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Finance Bill

Volume 712: debated on Monday 20 July 2009

Second Reading and Remaining Stages

Moved By

My Lords, I am pleased to open the debate on this year’s Finance Bill. As has now become customary, the Bill has been carefully looked at by the Economic Affairs Sub-Committee on the Finance Bill.

I start by thanking the noble Lord, Lord Vallance, for his chairmanship of the committee, and its other members for their dedication and diligence in scrutinising what is, by necessity, a lengthy and complex Bill. I will respond to the points raised in the sub-committee’s report later in my remarks, but I hope noble Lords will find it useful if I first briefly set out the context for our discussions today and describe some of the major effects that this legislation will have.

This debate comes as both the UK and global economies continue to face major challenges. The financial crisis has caused a world recession, with consequences that are hurting individuals and firms in every country. In the UK, the Government understand the serious impact that the international credit crunch and economic slowdown are having on people and businesses, and have taken comprehensive action to support the economy and protect jobs through these difficult times.

Recent figures from the National Institute of Economic and Social Research show that UK output fell by 0.4 per cent in the three months ending in June, after the decline of 1.3 per cent in the three months ending in May. The institute’s assessment is that the UK economy is now standing still rather than continuing to contract at a sharp pace. The first part of 2009 was difficult for all advanced economies. The global downturn meant that growth fell in all G7 countries and in many major economies across the world. Figures for the first quarter of this year show Japan and Germany contracting by 3.8 per cent, Italy contracting by 2.6 percent and the US by 1.4 per cent. We always knew that the start of the year would be tough. However, as my right honourable friend the Chancellor said in the 2009 Budget, we expect growth to return in the UK at the end of 2009 as the action taken by the Government to tackle the global downturn takes full effect.

We have seen other tentative signs that output is stabilising, but the Government remain cautious about the prospects for the economy. We cannot afford to be complacent; and, while we are confident about a strong and sustained recovery, we must follow through on delivering support for families and businesses. The Finance Bill provides for vital measures to support the economy this year and to help families and businesses through difficult times. It also provides for help to support the long-term prosperity of Britain and to ensure that public finances are sustainable in the future.

The Bill extends until the end of the year the temporary VAT cut that is stimulating the economy by leaving more than £11 billion that otherwise would have been taken in tax in the pockets of consumers and businesses. There has been growing recognition that the measure is working. The Centre for Economics and Business Research stated that,

“the VAT cut is working. It appears to be good value for taxpayers”.

Crucially, the Bill also introduces measures to support the public finances, which is a critical focus for the Government. We know that we must live within our means, and we are acting to keep the public finances on a sustainable path over the medium term. Consistent with our progressive principles, the fiscal consolidation asks for most from those who are most able to contribute and who have benefited most from the growth of the last decade. Consequently, the Bill creates the structure for the 50p rate of income tax from 2010 for those on incomes of more £150,000 per year—around the highest 1 per cent of earners. The Bill also provides for anti-forestalling provisions in respect of the planned restriction of higher-rate relief on pension contributions for the very wealthiest. To further support the public finances, the Bill implements increases in alcohol duty, which remained at or below the level of inflation between 1997 and 2007, and an increase in landfill tax from 2011, which will deliver emission savings equivalent to 700,000 tonnes of carbon dioxide by 2013.

The current circumstances make it imperative that the tax base is protected and sustainable. We will not tolerate tax evasion and avoidance, which undermine fiscal sustainability, damage the delivery of policy objectives, impose significant costs on society and shift a greater tax burden onto ordinary taxpayers. Consequently, in addition to the measures to support the public finances in the medium term, the Finance Bill includes a package of measures to protect tax revenues that will raise more than £1 billion during the period 2009-10 to 2011-12, and protect a further £3 billion of tax receipts per year from evasion and avoidance by 2010-11.

The Bill provides help for businesses, targeting it at those in most need while encouraging investment for growth in the future. The freeze in the small companies’ rate of corporation tax will help more than 800,000 companies. The temporary extension of the loss carry-back rules, benefiting more than 140,000 businesses, will help many viable firms that face cash-flow difficulties. The Bill is helping to support investment by temporarily doubling, to 40 per cent, capital allowances for businesses investing now. That will benefit a further 60,000 businesses, and is in addition to the business payment support scheme, under which 168,000 agreements have already been reached with businesses, deferring tax payments of £3 billion.

