 1.9 million—we are up there with London and other parts of the United Kingdom. Post Brexit, therefore, we are in a position to do great good for the United Kingdom of Great Britain and Northern Ireland. This is an opportunity that we should be taking advantage of. Some 77% of post-A-level high school graduates in Northern Ireland go on to further and higher education, compared with the UK average of 71%. Again, Northern Ireland is leading the way.
All such things make it attractive to come to Northern Ireland. Furthermore, labour and property costs for a 200-person software development centre in Belfast are 36% less than in Dublin, 44% less than in London and 58% less than in New York. We can see the benefits of coming to Belfast and Northern Ireland. Improved connectivity, which is central to this debate, will only enhance our global potential. How can we build on our base and our level of delivery in Northern Ireland and across the whole of the United Kingdom? The motion seeks to highlight the importance of the ability to hop on a plane and get anywhere in the world quickly—the need for competitive APD, to allow us to show the world that we are only a short, cost-effective flight away.
Only aviation can connect the United Kingdom with existing and emerging markets vital to our post-Brexit future, producing and maintaining thousands of jobs, and indeed the thousands more jobs to come. At the moment we have a competitive disadvantage that we cannot afford: we pay more than double the aviation tax of our nearest European trading rival, Germany. The tax on trade hits UK businesses as they seek to expand international trade essential to our post-Brexit future. It acts as a brake on airlines’ developing new routes to the very markets that UK businesses need to reach.
If the Government want to signal that Britain is truly open for business as Brexit approaches, what better way could there be than to cut this tax on trade by at least 50%, to bring us in line and give us an advantage? The high rate of APD is a brake on expanding links with the world, meaning that the United Kingdom of Great Britain and Northern Ireland loses out on connectivity opportunities, and it is one of the main reasons why Germany is better connected to South Korea, Japan, China and Brazil than the UK. It should be the other way around and we should be doing something to address that.
Does the hon. Gentleman agree that this is not only about Germany and further abroad? Under the Scotland Act 2016, Scotland is able to go ahead with its air departure tax proposal, which is a reduction of 50%, and that will affect the north-east, with a further bad effect on Northern Ireland in addition to the Dublin effect.
I thank the hon. Lady for her intervention and her wise words. The Minister has heard what she said, and I agree with her, as others do. We need to have a strategy and policy that move us forward together, so that we can all take advantage of what happens, rather than efforts that are divisive—perhaps the wrong word—or different ways of trying to achieve the same goal. I therefore wholeheartedly support the A Fair Tax on Flying campaign and its call for at least a 50% reduction in air passenger duty. I urge all Members to support the AFTOF campaign.
My mother often urged me not to be penny wise and pound foolish. Many people would say that that is the Ulster Scot in her, and in me—every pound is a prisoner, and we were told to look after it and to look after it well. There is nothing wrong with that: thriftiness is good—my children comment on that to me, but that is by the way, and I hope that they learn the lessons that my mother taught me, and that I have tried to teach them. The point is this: we need to focus on the immediate penny, but sometimes we forget the value of the pound. That was what my mum was telling me. We need to look at how we spend better to grow our economy.
From the Minister’s response to various comments, I know that he is sympathetic to our point of view. It has been outlined to me that up to £175,000 can be generated through trade from a high-growth market per average flight added. That is a massive amount of money per flight added, and gives us an idea of our potential to grow.
I am sure my hon. Friend will be as surprised as I was to hear that within five years it is reckoned that Dublin airport will be a strong competitor of Gatwick. At one point that was unimaginable, and it is simply because of APD.
My hon. Friend is absolutely right. Those are all the arguments and the evidential base from places around us. We should be looking at how such places advance and how we can do so alongside them or do even better.
New daily flights to the eight largest high-growing economies could generate as much as £1 billion in additional trade per year for the economy—that figure multiplied up from the one flight to all the flights together. The economic value of new connections to five Chinese destinations, which I mentioned earlier, will add £16 million to GDP and 530 new jobs. That alone gives an idea of the advantage to be gained there.
I do not want to make a pun, but I urge the Government to consider a pilot scheme—for a methodology whereby we can move things forward. Research by PwC shows that more tax revenue would be raised from other taxes than would be lost from abolition of the APD, with a net £570 million in extra tax receipts in the first fiscal year. Positive benefits through to 2022 could add up to as much as £2 billion in tax receipts additional to the total in the status quo. These are not just enormous figures; they represent our potential growth and what we can do. APD abolition could boost UK GDP by almost 0.46% in the first year, with ongoing benefits up to 2022. The increased economic output associated with abolition could lead to the creation of 61,000 jobs by 2022, which is not very far away. At my age, the years seem to go by quicker, but the fact of the matter is that we would quickly see the advantages.
I join the calls to sincerely urge the Government to reduce APD by at least 50%, to ensure that the United Kingdom of Great Britain and Northern Ireland, better together, is more connected to the world, including emerging markets, so that there is increased choice for holidaymakers and to demonstrate that a truly global Britain is open for business. After Brexit, we should be even more open than we are now.
It is a pleasure to serve under your chairmanship, Sir David. I congratulate the hon. Member for Belfast East (Gavin Robinson) on securing the debate, which is very important for the reasons he outlined. I also congratulate the Minister for being in his place this morning—I know how challenging that is at the moment, so well done.
It is very unusual to be in a debate with colleagues from the Democratic Unionist party and find that we agree furiously. In fact, it is a unique experience for me—I could recite many long disagreements—but today, the protracted issue, as the hon. Member for Belfast East rightly said, is the lack of action on APD and the economic barrier that it has put down. He further described it as an arbitrary charge that effects the economy, tourism and connectivity. Northern Ireland and Scotland, and particularly the highlands, which I represent, have something in common: air transport is not a luxury. We do not use it purely for holidays—it is part of the public transport mix and very important to us. The hon. Gentleman listed the number of airports affected, but that can be extended throughout the north of England and around the nations of the UK. Scotland is directly affected.
Within five months, I will have travelled to the US, Aberdeen, Israel, which I came back from yesterday, Lisbon and Nigeria. That is not unusual and is part of what being an MP is about. I am not unusual in the scheme of things in the UK, because that is what my business colleagues are doing. The hon. Gentleman is absolutely right to make that point.
Other right hon. and hon. Members will have to make up their minds whether the hon. Gentleman is unusual, but I leave that with them.
As the hon. Member for Belfast East pointed out, the tax does not work as an environmental incentive. It is simply an economic disincentive. The money goes into the general tax pool every year and does not go to tackle the environmental issues other than in the way that any other tax might. There is no direct funnelling of that money into environmental initiatives—otherwise there would be significant differences. As he said, all studies show that a reduction in APD would produce a net benefit to the economy.
The hon. Member for Strangford (Jim Shannon) said that PwC stated that if APD is scrapped, the Treasury will gain. He made the telling point that a Treasury report found that the UK is ranked 135 out of 136 countries in terms the cost to the traveller. That is damning of the cost of air travel through APD. He further pointed out that Ireland scrapped APD in 2014—an independent country making a decision for itself—and tourism shot up by 47%.
The hon. Member for Belfast East introduced a side issue, which I also thoroughly agree on, of cutting VAT rates for tourism. Combined with tackling APD, that would be of huge benefit to areas throughout the nations of the UK where tourism and visitor numbers are extremely important to the local economy. We support that strongly and we would commit to it if the power was with us. On the hon. Gentleman’s closing remarks, I cannot send a Valentine to the Tories because it certainly would not be sincere, but the comment about it being a humorous way to highlight a serious problem is valid.
Smaller airports suffer disproportionately from APD, such as airports in Scotland and my own airport in Londonderry, where we are trying to get route development money. Does the hon. Gentleman agree that that double disadvantage—the difficulty of attracting new routes and APD—needs to be countered and that action should be taken to help?
I will come on to some specific issues in Scotland, because the picture is different, particularly in the highlands and islands, but the hon. Gentleman’s point is very well made for the rest of the Scotland, where there are direct APD effects.
The hon. Member for Strangford pointed out that it is the highest tax of its kind in the EU. It is worth repeating that the cost in Germany is half. The scandalous figure is that, for long haul, it is the highest tax in the world, which affects tourism. The revelation that the hon. Gentleman sneaks off to use Dublin airport will probably reverberate around his local community.
APD is a competitive disadvantage. ABTA calls it a “tax grab”. The hon. Member for Strangford pointed out that Northern Ireland is losing out on connectivity opportunities. Again, it has that in common with other parts of the nations of the UK. His feeling was that the UK Government should just get on and reduce or scrap APD. We are always grateful for some motherly advice in Parliament—there is nothing more true than penny wise and pound foolish. The UK Government could benefit from a net increase in income from other taxes. The hon. Gentleman pointed out the impact of 61,000 jobs—that is a significant benefit that raises the question of why APD has been allowed to continue to so long. Why has it not been addressed?
Air passenger duty is one of the most expensive taxes of its kind in the world, as we have heard. It hampers Scotland’s ability to secure new direct international routes and maintain existing ones. It is simply a regressive tax. Combined with the other unfair tax on our tourism sector—VAT—we face among the highest taxations in the world. An independent report found that reducing air departure tax, as it is called in Scotland, by 50% will boost Scotland’s air connectivity and economic competitiveness.
Encouraging the establishment of new routes, which would enhance business connectivity and inbound tourism, would help to generate sustainable growth. That is why the Scottish Government remain committed to a 50% reduction in ADT by the end of the Scottish Parliament in 2021. We want to get on and deliver it.
We want to abolish ADT entirely when resources allow, but that cannot be delivered until the UK Government and the Scottish Government can ensure that exemptions afforded to the highlands and islands remain. The Scottish Government understand the importance of the exemption. Therefore, the introduction of ADT in Scotland will be deferred until the issue of the highlands and islands exemption is resolved. As a highlands MP, I know only too well that air connectivity is critical for the highlands and islands, and I welcome the Scottish Government’s determination to deliver the best possible outcome for the area. I could not possibly countenance the withdrawal of support for the highlands and islands which, for the reasons I pointed out, would lead to substantial difficulties for people who rely on air transport as part of the public transport mix.
Highlands and islands airports have been exempt from air passenger duty since 2000 because of the area’s low population density and peripherality. The current APD exemption helps support the viability of commercial air services in the highlands and islands. Without it, we would face reduced flights and the withdrawal of important services to the region. Alternative surface journeys by road, rail or sea are long, particularly for those coming from the islands, whose journeys often include overnight stays or overnight ferry travel.
Recognising the social and economic importance of flights to the region, the Scottish Government have worked to reduce the cost of air travel, but residents of the highlands and islands still pay more than people who live in other regions of the UK. The Scottish Government have worked closely with Transport Scotland, VisitScotland, Highlands and Islands Enterprise and, crucially, Highlands and Islands Airports Ltd to develop the network at Inverness airport and improve international air connectivity to the region. That has brought new routes, including a British Airways route to Heathrow and a KLM service to Amsterdam, and improved the frequency of existing routes. Similar work has led to the expansion of the air network serving smaller regional airports in the highlands and islands.
The introduction of those new flights has enabled our business and tourism sectors to flourish, but more could be done. We are all too well aware that those connections remain some of the most fragile across these isles. Since being elected in 2015—I served in the last Parliament as Transport spokesperson for the Scottish National party, and I am now its Business, Energy and Industrial Strategy spokesperson—I have consistently made the point that they are crucial to Scotland and to the highlands and islands. That is why the case for the exemption remains, and why the UK Government must provide assurances about route protections and public service obligations in respect of the third runway at Heathrow.
The Minister knows that the Scottish Government cannot implement ADT unless a solution is found to the problem with the exemption. Will the UK Government look at why APD was handed over in a state that put that exemption at risk? The Scottish Government were effectively given responsibility for APD without the power to implement it. What assessment have the UK Government made of the state of APD? What is the Department doing to resolve the issue with the highlands and islands exemption while supporting the Scottish economy? The Minister will be aware that the Scottish Government have convened a new highlands and islands working group, which includes organisations with expert knowledge of the highlands and islands economy. Its first meeting was on 15 June. What support have the UK Government offered that working group?
The Scottish Government want to continue to work with the UK Government to find a solution. While the UK Government continue to set APD rates, they should take the impact on the Scottish economy seriously. As we heard, that impact is also felt by the economies of Northern Ireland and of the other nations of the UK. Since APD was transferred in the state it was, will the Minister review it for the rest of the nations of the UK?
It is a pleasure to speak in this debate with you in the Chair, Sir David. I congratulate the hon. Member for Belfast East (Gavin Robinson) on securing the debate, which has been very inclusive and interesting, and on his illuminating speech.
Many of these issues have been discussed before, as the hon. Gentleman mentioned. They were foreshadowed in our debates about recent Finance Bills, in which I spoke on behalf of the Opposition. Labour argued in those debates that the Government need to be clearer about their long-term plan for APD. There have been a number of reviews of APD’s efficacy, proportionality and impact on competitiveness since its introduction in 1994, and we need to situate this debate in that context. However, despite those reviews, a number of questions still have not been answered, so I hope the Minister provides some indication of the Government’s thinking.
As has been indicated in previous debates on this topic, the Government estimate that APD contributes about £3.1 billion to general taxation. I am well aware that the hon. Gentleman and others suggest that, if one takes a holistic view of its fiscal impact, APD may be fiscally positive on the ledger. It would be helpful to hear from the Minister whether the Treasury is conducting a 360° review of APD’s fiscal impact. I understand that PwC has carried out research, but it would help if the Treasury were focused on this issue, too.
In response to the comments by the hon. Member for Shannon, I cannot resist—
For Strangford—that’s a step too far!
I beg the hon. Gentleman’s pardon. I am very sorry about that. He will perhaps be even more perplexed when I mention that, rather than pound pinching, my family talked about looking after the pennies and the pounds looking after themselves. Perhaps that reveals a psychological difference between lowland and Ulster Scots. Of course, we need to look after the pennies and the pounds—that is the whole point. We need to trace exactly the impact of APD.
Studies suggest that the evidence about APD’s impact on passenger numbers is mixed. As many Members said, such a duty is unusual in the international context, but the number of passengers using UK airports has increased by 15%—a substantial increase—in the past five years. Of course, APD needs to be considered in the context of there being no tax on aviation fuel and no VAT on domestic or international flights. There are also different levels of APD for different kinds of flights, and exemptions for children were introduced in 2015 and extended in March 2016.
I will focus on four issues: the long-term viability of APD, regional competitiveness, the unequal impact of APD on different groups of Britons, and environmental issues. From a revenue point of view, there are clearly significant concerns about APD’s long-term viability. The Government have moved to provide industry with earlier notice of APD changes. The rates for next year were announced last autumn. That is surely positive for industry but, as I mentioned, we have had no indication of the Government’s view of the long-term trajectory of the tax, particularly in the context of the race to the bottom occasioned by internal competition in the UK. The tenor of this debate demonstrates that the starting gun has been fired on that race—it has begun, and we need to know the Government’s response.
We must view increases or reductions in APD in the context of taxation generally across income levels. It is notable that, given the increasing popularity and accessibility of air travel, many more people pay APD. As my hon. Friend the Member for North Tyneside (Mary Glindon) said, many more people enjoy hard-earned holidays abroad, and there are also people who need to travel abroad for family or work reasons.
Equally, APD is far less significant for household incomes than VAT, another transaction-based tax, which Members touched on. We would be in a different situation if the potentially regressive impacts of consumption taxes as a whole were cancelled out by progressive income taxes, for example, but of course the Government reduced the top rate of income tax. The latest Office for National Statistics figures suggest that overall, unusually in Britain’s history—at least in recent times—people in the least well-off decile pay a greater proportion of their income in tax than those in the most well-off decile. That is a peculiar situation.
Another concern we must note is about APD’s impact on regional competitiveness, which has been a focus of the debate and was perhaps its motivation. As we have discussed, APD levels were devolved to the Scottish Government in the Scotland Act 2016 and initial suggestions were that it would be halved and then potentially removed altogether.
We have discussed at length changes mooted in Northern Ireland, where there has been a call for evidence. We got useful detail about the operation of that from the hon. Member for Belfast East. As I understand it, the Government stated in February 2015 that they would also consider the case for devolving APD to the Welsh Assembly. We have therefore seen much change in relation to this duty.
All those changes naturally raise questions for airports contiguous to other airports not subject to the same APD levels, whether they are contiguous to Scotland or to the Republic of Ireland. We heard interesting thoughts on that from the right hon. Member for Belfast North (Nigel Dodds) and the hon. Members for Upper Bann (David Simpson) and for East Londonderry (Mr Campbell). Of course, the hon. Member for Strangford (Jim Shannon) —I have got it right this time—gave us a typically passionate and inclusive speech and a glimmer of his holiday plans. I hope they are more sedate and relaxing than those of the hon. Member for Henley (John Howell), whose itinerary of recent movements sent my head into a bit of a spin.
We also heard from my hon. Friend the Member for North Tyneside, who pointed out research suggesting that the duty has a significant impact on people living in her area. She is always a doughty supporter of their interests.
The Treasury published a discussion paper on options to support English regional airports in July 2015, but it is difficult to find out what concrete steps have occurred since then. Furthermore, the Government have said they will look at the matter once legislation concerning state aid changes is produced. An indication from the Minister of the Government’s thinking on that would be helpful; it is particularly important, given the points made by the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) about the situation for the highlands and islands.
There is often confusion in this place, though certainly not on the hon. Gentleman’s part, about the impact of EU state aid provisions in general. Of course, they prevent the provision of arbitrary support, but, as he suggested, low levels of population could be a feasible basis for such an exemption.
The hon. Lady makes the point well. This is an exemption based on population density and the regional difficulties in the highlands and islands. Indeed, it should be possible—I hope it is—for the Scottish and UK Governments to work together to solve that problem.
I was pleased to hear the Minister say from a sedentary position that they are working on that. I hope the UK Government will do so with rather more application than they did on support for the steel sector, of which I had an inside view as a Member of the European Parliament: they made no attempt to secure clearance for the kind of support we saw applied in countries such as Romania, which had been okayed by the European Commission; they asked the Competition Commissioner for exemption only from environmental measures. There was not much application around steel, so I hope we will see a different approach to these matters.
Another concern is the impact of APD on Britons who have family living outside the British Isles. The previous four-banding system meant that such individuals could end up paying more APD than those travelling to the US, for example. None the less, the division in the calculation between short and long-haul travel continues to be criticised by some who feel that that disadvantages Brits with families in, for example, the Caribbean, India, Pakistan or Bangladesh, who need to fly long haul to visit them. One could argue that other, lower carbon alternatives are available to flying for short-haul journeys, which do not apply for travelling long distances. An indication of the Government’s thinking on that would be helpful.
Our final concern is about APD’s impact, or otherwise, on environmental outcomes. In response to a question posed by the hon. Member for Henley, the hon. Member for Belfast East maintained that APD does not have a positive environmental impact. However, we must look at it in the context of enormous public concern around climate change and the increasing significance of emissions from aviation. At APD’s introduction in 1994 and, following that, the Labour Government’s focus on it, there was an attempt to ensure that its design would have a green impact. For example, during the 2007 Budget process it was stated that APD
“plays a valuable role in ensuring that passengers understand and acknowledge the environmental costs of their actions. The resultant behaviour change can deliver significant climate change benefits”.
Those believed benefits were then detailed.
I hope that the hon. Lady does not misconstrue what I said as a suggestion that we are not interested in climate change. The Library briefing is helpful, talking about the Labour Government in 2006 and a Department for Transport recalibration of emissions, which were to increase and not decrease until 2030. I do not think consumers realise that the contribution is made for environmental benefit or that it is having any tangible impact. The growth of aviation technology will have a much bigger impact on environmental benefits than an APD charge.
I am grateful to the hon. Gentleman for those comments. I acknowledge that there is not necessarily the awareness to ensure that it does have such an impact. Some of the matters he just raised have led to calls for a redesign of the duty, which some believe could lead to a greater environmental impact. One suggestion, which was examined in 1998, was whether it would be better to levy the duty on planes rather than passengers to reduce under-occupancy and lessen emissions. However, the then Government suggested that a restructuring of APD would be more appropriate and the four bands were introduced. Of course, since then we have gone down to two bands.
It is interesting to note that the highly interventionist right hon. Member for Wokingham (John Redwood)—he is not often described as that—argued that, on reducing under-occupancy through such a measure,
“there is a green case to be made there.”—[Official Report, 23 April 2007; Vol. 459, c. 729.]
However, the practicalities of doing so are highly complex, which may be why that did not develop at that time. In particular, it is difficult to exempt transit and transfer passengers from the calculation, which led Alistair Darling away from initial moves in that direction.