The Bill also introduces measures to support investment in North Sea oil, to bring in new fields while ensuring existing revenue is protected. The Government are determined to ensure that the UK is a competitive location for multinational businesses. This is why the Bill introduces a package of reforms to the taxation of foreign profits. The main change will enable a group’s worldwide profits to be repatriated to the UK without tax being charged and without the need for complex double-taxation-relief calculations.

The main change is complemented by further measures to enhance the attractiveness of the UK as a location for multinational businesses, while protecting the Exchequer. These include a reasonable restriction on our generous interest-relief rules; consequential changes to the controlled-foreign-company rules; and the replacement of the unpopular Treasury-consent rules with a much simpler reporting requirement. All of these changes have been subject to consultation and stakeholder engagement, and have been broadly welcomed by all sides, including by Opposition Members in the other place.

I have already mentioned briefly the admirable efforts of the members of the Finance Bill sub-committee of the Economic Affairs Committee in scrutinising the Bill. I re-emphasise my thanks to the sub-committee for the thorough and helpful report that it has published. The report made a number of recommendations in certain important areas, and I will address some of the points now.

Throughout the development of the draft Finance Bill, the Government have been guided by extensive consultation with industry and other stakeholders. Our approach to consultation in respect of the foreign profits elements of the Bill was specifically praised by the Finance Bill sub-committee’s report. The report went on to say that the Government should apply the best aspects of this consultation to other consultations in future. It will not surprise noble Lords to hear that I and the Government are delighted to accept this recommendation.

The report queried why, when the draft was published, it contained gaps, specifically on the debt cap. Normally it would be preferable to publish a complete draft, and we will continue to endeavour to do so, as far as we are able, across the board. However, on the occasion in question, we were making important progress in respect of those particular clauses in frank and productive dialogue with industry. We felt it preferable to continue to develop the clauses in the light of those discussions, rather than to present Parliament with half-cooked clauses that we would then seek to change significantly.

The sub-committee’s report went on to recommend that the changes to the taxation regime on high-value pension contributions be carefully monitored and reviewed to ensure that they do not adversely affect the UK’s competitiveness as a global business centre. The Government have confidence that the measures in question will not significantly impact on our competitiveness. Other countries around the world are having to take comparable measures necessary for fiscal consolidation during these difficult economic times.

Tax is only one factor in the UK’s competitiveness, and the UK remains an attractive place to do business, as confirmed by the World Bank’s Doing Business 2009 report, which found that the UK ranks second in the G7 and second in the EU for ease of doing business. However, we are not complacent and of course we will continue to keep all tax legislation under review to ensure that it continues to meet our policy objectives.

The sub-committee’s report also raised concerns that the anti-forestalling provisions in the Bill might negatively affect those who, for whatever reason, might legitimately make irregular contributions to their pension schemes. In response to this issue, the Government tabled an amendment to ensure that, where irregular contributions have been made over the past three years, the special annual allowance will be increased to the average of those contributions, with an upper limit of £30,000. For those with average irregular contributions of below £20,000, the special annual allowance will remain at £20,000. This extends full protection to the majority of non-regular pension savers and means that even the highest contributors see their cap on savings attracting higher-rate relief lifted by half as much again.

This is a measured change, striking a reasonable balance between preventing the anti-forestalling regime driving up the costs of pension tax relief for the wealthiest individuals and enabling individuals to continue to receive higher-rate tax relief on pension contributions that they would have made in the absence of any announcement on the restriction of pensions tax relief from April 2011.

My Lords, I am grateful to the Minister for giving way. On this specific point, when the pension reforms in 2006 were introduced, together with the very good rationalisation in the so-called A-day regime, the Government’s policy was to encourage people in their year of retirement to make large contributions to their pension fund. How do these anti-forestalling provisions not result in those people being penalised, and what happens to people who were planning to proceed along that route on the basis of an undertaking from the Government only three years ago?