The taxation of aircraft fuel has been mentioned as an alternative, but that is prevented by the network of bilateral air service agreements under the principles of the Chicago convention. It would be helpful to hear whether the Minister has been involved in attempts afoot internationally to alter that agreement to provide more flexibility.
I am grateful to the hon. Lady for giving way yet again. She is talking about alternatives for taxation. Does she agree that had APD been used directly for environmental measures, it would have had a huge impact? For example, it could have been involved in the creation of alternative biofuels and other incentives and operations to reduce dramatically the environmental impact, yet it has not been spent in that way at all.
I am grateful to the hon. Gentleman for that interesting point. Hypothecation of tax is relatively unusual in the UK. My party believes—he will expect me to say this—that there needs to be much more investment in those technologies. That would be positive for our country, whether funds are hypothecated from a particular area or found through other mechanisms.
One other aspect of the international context—this was mentioned to me by a Minister—is the ICAOs agreement on the carbon offsetting and reduction scheme for international aviation, which was introduced in October 2016. Members have referred to the EU’s emissions trading scheme in that context, but we have not yet heard from the Government about whether we will remain part of the ETS beyond 2020. If we follow existing patterns for APD, Parliament will set the rate for 2021 next autumn. It would be helpful to get a clearer idea about how the Government view international schemes such as that of the ICAO interacting with multilateral mechanisms such as the ETS. The general lack of clarity on environmental matters amplifies the fact that the UK Government seem to lack any long-term vision about what constitutes green taxation in the first place, let alone how it should develop in future. This is a bit of a cheesy point, but I contrast that with the shadow Treasury team, which includes a shadow Minister who is focused exactly on such matters, and on the link between environmental and Treasury issues.
In conclusion, I am afraid that I lack the poetic sensibilities and contacts of the hon. Member for Belfast East (Gavin Robinson), but I congratulate him again on securing this debate. I look forward to hearing from the Minister about the five issues I raised: whether there will be a 360° review of APD; whether there is a long-term plan for it; what the Government’s view is about the substitutability of short-term flights, and whether that should be taken into account; whether the Government are participating in international attempts to reform the Chicago convention; and what their view is of the interaction between the ICAO scheme and the ETS, and what the future will hold for carbon trading for the UK beyond 2020—that point is very germane to this debate.
I congratulate the hon. Member for Belfast East (Gavin Robinson) on securing this debate. I have known him since he and I were elected and have always been fond of him, but I was not expecting a belated Valentine’s day present. I vaguely remember that some time ago the hon. Members for Strangford (Jim Shannon) and for East Londonderry (Mr Campbell) presented a giant heart-shaped card to No. 11. I wonder whether the Chancellor’s predecessor regrets not taking the advice on it. Flattery will get you everywhere at the Treasury, so I am grateful for that.
We have had a productive debate and it has been interesting to hear from all sides. There is significant agreement across the House that we view the UK aviation sector as extremely important to our quality of life and for creating jobs, and particularly for connectivity within our United Kingdom and beyond. There is no more important time for us to consider both how we can bring the United Kingdom closer together, and how we can make ourselves more open to the outside world. This is therefore a timely debate. Let me say a few words about APD and aviation in general, and then I will turn to Northern Ireland and try to answer, assuming time allows, many of the reasonable and important points raised. If I cannot do so, I will write to the relevant Members.
The UK aviation sector is a strong performer and we are a world leader in that industry. We have the third largest aviation network in the world, and since 2010 passenger numbers at UK airports have grown by more than 20%. That strength extends across the entire UK, not just at major airports such as Heathrow. Regional airports are growing and handled approximately 113 million passengers last year. There is good news across the sector.
Regional airports have been the basis of this debate. They make a valuable contribution to the growth of local economies and support connectivity across the UK. We appreciate that and want it to continue. We must also appreciate that aviation plays its part—like all industries—in contributing to the Exchequer. We heard various epithets about looking after pennies and not being penny-wiser and pound-poorer, and we appreciate that. The Treasury wants to ensure that we meet our commitments to public services and to continue to address the deficit and the debt.
We also want to pursue policies that will increase economic growth, in which tax has a role. As the hon. Member for Oxford East (Anneliese Dodds) said, in line with our international treaty commitments, we do not tax commercial aviation fuel and no VAT is charged on airline tickets. It is important that that part of the economy plays its part in funding public services, which was why the Government introduced air passenger duty in 1994. Without that duty, commercial aviation would be relatively undertaxed compared with other industries.
Air passenger duty raises around £3.2 billion a year, which is a significant amount of money. It would be foolish of the Treasury not to take that seriously and to proceed without great caution. That is why we are proceeding with the introduction of a call for evidence, which I will discuss in a moment. We appreciate the arguments that were made eloquently by the hon. Member for Belfast East—those points were also made by Democratic Unionist Members who spoke after him and by many other Members across the House, including those from the north-east, the west country, Wales and Scotland. We are alive to those concerns and I hope I can provide further detail about the steps that we are taking.
We are conscious that APD is often passed on to passengers as part of their ticket fares. This is not a tax on passengers—it is a tax on airlines—but in many cases it feeds through to the cost of tickets. In recent years we have tried to minimise the impact of APD on hard-working families to ensure that those who can afford to pay more do so. Last year we announced that rates will stay frozen for the sixth year in a row for the 80% of passengers who fly short-haul. That will help to keep down the cost of holidays for the vast majority of travellers, including those who travel throughout the United Kingdom for business or other reasons. We have exempted children from APD, which could save a family of four £26 on a short-haul flight and £156 on long-haul flights. Together those actions reduced the burden of APD by about £300 million pounds in the last financial year alone.
We have increased APD on private jets to ensure that those with the deepest pockets pay their fair share, and we are using those proceeds to fund some of the savings for families and holiday travel. I hope Members agree that, alongside those reforms, the Government have demonstrated their strong commitment to the aviation sector more generally, which was exemplified most recently by decisive action to address capacity constraints in the south-east. The new Heathrow expansion will provide capacity for an additional 260,000 flights a year and deliver an extra 16 million long-haul seats for passengers travelling from UK airports by 2040. I hope and believe that it will also be beneficial for all regional airports in the UK, including those in Northern Ireland and Scotland. We heard the Secretary of State’s important commitments on Heathrow and want them delivered. Additional capacity at Heathrow is expected to bring a boost of up to £74 billion to passengers and the wider economy over the next 60 years and we want that delivered at pace.
The Government are not blind to calls from the industry and over the years, including during my relatively brief time as a Minister, we have met a number of airports stakeholders. As a result of discussions with the DUP, we decided to create a call for evidence—I have received and read the representation from the right hon. Member for Belfast North (Nigel Dodds) on behalf of his party. The Financial Secretary to the Treasury has already visited Northern Ireland to meet stakeholders, including representatives from the airports, so that we can take seriously and listen directly to concerns about APD and VAT.
We are concerned to proceed with care in these matters, first because of the significant amounts of revenue for the Exchequer that are at stake, but also because, as we have heard during this nuanced debate, there are currently complexities regarding EU state aid guidelines. That situation may continue depending on the ultimate agreement that we reach with the European Union—in a moment I will come on to the position in Scotland, where those complexities have come out most vividly in recent months and years.
We keep the matter under review. The call for evidence has now closed. The Chancellor, Treasury officials and I will carefully consider the arguments submitted by many stakeholders in Northern Ireland. We expect to offer a response in the Budget in October or November. I hope we can continue conversations once we have carefully analysed the evidence submitted.
Clearly the tourism industry is important in Northern Ireland, as it is in all parts of the United Kingdom, and we appreciate that the Northern Ireland economy is still in recovery mode and that it requires our wholehearted support to continue to grow. Tourism in Northern Ireland has been growing significantly in recent years, as there is so much to offer there. We appreciate the unique position of Northern Ireland in the United Kingdom with respect to economic competitiveness. It is the only part of the Union that shares a land border with another state—the Republic—which poses a number of challenges, one of which relates to airports. Anyone who visits Northern Ireland and understands its economy will appreciate the impact on passenger numbers, business and other passenger choices of the fact that there are other airports within easy driving distance. We shall consider those points carefully in the coming months.
We have read the various reports hon. Members have quoted. We do not necessarily agree with all their findings, but the purpose of the call for evidence that has just closed is to build our own significant evidence base, to enable us to arrive at our own view. It may not be exactly the same view as the independent reports, but we intend to take a detailed, careful decision.
I will deal briefly with other points made in the debate. EU state aid rules, which are relevant to Scotland, have proved complex. As I said from a sedentary position—the hon. Member for Oxford East picked it up—we are working productively with the Scottish Government, which I should like to continue. I would be happy to discuss after the debate or on another occasion how we can step up those efforts. The Government passed the legislation recommended by the Smith commission in 2014 that devolved APD to Scotland. Implementation has been delayed, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) described, because it has proved difficult to square the circle as to how the measure would apply to the highlands and islands. I am sure the hon. Gentleman wishes for a settlement to be reached. We shall continue to work closely together and when it is eventually implemented we will bear in mind how it works in other parts of the United Kingdom, including for the airports closest to the Scottish border.
As the hon. Member for Oxford East mentioned, we have in the past looked into the impact of air passenger duty on regional airports in England. There was at that time no consensus about how to proceed. We analysed the various recommendations carefully. There were no easy answers and different airports came up with different and often competing proposals, but we remain open to further suggestions and are in constant conversation, as Members might expect, with airports, stakeholders and Members of Parliament who want to take the matter forward.
As was mentioned in the debate, we have had a discussion with the Welsh Government about the devolution of air passenger duty to Wales. Careful consideration led to the conclusion, which was respected by many if not all the stakeholders, that Cardiff airport was essentially within the same air economy as Bristol airport, and that it was necessary to proceed very carefully before changing the regime for Cardiff in view of the knock-on effect on Bristol. However, we shall continue to think carefully about whether there is a way around that situation. We should not want to harm Bristol inadvertently by creating a competitive advantage for Cardiff.
There are already powers for devolved Governments to take action on route development funds. I appreciate the current difficulties in Northern Ireland in taking that forward, but were the Executive there to resume, they would have the capacity to proceed and implement a route development fund for Northern Ireland. The Government in Wales also have powers to take action because they own Cardiff airport. They could act to develop it further from its current relatively small number of passengers—it is about 1.5 million a year, whereas there are 8 million at Bristol, its nearest competitor.
There is still no easy definition of long and short-haul flights. We have alighted on a definition of a short-haul flight as one where the capital—not necessarily the relevant airport—of the destination country is within 2,000 miles of the UK airport. The effect of that is to take in all European Union countries, plus most Mediterranean-facing countries, with one or two exceptions that are arguably anomalies, such as Israel and Egypt. The vast majority of countries bordering the Mediterranean fall within the definition, and it seems broadly logical. There is no perfect definition.
On the environmental points made, we are interested in treaty obligations. Perhaps there is an opportunity to take action on a multilateral basis. I do not think that that is being pursued today, but I am happy to look into the matter and revert to the hon. Member for Oxford East. As I said, we have taken action against private jets, which are less environmentally friendly and may at times be under-occupied. It has proved complex and difficult to take action on under-occupied flights. HMRC has done significant work on that and no simple solution has been found. Today the duty is paid by airlines, not passengers, so there would need to be significant change to the tax to implement that.
I hope I have answered some of the questions that hon. Members raised. If there are further points, I am happy to discuss them afterwards. I want to leave the hon. Member for Belfast East with my and the Chancellor’s reassurance that, in the months ahead, we will work carefully through the submissions in response to the call for evidence. We will listen to the arguments of the hon. Gentleman and his colleagues, which appear to have significant support from other parts of the House, and before the Budget we shall present our careful response. In the meantime I shall be happy to discuss the issue further should he or his colleagues want that.
This has been a productive debate. We may not be many in number, but we were ably assisted by the hon. Members for Henley (John Howell) and for North Tyneside (Mary Glindon), and by the Front-Bench contributors. I have enjoyed listening—the speeches were thoughtful and full of detail, which is how a debate should be.
I am grateful to the Minister for his commitment to engage in the interim and to present a response to the call for evidence in October. He is right that we have the power for a route development fund, but that misses the point that, if the Treasury were to permit the introduction of previously non-serviced routes where no APD is applied, not only would there be freedom to grow those routes, but it would be demonstrated to the Treasury that there is a benefit in not having APD associated with them. It is slightly different: if the Executive used their powers, APD would be charged for those routes.
We are one of a few European Union countries with APD. We have heard in the debate about the benefits for Ireland and the Netherlands from scrapping it. There has been exponential growth in their economies as a direct result. We are the only European Union country, out of 28 member states, where connectivity has declined. We need to think about the reasons for that and work productively to see what we can do to encourage growth in business, aviation and the country.
Question put and agreed to.
That this House has considered air passenger duty throughout the UK.
2015 Steel Summit Commitments
[Sir David Crausby in the Chair]
I beg to move,
That this House has considered progress on 2015 steel summit commitments.
It is a pleasure, as always, to serve under your chairmanship, Sir David. I am pleased to have secured this debate, which comes almost three years on from the 2015 steel summit. At that summit, in the midst of the steel crisis, steel producers, steelworkers, trade unions and parliamentarians came together with Government to discuss the challenges facing the industry and the support needed to at least level the playing field. We were not looking for special favours or advantages, just a fair environment so that British steel makers were not fighting against state-subsidised steel from east Asia or excessive energy costs compared with our competitors in Europe.
My constituents in Redcar felt the sharp end of that battle when the SSI steelworks and coke ovens were closed. Cheap Chinese steel had put the works under strain from falling prices, but it was Government inaction, in the face of pleas from parliamentarians, industry and the Community trade union, that left the works in a battle for survival. The closure wiped out 3,000 jobs and many more in the supply chain, rippling across our local economy.
Redcar is resilient and we are fighting back, but many families continue to struggle, working on lower wages in insecure jobs, working away or not working at all. Many come to my surgeries or visit the local citizens advice bureau, struggling with mortgages and personal debt. I do not repeat that story to dwell on the past, but to highlight why it is so important that the steel industry gets the support it needs to thrive. We cannot countenance any more reductions in steelmaking capacity in the UK after the loss of 175 years of steelmaking on Teesside. We cannot be complacent, as before, about the loss of any more steel jobs.
To return to the 2015 summit, there was a united request in the form of five asks, or five areas where the industry was struggling to remain sustainable, often because we were at a disadvantage compared with our competitors around the world. We were playing fair, but the playing field was tilted against us. I am speaking in the past tense, but sadly not enough progress has been made on those asks since 2015. The playing field is still uneven and tilted against British steel. While the existential urgency of the 2015 crisis may have passed, my town stands as a warning of what can happen if complacency sets in and the industry is not given the support it needs to survive.
On the point my hon. Friend has made about what happened in Redcar, does she agree that the closure of the blast furnace and coke ovens there was an act of industrial vandalism that led to the loss of a strategic asset for our country? Does she also agree that the steel industry needs to be seen as a strategic asset and in the context of our national security?
My hon. Friend is right. It was the second-largest blast furnace in Europe and the coke ovens were fantastic; they were capable of producing much more, including foundry coke, for which there was a huge market. It had a huge role still to play in the British steel sector, and we did not have a strategic nationwide approach to looking at those assets and preserving the value they had for our economy and for the future. I know many hon. Friends here want to contribute and share their thoughts and experiences, so I will not take too much time, but I will just give an overview of where we were and where we are now.
First, I will start with electricity costs. We asked for help with bringing the cost of electricity in line with that of our EU counterparts. In 2015, the Government introduced compensation for energy-intensive industries a few months earlier than planned, but a large disparity between electricity prices in the UK and the EU still remains. It translates into a total additional cost to UK steel producers of around £43 million per year, or around 17% of the sector’s net earnings, which is a significant margin to be losing in excessive energy costs. Europe offers many examples of acceptable state aid solutions to the energy challenge, but the Government have not given any serious consideration to what we can do.
Secondly, I come to business rates, which irk sectors across the UK, not just steel. The sector has put forward a number of proposals, such as removing plant and machinery from business rates calculations or offsetting previous trading losses against future business rates, but change in this area has been met by resistance, even though the sector has committed to reinvesting any savings, which would have a huge impact on local steel-producing regions. That feels like a short-sighted approach from the Government, ignoring a powerful tool for incentivising capital investment, increasing the productivity of the sector and helping to deliver a northern powerhouse boost.
Thirdly, public procurement is another area where the UK has so much potential to support UK steel makers, especially through large infrastructure projects such as HS2 and the Heathrow expansion. I know that British Steel in my constituency has aspirations to win contracts on those projects, and many other colleagues will have similar ambitions for their areas. There has been a close working relationship between the sector and Government on procurement.
Does my hon. Friend agree that the Government have missed a real opportunity for UK plc generally, and for steel in particular, with their decision to refuse the Swansea Bay tidal lagoon?
My hon. Friend makes a vital point, not just in terms of opportunities in that area for the creation of jobs and the boosting of the local economy, but in terms of the huge implications for the steel industry that we know such major infrastructure projects have in keeping that pipeline going.
The publication of an annual steel pipeline to provide early sight of such opportunities for UK producers has revealed over 4 million tonnes of steel requirements in the coming years. The publication of the procurement policy note on procuring steel in major projects has also helped to encourage a more holistic and proactive approach to steel procurement. Despite these steps forward, the benefits of this relatively low-cost way of subsidising UK steel and jobs are not being maximised. The guidance is interpreted differently by different Departments and organisations, and information sharing is still far too limited. Clearer and more detailed data on the amount of UK steel in public projects would be a welcome improvement, to track progress and to ensure it is held up to the light of public scrutiny. Introducing a baseline for levels of steel in UK projects would also help to maximise the benefits to domestic steel production.
Fourthly, trade remedies have been an incredibly important defence mechanism in the battle against state-subsidised steel, which is flooding the market and forcing down prices.
Does my hon. Friend agree that, in the light of the American steel tariffs, there is a real danger that steel that has hitherto been going to the US will be diverted and dumped on to the British market, and that the current UK policy is going in the wrong direction, unlike that of the European Union, which is going in the correct direction?
My hon. Friend is absolutely right; I know colleagues have raised that issue a number of times with the Secretary of State for International Trade. The implications of the steel tariffs that President Trump has announced are not just a direct existential challenge to our steel industry here; the knock-on effect of further dumping from the Chinese market and others into our market is a real crisis coming down the line.
Such unfair trading practices put UK steel at a disadvantage for trading fairly without a single bit of state support. Thanks to work within the EU, dumping methodology has been reformed and a modernised regime has had a big impact in reducing the levels of dumped steel in the EU market. It is a real worry that, when we leave the EU, the UK will not endorse the same kinds of protection and the UK steel market could be in danger of being swamped. The UK Government’s unexplainable opposition to the modernisation package within Europe suggests that they will not introduce the same approach in the UK system post-Brexit. The proposals so far suggest there could be a much more difficult and drawn-out process for initiating defence measures, by which time the damage would have been done.
I congratulate my hon. Friend on securing the debate. As someone from a ceramics area, the issues she is talking about resonate with the industries I talk to. Does she share my concern that not only do the Government seem not to want to commit to the European calculations for dumping, but the introduction of an economic interest test and a public interest test gives further opportunities for Ministers to take away the protections, even if they were to update the methodology themselves?
My hon. Friend is right. It is vital that we all contribute, and that the Government listen to the debate as we produce the legislation and look to leave the EU.
Our fifth ask was on environmental regulations, which is one area where there has been positive progress, allowing more time for specific sites to meet the requirements of the industrial emissions directive. However, one fully completed promise and some minimal progress on others is not a great record, almost three years on from the steel summit.
I congratulate my hon. Friend on securing the debate. Listening to her analysis, a balanced scorecard on the Government’s performance would not show a terribly high score. Does she agree that, three years on from that steel summit, it would probably be a good idea for the Government to convene a steel summit to review how the industry is doing now and set us fair for the future?
My hon. Friend makes an important point. Three years on, it is vital that we look at the crisis we were in, where we are now and the impact of any measures brought in. He is right to put that suggestion forward. I remember his raising it on the Floor of the House at the height of the steel crisis and being met with guffaws and laughter, as if a steel summit would be an irrelevance and meaningless. It actually acted and secured some outcomes. He is absolutely right that three years on is the time for an update and to pull the sector and the industry together to look at what more we need to do.
Our key asks have been put forward again and again in applications for a steel sector deal. This process started in 2016, and we are still waiting. The issue appears to have been kicked into the long grass, and the complete absence of progress on a sector deal in the last 10 months has meant no improvements in levelling the playing field for UK steel makers. The longer we delay bringing forward a sector deal, the more time we lose to prepare the industry for the future challenges.
Those challenges are already emerging, such as in Donald Trump’s decision to impose tariffs on steel and aluminium imports into the US. That underlines what my hon. Friend said about this being an important time to come together and take stock of the implications of the new world that we are in. The tariffs will cause the UK to lose out not just in the direct hit to our exports but, as my hon. Friend the Member for West Bromwich West (Mr Bailey) said, from the diversionary effect as global steel makers look for another market to sell to.
I will finish by talking about why this matters. There are some, including in government, who continue to view steel as a sunset industry that has had its day, and which they would prefer to see in managed decline. That is a short-sighted and pessimistic view of an industry that should be at the heart of the UK’s ambitions for the future. Steel—especially many of the specialist types that the UK manufactures—is a crucial component for so many areas of Britain’s industrial landscape. It underpins our industries, from aerospace to automotive.
Steel has huge future potential. For instance, the Materials Processing Institute in my constituency is working to develop new specialist steels that will form part of the future export market. The industry is crucial to our industrial and manufacturing competitiveness. We have to value domestic production, not through protectionism but by empowering it with a fair playing field.
I secured the debate because progress in supporting British steel has stalled. My constituents and I know too well what complacency can mean for steel jobs in the UK. I hope Ministers will listen and take a renewed interest in backing our steel industry.
It is a pleasure to serve under your chairmanship, Sir David. It was also a pleasure, as is often the case, to listen to the hon. Member for Redcar (Anna Turley), who is my friend and who speaks so passionately on these matters. I congratulate her on securing the debate. It is always good to see such a doughty group of campaigners for this vital industry.
The hon. Lady will know, as will her colleagues, that I visited her constituency and saw for myself the shock caused by the closure of what was once an exceptionally large and productive plant and the concern expressed by people who had lost highly productive jobs that were critical to the UK’s economy. She also knows that the Government, and my hon. Friend the Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy, who has responsibility for the sector, want to do everything that we can to ensure the return of those jobs. She has done wonderful work in her constituency, ably supported by the hon. Member for Scunthorpe (Nic Dakin), other parts of her region and its mayor, to reopen that site as part of the new, low-carbon economy. I am in no doubt about the passion with which she speaks and of what a hammer blow that closure was for employees, their families and the whole region.
The hon. Lady is right to raise what has happened since the closure. That was clearly a momentous time for the industry, and some tough questions had to be answered by the Government and the industry, working together. There have been signs of progress. We have seen a recovery in the world price of steel. The UK has benefited from the decline in the value of our currency, which has made our exports more competitive. However, we are under no illusions about the difficulty of the international market, which we will raise with President Trump when he visits us this weekend.
We are all deeply and profoundly disappointed with the section 232 tariffs. Huge amounts of work have happened behind the scenes to try to focus the US on potentially legitimate concerns about over-capacity production in China, rather than on penalising its closest allies and their industries. Those conversations have happened—my hon. Friend the Secretary of State for International Trade and President of the Board of Trade raised it directly with the US Secretary of Commerce last week. We will continue to make the case for a UK and EU exemption to the tariffs. We have shared legal support on these exemption questions with UK firms and with the industry, and we are pressing hard on behalf of those companies for assurances on the product exclusion process.
Those are the direct impacts of the tariffs. The indirect impact can have a chilling effect on the supply chain, which we are aware of. Indeed, we voted in the EU in support of provisional measures to curb steel imports only last Thursday. We will continue to offer a doughty response, which we must do on behalf of British-based companies.
That 2015 plant closure was such a pivotal moment. We received the five asks of the steel industry, which looked not only at what could be done in the short term but also at the long-term outlook for those companies. A number of changes to the industry’s structure have happened since. Greybull Capital acquired Tata’s long products business, which is based in Scunthorpe and is now part of the British Steel group. The Scottish mills have reopened under the ownership of Liberty Steel, which also bought Tata’s speciality steel business, based in Sheffield and Rotherham.
We should all be pleased to see the Tata-thyssenkrupp venture in Port Talbot coming to fruition. I visited it myself and saw the pride in that long tradition of steelmaking. I pay tribute to the management and the unions, who worked so hard in making that deal happen. Securing those jobs was vital. The deal was accompanied by the decision to invest in the blast furnace. The company will now work to ensure the commitment that as much as possible will be done to avoid any compulsory redundancies until 2026. I have to pay tribute to the pool of highly skilled workers who are dedicated to the future of the industry. We are incredibly lucky to have them.
However, the Government have done our bit, too. We set up our industrial strategy. The hon. Member for Redcar rightly raised energy costs. The Dieter Helm review that we commissioned found that, while our energy companies pay more than some of their European counterparts, it is often because other countries decide to spread those costs to consumers’ bills.
I recommend that the Minister looks at the “Steel 2020” report produced by the all-party parliamentary group on steel and metal related industries. It contains a detailed road map on what can be done on energy, including on wholesale costs, network and transmission costs, energy efficiency aid, reform of the emissions trading system and long-term remodelling. Will she update us on what the Government are doing, and whether she has had a chance to look at the report?
I am happy to read the primary source. I have seen many of those recommendations, which inform our response to the Helm review.
I was making the point that other countries have taken policy decisions to put the costs that would in this country be borne by industrial customers on to household bills. We have ended up in a situation in which some of our industrial energy bills are higher than average, but our household bills are lower than average. Those policy levers are difficult to change; we all support, for example, the energy price cap Bill that we will bring forward later this week.
However, as the hon. Member for Redcar pointed out, we have spent more than £250 million in compensation specifically for the steel sector and other energy-intensive industries to help to mitigate those policy costs as we transition to a low-carbon future. We successfully pressed for the introduction of trade defence instruments to protect UK steel producers from unfair dumping. We set out visibility on the pipeline going forward, which I know was a big ask from hon. Members in the room.
The Government plan to procure construction contracts that will use 3 million tonnes of UK steel over the next five years, which is enough to build 170 Wembley stadiums. I understand the comment from the hon. Member for Penistone and Stocksbridge (Angela Smith) on the Swansea bay tidal lagoon. Believe me, I worked so hard on those numbers, but to build the country’s most expensive ever power station basically to create a couple of dozen jobs was just not economically effective when compared with other opportunities in all our constituencies.
The power of Government procurement should not to be underestimated. Every Government steel contract in England is now required to consider its social and economic impact on local communities and what those decisions mean for the constituencies we are all so proud to represent.
We are grateful for the constructive proposals put forward by the steel council. I asked for guidance on this. The steel council, which I was proud to chair when I was the relevant Minister, met last in June and will meet again before September. It now meets regularly, and that is an opportunity to discuss the current challenges but also for the industry to work together. Historically, members of the industry have not sat around a table and worked together on the outlook and productivity investments; it has had a very competitive mindset. The industry working together and with Government is a very important part of the plan as we go forward.
The Minister is setting out her stall very well, but as she has said, most of the benefits that we have at the moment are down to global changes and the restructuring that the industry has done itself. The assistance on energy prices was in train before the steel crisis in 2015. Since the crisis, there has been some progress on procurement, but frankly the steel sector deal, which the Government have always been positive about and have said is the way to address the steel crisis issues and the five asks, has not yet delivered. Will the Minister tell us where we are on delivering a sector deal for steel and, indeed, whether that will happen? Is it just a case of officials preventing Ministers from doing their job?
No, no—far from it. The hon. Gentleman invites me to move on to the next part of my response, which is about exactly this issue. One of the first parts of the sector deal is getting the sector to work together to say, “What is it that we collectively need going forward?” We had the “Future Capacities and Capabilities of the UK Steel Industry” report produced at the request of the industry; the Government paid for it with taxpayers’ money. It highlighted onshore opportunities that will be worth up to £4 billion a year by 2030. This is about customer demand and substituting for imports specialty steels, higher-quality steels or steels that can support the investments in the offshore wind industry—things that are now being imported. That opportunity exists for the UK plants and it is forming part of the sector deal.
As I have urged hon. Members to recognise before, we should not use the steel sector deal as a measure of how much the Government love the sector. The idea is not to have Government write it and say, “This is what you need to do.” It is for the industry to come together and set out what it needs and wants from Government. We have seen the publication of sector deals that directly benefit the industry that we are talking about. The automotive sector deal was an early one out of the traps. The automotive industry has already increased its use of UK-made content. That went up from 36% previously to 44% two years ago, and the aim is to reach 50% or more by 2022, as a direct result of the sector deal. The construction sector is a vital market for many of the steel products in this country, and we published the construction sector deal last Thursday. It aims to build homes and offices quicker than in the past and it also has commitments in relation to domestic content.
We are absolutely committed to securing a steel sector deal that works for Government, industry and employees. It would be unfair to blame any delay on my hard-working officials. This is about getting the right deal—one that is not just a simple request for money but is saying, “What are we collectively going to do to increase productivity and competiveness, so we can invest again in these steel plants and create jobs in these important areas?”
I do not agree with the Minister’s comments about the tidal bay lagoon, but there are other aspects of UK manufacturing where a sector deal could play a real part. The development of the shale gas industry is one of those. Can the right hon. Lady update us on progress made in maximising UK steel content in the shale gas industry?
That is an excellent point. The hon. Lady will know that I am keen for us to have an energy policy that delivers secure, affordable, low-carbon and innovative energy. I believe that onshore shale gas can play a part in that, and we are soberly going through the process of testing the wells. She raises an important point about ensuring that that work is done using UK steel content. I will take that away for my conversations with the companies, but I did hold a very effective shale industry roundtable, at which I was struck by the number of small companies that are making the pipes and specialty products that rely on UK steel and the opportunities for them, so the hon. Lady makes an excellent point.
I again reassure colleagues here today that work is going on on the sector deal, but we have to encourage the companies that we are working with and that provide so many jobs in the constituencies represented here to think about what they will do. There are positive signs. We are seeing steel companies investing in very good research and development. Companies are bidding for money from our industrial strategy challenge fund—the current wave—for more innovative products, and that is incredibly important going forward.
UK Steel was disappointed with the Government’s response to the sector deal proposals so far—not because there are not weaknesses in what it has put forward that it is aware of, but because the things that were highlighted were not, bluntly, weaknesses. There needs to be a proper dialogue going on that delivers an outcome. How long does the Minister think it will be before we have a sector deal for steel?
I will not speak for the Under-Secretary of State for Business, Energy and Industrial Strategy, my hon. Friend the Member for Watford (Richard Harrington), who chairs the steel council and is closely involved in the conversations, but I urge the hon. Gentleman to think about the outcome, not the timing. We recognise the importance of the industry. We are setting out plans to ensure that its products can be sold into other UK sectors as part of those deals. I am confident that we will get there, but the steel sector deal has to be a deal that works for the long-term future and is not a quick fix. I think that all of us would say that putting another sticking plaster over the problems that we saw in 2015 would not be the way to secure the jobs of the future. We know that there is a huge opportunity from UK— domestic—clients wanting to buy these products, and we have to help the industry to find a way to get there.
I appreciate the Minister’s response to that question and her update on the steel council; I am glad that it is meeting regularly. I just want to go back to the point made by my hon. Friend the Member for Scunthorpe (Nic Dakin), in his first intervention in the debate, about the option of putting together another steel summit. I feel that the time for that is now. Particularly if the sector deal is struggling, getting everyone together and getting everything on the table might just help to facilitate it.
In my closing remarks, I was going to address the hon. Lady’s point on that, because I think we have made progress in ensuring a sustainable and competitive future for UK steel. However, we cannot be complacent. We know that there are global challenges that affect the sector dramatically. We have made progress on improving the competitiveness and innovation of the industry, and it is really heartening to see that we have these brilliant companies wanting to do the R&D and innovation in the UK. With global or European companies, that has not always been the case: they have made decisions to make certain sorts of products here, but to keep the R&D and intellectual capital elsewhere.
We will continue to work in partnership with the steel sector. This involves not just the companies, but the unions, the devolved Administrations and other stakeholders—in particular, the local communities. I will raise with the Under-Secretary the question of whether the time is right for another steel summit, particularly in the light of international events. Ideally, it would be when we have some progress to report back from the conversations that we are having at a diplomatic level.
I close by thanking sincerely the hon. Members present for raising these issues once again and by assuring them that there is no complacency and we are all dedicated to this vital strategic industry.
Question put and agreed to.
Leaving the EU: Customs Arrangements
[Mr Gary Streeter in the Chair]
I beg to move,
That this House has considered customs arrangements after the UK leaves the EU.
It is a pleasure to see you in the Chair this afternoon, Mr Streeter. I am particularly grateful to have been selected to lead this debate. I led a debate on the European Free Trade Association and the European economic area in February, which I believe has brought that argument and some of the arguments around it to the fore. I see this debate as very much part of an evolving evaluation of the necessary arrangements that our country will need to put in place to secure free trade with the European Union and the rest of the world post March 2019.
This debate on customs arrangements follows and builds on what I was saying in February, because in my view, EEA-EFTA takes us some way towards achieving the aim of frictionless trade with the European Union post-Brexit, but without the satisfactory customs arrangements there will still be barriers to prevent our achieving that. That has been demonstrated to anyone who has spoken to the Norwegians and the Swedes, the Americans and the Canadians, and the Swiss. Anyone who suggests that those borders operate frictionlessly at the moment would be under a misapprehension.
I recognise, as I said to one or two colleagues as I wandered in, that today’s debate takes place in a vacuum. On Friday, the Government announced their ambition, which I welcome, for an EU-UK free trade area for goods, with a common rulebook and a labour mobility framework. The vacuum on the other side is that we are yet to see the much-awaited White Paper. I hope the Minister will confirm, despite all the rumours that have been swilling around this morning, that the White Paper will be published on Thursday.
I want to concentrate on those customs arrangements. Much of the debate about our post-Brexit customs arrangements has been about style over substance. Whether it is “the” or “a” customs union, max fac, new customs partnership or a facilitated customs arrangement, frankly, I do not care what it is called. As far as I am concerned, it can be called anything you like. The test must be whether the customs arrangements that we put in place protect jobs and businesses, avoid a hard border in Ireland, allow for frictionless trade and reflect the realities of the ports of our country. That is why I have always supported the Prime Minister’s customs plan as stated in the Lancaster House speech, in which, I remind colleagues, she said:
“Whether that means we must reach a completely new customs agreement, become an associate member of the Customs Union in some way, or remain a signatory to some elements of it, I hold no preconceived position. I have an open mind on how we do it. It is not the means that matter, but the ends.”
That is clearly true. It is not the means that matter, but the end.
The risks facing businesses, if we do not get this right, are clear. First, and overwhelmingly, in terms of customs, there is “rules of origin” risk and the requirements that places on trade. Those are most significant for exporters, if we do not come up with a satisfactory solution. The rules of origin requirements prove the country of origin for a product and they are essential for qualifying for lower tariffs. They are established to ensure that a finished good, and anything going into it from the supply chain, comes from the area that it is stated to have come from. Only then will it qualify to move across the border, and qualify for the tariff regime that is established for it. They are also needed to ensure that tariffs are not avoided by shipping goods through a country with a lower tariff, which could undermine the tariff regime.
When it comes to exporting food, proving origin can be quite simple: it is either grown in a country or it is not; but when it comes to the export of cars, for example, it is extraordinarily complex. The composition of each nut and bolt needs to be assessed, to ensure that enough of the car’s origin allows it to qualify for the lower tariffs. That affects not only the car industry, but pretty much any industry with a complex supply chain.
That is even more the case with aircraft wings. The Airbus plants in north-east Wales have a central part in the Welsh economy. Components cross EU internal borders several times before finally being assembled. The danger is extreme to our local economy, as well as our participation in the wider project.
The hon. Gentleman is completely right and he guesses my next point. I was about to say that rules of origin should not be underestimated or lightly dismissed with the usual line that these issues were not a problem before we joined the EU, or by the extraordinary assertion—heard last week—that manufacturers would somehow be able to get cheaper components from somewhere else in the world. To return to my fabled car, in the 1970s, before we joined the European Union—or the European Economic Community, as it was then—a car made in the west Midlands had its supply chain solely from that area. Now, as the hon. Gentleman is rightly pointing out about aircraft wings—it is true for cars, too—that supply chain has sources all over Europe and will usually see multiple cross-border movements before it is completed.
The suggestion that cheaper components could be sourced from anywhere else in the world betrays a fundamental lack of knowledge of the integrated nature of manufacturing in the 21st-century world. The response to someone making those assertions can only be, “Get real!” Moreover, the significance of this burden is shown by the previous Government’s balance of competence review into the EU, which highlighted that the costs associated with rules of origin ranged from 4% to 15% of the value of trade. That is why the chief executive of the Chemical Industries Association told the House of Lords Committee that rules of origin add a “substantial level of bureaucracy” as
“the cost of providing the technical proof that a chemical or any other manufactured product originates from the EU or the UK, bearing in mind that”—
particularly for chemicals—
“there could be several stages of synthesis involved”,
“clearly outweigh the benefit of duty-free”
or tariff-free sales.
Currently, exporters need to fill out one form, at most, for VAT purposes. If we do not come to a satisfactory arrangement, exporters would need to fill out more paperwork. Furthermore, the UK could use access to the EU databases and the e-customs systems, which make this processing even easier.
It is clear from the motor manufacturers’ association that Honda, for example, has 3.5 million parts per day coming in for its just-in-time manufacturing. One of the complications of these highly integrated supply chains is that we cannot roll over our existing free trade agreements, precisely because of the limits on rules of origin and the ways that those would apply. We cannot manufacture a car now to have the amount of British components that would allow us to roll those free trade agreements over.
My hon. Friend is absolutely right about the example that she gives—the car industry. Her Majesty’s Revenue and Customs has given us clear evidence on this, as well, in terms of the extra bureaucracy. It estimates that 180,000 exporters will now need to make a customs declaration for the first time, having not needed to do so previously. That is in addition to the 141,000 exporters that currently make a declaration for trade outside the EU. That extra bureaucracy is roughly in the small amount of £4 billion a year. Anyone who thinks that is a price worth paying, with the cost being put on industry, should think again.
Some have said that this is a price worth paying to pursue free trade agreements with new markets—markets that will bring us huge new rewards; but the supply chains that will be impacted by these new barriers cannot simply be removed from the EU market and integrated into a new market. The supply chains that will be impacted by those new barriers cannot simply be removed from the EU market and integrated into a new one—they have taken decades to build up and are facilitated by free trade in the EU. By most conventional expectations, it would take further decades for EU exporters to embed themselves in new markets and new supply chains.
The extra requirements would also require physical infrastructure at borders to deal with customs processes. Currently, few checks are required on EU goods at ports, so ports have customs infrastructure in place to deal with non-EU imports only. Given that less than 1% of the lorries arriving through the port of Dover or the channel tunnel require customs checks, there is very little infrastructure, and there is no reason for there to be more.
That is also true on the other side. When representatives from the port of Calais came to speak to the Treasury Committee, they made the point that they have so far made no investment in infrastructure. Whether they will be able to deal with the new customs arrangements by the end of the implementation period without more infrastructure being put in place, or indeed without substantial delays at the port, is not only open to question, but evidence to the Select Committee proved it to be so.
The port of Dover estimates that even a two-minute delay in customs processing would lead to a 17-mile queue from Dover. Even short delays would have an impact on the just-in-time production lines that my hon. Friend the Member for Eddisbury (Antoinette Sandbach) mentioned, with costs compounding each time a component crosses from the EU to the UK or vice versa. As I said earlier, in the car process, that usually happens between three and four times.
A great deal of attention has been paid to Dover and Calais and the east-west, north-south routes, but much less has been paid to the Dublin-Holyhead route, although Holyhead is the second-busiest roll-on roll-off port in the United Kingdom. In the Exiting the European Union Committee, when I asked the now former Secretary of State for Exiting the European Union, the right hon. Member for Haltemprice and Howden (Mr Davis), what consideration had been given to Holyhead, he said that none had been given. That was some time ago. I asked the Secretary of State for Wales when he had last visited Holyhead, and he said it was in April 2017. Does the hon. Gentleman share my despair that that route has not received the attention that it requires?
Again the hon. Gentleman guesses what I was about to say next. I was using the ports of Dover and Calais as examples of ports across the United Kingdom. Of course, it would also require restrictions and a border infrastructure to be in place between the two ports he mentions.
Over the last few years, some people have called that project fear, but the reality is that we are facing risks to our economy and to people’s jobs. In the last two weeks, businesses such as Airbus and Jaguar Land Rover have been increasingly vocal about these events and the risks. A recent Institute of Directors poll found that business leaders want a post-Brexit customs arrangement that avoids the new customs processes and maximises EU market access by minimising regulatory divergence. Warnings from big employers and investors in the UK should not be ignored, and certainly not by a Government who are committed to protecting jobs and enhancing employment opportunities.