My Lords, the Government would clearly encourage people to make appropriate provision for their retirement. At the same time, we wish to increase higher rates of taxation to ensure that the burden falls on those who, as a consequence of the great prosperity of the past 10 years, have enjoyed significant increases in income and to ensure that that increase in taxation cannot in some way be subverted by people contributing funds into pension schemes. Accordingly, a balance needs to be struck. We have listened to the contributions of those in the other place and have made amendments to our proposals to reflect the arguments that we have heard. I will no doubt come back to the subject of pensions in my closing speech in response to other points that I imagine will be made by noble Lords as the debate progresses.

My Lords, perhaps the Minister will allow me to intervene again. I am not making a debating point here; this is a serious point. People thought, and were encouraged to think by the Government—it was the Government’s policy—that they might be able to pay the whole of their final salary into the scheme in order to provide a pension. Of course, that is even more important now because of what has happened in the markets. People who contribute more than £30,000—which, I accept, is an improvement—will find themselves having to pay 20 per cent tax on that contribution. How can that be fair, and how can people depend on what the Government say if they change their mind so quickly and undermine people’s planning?

My Lords, the Government have not changed their mind; their position has been quite consistent in this area. We encourage people to save for their pensions but, at the same time, we cannot make commitments which necessarily bind future Chancellors or future Governments. No one was given an assurance that that arrangement would remain in place in perpetuity. As I said, I am sure that we will come back to pensions later in the debate and I will cover any points raised in my closing remarks.

The final recommendation in the report that I would like to touch on relates to real estate investment trusts. The report recommended that the Government look again, taking account of international experience, at what kind of measures would be necessary to get more REITs. The acquisition of property by a UK REIT is subject to the normal rules on stamp duty land tax. The charge to companies becoming REITs at the rate of 2 per cent of the market value of their investment properties at the time of conversion was essential to ensure that the UK REITs regime was introduced at no overall cost to the Exchequer. That is a reflection not just of the latent capital gains of existing companies converting to UK REITs but also, importantly, of the favourable tax regime offered to any UK REIT in the future. We will continue to keep the UK REITs regime under review as part of the normal Budget process.

Once again, I thank members of the Finance Bill sub-committee for their hard work and thoughtful recommendations. In the development of the Finance Bill, and during its passage through Parliament, the Government have at all times been guided by our progressive principles and our desire to build a stronger, fairer Britain. We believe that the policies that the Bill implements will help us to overcome the current economic challenges and will lay the foundations from which Britain can grow and prosper. The measures in the Bill are good for individuals, good for business and good for the economy as a whole. I commend it to the House.

My Lords, I begin by declaring my interests as set out in the Register of Lords’ Interests in case anything that I may say could be thought to impinge on them. I continue by complimenting in advance the noble Lord, Lord Vallance of Tummel, and, through him, the Select Committee on Economic Affairs for its report on aspects of the Finance Bill 2009, which we now debate at Second Reading.

As usual, the committee has chosen specific items from the Bill and provided useful scrutiny and comment on them. However, the Bill is derived from the Budget, and the Budget and more recent developments in the economy form the background to today’s debate. The fact that the economy shrank by 2.4 per cent in the first quarter—as the committee points out, the fastest rate for more than half a century and far worse than expected—provides a truly serious background to our deliberations. Sadly, this House cannot amend the Finance Bill but we can question the Government and offer our own views and I begin by brief reference to the three topics that the committee chose to examine: foreign profits, the pension annual allowance and real estate investment trusts.

As so often these days, the recurring criticism which has coloured debate on the Bill and which the committee’s report echoes is the lack of consultation before rushing to legislation. It was with masterly understatement that the committee concluded that,

“it is not good practice that the Finance Bill should be incomplete at the time of publication”.

This policy of “shoot first, ask questions later”—the kind of YouTube politics favoured by the Prime Minister—should have no part in consideration of a Finance Bill, or indeed of any other.

The noble Lord, Lord Vallance, and other noble Lords participating in the debate will doubtless wish to debate these matters more fully but, on foreign profits, I simply urge the Government to take on board the recommendations of the committee and to delay implementation of the worldwide debt cap, which runs the risk of incentivising debt, until there has been a chance for further proper consultation, as the committee requested. The distinguished witnesses whom the committee met described this issue as a “Frankenstein monster”. Clearly they felt strongly about it, being of the view that the Government had not yet got it right.