On that point, it is important for everyone to recognise that although big businesses can be noisy and have press contacts, the way that business filters through like a food chain means that they provide work for medium-sized businesses, who provide work for small businesses. As a country, we would be completely foolish to risk fundamentally changing the way we deal with our existing EU customers without having a clue about what the new customers in the rest of the world might want. We have to find a way to preserve frictionless trade with our existing customers if we want to protect our economy.
My hon. Friend is right. The supply chain provides jobs in all sorts of areas across the country. It is not just the big employers, but the thousands of people who are employed in their supply chain. For a small firm, the bureaucracy of restrictions such as rules of origin requirements and certificates, will be so extreme that some of them are likely to go out of business. We need to realise that.
We need a solution to those problems that protects jobs and businesses, that reflects the realities at ports, that avoids a border in Ireland and that can be fully enforced by the end of the implementation period. It is no good just relying on the technology being there, because at the moment it does not exist or it has never been tested on anything like that scale.
I am not sure that I am in universal agreement with all hon. Members, but I welcome the Chequers plan as a sensible proposal. As with everything, it will be in the detail, and as I said earlier, we are in a slight vacuum at the moment because the White Paper’s timely publication will be important, but it is not yet with us. One ambiguous area is the suggestion that maintaining frictionless trade with the EU will limit our ability to pursue new free trade deals. I will leave it to the Minister to explain exactly how those proposals will ensure that we can keep the option of free trade open.
The Government’s proposal is a welcome step towards at least recognising the economic reality that will hit us. I do not want to say that the debate has secured all the answers yet, because we will have the White Paper, but I will say that the Brexit debate has not yet faced up to some of the inevitable trade-offs between different rules around the world. If barriers are removed somewhere, they will almost certainly be put up somewhere else. That is the consequence.
The hon. Gentleman talks about inevitable trade-offs across the world. Up to now, we have talked about the UK’s fluidity in terms of trading with the EU and beyond, but does he agree that we must not lose sight of the massive political and trading changes that might take place in remaining EU countries such as Hungary, Poland, Germany and Austria after we have left?
The hon. Gentleman may well be right. We cannot know what will happen. We can see tensions already and they may result in different outcomes. We have some certainty about various procedures with those nations because they are members of the EU, but we cannot have the same certainty with other countries that present that fated opportunity.
Whether we like it or not, our economy is extraordinarily and almost inextricably interlinked with the EU’s, with manufacturers benefiting from the complex supply chains. If we were to put up barriers between the UK and the EU by leaving the single market, or by having no comprehensive customs arrangement, we would have to be sure that any new trade deal could make up for putting those barriers in place.
Will the hon. Gentleman give way?
Will the hon. Gentleman give way?
A panoply of choice! I will give way to the hon. Lady and then the hon. Gentleman.
To return to the hon. Gentleman’s welcome of the Chequers plan, could he give more detail about that and how he thinks it will actually work? I have concerns that it may not be workable at all.
As I have said several times, we do not know the detail, but we should welcome three things: first, that there is a plan, because we are a long way into the process; secondly, that it attempts to put in place a UK-EU free trade area; and thirdly, that there is a common rulebook. As I explained earlier, we cannot just solve the customs part; we need to solve the standards issue as well, because if we do not, we will not be able to trade the products that we want to trade even if we have the best customs arrangements.
None of us has yet seen any of the detail. Some of us will cautiously welcome the plan as a starting point for establishing a free trade area, and some of us will be a bit more positive. We have not yet seen the reaction from others, but I hope they realise that it is an opening offer from the Government that needs to be looked at sensibly.
This a two-way traffic issue and there needs to be flexibility from Europe as well. The UK Government have made some movement in relation to what happened at Chequers and in showing willingness to accommodate, but that needs to be reciprocated by Europe. They can allow us to have that access to the open market in Europe.
The hon. Gentleman is right, but I say to him, and I am sure that he will accept it, that until we actually put a proposition down to negotiate with, there was nothing to negotiate with. Until the Chequers proposal, it might well have been said by a number of our soon-to-be former EU partners that there actually was not a deal to negotiate on. There were the Prime Minister’s principles: no hard border in Ireland, frictionless trade and the ability to do free trade deals. Those are principles and there is nothing wrong with those principles, but they were not an executable plan. Until they were an executable plan, there was nothing to negotiate on.
Is it not also the case that if we are going to approach this negotiation, we have to look at it—as in any good negotiation—from the other side’s point of view? For the other side, the issue is that they are part of an international treaty that is underpinned by a rulebook. If we are going to ask them to adjust their rulebook to accommodate us, we will have to show that we can do that in a way that is likely to promote certainty for the future, and furthermore does not undermine their own cohesion.
My right hon. and learned Friend is correct. I think that he has made the point several times in this place and in others that there has been a misunderstanding and a failure to comprehend exactly what the EU Commission is. It is a legal body that takes its instructions from others, and therefore its ability to deviate too much in those negotiations until its instructions are changed means that we have failed to understand how we should have been negotiating initially. Now that the plan is there, I am hopeful that we will see more progress.
I am very grateful to my fellow south Londoner for giving way. I know this is a debate about customs, but my biggest issue with the Prime Minister’s proposals is that they do not cover most of the economy, which is services. On customs, however, I have a couple of questions.
First, does he know of any example of where the EU has allowed a third county to collect customs duties on its behalf? The hon. Gentleman has talked about the importance of the rules. Secondly, although I appreciate his comments welcoming the proposals, they are also based on “to be invented” technology to resolve the Irish border issue. Unless that technology is invented and can work, I do not see how it will be able to resolve that conundrum.
I will deal with my fellow south Londoner’s latter point first. I agree with him on technology. There needs to be a system in place. We may move to a technological solution, but, as I said a few moments ago, it is clearly not there at the moment, or it has not been tested on this sort of scale yet.
Secondly, I do not know of any such example, and that will obviously be challenging to the rulebook, but that does not mean that we should not put the proposition forward and therefore I respect what the Government are trying to do in that regard.
As for services, which the hon. Gentleman was clearly talking about and is 80% of the UK’s exports and economy, my hope is—I am not sure whether the Minister will be able to say so today, but it is my hope—that the White Paper may give some hints about how the Government will put in place their enhanced equivalence regime, and the proposals for that, which the Chancellor mentioned in a speech at a different Mansion House event just recently. So I hope that we will hear some news on that in the near future.
Let me go back to the idea of free trade arrangements and free trade agreements. The Treasury Committee had the privilege of going to Washington in April and we met a number of American free trade or trade arrangement negotiators. Everybody I spoke to was excited about doing a deal with the United Kingdom, which is good news. Why were they so excited? Because they told us, frankly and openly, that they can dictate the terms they want, they will get whatever they want and any agreement will give their producers unfettered access to our markets.
We have to be careful, because no one is asking the right question. Of course people want to do deals with us; why would they not want to? The question is this: on what terms of trade will those deals be done? If someone can tell me the answer to that question, I will happily sit down and conclude my remarks now.
Will the hon. Gentleman give way? [Laughter.]
I look forward to the hon. Gentleman’s expert intervention.
Presumably on terms that are mutually advantageous to both sides.
Were that so, I would sit down now, but there is no indication from any of the negotiators to whom I have spoken that that is the case. I will not go into the lurid details of how exactly they have described the prospective arrangement, because this debate has far too genteel an audience. However, I say to the hon. Gentleman that there will clearly be areas of mutual advantage, but it is very clear that those terms of trade in the short term—they may change in the future—are likely to be less advantageous.
Will the hon. Gentleman give way?
In one moment. I just want to make this point, because it is pertinent to what the hon. Member for East Londonderry (Mr Campbell) was saying. Free trade with the Commonwealth is a goal—an announced goal—for a number of the Brexiteers, but the key question again is this: on what terms will those deals be done?
The economic modelling done for the Whitehall papers shows that a free trade agreement with America would provide a UK GDP benefit of about 0.2%. That is because the average weighted tariff with America is only 2%. So if we get rid of all the tariffs with America, it would add 0.2% to our economy. If we reach agreements with China, India, Australia and New Zealand, of course they would add benefit to the economy—somewhere between 0.1% and 0.4%. I just ask Members to bear that in mind, given the scale and the benefit of the trade that we do with the European Union.
I thank the hon. Gentleman for giving way. Does he not agree that, in relation to trying to get a deal and to how we conduct the negotiations, the perception out there among the general public is that Europe keeps changing the goalposts and therefore we cannot get to a definitive position?
The hon. Gentleman is clearly a learned man and I take his view that the great Shakespearean themes are perception and reality, and reality becomes perception and the other way round. But that is not true of course, and it is for those of us who are in this place to stand up and base our decisions on evidence, and to speak the truth. So it is absolutely clear to me that, as we need to protect jobs and businesses, and if we are ready to protect them as they are now, we do not need to sacrifice them for potential gains, if those gains look small and potentially unrealisable.
The hon. Gentleman is being very generous in giving way. On the point that he has just made, Michel Barnier gave evidence to the Brexit Committee last year and he said that there is a cultural difference here. He said, “Your side seems to think that this process is, ‘You give us a bit of that and we’ll give you bit of this’, whereas on the European Union’s side it is a matter of fitting our mutual desire for the most favourable terms into the rules that have been agreed by the UK Government over many years”, and until that difference in cultural perception changes we are not going to get very far.
I thank the hon. Gentleman for that point; I hear him and I will look carefully at the Select Committee’s report on that point.
In concluding, I will make a few remarks to the Minister. I hope that he will be able to outline how the Government’s proposals will overcome the costly non-tariff barriers that I spent some time outlining and took a number of interventions about earlier. I also hope that he can reassure us about the steps the Government will take to ensure that the new customs arrangements will be fully ready and tested by the end of the implementation period. I would obviously like to be assured that the Government, and in particular the Department for Transport, have a plan to ensure that our ports and ports on the EU side will be ready for any changes.
Governments should always put the creation and protection of jobs and livelihoods first. While we are leaving the EU, we should not sacrifice people’s livelihoods. That is not what people voted for; whatever they voted for, they certainly did not vote for that. Therefore, it is important to listen to the voice of business.
As I have said, I drafted this speech on Friday and it has gone through one or two reiterations since, on the basis of what has happened, and it will probably go through another one when I see things on Thursday. Nevertheless, I welcome Friday’s agreement. Clearly, we should welcome the fact that it aims to remove the need for tariffs, customs checks and controls. It will be called a facilitated customs arrangement. I understand that the White Paper was going to be published on Thursday; perhaps the Minister might care to give us some detail on how a facilitated customs arrangement is intended to work.
I have taken a number of interventions because this is an extraordinarily important subject. It goes to the essence of what we need to put in place before we leave the European Union and why. Many of us would say that these issues should have been sorted a long time ago, but we are making a good start now. I hope that this debate will contribute to people’s understanding of some of the issues that this country’s businesses will face as we leave the European Union.
We have 30 minutes until the Front-Bench speeches begin and three people are seeking to catch my eye. Even I can do the maths: there are no more than 10 minutes each, including interventions.
It is a pleasure to serve under your chairmanship, Mr Streeter. I congratulate the hon. Member for Wimbledon (Stephen Hammond) on securing the debate. We serve together on the Treasury Committee and he has presented a typically thorough and well-grounded case for our having frictionless trade and preferably for being in a customs union. I will make a few remarks based on the experience of businesses in my constituency and then ask the Minister a couple of questions.
My constituency in County Durham has a lot of manufacturing and some agriculture, and people in both those areas are interested in the customs arrangements. We do not have significant service sector exporting. I have people who work in the Nissan factory in Sunderland and in small engineering firms that supply the factory. I have a GlaxoSmithKline pharmaceutical plant, which employs 1,000 people, and PPG, a supplier of coolants and sealants to Airbus, which employs 200 people. What north-east manufacturers are concerned about is frictionless trade and regulatory alignment. Those are their top two priorities.
The north-east chamber of commerce has done a great deal of work with the Department for Exiting the European Union and I am sorry to say that up until now it has been disappointed with the Department’s response. The chamber sent people to train departmental officials, and as the process of the last two years has gone on those officials have become so demoralised that more of them have left the Department than have used the knowledge the chamber gave them. A fortnight ago, the chamber’s chief executive, James Ramsbottom, said that political chaos was reducing business confidence.
We all hope that the Chequers agreement is a step forward—I think it is—but we would like to see a few more steps taken in the north-east. The Government’s assessment has shown that the region would be the part of the country worst hit by a hard Brexit, with a 16% fall in output and unemployment shooting up to a quarter of a million. That would be more people unemployed in our region as a result of a no-deal Brexit than we had in the depths of the recession in the 1980s, when the steel industry and coal mining were being closed left, right and centre.
The hon. Member for Wimbledon pointed out very well the reality. This is what my constituents say to me about the significance of the gravity model: it is expensive to move components around the world. People cannot start importing from Thailand at the same cost as they import from the Netherlands. I urge the Minister to go back to his colleagues with the message that we have to get away from this unicorn Brexit.
As well as wanting frictionless trade, people want no disruption to current systems. I will use examples from each of the firms I mentioned in asking the Minister to explain how a system using one bureaucratic set of rules for imported goods and another exported goods will work. I simply do not understand how that distinction will be made.
Nissan gets components in as part of its integrated supply chain and makes cars. It sells some cars in the UK, some into the European Union and some into third countries in Eastern Europe beyond the EU. When it gets the components, how will it know which will go into which cars to be sold in which places? I just cannot grasp that.
We have the same situation with GlaxoSmithKline pharmaceuticals. The company makes drugs with inputs from Ireland—it is a big multinational with plants all over the world—and sells them across the channel in France. How will it know which packets are being used in England and which in France? Or is it the Government’s idea to just sort of pro rata the sales? How would that work if, for example, there was a flu epidemic in France and not in England? Prediction would not be possible—the figures would have to be worked out post hoc and then people would have to claim money back. I simply do not understand how that would work.
Let me give the third example, of PPG. The company makes a component that goes into an Airbus product but has no control over what Airbus does with its outputs. It does not know whether Airbus is selling into Britain or France or Germany, so how will that work? Ministers are doing their best but that they need to do better, and I very much hope that this afternoon the Minister will enlighten us a little more about how precisely this will work.
It is a pleasure to serve under your chairmanship, Mr Streeter. I am grateful to my hon. Friend the Member for Wimbledon (Stephen Hammond) for securing the debate. We applied for the ballot on the same day and he has twice been luckier than I have. He clearly carries the luck with him.
I will focus my remarks on three areas: what the public voted for, the agreement made at Chequers last week, and rules of origin. It is vital that we respect the referendum result. However, I argue that far too much has been read into it. The public gave us a direction of travel, not a road map.
It will be instructive for my constituents if I cite statements made by Vote Leave and its leadership. Not only did they not describe the end state during the campaign, but they refused to do so as a matter of strategy. The brains behind Vote Leave, Dominic Cummings, asked of the campaign: does it
“need an exit plan, or does that simply provide an undefendable target and open an unwinnable debate”?
The Vote Leave application for designated campaign status went even further, stating that the sole purpose of the organisation was to campaign to leave the European Union in the referendum. In other words, no plan for how to approach our customs arrangements was put to the public, only the high-level objective of leaving the EU. The application continued to state that the full range of options for leave deserved to be heard and that they were “legitimate” and “equally valid”. That hardly sounds like a campaign with a solid plan to put before the electorate. None of those statements suggested for a moment that leaving the customs union and the single market would be the clear consequence of voting to leave.
Some of my constituents in Eddisbury voted to leave the EU, the customs union and the single market, but for every email I get pointing that out, there are others that say their vote to leave was not a vote for a hard Brexit. My suspicion is that there is a majority in Parliament and the country for a soft Brexit, but no majority anywhere for the kind of Brexit supported by the European Research Group members of my party. The Government’s analysis is an effective admission that some leave campaigners have overstated the economic benefits of free trade to justify taking us out of the customs union. That is why I am pleased that the Government have come to an agreement about their negotiating position. It is a welcome dose of reality and a concrete plan, which has eluded DExEU to date.
I support the outline of the plan and look forward to the publication of the White Paper, which I hope will come this Thursday as promised, because Parliament needs time to examine the document in advance of the Taxation (Cross-Border Trade) Bill and the Trade Bill next week. The outline, however, contains much that I can support. A common rulebook for goods and agriculture and a combined customs territory with the EU will go a long way to resolving both the concerns about the Irish border and more generally about ensuring free and frictionless trade. The major industry sectors in the north- west are car manufacturing, chemicals, pharmaceuticals, aerospace, and energy, particularly nuclear energy.
I have spent five hours a week pretty much every week since we have been sitting in this place listening to evidence to the Business, Energy and Industrial Strategy Committee. Business after business has come and said that they do not want to apply under different rules. They say that very often the rules have been British rules that we have taken to Europe—rules on consumer protection, on airline safety, and on how to safely test pharmaceutical products. We have been setting the standards and exporting them not only to Europe, but globally. It is clear that the move forward at Chequers has much to support it in terms of the common rulebook. Frictionless trade is not only about customs and tariffs, but about non-tariff barriers, and it seems sensible and pragmatic to say that there are many areas—vast areas—where we do not need to diverge. We have set the standards. Very often we have higher global standards than other nations. We have much to be proud of as a nation in how we have led the way in Europe.
As for getting the detail right, I did not stand to get elected as a Conservative to increase costs on my businesses or to tie them up in further bureaucracy. Far from it. As my hon. Friend the Member for Wimbledon has described, 180,000 firms would need to have additional paperwork and fill out additional customs requirements. If we can reduce that, and if we can get and preserve frictionless trade in our negotiations with Europe, it has much to benefit both the European side and ours.
I am very familiar with the port of Holyhead. We have only one World Trade Organisation-compliant port in this country—Southampton—so all the other ports would need major infrastructure. At the moment, the technology for filling out manifests means that it takes a minimum of four hours from loading goods on to a ferry for them to be processed before they can come off at the other end. Crossings such as Dover do not last four hours, and we can immediately see the problems caused.
I, too, have concerns about services and the fact that many goods are sold with services. An iPad, as my researcher would say, is an expensive paperweight if it does not have the software that comes on it. We need to look at how we can include services, because they are so important for our economy. The loss of access to European markets would be devastating for the many people in Eddisbury who work in the service sector.
Although regulatory alignment on goods is important, it is not enough on its own and this is where we have to look at the impact on our trade of rules of origin. My hon. Friend the Member for Wimbledon was not aware of my speech and I was not aware of his, but we have both picked on the same point about the threat that rules of origin potentially pose for us. Outside a customs union, the UK’s exports to the EU would no longer be exempt from the EU rules of origin. A detailed analysis of supply chains and the cost of obtaining a proof of origin certificate would be required. A complex motor, for example, has many different parts, and every nut, bolt and screw has to have a rule of origin certificate. It is not a simple and easy process to undertake.
It would be a substantial burden to exporters and would act as a significant non-tariff barrier even in a free trade area. The Centre for Economic Policy Research even suggested that the cost of proving the origin of a product could be between 4% and 8% of the value of the goods. That would have a knock-on impact on our ability to roll over trade deals that we currently benefit from as a part of the EU, because the trade agreements treat the EU as a whole when considering whether rules of origin apply to goods that are
“sufficiently processed in the EU”
so as to qualify for the preferential tariff rates.
Japan identified “cumulative rules of origin” as an issue in its letter to the UK and the EU. That is why I have raised questions about the Government’s plans to retain membership of the regional convention on pan-Euro-Mediterranean preferential rules of origin. I hope the Minister has something to say about that. I look forward to further detail in the White Paper, but I welcome the steps forward made at Chequers.
It is always a pleasure to speak in debates, Mr Streeter, no matter what the issue may be, but, as a Brexiteer, I will give an opinion that might not go down well with others in this Hall. However, it is my opinion and that of many in my party. We are where we are and we have to try to find a way forward. I am very much one of those guys who tries to find a way forward. Coming from Northern Ireland and from a political background, and understanding the political process of where we have got to, I feel that if there is a will to find a way forward, we can find it. I want to express my thoughts in a constructive fashion, and hopefully other Members will appreciate what I try to say.
First, I thank the hon. Member for Wimbledon (Stephen Hammond) for securing this debate and allowing me the opportunity to speak in it. He succinctly and purposefully put forward his viewpoint, as other Members have done. With the increased uncertainty regarding the bill for our leaving Europe, it is more important than ever that we remember what people voted for when they voted to leave in June 2016. I am clear about what I and the constituency of Strangford voted for: we voted to leave by 56% to 44%. I am very clear about that.
I asked the Prime Minister a question yesterday on fishing, which is important for my constituency, and she answered it. I hope Members get a chance to read it. One could not be anything but clear about what the Prime Minister said in relation to fishing. I am reassured by her response to my question. The Minister’s Parliamentary Private Secretary, the hon. Member for North Cornwall (Scott Mann), is interested in fishing issues and I know he will have taken note of that.