On REITs, the committee pointed out that the reforms,

“failed to live up to expectations”.

They did not, as Deloitte pointed out, go far enough. That there are no residential REITs, nor any new ones, that are not converted from property companies suggests underlying structural defects in the design of the scheme.

On pensions, I acknowledge that some progress was made in Committee in another place on, for example, anti-forestalling and the responsibilities of senior accounting officers, but that progress was only very limited. Why do the Government not realise the importance of encouraging savings as part of a sound economy? Now they seem obsessed with restricting and penalising, through piecemeal and ill considered legislation, those who would save through their pensions. So soon after the redesign of the whole system, it is unsettling, to say the least, that what looks like a morass of potential tax traps has now been imported, piling on complications where simplification would be preferable. Surely the Prime Minister has damaged the pensions sector enough over the years. What is needed is a stable, predictable and fair environment.

As for the rest of the Finance Bill, lengthy and complex it may be, as the noble Lord, Lord Myners, said—that is the habit of Finance Bills—but it does little to address the great issues that we face. We see what can only be described as snide little political wheezes like the 50p tax rate brought forward by a year and increased by 5p simply to try to wrong-foot the Opposition. Is there no limit, one wonders, to the extent to which the Prime Minister is willing to demean himself and debase his office? Did he learn nothing from the 10p tax rate debacle?

The latest measure was condemned by all informed opinion, such as the Institute of Directors, the Institute for Fiscal Studies and Ernst & Young. Far from raising the Treasury’s planned £2.4 billion, the combination of avoidance, emigration and a consequential fall in indirect tax revenues must surely erode that figure substantially—similarly with the £12 billion VAT reduction, to which the noble Lord also referred. Notwithstanding the fact that he has rounded up support from one organisation, I believe that that was another ill judged irrelevance, denounced by retailers and the public alike, both of whom might have been thought to be beneficiaries at a time when massive discounts of 20 per cent and often much more were being offered to help them to survive the recession.

What thought did the Chancellor give to the real impact that will come when he restores his cut on 1 January next year? That will be the sting in the tail to an economy in crisis. The fact is that the Budget managed to be both an odds-and-ends ragbag that contributed nothing to recovery and, by common consent, one of the worst in modern times. It was bad because of what it failed to do. It failed to provide a theme—a vision even—of how to address the debt crisis that is poised to overwhelm the country. How, for example, do the Government plan to solve a debt crisis by piling debt upon debt? The Budget failed to instil confidence. It breached manifesto commitments and it undermined competitiveness and still we wait to learn how the Government plan to tackle the public finances that they have so wantonly destroyed.

Last year, the Chancellor predicted that the Government would need to borrow £38 billion this year. Now that forecast has increased to £175 billion, almost five times as much. The Prime Minister had said that he wanted the International Monetary Fund to be an early warning system. On Budget Day, the IMF warned him within an hour of the Chancellor sitting down that the decline in GDP this year would be not 3.5 per cent but 4.1 per cent and that the budget deficit would be the worst in the G20 next year, at 11 per cent of GDP.

From the perspective of three months later, the Budget can be seen as inaccurate, inadequate, irrelevant and one more wasted opportunity to start the recovery process, just when it was most needed. But the IMF has gone on to warn that Britain is the only leading economy in the G20 that is unable to budget for any kind of package next year. Not only that, but the Chancellor must start paying back debt much earlier than next year’s Budget. Is it not time now for the Government to spell out their plans, instead of hiding them for electoral reasons, so that we can start to shore up international confidence?

However, this is a Government with form. Despite the strong and growing economy that they inherited in 1997, they have not achieved a budget surplus since 2001, the year after the plans that they had inherited from their predecessors ran out. Through all the years of plenty that followed, while other countries were reducing taxes and building reserves, this country was doing the opposite. Even at the top of the cycle, the Chancellor was still running a 3 per cent deficit, while lecturing others on what they should be doing. As the OECD has pointed out with regard to the UK, fiscal policy is constrained by weak budgetary policy. It has also forecast that our fiscal deficit will climb to 14 per cent next year, the worst in the industrialised world.