That is something on which he and I would be on the same wavelength; we are probably both encouraged by it.
People did not vote to straddle the EU and the UK, for outside influence in law making to be countenanced, or to retain residual membership of Europe. They voted to leave. I voted to leave, and my constituents voted to leave. That is the principle on which everything we do must be based. I understand that the complexities are incredible. I look on everyone in the Chamber as friends and colleagues, and sometimes we differ in our opinions and the way we look at things, but the right hon. and hon. Members present want, as I do, to find a way to an agreement and understanding with Europe.
The hon. Gentleman is right that a 52% to 48% result has to look like a compromise that the whole country and Parliament can somehow find a way to get behind, so does he agree that the Prime Minister’s outline proposals from Chequers go some way towards that? They would satisfy him as to what is needed for the fishing industry; but I will never forget the unemployment figures given by the hon. Member for Bishop Auckland (Helen Goodman). Surely the hon. Gentleman must agree that the right proposals will safeguard all the industries in question, and that they must include close alignment to something like the customs union.
I have some concerns about the customs union; but the hon. Lady will know that. We need to focus on how to get a workable relationship with the EU, where it understands that it needs us and—I have to say—that we need it. There is a need for us both to find a suitable—perhaps complex—way forward, ensuring that trade can continue. Like the hon. Lady I am concerned about how business will be affected. We cannot ignore the comments made by big business this last while; but many other businesses are quite confident about the future. I would rather there was a clear agreement and understanding. I take my opinion from Northern Ireland and the Republic of Ireland; I am conscious of that perspective, and where we are.
I am grateful to my hon. Friend—he is truly a friend. He speaks about the importance of listening to business. Last week the Financial Times carried a report suggesting there were fears about food rotting in ports as a result of the Government pursuing a no-deal Brexit. The hon. Member for Strangford and the small group of 10 MPs that he is in have considerable power with the UK Government. Will he use that to impress on the Government the view that we cannot have a no-deal Brexit, as it would be so bad for ports, including those of Northern Ireland?
I do not believe there will be food rotting at the ports. I am more of an optimist about the future. Forgive me for saying it, but I always see the glass as half full rather than half empty. I look positively for the way to achieve our goals. I read the same press report as the hon. Gentleman, but we need to focus on where we are.
The Prime Minister has set out her stall clearly. I am a confirmed Brexiteer—it is not a secret, and hon. Members will know it. I feel that we would be better out of the EU, and I want to be out of it. The Prime Minister has made it clear where we are going; but I feel we need an agreement with the EU, to move forward. I hope that the Prime Minister can achieve that and I support her in trying to do it; but I am a single voice in the Democratic Unionist party. There are 10 of us, with a collective voice, and the 10 of us together will support the policy we agree on. I suppose that at this moment we may not be altogether sure what the Prime Minister’s policy is; but I hang on to the assurance that she gave me yesterday about fishing. I want to hang on to her other assurances as well.
I understand that the divorce settlement is onerous and acrimonious, but there is a way forward and we must find it. How are we, in the Republic of Ireland and in Northern Ireland, to achieve it? Last year I spoke at Irishfest in Wisconsin. It was a very good event. The Culture Minister of the Republic of Ireland spoke about Brexit from the Republic’s perspective, and I spoke about it from the Northern Ireland perspective. When the debate was over there was not that much difference between what we were trying to achieve. It meant we both had a mind to find a way forward. I want the border as it is. Administratively there must be a way we can get that.
We must also be ever conscious and mindful of the security and safety of the United Kingdom of Great Britain and Northern Ireland. As is true anywhere, the Government have a responsibility for the safety of every citizen. How are they to go about that? It will be done in the same way as the Garda Síochána, the Police Service of Northern Ireland—and before that the Royal Ulster Constabulary—MI5, MI6, and all the other bodies involved have done that work over the years. That is quite easy. Vehicle number registration is something that perhaps we have not done much with. The agri-food sector is very important for my constituency and it can be considered as an example, administratively; milk products cross the border three times and that happens easily because we are in the EU. However, we will be out of the EU on 31 March, so we must look towards that time.
The Exiting the European Union Committee visited south Armagh at the end of last year and of course the border we saw then is the one that the hon. Gentleman wants. Everyone we spoke to in the north and the south wants it—that is, virtually no border. Does the hon. Gentleman agree that it is also desirable to have a similar border between Dublin and Holyhead?
I am sure that the Government will respond in relation to the arrangements that are already in place. I do not have the knowledge of Holyhead and what is going on there to comment; but I am fully aware of what happens in south Armagh and in the Republic of Ireland and Northern Ireland, and I think I speak with some authority about that.
I want to be careful about the time, Mr Streeter; am I allowed some leniency as to extra time?
There is a minute to go.
My goodness! Then I will go on to mention that the Prime Minister said at Prime Minister’s Questions that we are working towards a
“Brexit that ensures that we are out of the customs union, we are out of the single market, we are out of the jurisdiction of the European Court of Justice, we are out of the common agricultural policy, we are out of the common fisheries policy, we bring an end to free movement, we take control of our borders, and we have an independent trade policy, but we are also able to have a good trade arrangement with the European Union, protecting jobs and prosperity for the future.”—[Official Report, 4 July 2018; Vol. 644, c. 315.]
That is what I wanted to hear, and I will support her to achieve that.
My party’s leader, Arlene Foster, has said:
“People voted to take back control of their laws, borders and money, not to make Northern Ireland’s constitutional framework resemble the backside of a tapestry.
To create some kind of hybrid status for Northern Ireland where we would be subject to laws and regulations set by others over which we would have no say, whilst setting us apart from our biggest market in the rest of the UK, is sheer madness. It would be the road to economic ruin and the beginning of the constitutional break-up of the United Kingdom.”
People cite the Belfast agreement as a reason to retain a special status in the Union. They say that the terminology that asks for the encouragement of cross-border trade means that we must continue the status quo. That is not the case. The only say that the Belfast agreement has in the matter is the fact that any calls for unification with Ireland must be done through a border call. That has not been done. A back-door unification through a segregated UK is not acceptable. Let us make it clear what we are saying. I look to the Minister in this matter. This customs arrangement must ensure that the integrity of the UK is retained, and that is not simply for the benefit of Northern Ireland—it is for all of us, the United Kingdom of Great Britain and Northern Ireland. As I often say to my Scottish National party friends, we are better together.
On that note, Mr Streeter, I thank you for chairing the debate and congratulate the hon. Member for Wimbledon (Stephen Hammond) on securing it. I also want to mention the fact that there are quite a lot of people in the Public Gallery, which is unusual. It is good for people to see that debate in this place can be respectful and that it can be conducted without shouting as we perhaps do at Prime Minister’s questions. It might be fairly dry, but the issues we are debating are important to businesses in our constituencies. I will save most of the particularly lengthy speech that I could make for the debate on the Taxation (Cross-border Trade) Bill next week. I am sure that the two Front Benchers have heard most of it already anyway. As repetition is encouraged in this place they will be delighted to hear it again next week.
You will not be surprised to hear, Mr Streeter, that the SNP’s position is that we should stay in the EU. Scotland voted to stay in the EU, and I believe that is in the best interests of people in Scotland. That is not just because people voted to remain, but because I passionately believe that being a member of the EU has helped us culturally, and also had a huge economic benefit. If we cannot stay in the EU, I think we should stay in the single market and customs union. A number of issues about staying in the customs union have been rehashed and discussed in this debate and I will mention a few of them, but first I wish to comment briefly on the Chequers plan.
The Chequers plan should have been published before article 50 was triggered, and we should have had this level of certainty about the UK Government’s future plans at that stage. Businesses are worried about what will happen—in a recent poll, mainly small businesses said that they are using only in-house expertise to plan for what will happen post-Brexit. They are not bringing in any specialist knowledge, which is a problem. At this point, however, they cannot bring in specialist knowledge to help them plan, because we do not know what will happen. Even the plan from the UK Government—the Chequers agreement, as I am sure it will be known—provides no certainty because we do not yet have an agreement with the EU, which is fundamental. This is a negotiation, and we need certainty for businesses so that they can work out what customs arrangements will look like.
The hon. Member for Wimbledon spoke at length about some of the bureaucracy involved, and that is a key issue in leaving the customs union. He gave the statistic of £4 billion a year in extra bureaucracy, which is a phenomenal amount of money. If a two-minute delay at Dover becomes a 17-mile queue, that would be totally unmanageable, but there are not yet any plans. The UK Government issued a written statement about the possibility of creating extra lorry parks, but that will not cut it. We will need significant infrastructure investment for any delay to be manageable, which is a real issue.
I will come on to rules of origin checks, but phytosanitary and animal health checks will also be required at the border, which is a particular issue for the agricultural industry. As everybody knows, Scottish food is the best in the world, and being able to export it to the EU is incredibly important to us. Someone who is exporting langoustine to the EU does not want it to sit in a lorry for even an extra hour, because it will not be in a very edible state once it gets there. There is therefore a real concern about the possible impact on the quality of our exported food if there is any sort of delay.
Non-tariff barriers and rules of origin are important. The hon. Member for Eddisbury (Antoinette Sandbach) raised a point about rules of origin that I have mentioned previously, and in particular the rolling over of the EU’s current free trade agreements with third countries. It is incredibly important to ensure that those free trade agreements include cumulation, so that when cars are sold that do not meet the 65% content rule—for example, if they are being exported to South Korea—cumulation of EU content with UK content can be included to allow that free trade agreement to continue. If those free trade agreements are not rolled over with an element of cumulation, on the day that the UK leaves the EU we will no longer be able to export cars to South Korea. That will be an issue for other countries as well, but the car industry has that 65% figure, which is important.
Although the UK has a system of authorised economic operators, its system does not have the same flexibility to allow someone to become an AEO that exists in some other countries. The UK Government have said that being an authorised economic operator will help with exporting, which it will. However, that AEO system needs to be more flexible and ensure that people can more easily fulfil the requirements to become an AEO. If there are any additional customs barriers to those that currently exist, many more people will need to apply to become an AEO and have less friction in their trade.
There is not yet clarity on how rules of origin will look, or on filling in the form, and I am slightly concerned that that was omitted from the Customs Bill. At the moment, the British Chambers of Commerce has things such as certified rules of origin, but the Bill does not state what our rules of origin form will look like, or whether the UK Government will create a form that business can fill in to replicate the EUR 1 form. Obviously, we cannot continue to use the EUR 1 form because we will be outside the EU, but the Government need to copy and paste it in, and it would be good if they could give certainty to businesses about what that form is likely to look like, so that they know with what they will be expected to comply.
We are told that the benefit of leaving the customs union is that we will be able to strike free trade agreements, but earlier the point was made pretty comprehensively about how low those free trade agreements will be. Earlier this year The Sun published an article called “Vote for bargains”, which it later corrected. It was put out by members of the European Research Group, and it stated that there would be a £1 reduction in the price of butter as a result of us leaving the EU and being able to reduce our tariffs. In reality, only 0.23% of the butter that we import comes from outside the EU, and that comes from New Zealand. It does involve a tariff, but it is only 0.23% of the butter that we import. Crashing out without a trade deal and having tariffs on EU butter would be a real problem for the UK. My best guess is that rather than £1, we are looking at a saving of a couple of pence, but that would be only for companies that export butter from New Zealand because it is not sold in any retail way that I could find.
The article also stated that there would be a £44 saving on a TV from South Korea. Given that the EU has a trade deal with South Korea that includes zero tariffs on such goods, it is important for us to challenge such assertions when they are made. Misinformation is being spread about the cost of tariffs, but in reality that cost is minimal compared with the huge cost of non-tariff barriers. As the hon. Member for Bishop Auckland (Helen Goodman) said, if the gravity model comes into play, we do far more trade with the EU than with anybody else. If a country has a free trade agreement with another country, it will have some regulatory alignment with that other country; it will not be free to make all its own rules because it will have to sign up to some of that country’s regulations—we have already discussed chlorinated chicken, for example. It is not the case that the UK will be a sovereign nation that is able to make all its own rules; that is not how free-trade agreements work—they involve give and take.
I think the customs union is vital. The Chequers agreement does not solve many of the issues that we have been discussing, or give certainty to businesses. It is also likely to be unacceptable to the EU and it does not solve the problem of Northern Ireland because of issues with technology. Next week, during discussion on the Taxation (Cross-border Trade) Bill, we will have the opportunity to vote on an amendment tabled by the right hon. Member for Broxtowe (Anna Soubry), which states that the UK’s negotiating position should be that we stay in the customs union. It is vital that Members support that amendment, and I think we have a majority in the House of Commons for that. If that is not the will of the people, I do not know what is.
It is a pleasure to see you in the Chair, Mr Streeter, and I congratulate the hon. Member for Wimbledon (Stephen Hammond) on securing this debate. I do not wish to do him any harm, but I can say honestly that I am always prepared to listen to him, and I found his speech lucid, informed and persuasive.
You will understand what I mean, Mr Streeter, when I say that when I was sitting in the Library yesterday, this was not an easy debate to prepare for. Major issues within the Cabinet were being resolved in public, and it was not clear whether today would begin with the Prime Minister being in a position to say that she can go forward and deliver the Brexit deal that protects jobs and the economy that we all want. I do not say that with any pleasure or partisanship, because as I listened to the hon. Gentleman, I could not help thinking that at this stage we should not even be having this debate. We should know the answers to many of the questions he raised, or at least we should know the UK’s preferred answer to those questions.
We cannot deny that, since the referendum result, there has been a lot of delay and dithering, and the lack of clarity that that has caused has put jobs and living standards at risk. That delay and lack of clarity is operating within an economy that still faces many significant challenges, such as the collapse in growth, huge problems with productivity, and the fact that many of our constituents live very difficult lives—those on both Front Benches agree about those challenges, even if we propose different solutions.
It seems reasonable to say that the Government by now should have come up with a credible and comprehensive customs plan for post-Brexit. Recent events at Chequers indicate that the Government are moving away from the type of Brexit advocated by many Tory Brexiteers and towards what we might call a soft Brexit—I would simply call it an economically realistic Brexit—but the Government’s proposals at Chequers stop short of the comprehensive customs solution we feel is needed. Meanwhile workers, businesses and everyone who voted in the referendum, no matter how they chose to vote, are reasonably seeking reassurance and security over what Brexit is likely to mean for their future and that of the country.
As the Opposition, our message has been clear and consistent: we respect the result of the referendum, but we still want to work with European partners in the economic interests of the country. Our priority is simply to get the best deal for jobs, living standards and the economy, and we are pragmatic about how that should be done. We will reject any race to the bottom in workers’ rights, environmental safeguards, consumer protections or food safety standards. We want people in this country to continue to enjoy the same protections as our cousins on the continent. That is why Labour proposes to negotiate a new comprehensive UK-EU customs union to ensure frictionless trade between the UK and EU. In particular, we want to ensure that there are no tariffs with Europe and the continuation of advanced supply chains, particularly in manufacturing, which was well described in speeches today. Crucially, we want to help avoid a hard border in Northern Ireland.
A number of northern businesses have come to me. They are all globally owned, global manufacturing and exporting businesses that use the port of Dover. They have said they are now looking at contingency with other ports because of the proposed customs arrangements. They are concerned that every port will have the arrangements and their businesses will have to move outside the UK. Are the proposals that my hon. Friend is outlining not exactly the sort of proposals that will alleviate the fears of those businesses?
My hon. Friend is absolutely right. I say to all Ministers that, for many of us, this matter is not an abstract question. I am a little younger than my hon. Friend the Member for Bishop Auckland (Helen Goodman), but I grew up in the north-east in the 1980s, not far from her constituency. It was clearly a time of substantial turmoil. We had the miners’ strike and the shipyards closing. The modern prosperity of those areas has been built around a relationship with the single market, the European Union and inward investment. Many of my schoolfriends work in that Nissan plant, which is the most efficient car factory in the world. There is a plant in Mexico that disputes that, but we are pretty sure we have got it. The Government should not underestimate just how willing many of us are to fight to ensure that the next generation do not have to undergo the kind of economic turmoil that many of grew up within. They should recognise the benefits that have been brought from that relationship.
The Taxation (Cross-border Trade) Bill—many of us here are veterans of its Committee—ostensibly sets out from the Government’s point of view how we will create a functioning customs framework for the United Kingdom once we leave the European Union. Many of us have read all of that Bill, and there is nothing in it that guarantees frictionless trade through UK ports from the moment of exit. There are no measures that properly resource Her Majesty’s Revenue and Customs for the task ahead. There is nowhere near sufficient detail on the powers and provisions of the Trade Remedies Authority, which will be charged with securing vital British interests.
Frankly, it is just an enabling Bill. The political decisions that will be required to decide whether we use the powers within that Bill have not yet been taken. They may have been taken at Chequers, but we will need to see more detail on that and the political fallout. It is still fair to say that the Government have failed to offer specifics on what the new customs system will look like, how it will work and, crucially, whether it will be ready on time. Huge underlying questions remain about whether the current customs declaration service programme can deal with the sheer workload and pressure coming its way post-Brexit.
Everyone in the House agrees that we must avoid the nightmare scenario of gridlock at UK ports with lorry queues stretching as far as the eye can see, yet the Government continue to refuse to acknowledge that HMRC has had its staffing levels cut substantially—they have been cut by nearly a fifth since 2010. There are still plans to close 137 HMRC offices across the country. HMRC has 2,000 less staff today than it did on the day of the referendum. That has to bring into question our ability to deal with a future customs regime.
In contrast, we recognise the urgent need to hire and train more customs officers and HMRC staff, particularly if the Government are to meet their ambitious target of a fully operational customs system by 2019. In addition, the Public and Commercial Services Union only last week warned that strike action looks increasingly likely after the Treasury announced without consultation that the pay cap would be lifted only through cuts and increased workloads across Departments. That is not an ideal position to be in, based on where we are today.
Post-Brexit, we will need the ability to enforce against the dumping of unfairly priced goods. At the moment, those remedies are provided in conjunction with the EU, but on leaving the UK will have to enact and manage its own trade remedies. The measures are spread across a number of pieces of legislation and are of great interest and importance to UK manufacturers. The manufacturing industry remains an indispensable part of the UK economy. Some of the speakers today, particularly my hon. Friend the Member for Bishop Auckland, articulated just how specific and detailed the questions are that we are receiving from constituents on how the system will work. The complexity of modern manufacturing does not seem to tally with some of the Government’s aspirations for how the system will work going forward.
We want the Government to set out a clear path to our mutual objective of creating a functioning institutional framework for the handling of customs once we leave the European Union. Crucially, we must recognise that the final customs regime post-Brexit will be a result of the deal we strike with the EU, not the deal we strike among ourselves in Parliament or between different factions of the Conservative party. We must be ready for that regime, but we feel that the overwhelming evidence favours the UK entering into a continued and renewed customs union with the EU. The Government perhaps moved some way towards that last weekend. Perhaps they will go just that little bit further to get us the post-Brexit customs regime that this country needs.
Before I call the Minister to respond, I ask him to leave two minutes for Mr Hammond to have the final word.
I will certainly leave two minutes for my hon. Friend the Member for Wimbledon (Stephen Hammond).
It is a pleasure to serve under your chairmanship again, Mr Streeter. It is also a pleasure to follow the hon. Member for Stalybridge and Hyde (Jonathan Reynolds). I believe we might be facing each other next week on another occasion. There seems to be a sense that something is happening on Monday or Tuesday next week. I also congratulate my hon. Friend the Member for Wimbledon on securing the debate.
As many have suggested, it might be worth me injecting as much clarity as I can on the Government’s position. While Members made extremely valid and well-put points about the downsides of an arrangement in which we perhaps have no deal and there is a hard border between us and the EU27, I am not so sure that the merits of the proposition that the Cabinet agreed at Chequers have come through.
As we all know, the main problem with a hard border or even with the maximum facilitation arrangements is that we would have a border between ourselves and the EU27. We would have various degrees of friction that we would seek to reduce under the max fac model through various facilitations and the use of technology, but we know there would be costs associated with that kind of arrangement. That is why at the Chequers meeting we wisely moved towards something that works much better in that respect. In terms of the cost of the kinds of frictions we might have with some of the scenarios that have been conjured up this afternoon, the head of HMRC tallied the cost of the additional customs declarations that would have to be entered into as a consequence of a border between ourselves and the EU27 at about £20 billion a year. Those are not insignificant costs to business, which the Government most certainly recognise.
The model we are now looking at is a facilitated customs arrangement, where we will act effectively as the agent for the European Union at our borders when it comes to goods coming through the UK into the EU. We will be collecting the European Union’s tariff at that point. For goods going directly into the United Kingdom for consumption or end use in our jurisdiction, we would apply the UK tariff at that point.
We would also have a common rulebook, which means that for regulation pertaining to goods and agricultural products, we would not, at least initially, have any regulatory misalignment between ourselves and the EU27. The significance of that is that we will therefore not require border and customs arrangements between ourselves and the EU27, and indeed between Northern Ireland and the Irish Republic.
On goods that are coming in from a third country, how will the Government work out on which bits of a shipment to charge the UK tariff, and on which bits to charge the EU tariff?
I point the hon. Lady to her question about the White Paper. There will be more detail to come on just those kinds of questions, and of course much of this will remain to be negotiated. Our estimate is that the vast majority—well in excess of 90%—of goods coming in could be charged directly at the border as an EU good, or would be non-tariff anyway under both EU and UK arrangements, or face the UK tariff accordingly. A very small proportion might fall into the category to which she refers.
That was the crux of my questions. Listening to the Minister, I realise I perhaps did not formulate it quite as accurately as I should have. The question is not how much comes for one purpose and how much comes for another purpose. The question is how the person importing knows what the purpose will be, and where the final user will be. That is the tricky question. I can see the Minister frowning, so he knows it is tricky as well.
When goods come in and the end-use cannot be determined, we foresee a situation where we might have to charge the higher tariff, with a rebate mechanism in place once the end-user can demonstrate that those goods have indeed been consumed, or found their end-use, in the United Kingdom. As I say, some of those matters will be addressed in the White Paper that will be with us this week.
Hon. Members have rightly mentioned supply chains and the importance of goods and components going in and out of the EU27. The points raised by the hon. Lady in the context of Nissan will be accommodated substantially by the model we are putting forward. My hon. Friend the Member for Wimbledon mentioned VAT systems. We have made it clear that we are looking in the negotiations to ensure that we have the best of the arrangements that are there at the moment, in terms of systems and making our VAT interactions as smooth as possible, albeit we will look to control rates of VAT. In the recent Budget the Chancellor commented on the abolition of acquisition VAT and the move towards import VAT. We recognise that there are certain cash-flow impositions on the part of business that we will want to take into account.
A number of hon. Members rightly mentioned ports, and I think a couple specifically suggested that a two-minute delay could lead to a 17-mile tailback at Dover. We are, of course, extremely cognisant of that risk, but once again, it applies if we need border and customs arrangements in place at the port of Dover, Holyhead and the other ports that have been mentioned. Under this model, that would clearly not be the case.
My hon. Friend the Member for Wimbledon also made a point about free trade deals and how the approach of the facilitated customs arrangement would facilitate them. Most importantly, as distinct from being in “the” customs union, or in a customs union with the customs union, we would not operate a common external tariff, so we would be free to set our own tariffs. The fact that we have a common rulebook between ourselves for goods and agricultural products means that the issue of regulatory barriers, which might otherwise be in place for us in doing FTAs and bringing goods into the UK that might then go on to the European Union, would also be substantially resolved.
The Minister is obviously right in what he has just said about tariffs. Does he also accept that the rulebook and some of the standards in it are likely to restrict our ability to have free trade with certain countries if they do not meet those standards?
My hon. Friend is right inasmuch as that is potentially the case if there are any inconsistencies—we might otherwise have varied our rules accordingly to accommodate an FTA. However, the Government have made it clear that although we will have total alignment at the start, we will not seek an arrangement where we will be unable to deviate from that in the future, albeit we recognise that there will be consequences for doing so.
A number of hon. Members raised the issue of preparedness, and I assure them that we will be in a good position and ready on day one if we have a no-deal situation. The Chancellor allocated £3 billion for Brexit preparations in the last Budget. Her Majesty’s Revenue and Customs received £46 million last year and around £250 million in this financial year. We have already recruited, or have in train the recruitment of, around 1,000 new staff going into HMRC with a focus on borders. We have said that we will move that figure up to between 3,000 and 5,000. Some Members mentioned the customs declaration system. The National Audit Office has suggested that we are broadly speaking where we need to be to ensure that that system comes online and live before March next year.
The hon. Member for Streatham (Chuka Umunna) asked why the EU would allow us to collect EU tariffs when there are no such arrangements with any other trading partner. We are in a unique situation. We are a very large trading partner with the European Union. We have complete alignment at the moment in regulations with that market, so we start from a position that is not occupied by others.
I think I have gone through most of the points raised by the hon. Member for Bishop Auckland (Helen Goodman). I am grateful that she said that initially she broadly welcomed the proposals, and we should all do.
My hon. Friend the Member for Eddisbury (Antoinette Sandbach) made the very important point that we are seeking an arrangement that can command the broad support of the British people—an arrangement that ensures that the UK and the EU have frictionless access to each other’s markets for goods; that provides regulatory flexibility in the way that I have described; that enables commitments to Northern Ireland to be met and the Good Friday agreement to be honoured; that sees us leave the common agricultural policy and the common fisheries policy; that allows us to deliver an independent trading policy; that ensures that, in future, all laws in the UK will be legislated for by our Parliament; that restores the supremacy of UK courts; and that ends the free movement of people and vast payments to the EU. The broad majority of people in our country will welcome that achievement.
I hope that, particularly in the debate on Monday, Parliament as a whole comes together. This is a moment in our history where there are undoubtedly significant opportunities, but also a number of challenges. I hope we see the debate through that prism, rather than through anything that is rather more narrow and party-political. On that note, Mr Streeter, I gladly give the Floor to my hon. Friend the Member for Wimbledon.
Thank you very much. Mr Stephen Hammond will have the final word.
Mr Streeter, you will be pleased to hear that my final words will not be as long as my starting words. Thank you for being in the Chair this afternoon. I think you will agree that, although we did not have as many contributions as we sometimes have in such debates, they were of exceptionally good quality. I thank all hon. Members for contributing.
The Minister said at the beginning that he had hoped that we would set out a little more ambitiously some of the potential opportunities that the Chequers plan will afford. Today, he has heard everybody welcome that plan, but some hon. Members set out some of the considerable risks if we do not achieve the ambitions in it. We are grateful to him for setting out in his 10 minutes some of those ambitions in a little more detail, because they overcome some of the issues if they are enacted. He is right to make that entreaty.
I hope that after we have seen the White Paper this week, we can all join the Minister next week in supporting the customs arrangement. However, there are significant issues about rules of origin and the cost of bureaucracy. I know he knows that, and I hope the Government keep it in mind as they move forward.
Question put and agreed to.
That this House has considered customs arrangements after the UK leaves the EU.
Open Access Rail Services
[Mr Philip Hollobone in the Chair]
I beg to move,
That this House has considered open access rail services.
It is a pleasure to serve under your chairmanship, as always, Mr Hollobone. It is noticeable that the audience is fleeing just as the highlight of the day is coming on.
I secured this debate for two reasons: first, because I think the present system of rail franchising needs a certain amount of reform; and, secondly, because I am conscious that an open access operator will shortly put in an application to the regulator to deliver direct rail services to my constituency. I hope the application will be for four trains a day each way serving Scunthorpe, Grimsby and Cleethorpes, because that would be a great boost to the local economy.
Just last week, the Government acknowledged the important part that northern Lincolnshire and the Grimsby-Cleethorpes area have to play in the northern powerhouse, when the Northern Powerhouse Minister and Lord Henley from the Department for Business, Energy and Industrial Strategy visited north-east Lincolnshire to sign the pilot town deal, which promises considerable investment in the area. It also recognises the importance of the Humber estuary and northern Lincolnshire in particular to the national and regional economy.
The reality is that the south bank of the Humber is badly served by rail at the moment. The hourly service to Manchester airport is very welcome. It provides connections to Doncaster and Sheffield, which link to many parts of the country, but businesses and many Members of Parliament would greatly benefit from a direct train service.
I note that the former Rail Minister, my hon. Friend the Member for Blackpool North and Cleveleys (Paul Maynard), has joined us. I think I am right that he once described himself as an apostle of open access. Hopefully, he will continue to argue that case in the higher reaches of Government, to which he has succeeded in climbing. I hope the new Minister—I welcome him to the debate—has similar views. In recent appearances before the Transport Committee, the Secretary of State seems to have been more sympathetic and warmer to the concept of open access.
In my part of the country, Hull Trains has given a considerable boost to the economy of the north bank of the Humber. Grand Central, which I think is about to submit an application, will hopefully do the same for the south bank.
My constituency also benefits from open access services run by Grand Central, which covers Yorkshire and the north-east to London. It is a vital service, but this year it has been struggling and not performing very well. Does the hon. Gentleman agree that the recent frequent cancellations, the failure of air conditioning units and the overcrowding are worrying signs that require investigation?
I acknowledge what the hon. Gentleman says, and I have to say that I have experienced similar problems on some of my own journeys. Hull Trains, in particular, has recently gone through a rather bad spell, from which it has now hopefully recovered. That does not take anything away from the concept of open access which, as the hon. Gentleman acknowledges, has provided services to towns off the main east coast and west coast lines. That is essential if we are to develop the north-east and Humberside economies.
Will my hon. Friend give way?
I give way to yet another former Transport Minister.
Does my hon. Friend agree that the concept of open access could drive efficiency back into the railway system, where it is needed? He mentioned the failure of the franchising system. Network Rail’s inability to link to the requirements of the operator is one fundamental problem with the rail system. A slot auction system for access could give Network Rail an incentive to align itself with the operators’ objectives.
I thoroughly agree. My hon. Friend’s experience as a former Minister makes that a particularly relevant point.
We are currently experiencing record private investment in UK rail. In 2016-17, that investment totalled £925 million—the highest since records began. The vast majority—£767 million—was spent on rolling stock. Some of that went to Hull Trains.
Given the other demands on the Budget, the idea that more taxpayer investment would go towards the railways was a myth. I know the Opposition’s policy is to renationalise the railways, but those of us who remember the nationalised system know that, in fact, it spiralled down because of a lack of investment. The reality is that there are so many calls on Government investment that transport does not get what it deserves. If the Government have a choice between investing in the health service and improving the rail services to Cleethorpes, I rather suspect that the rail services to Cleethorpes would suffer.
On that point, I am a Labour and Co-operative Member of Parliament, and there are proposals for the co-operatisation of the railways. An open access operator—Go-Op—is developing a route in the south-west. Diversifying rail ownership is a big priority for the Co-operative party and for me as a Member of Parliament. Does the hon. Gentleman agree that we need diversity of ownership in the system?
I am perfectly happy to have diversity of ownership—that is what the free market would most likely deliver. Sadly, the history of British Rail did nothing to encourage my enthusiasm for a nationalised system. Indeed, British Rail ended the direct service to Cleethorpes in 1992.
There has been record investment and record numbers of journeys in recent years. Passenger numbers fell under British Rail but, since privatisation in 1994, the numbers swelled to 1.65 billion in 2015—almost triple the low point of 1982. Although there have been clear failings by Virgin Trains, it is vital to look beyond the headlines. Thanks to the Transport Secretary’s efforts, rail efficiency has been improved, ensuring that passengers and taxpayers get maximum value. On average, 97% of every pound of passengers’ fares goes back into the railway, which is very welcome.
Since Virgin took over its franchise in 2015, it has contributed more to the taxpayer than when the service was publicly run. Refurbished trains, additional services and improved ticketed access are just a few of the benefits that passengers have experienced. Of course, Virgin is not blameless in the debacle, but it is not alone. Network Rail, the publicly owned element of the railways, failed to deliver the promised improvements on which Virgin based its final projections.
I have been reassured by the Transport Secretary’s commitment to a new approach from 2020, with the first regional public-private partnership on the route. The partnership will have one brand, one management team and one leader, which will ensure that it is transparent and accountable to both Parliament and passengers.
A privatised franchise system on the east coast is preferable to the publicly owned system that preceded it. It has also been improved dramatically by the advent of open access operators, which provide constant competition to drive up standards and outcomes for passengers. The main problem is that the rail industry has been reformed to an unsatisfactory halfway house between nationalisation and privatisation. The solution, contrary to what many in the Opposition would argue, is not to nationalise the whole system—the experience of British Rail shows where that will take us—but to push ahead with privatisation and extend the market by allowing open access on other lines which could benefit so greatly from it. The hard left so often tell us that true communism has not been tried, but in actual fact true competition has not been tried on our rail network.
Open access could be a logical component of the Prime Minister’s mission, which she set out at the party conference last year, saying of free markets that she was
“prepared to reform them when they don’t work.”
The rail service is a prime example of a market underperforming. The solution, rather than to take the market out of the picture altogether and reverse all the progress made over the past few decades, is to reform the market, taking on the monopolies so as to expand it and allow it to flourish.
Competition must extend beyond the bidding stage to avoid the winner being granted a complete monopoly. The message to existing franchise operators and bidders should be clear: expect competition in future.
My hon. Friend is making strong points about competition and bidding. Is it not also incumbent on the Government to refine their bidding process, ensuring better information for potential rail service providers so that contracts may be structured to work for the long term?
That is an important point. It is essential that we move in that direction.
What has been the impact of competition to date? As I said, passenger journeys have increased by 42% on competitive lines, compared with 27% on those that have no competition; revenue has increased by 57%, compared with 48%; and average fares have increased by only 11%, compared with 17%. The east coast main line has open access operators such as Grand Central Trains and Hull Trains. Other rail lines around the country would do well to replicate that model.
Open access operators take no support from the taxpayer. The open access model creates competition on the line, which has led to fantastic results. In fact, since that has been the case on the east coast, the main line has had the highest satisfaction ratings in the country. The east coast open access operators deliver the very highest rates: in 2015 First Hull Trains and Grand Central each had a 94% passenger satisfaction rate, which was the joint highest score of all operators. That was confirmed in 2016 and 2017 in the passenger satisfaction surveys conducted by the Competition and Markets Authority.
In 2016, the CMA recommended more on-track competition generally, either with much more open access to compete with franchises on the same lines or with multiple operators to provide services in a fully commercial environment. Unlike the CMA, however, the Government are yet formally to declare their support for the principle of extended open access. Perhaps the Minister will take up the offer to do so this afternoon.
Open access competition has led to new routes being opened or reopened. Without open access on the east coast main line, would places such as Sunderland, Hartlepool, Halifax and Bradford have the frequent, direct and high-speed long-distance services from which they now benefit? Something similar desperately needs to be replicated in northern Lincolnshire.
The business community has made its support for open access clear. On services to northern Lincolnshire, the Hull and Humber chamber of commerce stated:
“Hull Trains have done an outstanding job for the city in improving our rail service from a one a day return with the main franchise holder (GNER) some years ago to seven a day now.”
In the north-east, the chambers of commerce have been equally supportive.
Some argue that more open access will reduce the franchise premium. I acknowledge that protection should be offered to the franchise holders given that they pay such a large amount for the privilege of operating services, but I ask the Minister what is more important: the Treasury getting additional resources or the passenger getting better services? Without doubt, we should focus on the passenger.
To conclude, I restate the importance of services into northern Lincolnshire, which have the support of business and of the local community who want the services for leisure travel. As I said, the Government gave northern Lincolnshire the title “energy estuary”. It is an important part of the northern powerhouse, which has focused too much on the north-west and the Leeds-Manchester-Liverpool triangle. An opportunity now exists to provide a boost to the local economy in many of our regions and provincial towns, and coastal communities in particular. I urge the Minister to do all he can to support the requirement for services into northern Lincolnshire. I very much hope that the application to the regulator in the not-too-distant future will be successful.
It is a pleasure, Mr Hollobone, to serve under your chairmanship, which I am sure has played its part in attracting not one but two illustrious former Rail Ministers to the debate.
I congratulate my hon. Friend the Member for Cleethorpes (Martin Vickers) on securing the debate and on the landmark town deal for Greater Grimsby that was agreed last week. More than 8,800 new jobs and nearly 10,000 new homes will be delivered in Greater Grimsby, including his proud constituency of Cleethorpes, thanks to a deal worth £67 million. The deal encompasses improvements to key roads and the establishment of enterprise zones to attract and support businesses in the area, further increasing investment and employment.
Competition through open access on the rail system has delivered benefits to parts of the network, as my hon. Friend highlighted and as the Competition and Markets Authority noted in its 2016 report on rail competition. For a number of years we have had successful open access operators on the network, such as Hull Trains and Grand Central, delivering important services to the communities that they serve.
In the right circumstances, therefore, the Government have supported open access applications—for example, Hull Trains’ successful application to run innovative services in 2017 in support of Hull’s year as the city of culture. Those services gave many more people the opportunity to enjoy the city’s excellent showcase, and they still operate today.
Ultimately, the independent Office of Rail and Road determines applications to run open access services based on industry consultation and its own analysis, balancing the range of statutory duties, which include benefits for passengers; the financial impact on the Government and, critically, existing passengers; and the performance impacts on the network. Grand Central’s 2016 application to run services to Cleethorpes was not granted by the ORR, but as a Department we want future applications that offer genuine benefits for passengers, serve new markets such as Cleethorpes and deliver innovative services that complement the existing franchising system. We made that position clear in “A Strategic Vision for Rail”, published last November, and in the guidance we issued to the Office of Rail and Road last July.
It is important to pick up on the point made by my hon. Friend about open access operators not receiving any Government subsidy. It is true that we do not directly subsidise open access operators, but they do not pay towards the fixed costs of the network on which they operate, and nor do they contribute towards the vital social services that the franchised operators that they compete with deliver. That creates something of an uneven playing field, which distorts the incentives of operators and means that we cannot realise the full benefits of competition for passengers.
The CMA recommended that, with robust reforms in place, open access could deliver benefits for passengers. The Department for Transport and the Government agree with that assessment. That is why we are working closely with the ORR on its proposals for reforming track access charges in the next rail control period CP6 from 2019 to 2024. Under those reforms, open access operators will pay an appropriate amount towards the fixed costs of the network where they can. We support that as a vital step in creating a level playing field between franchised and open access operators.
We have also consulted on a possible public service obligation levy. The levy would complement track access charging reform so that open access operators would also pay towards the social services that franchises deliver to many stations—those stations would not have the levels of service they do today if the free market was left entirely to itself. The Government offer greater passenger choice through the franchising system to deliver social as well as economic benefits. A greater contribution from open access operators towards the costs of the railways and a more level playing field should lead to more opportunities for open access services, but it is critical that we get the reforms in place first so we can start on the right footing.
It is important to state that franchised operators will still deliver the vast majority of services. We need public accountability to ensure everyone can benefit.
I welcome the Minister’s comments, particularly on creating a level playing field. Does he acknowledge that it would be beneficial for perhaps two franchise operators to operate on some of our main lines, such as the east coast? That would provide competition between them.
Indeed, in 2016 the Competition and Markets Authority said that there could be a greater role for open access of up to 30% of train paths on some routes. It suggested that it would like two to three open access operators on each inter-city route—east and west coast—and also on the Great Western main line. That recommendation was subject to important reforms to ensure that the open access operators make that appropriate contribution towards the cost of the railway. Those reforms were the ones I mentioned: to track access charging and the introduction of a public service obligation. Both would therefore see open access operators pay a sufficient contribution towards the overall cost of the railway.
It is right that government retains sufficient control over services and fares as well as operator profits through franchising contracts. Those contracts allow government to ensure the provision of socially and economically beneficial services that the market would not otherwise provide and protect passengers by regulating certain fares. It is also right to recognise the role that franchising plays in rebalancing the economy—franchise payments from the most heavily utilised parts of the network fund services in other regions, thereby maintaining the national network and providing a range of economic and social opportunities that would not otherwise materialise.
Open access has an important role to play in delivering new, innovative and commercially viable services for passengers, but it must fulfil that role as part of a railway that serves as a national asset and not just a business. That means operating alongside and complementing a franchising system that allows the railway to shape and support people, businesses and the economy all over the country.
Question put and agreed to.
Defined-benefit Pension Schemes
I beg to move,
That this House has considered protecting defined-benefit pension schemes.
It is a pleasure to serve under your chairmanship, Mr Hollobone, and to introduce this important debate. I welcome my hon. Friend the Member for Birmingham, Erdington (Jack Dromey) and the Minister; their presence underlines the importance of this issue.
There are few more precious assets than a pension. Pensions are not benefits; they are deferred wages deducted from the previous earnings of responsible working people who decided to save diligently during their working life, in return for financial security in retirement. As we all know, the funds that are made up of those savings invest huge amounts in our economy, as well as providing for our pensioners in retirement. Dignity in later life is something that every Member present values immensely. We should all feel duty-bound to do everything we possibly can to guarantee that for each and every pensioner in our country, without exception.
Let me begin by stating from the outset that I am no expert on pensions. I have called this debate because it is of the utmost importance to workers in my constituency. I believe that will be the case for all Members here today. It is incumbent on us all to develop our understanding of the key issues to ensure that the livelihoods of pensioners up and down our country are safeguarded, and to ensure dignity in later life for all.