In 1997, all the economic indicators were strong and heading in the right direction. Now they are all weak and heading in the wrong direction. Productivity, a vital and often overlooked measure of economic health, is down by 4.7 per cent in the first quarter of this year. In manufacturing, it is down by 8.3 per cent, almost double the fall of the previous quarter. Business investment fell by 7.6 per cent in the first quarter compared with the previous already poor quarter. That is hardly surprising considering the continuing credit famine. Exports of goods fell by £4.1 billion in the first quarter and our overall deficit in trade in goods last year was £93 billion—so much for the proclaimed benefit to exporters of a weak pound. GDP in the production industries is down by 12.5 per cent in two years.

As regards employment, in the first quarter of this year public sector employment rose by 15,000, while private sector employment fell by 286,000. I regard both those figures as bad news. Since March the deterioration has accelerated dramatically, with youth unemployment leading the way. One can imagine not only the heartache and misery that that must cause but also the massive and growing cost to the public purse at a time when revenues are drying up. I fear that that trend has much longer to run.

As the Government scrabble around over the next few months trying to find green shoots, they will be clutching not at green shoots but at straws. All they will find is a lunar landscape, with mountains of debt stretching to the horizon and a dust cloud of inflation hovering above it. Already soaring upwards, borrowing will be more in the next two years than the entire accumulated debt of all previous Governments since the 17th century added together. It will double the national debt. We will be paying more in interest on those debts than on the whole of the education budget. I believe that the bloated state of our public finances will delay our recovery from recession, not hasten it. Unless we get to grips with it soon, the situation will get even worse.

The Government want to sell £220 billion of gilts this year and they are competing with, among others, the United States, Germany and Japan, which alone are seeking between them to raise £2.7 trillion. Therefore, the possibility of a gilts strike and the collapse of sterling cannot be ruled out and the consequences of that would be calamitous. I have no wish to sound unduly alarmist, but this should come as no surprise, because if we include, as we should, the cost of rescuing the banks, off-balance-sheet PFI liabilities and public sector pension liabilities, the United Kingdom’s gross liabilities already exceed 275 per cent of GDP and, while the liabilities and debts are rising, GDP is falling.

On top of public debt, personal debt, with the active encouragement of the Government, has reached the highest levels in the world, at 186 per cent of disposable income—higher than America’s 142 per cent and, indeed, the highest that any G7 country has ever seen. We have one of the lowest gross national savings ratios in the world, while house price inflation averaged 9.3 per cent in the decade before the credit crunch, compared with 3.9 per cent in America.

The damage wrought by this “dysfunctional” Government—to quote their colleague in this House, the noble Lord, Lord Sainsbury of Turville—is literally immeasurable. It will take years, indeed decades, to repair and it has been caused not just in the past two years of panic and misjudgement but cumulatively over the past decade. It comes as no surprise to learn only today that for the first time in 350 years the Treasury has had its own accounts qualified by the National Audit Office.

The noble Lord, Lord Myners, says that the Government are not complacent, but it seems to me that they are not in control of events. It is easy to say that the crisis is international and that it all began in America. Of course, what happened there partially triggered the denouement, but it also began in the United Kingdom. Northern Rock collapsed before Lehman Brothers. Our banks and building societies were every bit as extended as America’s and they were poorly regulated as a result of the Prime Minister’s fateful changes of 1997. I warmly welcome my honourable friend George Osborne’s clear-sighted proposals to reverse the split-level responsibility that has so damaged banking regulation.

Our housing market was every bit as overheated, overpriced and overborrowed as America’s, the result of easy credit fanning the feel-good factor to win votes. With our public spending levels, our high taxation, our deficits and our debt, ours was not an economy whose fundamentals were stronger than others, as the Prime Minister and the Chancellor repeatedly claimed. It was not an economy uniquely well placed to weather the storm, as they also claimed. It was and is the reverse of those things. It is uniquely weak, uniquely overextended and irresponsibly managed. We urgently need an exit strategy. We need firm decisions to tackle public expenditure and borrowing levels before confidence in sterling collapses and inflation engulfs us. Yet the Government prevaricate; they do nothing and say nothing. This year’s Finance Bill, like the Budget and recent government behaviour, is largely irrelevant to the truly dreadful problems that the nation’s finances face. The day cannot come soon enough when a new Government can come to grips with them and get down to rebuilding our country.

My Lords, I am very pleased to introduce the report of the Economic Affairs Committee on the Finance Bill 2009. It is the seventh annual report in a series that has now become well established and confirms the role of this House in the parliamentary scrutiny of finance Bills. Our sub-committee on the Finance Bill provides a forum, not available in the other place, for taxpayers and their advisers to express their concerns and for officials to respond. I should like to thank my fellow members of the sub-committee for their wise contributions, their non-partisan approach and their necessarily speedy and intensive work. I am also grateful to our witnesses, professional and official, our specialist advisers, the clerk and our secretary-administrator.

The sub-committee has to focus, and this year it examined three topics: tax relief for pensions contributions; the taxation of foreign profits; and real estate investment trusts, or REITs for short. We also followed up our examination last year of two cross-cutting issues: consultation and international competitiveness.

First, on pensions, we accept that the Government have to be free to make such changes as they think fit, but we were concerned that the proposed restrictions to relief for pension contributions, limiting them to the basic rate of tax for high income individuals, risk damaging pensions savings. New rules for pensions came into effect only three years ago. It is very early to make a highly significant change. Although its scope is limited to high-income earners, it may be seen as the thin end of the wedge. A good tax system needs simplicity, consistency and certainty, especially in a long-term business such as pensions. The changes have an adverse effect on each of these qualities. Only a comparatively small number of taxpayers are directly affected, but they set the policy of their companies’ pension schemes and their approach may be coloured, especially as employers' contributions are also affected. We think there is a real risk that savings will switch away from pensions.

We accept that the Government's aim is a level playing field between defined-benefit and defined-contribution schemes, but in practice that may be difficult to achieve. It is not easy to assess the value of contributions to a defined-benefit scheme. We are also concerned that the scheme may lead to exceptionally high marginal rates of tax. The CBI gave an example where the marginal rate was 145 per cent. More consideration is needed on both these areas in the consultation on the substantive scheme.

Given the potential benefit of simplification, we were attracted by an alternative approach of simply restricting the annual and/or the lifetime allowance. By contrast with the Government's proposed changes, this would have been consistent with the present scheme of relief. However, the incidence and impact of a change of this nature would have been very different from those of the Government's proposals and, with considerable regret, we concluded that this was not a line we could pursue.

We questioned the need for antiforestalling measures. There was a legitimate expectation that relief would continue at the taxpayer's marginal rate. It would not have been unreasonable to allow people time to adjust their affairs. In any case, additional contributions would have been limited by the annual and lifetime allowances as well as by what people could afford. In our report, we said that solutions would need to be found for all those individuals who have good reason for not making their pension savings regularly or frequently, who include the self-employed and those retiring or made redundant. As the noble Lord, Lord Myners, outlined, subsequent changes to the Bill have met some concerns, certainly those of the self-employed, and that is welcome, but it is disappointing that, as we understand it, there has been no real recognition of the impact on those who retire or are-made redundant.

The taxation of foreign profits was our second chosen topic. The foreign profits package was introduced after much consultation. It encompasses the exemption of foreign dividends, a cap on allowable finance expenses and the replacement of the Treasury consent rules by a post-transaction reporting requirement. It was very difficult for our witnesses to assess the overall package while there were still gaps in the Finance Bill proposals. Many government amendments were made in the Commons Public Bill Committee. This is the second year in succession that we have had to comment on this aspect, which is very disappointing. The sub-committee was also disappointed that dividend exemption, which was universally welcomed in principle, had been marred by complicated and controversial drafting. We recommended that wherever possible in future, there should also be consultation on drafting.

The restriction of interest relief via the debt cap was least welcomed, and we were not greatly reassured by the responses of officials. We were concerned that a long period of consultation had left some important issues unresolved. We were also very concerned about the complexity of the debt cap provisions, and we recommended further dialogue with the representative bodies, either to discuss changes or to persuade them that further changes were not appropriate. We recommended that in view of the problems with the debt cap provisions, their implementation should be further delayed unless those problems could be resolved during the passage of the Bill. The private sector will still be considering the amendments made in the Commons Committee. If it is content, that is a welcome outcome; if it is not, we urge the Government to consider holding off until there is resolution.