Providing our pensioners with an income that they can live on comfortably is a key pillar of dignity in later life. The fight against pensioner poverty must therefore include a determined effort to provide the highest quality pensions in the most secure and sustainable way. Defined-benefit pension schemes have offered some workers precisely that for many years. The attractiveness of an affordable scheme that enables them to plan their retirement by knowing in advance precisely how much they will be paid is undoubtedly a key factor for many workers when choosing their employer. If we are to encourage more workers to save, responsible choices must be rewarded. Any pension fund deficits that arise are certainly not the fault of the scheme member, who has simply chosen to sacrifice pay today for pension tomorrow so that they have an adequate income after they retire. We must certainly avoid sending any message that deters current and future generations of workers from saving for retirement.
This issue is particularly topical in my constituency. Not only are many workers affected by the recent collapse of Carillion; more than 1,000 workers at Bentley Motors are in discussions with their employer about the future, and potential closure, of their DB scheme. Former Rolls-Royce employees, some of whom have been paying into the scheme for almost 50 years, face the prospect of serious financial hardship in retirement, with the potential to lose hundreds of thousands of pounds. The younger workers in the scheme stand to lose the most. I will come on to intergenerational unfairness towards the end of my speech, but I would welcome a commitment from the Minister to discuss this particular case with me in the near future, to see what support he can give to scheme members in Crewe and Nantwich.
Auto-enrolment has been a success in that it has increased the number of workers saving for retirement, so I applaud the Government’s continued efforts in that respect. However, auto-enrolment cannot be seen by employers as a retreat in which they can hide from their responsibilities under existing DB schemes. DB schemes appear to be working well—the Minister said so in his address to the TUC earlier this year. He also said that where employers can, they should continue their responsibilities. I wholeheartedly agree with him. Research by Mercer published earlier this month suggested that DB pension deficits at FTSE 350 organisations have more than halved since January. In 2015, FTSE 100 companies paid around five times as much in dividends as they did in contributions to their DB pension schemes.
The Green Paper that the Government published last year states that in 2015, companies with a DB pension scheme deficit paid out £53 billion in dividends—25% more than their disclosed deficits. It therefore seems logical to conclude that those companies have the ability immediately to repair their pension scheme deficits by feeding dividends into deficit repair contributions.
I do not pretend that there are no issues with individual DB schemes, but in aggregate such schemes do not appear to be inherently unaffordable. We must remember that they provide decent, good-value pensions. Defined-contribution schemes require much larger contributions to have a realistic chance of providing benefits equivalent to those paid by DB schemes. The value of the pot in a DB scheme is far higher in nearly every case, and both scheme members and their employer will have paid less for it.
There also appears to be an issue with overly risk-averse assumptions threatening DB schemes. Pensions Regulator guidance allows schemes to base the discount rate on the rate of return that assets held by the fund are expected to generate over the lifetime of the scheme, yet trustees seem reluctant to use that method. There is concern that the corporate failure of Carillion will create an even more risk-averse climate.
I apologise for missing the start of my hon. Friend’s excellent speech. Does she agree that one of the issues is that the Pensions Regulator is unaccountable? I have had a particular issue given what has happened post-Carillion, and I have been trying to find out how the Pensions Regulator makes decisions, which is not at all clear. Does she agree that that needs to be brought up in this place so that there can be proper accountability?
I thank my hon. Friend for making that point. From my conversation with the Minister before the debate, I am sure he will be happy to talk about that in his speech and when he meets the Pensions Regulator.
The Green Paper shows that there has been a clear decline in gilt yields over the past two decades. The public sector trade union, Unison, is of the view that most schemes that did not hedge their risk should seriously consider using that discount rate method.
I congratulate the hon. Lady on bringing this matter to the Chamber. On average, people believe that their living expenses will account for 34% of their pension, yet they will actually account for 49%. Does she agree that more should be done to ensure that people make the most of pension schemes by paying in themselves? I think that is the thrust of what she is saying—that individuals should make more effort rather than relying on employer contributions, which in many cases have been found to be suspect.
I apologise to the hon. Gentleman—it was hard to hear him because of the sound of the fans. I will come on to those points.
Basing assumptions on gilts may artificially inflate deficits and future service costs for the sponsoring employer and scheme members. That may lead to the unnecessary closure of schemes to new members and future benefit accrual. Unison’s experience is that some employers would rather pay more and use the increase in costs as an excuse to close their DB scheme, saving money by transferring members into a DC scheme with lower employer contributions, which results in reduced pension benefits for scheme members.
Not only are DB schemes desirable, but they can be affordable and good value for money. We should do everything we can to protect them. The Government’s role should be to provide an adequate regulatory framework, meaningful enforcement and appropriate incentives to help encourage sound decision making and ultimately to provide decent pensions. I welcome the Government’s White Paper and the regulator’s ambition to be clearer, quicker and tougher.
I hope that the Minister can provide me with a little more clarity or reassurance about three issues. First, there appears to be no new relief for employers struggling with DB liabilities. Although I welcome the suggestion that there should be penalties for directors who do not take sufficient care of scheme members’ interests, without support for struggling employers, tougher rules may simply incentivise more of them to close DB schemes in favour of DC schemes with inferior pensions for workers. Secondly, what additional resources are being provided to ensure TPR has the capability and capacity to effectively regulate the sector?
Thirdly, encouraging consolidation over alternative options would not prioritise the protection of members’ benefits, which should be the Government’s primary focus. I understand that insurance buy-out remains the best solution for guaranteeing member benefits in DB schemes. Securing member benefits should be paramount. With an insurer, members are almost certain to receive their benefits in full. The Association of British Insurers believes that prices are the best consultants have ever seen, and that that option is available to smaller schemes.
Although I understand there is a need to provide options for employers that simply cannot secure a buy-out, any new framework should not incentivise consolidation purely on the basis that it is a cheaper option. The risk of investment failure was highlighted by the Pension Protection Fund in a submission to the Select Committee on Work and Pensions. In the absence of a substantive employer, the security of members is entirely dependent on the investment performance of the fund and the associated buffer. Consolidation is therefore less secure than buy-out, and profit withdrawal in years of good investment returns may lead to scheme failure by preventing a strong build-up of reserves.
Consolidation also means that risk, rather than being dispersed across several schemes, becomes focused on one investment strategy. Different consolidators may be inclined to pursue the same investment strategy, resulting in a high correlation of risk in the DB sector. Obviously, that may lead to all schemes failing at the same time. I am also concerned that younger members may shoulder the risk of commercial consolidators collapsing. We should not pursue any policy that leads to greater intergenerational unfairness.
To put it plainly, I am concerned that the option to consolidate or transfer into a super-fund may be seen by some employers as another bolthole to escape their liabilities on the cheap.
I thank the hon. Lady for securing this important debate. She is making a very good speech in many respects, but one of the concerns about DB schemes is that some that have existed for a long time have few members but a large legacy. A scheme may have only 100 employees, for example, but a very large legacy behind it. I wonder whether she recognises that super-consolidation may be an option for such schemes.
I touched on why I have concerns about that.
As I said, securing member benefits should be paramount. What reassurance can the Minister give me that the eventual framework will ensure that employers’ decisions are focused on that objective? If an employer has the means to get a buy-out and that is the best way to guarantee scheme members’ benefits, it should get a buy-out. We need a framework that incentivises decision making on that basis.
Will any legislation that is enacted be applied retrospectively to cover commercial consolidators formed in the intervening period? I am concerned that a two-tier system of regulation would provide loopholes for those willing to exploit them. Directors of sponsoring employers must have personal liability—there must be criminal offences and heavy fines.
I support the White Paper’s push for clearer, quicker and tougher regulation. I commend the Minister’s efforts and I hope that the White Paper leads to measures that further protect defined-benefit pensions. However, I remain concerned that over-zealous prudence and assumptions threaten otherwise affordable DB schemes. There should be additional support and relief for struggling schemes. I would like to be confident that TPR will be given the resources it needs to have the capability and capacity to regulate effectively in the light of any changes. I am concerned that consolidation—although it may be the best option for some schemes—will be seen as an acceptable cheaper option that does not prioritise protecting scheme members’ benefits when more secure alternatives, such as buy-out, are available and within the means of the employer.
We must endeavour to build a framework that incentivises workers to save responsibly and deters directors from behaving irresponsibly. Paying dividends must not be prioritised at the expense of protecting pensions. I would be grateful if the Minister responded to the issues I have outlined and committed to looking into the ongoing matter at Bentley Motors, which is of concern to more than 1,000 people in Crewe and Nantwich who work for the company, and to working with me to promote a dialogue that has the protection of scheme members’ benefits at its heart.
Order. The debate can last until 5.30 pm. I advise Members that we expect a Division at about 5 o’clock, in which case the debate will be extended by 15 minutes. If there is no Division, I am due to call the Front-Bench spokespeople at 5.8 pm, with the guideline limits being five minutes for the Scottish National party, five minutes for Her Majesty’s Opposition and 10 minutes for the Minister, leaving Laura Smith two or three minutes to sum up the debate.
There are four speakers seeking to catch my eye, one of whom has left the Chamber. We will start with Paul Masterton.
It is a pleasure to serve under your chairmanship, Mr Hollobone. I refer the House to my entry in the Register of Members’ Financial Interests. For the 10 years before I was elected, I was a pensions specialist solicitor. I must say to the hon. Member for Crewe and Nantwich (Laura Smith) that, for someone who claims not to be an expert, she demonstrated an incredible grasp of the key issues in a good opening speech, which certainly puts me to shame.
When we talk about protecting DB schemes, it is worth remembering that the fiduciary duty on the part of trustees is to protect the benefits already built up. Their responsibility is to ensure that the benefits accrued can be paid, not to ensure that an employer continues with ongoing DB provision. That is fundamentally an employment matter. On many occasions, the best way to protect DB benefits is to reduce future accrual, to close the scheme or—in the most nuclear option—to tip the employer into insolvency and have the scheme move into the Pension Protection Fund, so we must be careful about what we mean by protecting DB benefits and DB schemes.
It goes without saying that DB schemes face major challenges, and the Government have recognised that through the Green Paper and then the White Paper. When the Green Paper came out, I was not sure whether I agreed with the statement that DB schemes were not largely unaffordable simply due to my case load in the office at that time. Generally, the system works well for most employers, but we need a tougher approach for those failing to act responsibly.
I am pleased that the regulator was granted many of the powers it sought, because one of my big frustrations in practice was that it was largely toothless. It would send a lot of letters and have conference calls. Those who were really unfortunate would be dragged down to Brighton for an awful meeting where nothing really happened.
My hon. Friend will be pleased to know that I am not being dragged but going voluntarily down to Brighton, where the Pensions Regulator is based, this Thursday for a proper five-hour sit-down. In that, I will certainly take up some of the concerns of the hon. Member for Crewe and Nantwich (Laura Smith).
I am pleased to hear that, because the Pensions Regulator performs a vital role in overseeing occupational pension schemes. One of the big frustrations on the trustee side—not usually on the employer side—was that the regulator did not seem to have the time or resources to get stuck in or do anything serious to encourage or require an employer to change course. Some of the suggested improvements are very good.
In the past, pension schemes operated in a world of high interest rates and good equity returns. We now live in a different world. Investment decisions reflect ongoing uncertainty and volatility, which has led to widespread de-risking and a preference for investing in bonds and gilts. That has been a huge loss to the UK economy, with funding being taken out of equities. We could do more to look at how to unlock some of the vast sums that sit behind pension schemes.
Does my hon. Friend share my frustration that often UK infrastructure is owned by overseas pension schemes and that, despite exhortations from the Government for schemes to invest more in the UK and in these stable, high-producing assets, they still seem reluctant to do so?
I do. Big pension funds—Canadian pension schemes and many others—invest a lot, and those investment projects provide good returns. We could unlock huge amounts of money.
Final salary pension schemes will end up in one of two places. They will either be successful and be bought out with an insurance company or fail and end up in the PPF. The hon. Lady was right that deficits have been pushed up by low gilt yields and low interest rates. Many employers, pushed by their trustees, and to a certain extent by the regulator, have prudent assumptions in their valuation setting, which increases the amount they have to pay in. That can provide a false picture of the deficit, but it does match the reality of trying to buy on the market. There is flexibility in the system, and one thing the regulator is looking at is being more akin to employer affordability in the valuation assumption setting, which should help with some of these problems.
Fundamentally, this drives to a system that is completely linked to the employer covenant. The stronger the employer, the more flexibility there is, which gives much more leverage to play around with assumptions. A weak employer cannot afford to take as much risk, so it is much tighter with its assumptions. That pushes the deficit up, which means more money has to be paid in. It is a self-perpetuating cycle where the weakest schemes, which need the greatest support, do not get it. They need the breathing space, but they have to pay high levels of deficit repair contributions. As my hon. Friend the Member for Solihull (Julian Knight) said, we should consider that many such schemes are legacy schemes, predominantly in old-school manufacturing industries, and many of those companies are shells of what they were in the ’70s and ’80s when their schemes were brought in. Those employers already provide weak covenants, and that situation may only get worse as we move forward.
It is remarkable that “The Purple Book” from the PPF estimates that 3 million DB members have only a 50% chance of seeing their benefits paid in full. The PPF is a fantastic lifeboat scheme to ensure that people still get decent payment of pensions, but we do not really want people to be reliant on it.
I disagree with the hon. Lady about consolidation. What the Government have been looking to do on that is sensible. Lack of scale is crucial. Two thirds of the UK’s defined-benefit schemes have fewer than 1,000 members, and small schemes cannot access the same sophisticated investment opportunities as bigger schemes. Even costs such as advisory fees, accountancy fees, actuarial fees and legal fees are disproportionately high for small schemes. There is a good place for consolidation, but she is right to worry about governance and ensuring that we do not go from a situation under an employer scheme with high levels of governance to one under a bigger scheme where that gets lost. That can probably be worked through in a scheme’s design and set-up. Ultimately, the solution to protecting DB schemes is not governmental but in the economy and the strength of the sponsor or, where available, the parent company. One of the big difficulties is volatility and the lack of certainty around risk.
The Government continue to take steps to pick apart the issues faced by the DB sector. They are doing good work, but fundamentally we need a clear understanding that governance, funding and covenants are intrinsically linked. I look forward to hearing the good story the Minister has to tell on what the Government are doing.
It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate my hon. Friend the Member for Crewe and Nantwich (Laura Smith) on securing the debate and the excellent way in which she introduced it. Once again, she has proved to be a formidable advocate for her constituents. I do not intend to cover the same ground but will instead raise an issue facing one of my constituents that also affects thousands of members of defined-benefit pension schemes who are not entitled to any protection against rises in the cost of living.
My constituent, Mr Thorpe, is one of a significant number of members of the Foster Wheeler defined-benefit pension plan. Members of the scheme have received no increase in their pensions since 2002. This issue is not restricted to a single scheme—those with defined-benefit pensions accrued before 1997 are not entitled to any statutory inflation protection. While many enjoy discretionary increases, about 100,000 pre-1997 pensions receive no increase, because before then any increases were based on the rules of the scheme only. That remains the position for pensions earned before that date.
If the rules provide for increases, whether fixed rate or index-linked, they must continue to be paid. However, in the same way, if a scheme does not make such provision, none will be paid. In a number of schemes, increases are paid at the discretion of either the trustees or the employer, which leaves the living standards of thousands of people in our country not protected by law but subject to the discretion of others.
To illustrate the impact, Mr Thorpe provided me with a simple calculation based on the case of a fellow Foster Wheeler pensioner. We will say that this chap is called John. He retired in 2002 at the age of 60 and his pension at the age of retirement was £10,000 per annum. In 2017, when he was aged 75, the purchasing power of that pension was down to £5,600 per annum. By 2027, when he is aged 85, the purchasing power of John’s pension is likely to be less than £3,000 per annum—a 70% fall in the value of the pension over the course of his retirement. That has an impact on only a relatively small number of pensioners who paid into their pensions during a specific period of time but, as I hope I have illustrated, it has a massive impact on those individuals.
We face a situation not unlike that of the Women Against State Pension Inequality Campaign, in which people find themselves at a disadvantage simply because they were born in a particular timeframe or had worked prior to the introduction of particular legislation. When I wrote to the Minister, his response stated that he did not think that it would be right
“to consider retrospective changes to the rules on indexation”.
Given that the analysis by the House of Commons Library found that in 2015 FTSE 100 companies paid five times as much in dividends as they did in contributions to defined benefit pension schemes, will he look again at what seems to be a very unfair situation? Employers should have a duty to do right by their employees and pensioners before they consider rewarding shareholders.
My constituent, Mr Thorpe, states that research indicates that the cost of inflation protecting the Foster Wheeler pre-1997 pensioners would be around £1 million per 1% awarded. That is a modest and sustainable cost for a fund with a value of almost £3 billion. Thousands of pre-1997 pensioners were extremely disappointed to see that the White Paper does not propose any solutions to that issue. As my hon. Friend the Member for Crewe and Nantwich said, pensions are deferred pay. Nobody would argue that it is sustainable or equitable for someone to have no pay rises related to the cost of living for a 25-year period or possibly longer. What does that say to the next generation of pensioners about the necessity of saving for their retirement? It is hardly an encouragement to them to save for their old age. In conclusion, I ask the Minister to look again at this issue.
It is a pleasure to serve under your chairmanship, Mr Hollobone. I congratulate the hon. Member for Crewe and Nantwich (Laura Smith) on securing this important debate. I was heartened by it. I had thought that cross-party working and the recognition that we are all trying to do something in a positive space had been lost to a certain extent, but her speech was incredibly positive in that regard. I am sure the Front-Bench speaker, the hon. Member for Birmingham, Erdington (Jack Dromey), will reflect that later. I also want to say that the speech by my hon. Friend the Member for East Renfrewshire (Paul Masterton) was the speech I wanted to give. We have just been discussing that. It was absolutely top drawer and very thoughtful.
My career as a financial journalist spanned what I would call the sharp decline of private workplace DB schemes. I remember all too well speaking to people at the Allied Steel and Wire steelworks in Cardiff, who had effectively lost their pensions when their company was wound up almost overnight. The same was true for Maersk, probably one of the worst examples of corporate acts in this country in the last generation. Under the laws at the time, retired members were understandably protected first, which meant that those who were even just a few weeks from retirement ended up with virtually nothing. I can remember the heartbreak in their voices.
That decline comes from many issues. In that instance, it came from poor company governance and the fact that the economics of DB schemes have been fundamentally undermined over time through demographics and investment returns. Frankly, for the last 15 years, DB schemes have been effectively dead in terms of new members for the private sector. They have existed in the public sector and have morphed and developed over time—we will see how that goes and whether the current models are sustainable.
In response to those issues at Maersk and ASW, we had the Pensions Act 2004, which helped to set up the PPF. Mr Rubenstein’s management of that has been pretty exceptional. The PPF has been well managed, but frankly it can take only so much. A lifeboat can take only so many passengers. The difficulty is, as my hon. Friend the Member for East Renfrewshire noted, that 3 million members face potentially only a 50% chance of having their pension. The more we load into a lifeboat and the greater the burden on other funds, the more likely they are to collapse in turn.
We need a longer-term solution, and we need to focus on the 2,000 schemes with fewer than 100 members. I believe conversion is a good idea. However, I take the point of the hon. Member for Crewe and Nantwich that perhaps the current models of conversion, which to a certain extent are zombie funds, are not the way we want to go. What we need is to transfer to scale, so that the returns come through back office. More than that, potentially, there is my big idea—I have written to the Minister about this before and he will not be particularly surprised that I mention it—of rebasing some work-based pensions over time, so that we end up putting everything on a sustainable footing. We could also adapt schemes to the modern world in terms of spousal pensions and, I would suggest, the potential provision of social care.
The tail is wagging the dog. We have a statutory architecture built for a system where people had jobs for life and DB schemes were ongoing entities. For increasing numbers of schemes, retired and deferred members far outweigh active members. Employers are not members, and members are not employees. In that context, the direct link between the employer and the scheme makes diminishing sense. Of the £80 billion or so paid into workplace pensions, around three quarters of which is in respect of DB schemes, nearly half goes to the public sector, yet active membership of DB schemes is now down to just 7 million workers and is falling daily.
We need to break the link. First, we should establish a universal benefit structure, or a kind of common denominator pension, based on a common structure—for example, a one-sixtieth or one-eightieth scheme, with 50% spousal pension and consumer prices index inflation-proofing up to 5%. We would then go through the time-consuming and laborious process of valuing existing DB schemes by reference to that universal scheme on an actuarially neutral basis. For example, in my 20s I contributed a negligible amount into a final salary pension scheme on a one-fiftieth accrual basis. As a result, I was guaranteed a pension of nearly £4,000, with RPI and a two-thirds widow’s pension. The scheme is now in the PPF, but that is because the promises were far too great for the contribution levels.
It would have been better if, at an earlier stage, those considerable benefits had been converted to, say, a £5,000 pension in a new scheme. People would not lose their pension initially, and hopefully not at all. Instead, it would be simplified and moved on to a surer footing. That is one point for the hon. Member for Crewe and Nantwich, who talked about consolidation schemes. We could invest in very large schemes indeed. Some of the governance in some of the smaller schemes with fewer than 100 members is frankly very amateur. It is pitiful and almost mothballed.
If we were to have larger schemes, privately run by something such as a type of National Employment Savings Trust, with Government involvement on the board and oversight by regulators, we could move to a situation where we all feel more invested and know exactly what we are getting. Crucially, we could rebase to enable us to provide better futures for spouses.
Another area I will mention is that we could offer a social care option. If I had a very large scheme involving maybe 500,000 to 1 million members, I would have the scale to offer a social care option. I could say to someone, “At the moment you will get a pension of £10,000 per year. What we will do is to give you a pension of £8,000 per year, but we will invest through our scheme, because we have scale and can do so.”
Sitting suspended for a division in the House.
I apologise. We were so rudely interrupted by the Liberal Democrats.
The effective remodelling of these almost-zombie DB schemes could be a means by which we ostensibly kick-start a different approach to social care and allow people to choose whether to supplement their social care in the long term by actively deciding to put away a certain amount of pension in order to receive a certain amount of social care insurance. There are all sorts of options for that.
I conclude by saying that the Green Paper and White Paper were refreshing and thoughtful. We have an opportunity to do something that the Turner report did not do—it dealt mostly with public finances and the state pension—which is to shift the balance and the focus on to private sector workplace pension schemes. We need them to play a role, but we also need to repair the problems of the past.
We now come to the first of the Front-Bench speeches. The new finish time for the debate, because of the Division, is 5.40 pm.
It is a pleasure to serve under your chairmanship, Mr Hollobone. First, I congratulate the hon. Member for Crewe and Nantwich (Laura Smith) on bringing to Westminster Hall such an important debate and such a good-natured debate—it feels like a while since we have had one of those in this place.
There is agreement. Everyone recognises that DB schemes have been in decline for the past 15 years. I would like to give a bit of perspective on the numbers. The 1.3 million active, contributing members of private sector DB schemes account for only about 10% of the total 13.5 million private sector DB memberships. That gives people an idea of just what the burden is on those who have not yet retired under these schemes.
I also agree that there are many factors as to why DB schemes have declined as they have. There have been umpteen tax and regulatory changes and legislative changes. There have been changes in the financial market; there was the financial crisis in 2008. Ultimately people are living longer, which has a huge impact on pensions in general.
I was very happy when I read in the Green Paper the Government saying that DB pensions are certainly not unaffordable. It is a case of being realistic and seeing what we can do. Pensions have not always worked out as planned, as I have seen since I have been looking at and working on pensions. However, it is good that the Green Paper said that the evidence in relation to unaffordability was far from conclusive.
The hon. Member for Solihull (Julian Knight) explained something really well in saying how we can rebuild, restructure and consolidate these things to have a realistic and practical approach to how to answer some of the questions that are being flung up. I will explain where the scepticism comes from. He used a phrase that stuck out when he said that we need to know “exactly what we are getting”. I think that is all that anyone ever looks for when it comes to dealing with their pension, but unfortunately the goalposts continually move. That is the problem with pensions in general, not only DB schemes, just now. The goalposts are constantly moving, so it does not matter whether it is five years or 30 years down the line; people will probably have a very different deal from the one that they signed up to.
Let me give an example as to why it is right to be sceptical of some of these companies. In 2015, FTSE 100 companies paid about five times as much in dividends as they did in contributions to their DB pension schemes. The 56 FTSE 100 companies with a DB pension scheme deficit paid 25% more in dividends. Therefore, in theory, these companies would have the ability to repair immediately their pension scheme deficits were they to feed their dividends into deficit repair contributions.
I was very grateful to see the Government set out in the White Paper an approach that would involve enforcing a stricter body of regulation—tougher rules, tougher legislation, proactive powers—so that the Pensions Regulator could intervene quickly and effectively. All those things are tremendous steps in the right direction. However, if we recognise the reality of what the financial market is like just now, failures such as Carillion, BHS and even, more recently, Toys “R” Us show that this situation can become very toxic very quickly.
It is clear that the UK Government did not have a robust enough system to protect savers. What we are seeing now is only the start of steps in the right direction—towards having a robust enough system. As we know, the loss of pension savings can shatter an entire life in the days when people should be enjoying life most. We have to take this issue really seriously, which is why one of the disappointments of the White Paper was that at no point did it mention Brexit. We will probably all have differing views as to what Brexit will mean for the UK. Brexit could well be the answer to pensions; it could solve everything, but I still think it is right for us to see some detail of it or some Government predictions. What effect will this really big change have practically on our pensions day to day? For an entire White Paper not even to mention Brexit stood out.
Just now, 300,000 more pensioners are in poverty. That is the first sustained increase in pensioner poverty in 20 years. The UK has a wider than average gender pensions gap. We see that with things such as the WASPI Campaign and throughout all the different aspects of pensions policy. As I have said, the publication of the White Paper is welcome, but a sense of urgency seems to be lacking in this Tory UK Government. The Department for Work and Pensions itself has said that the legislation needed to enact the new regime will not be ready until, at the earliest, 2019-20. That means that until then unscrupulous businesses seeking to avoid their pension obligations might find it easier to do so.
I will conclude my remarks with something that I have said many times. The Minister is probably fed up of hearing us ask for this, but the SNP has long called for the establishment of an independent pensions commission, so that we can take a step back from pensions and look at the issue holistically and from a totally fresh point of view in order to see whether we can do anything radically different. That said, I think the Government are heading in the right direction, so I hope that they reflect on the comments made today.
It is a pleasure to serve under your chairmanship, Mr Hollobone. First, I congratulate my hon. Friend the Member for Crewe and Nantwich (Laura Smith). She is a great champion of her constituency, and Bentley workers will be proud of her for bringing their cause to Parliament today.
I dealt 40 years ago with Rolls-Royce—the Mulliner Park Ward factory in Hythe Road on the Park Royal estate. The craftsmen were outstanding. They were the salt of the earth. They were highly skilled, producing cars that were quite remarkable. Since the move to Crewe, it has been generally a successful company, but right now, 1,200 members of the DB fund face an absolutely unacceptable threat to their future pension entitlements. These people have a minimum service of 16 years and a maximum of 47 years. I share their sense of anger at what is happening.
Former employees of Rolls-Royce Motors, which was then sold to Volkswagen, now face serious financial hardship in retirement. They will potentially lose tens of thousands of pounds. Although the Crewe site has received billions in investment, the DB fund has moved from surplus to deficit in the time of its ownership by Volkswagen. Volkswagen remains the parent company, with ultimate responsibility. Would it treat its employees in Wolfsburg in that way? I very much doubt it.
Negotiations continue at Bentley. I urge the company to move, and to move substantially, at the next stages, because the levels achieved thus far through the negotiations go nowhere near the losses that many will suffer. In particular, young workers in the scheme will suffer very badly indeed.
Sadly, what is happening at Bentley is a symbol of the wider problem of decline in DB schemes. The percentage of DB pension schemes open to new members fell from 43% in 2006 to 13% in 2015. The number of DB schemes in the UK will shrink to less than a fifth of current levels over the next quarter of a century, according to predictions by Hymans Robertson.
In a very positive speech by the Pensions Minister to the Trades Union Congress conference on pensions, he argued—I think he was right—that DB provision was working well and employers should seek to continue their responsibilities to their employees by maintaining good DB schemes. Would that more employers heeded that advice.
It is absolutely wrong for wealthy companies, with well-funded DB schemes, which many of them have, to look to close those and move to DC pensions purely to transfer the risk from the employer to the employee. That is all the more wrong when we look at the data released in June, which showed that among FTSE 100 companies, DB pension schemes have reached 100% funding and, among all private sector DB pensions, they are 98% funded. Clearly, the majority of DB schemes remain healthy and sustainable. Companies should look to do the best by their workers, and the best pension for their workers is a DB pension. They should, therefore, continue to accept their responsibilities and, I stress again, not simply transfer them on to the backs of their employees.
There are wider consequences to the decline of DB. The erosion of good, well-funded DB schemes has left few workers with a solid final salary pension scheme guaranteed to provide them with an income until they die. The UK has the fourth highest share of pensioner household income received from private pensions and other forms of capital, such as home ownership. As the prevalence of DB schemes and the rate of home ownership fall rapidly, however, the next generation will face considerable financial challenges, including in retirement.
Auto-enrolment has been introduced in parallel to what has happened to DB. It was a triumph by a Labour Government, and I warmly welcome the continuity of policy under this Government. Auto-enrolment has seen 9.7 million more people in pension schemes, saving for retirement. While that move has been immensely positive, it has meant more workers saving into DC schemes. We do not want to see that posed against good DB schemes—on the contrary.
A Pensions Policy Institute report in 2016 found that the median saving of DC scheme members could yield only £3,000 a year as an annuity, which is not a lot of money to live on in retirement. The contrast between historical, good DB schemes and many of the current DC schemes is stark indeed. More work needs to be done, therefore, to improve the adequacy of returns on DC savings, including by looking in more depth at costs and charges.
Collective defined-contribution schemes are an important alternative to the current DC world. While not as secure as traditional DB, CDC provides workers with the opportunity to share the risk associated with their pension investments, as well as the ambition of an income in retirement, which DC can never do. Royal Mail and the Communication Workers Union—to their great credit—have been working to form an agreement, which would be the first CDC scheme in the UK. That would forge a new and exciting pathway to a better pension for Royal Mail’s 142,000 workers.
We look forward to continuing to work with the Pensions Minister and the Government on the passage of the necessary secondary legislation, to enable CDC schemes to be formed, and to work with Royal Mail and the CWU to ensure the best possible scheme for their workers is put in place as quickly as possible. That is a landmark development. It opens up immense opportunities at the next stages. We will encourage many employers—including on a sectoral basis—to take that path. I stress again, if DC is not as good as DB, CDC is a damn sight better than ordinary DC schemes, but—the evidence overwhelmingly shows—still not as good as good DB schemes. We therefore do not want one to be posed against the other. This is a new option and alternative, developed in particular circumstances, which we think others will follow at the next stages.
If responsibility falls on employers, there is also a responsibility on Government. I agree with the tone of this debate and some of the comments made. The DB White Paper is a step in the right direction—no doubt—in seeking to live up to the challenge of protecting good DB schemes, and ensuring they continue to thrive and maintain their members’ benefits.
I welcome a number of the proposals in the White Paper, such as criminal sanctions for directors neglecting pensions schemes. However, my hon. Friend the Member for Crewe and Nantwich was right to question precisely how that would work for potential incomes, given unforeseen circumstances. I welcome the proposals for stronger powers for the Pensions Regulator, with which we had a constructive meeting here last week. I welcome the proposals for clearer standards on scheme funding and for scheme consolidation. I think the hon. Member for Solihull (Julian Knight) is right that consolidation and, therefore, economies of scale, offer significant prospects at the next stages. I welcome the moves towards cost transparency.
However, there are concerns about the White Paper, for example, the reluctance, at this stage, to build on voluntary clearance and corporate takeovers. We recently had the scandal of the hostile takeover of GKN by Melrose. The issue of 50-50 member nominated trustees should have been in the White Paper, but it was not. It remains a strong ambition of the Labour party. We hoped to see stronger commitments to mandatory cost transparency for trustees in DB schemes. Another concern was the review of the Pension Regulator’s valuation procedure and some of the problems that emerged, for example, over the rather conservative interpretation in the universities, which made it more difficult to reach a settlement in that dispute.
There is much in the White Paper that is good and that we welcome. We have ambitions, however, at the next stages. Employers and Government have responsibilities. The most reliable route to a secure and sustainable retirement remains a DB pension. I say to Bentley, workers are the beating heart of any company. Bentley and other wealthy and prestigious companies need to look again at how they treat workers, who are essential to the success of their companies, and investigate every possible route to keeping their DB pension scheme open. That is why I strongly urge Bentley to think again. Bentley—of all companies—should be ashamed of itself for behaving this way in relation to its workers’ pensions.
It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank the hon. Member for Crewe and Nantwich (Laura Smith) for three things: first, for bringing this important debate forward; secondly, for entitling the debate, “Protecting defined-benefit schemes,” when we have a White Paper on that exact point, which allows me to address that; and thirdly, for being complimentary and measured in the way that she approached a serious problem for her constituents.
It has been an interesting week in Parliament. Two Cabinet Ministers have resigned, Donald Trump is President and arrives in this country on Thursday, and a Conservative Minister has received not one, but two compliments for a speech at TUC house. I do not know which is the more remarkable of those events. I greatly enjoyed my time at TUC towers. I made it out alive and look forward to the return invite from the comrades, when they want me to further elucidate the way ahead. It was an honour to speak at Congress House. I genuinely wanted to do it and I would welcome the opportunity to return.
The debates gives me the opportunity to talk about defined benefits in the round. I will then try to address all the individual points raised. The DB schemes provide an important source of income in the retirement plans of millions of people. In the private sector alone, 10.5 million members rely on such schemes, with around £1.5 trillion-worth of assets under management. That helps to fuel the UK economy, whether through corporate bonds, Government bonds or equities.
We fundamentally believe that the system is working well in the majority of cases for the employers, the trustees and, importantly, the scheme members. I stress, however, that while we already have a robust and resilient system of pensions protection in place in the United Kingdom, we want it to work in the interests of everyone. While it is not always possible to get that balance right, nor to prevent insolvency, where insolvency occurs we should never forget that we have the Pension Protection Fund, set up in 2005 and taken forward under successive Governments. It has utterly transformed the landscape for so many people who would have been desperately vulnerable and affected previously. For the avoidance of doubt among everyone reading the debate, the PPF compensation scheme ensures that individuals receive at least 90% of their pension benefits.[Official Report, 9 October 2018, Vol. 647, c. 1MC.]
To ensure that the DB system is sustainable in the long term and future-proof, we have addressed the key challenges and opportunities in our 2017 Green Paper and published our White Paper, as I said earlier, which sets out our conclusions, which effectively fall into three core areas: increasing member protection, improving scheme funding and exploring options around consolidation.
The key proposals strengthen the Pensions Regulator’s powers, as set out in the Government’s manifesto, and give the regulator new powers to punish those who deliberately put their pension schemes at risk. For the worst offenders, that could mean criminal sanctions.
We will strengthen the system that enables the regulator to oversee corporate transactions, which will mean that it will be aware of more types of transactions, and will find out about them earlier, so that it can intervene at the right time. It will also mean that employers must explain how they have taken account of their pensions in relevant corporate transactions.
On corporations and dividends, which the hon. Member for Paisley and Renfrewshire South (Mhairi Black) raised, she will be aware that although we are not against a healthy company paying out dividends, the Department for Business, Energy and Industrial Strategy is undertaking a consultation on insolvency and corporate governance specifically. That ongoing consultation looks at how the framework of distributable profits could be improved. That Department will respond in due course—my expectation is that that will probably be in September.
I take issue with the hon. Lady’s point on pensioner poverty, as I think I have done before. In the 1970s, pensioner poverty was at 40%. It is now down to 16%—close to historical lows. That is clearly still too high, but it is a dramatic improvement on the previous position.
On scheme funding, defined-benefit pension trustees must report their funding position to the regulator. The Pensions Regulator can use anti-avoidance powers, including contribution notices and financial support directives. We accept that that process has to be improved—there is no doubt about that—so there will be clearer requirements and more explicit accountability, which should lead to positive changes in behaviour among employers and trustees. We will give the regulator the power to enforce clearer funding standards and to take action if trustees or sponsor employers fail to comply.
The regulator will produce a revised DB funding code for public consultation, which will be clearer about some key issues that cause confusion. The trustees will also be required to appoint a chair who must submit a chair’s statement with the scheme’s triennial valuation. We will work with the regulator and others to consider what can be done to promote greater transparency of costs in DB schemes and to support trustees in communicating more clearly with their members on scheme funding issues.
On consolidation, benefits of scale can help schemes to reduce costs per member, improve governance and enable access to more effective investment strategies. There are already several ways for DB schemes to consolidate, such as DB master trusts, which the hon. Member for Birmingham, Erdington (Jack Dromey) and I debated earlier. As the White Paper announced, we are considering ways to raise awareness of the benefits of consolidation among employers and trustees. In addition, the industry is actively looking at ways to innovate and is proposing new models of consolidation such as super-funds, as hon. Members will be aware.
I stress that the White Paper made it clear that consolidation must be done in a safe way, which is why we are looking to introduce clear parameters within which those vehicles can operate, as well as a supporting authorisation and supervisory regime. Any transfer to a consolidator would require the consent of the transferring scheme’s trustees, who would need to take a considered view, along with the sponsoring employer, on whether consolidation could improve outcomes for their members.
I will try to address some of the key points of the debate. In relation to collective defined-contribution schemes, which were raised by the hon. Member for Birmingham, Erdington, it is right to say that the Government are open to working together with the Communication Workers Union and the Royal Mail, which I have met together, and to say that I have been impressed by how much they are joined at the hip. We wish to assist them in finding a way forward to CDCs. Everybody understands that there is a way to go, but they are clearly an option. We will continue to assist by way of Government time.
The hon. Member for Crewe and Nantwich raised the issue of the regulator’s powers and whether it had the capacity to take them forward. I should make it clear that it will have an additional £3 million of funding to boost its frontline resource, which will result in more than 40 new members of staff. It is taking on more cases, and its proactive work has increased by 90% this year. It has made four successful prosecutions for non-provision of information, and has secured more than £1 billion in settlement through the use of anti-avoidance powers, including cases such as BHS, which secured £363 million, and Lehman Brothers, which secured £184 million. It has also prosecuted a number of scammers and the like.
There were a couple of other quick points. The hon. Member for Strangford (Jim Shannon) wanted more contributions to be made, and auto-enrolment is clearly the answer to that. The hon. Member for Stroud (Dr Drew) wanted greater accountability for the Pensions Regulator, and I will write to him about that.
It is fair to say that my hon. Friend the Member for East Renfrewshire (Paul Masterton) is the No. 1 pensions expert in the House of Commons. He is very much after my job and I accept the challenge. I agree with a great deal of what he said. Likewise, my hon. Friend the Member for Solihull (Julian Knight) made a superb speech. He has bitten off an awful lot if he is going to solve social care on the back of a pensions revision, because that is a mighty challenge.
The hon. Member for Ellesmere Port and Neston (Justin Madders) is aware of the letter I wrote to him about Foster Wheeler. As for several other similar schemes in relation to pre-1997 indexation, I stand by that letter. We do not propose to intervene in a matter that is between the company and the individual employee. Clearly, however, I am happy to discuss that further with him.
I believe I have answered most of the points that were made. Clearly, this is a consultation. The White Paper is detailed and sets out comprehensively what we are trying to do, but we do not necessarily think that everything in it is perfect. We want to get people’s views and opinions, and I value the opportunity to briefly sketch out some of the key points. I want the case of the hon. Member for Crewe and Nantwich to be made in future. I will take the product of this debate to the Pensions Regulator when I spend the afternoon in Brighton on Thursday. I thank her for her time and for securing the debate.
I thank hon. Members for attending this important debate. It is great to hear the Minister respond to the issues that I raised, and I thank him, especially for agreeing to meet me to discuss the ongoing issues at Bentley Motors. I also thank the hon. Member for Birmingham, Erdington (Jack Dromey) for his detailed response and for his continued efforts. I know he will continue to keep a close eye on the issue and to hold the Government to account.
Sustainable options need to be made available for smaller schemes, and I welcome some of the ambitious plans that the Minister and other hon. Members have clearly set out. My point was not that the policy should not be pursued, but that proper safeguards should be put in place to ensure that employers consider all the available options with a single focus on protecting the benefits for scheme members.
The debate has demonstrated that there is much common ground when it comes to defined-benefit pension schemes, which I welcome. I am also pleased that there has been great continuity of policy from the last Labour Government, which I hope continues.
The contributions of hon. Members have been interesting and informative. It is an incredibly complex topic, and it is incumbent on all of us to learn from each other and from the wealth of experience and expertise outside of this place to ensure that the Government pursue an evidence-based approach to protecting pension benefits for all our constituents.
Question put and agreed to.
That this House has considered protecting defined-benefit pension schemes.