We had few comments on the changes to the rules on controlled foreign companies. We welcomed the changes concerning the rules for Treasury consents and for putting their substance into regulations.

Our third chosen topic was real estate investment trusts or REITs. The sub-committee was concerned that REITs had not lived up to expectations. Although they were introduced to promote greater efficiency and flexibility in the property market and to counter shortages in the housing market, there are no residential REITs or new commercial ones. Obviously, market conditions have been a major factor, but that was not the whole answer. There are also structural weaknesses in the legal framework for REITs, and the Finance Bill, as published, did not tackle those issues. We proposed that a variety of measures should be considered. Some were comparatively minor, such as looking again at the industry's “snagging list”, and others could be tailored to meet the current economic circumstances, such as allowing the payment of scrip dividends. Others could be more significant, such as reducing the entry charge, which might enable the original purposes of the scheme to be met just as the market may be turning. At the Commons Report stage, the Government went some way towards meeting our concerns by introducing a provision to cater for REITs in severe financial difficulties and promised further discussion on scrip dividends. These are welcome responses, if far from addressing all the issues we raised.

More generally, REITs were introduced following well handled consultations, but since then, officials have appeared complacent and unduly cautious, with perhaps too much emphasis on issues such as cost without looking at the broader picture. We suggest that much could be learnt from international experience, particularly that of France.

I now return to the two cross-cutting issues that I mentioned earlier, the first of which is consultation. Given our sharp criticism of the consultation before last year’s Finance Bill, we were keen to see how good it had been this year. We were left with a favourable impression across the board of how the consultation on foreign profits had been handled. The one aspect that concerned us, as I mentioned earlier, was that when it was published, the Finance Bill was incomplete. We recommended that HMRC considers very carefully why it did not allow itself sufficient time to complete the consultation and the subsequent drafting process.

We concluded that, given the nature of the changes, it would have been very difficult for the Government to consult on pensions, even informally. However, we thought that Her Majesty’s Treasury and HMRC were at fault in failing to consult on the novel and contentious measures on the duties of accounting officers of the largest companies and on naming and shaming serious tax defaulters. We were not persuaded by the reasons given by officials for this lack of consultation. Some changes to the accounting officers’ provision have been made in consultations since the Budget, but it would have been much better if they had been made earlier. We recommended that in future there should be consultation on all such issues, and we hope that it will not be necessary to revert to this aspect in a future report.

The second cross-cutting issue is the effect of the measures that we examined on the international competitive position of the United Kingdom. There was general agreement that some parts of the foreign profits package were positive but others much less so. The outstanding issues clearly need to be resolved before the full impact on competitiveness can be determined. We thought that the opinion of officials that the pension changes would have little effect on competitiveness was likely to be overoptimistic, and we recommended that the effect of the changes should be monitored carefully. The likely impact on the UK’s competitiveness of the Finance Bill provisions as a whole is difficult to assess; it might be narrowly positive if the concerns about the debt cap rules can be resolved.

In summary, our report was less critical than last year, with more things to welcome to balance our criticisms. Our main concern was that the Government have underestimated the risk of damaging pension savings by changing the long-standing rule that relief for pension contributions should be given at an individual’s marginal rate. Although only some of our concerns about this year’s Finance Bill have been met during its passage, I hope the House will agree that our reports are valuable in strengthening parliamentary scrutiny and drawing attention to the concerns of taxpayers and their representative bodies.

My Lords, as a member of the Economic Affairs Committee and the Finance Bill sub-committee, I will take up the third of the three topics on which our report concentrates: the real estate investment trusts, or REITs, which the noble Lord, Lord Vallance, mentioned. The sub-committee took the opportunity to review their progress since the introduction of the REITs regime in January 2007.

The REITs concept was introduced into the UK by the Finance Act 2006. Its aim was to improve the quantity and quality of finance for investment in property and remove tax distortions, in particular the hazards of double taxation, for property investment companies. Minor technical changes have been made to the REITs regime in every Finance Bill since 2006, and the measures in this Bill are modest but useful and welcome.

In considering whether the arrangements have worked satisfactorily overall, the committee concludes that the regime was successfully launched, has been well handled and has operated well for large existing commercial property investments groups that have converted into REITs, of which there are now 21, with assets of some £30 billion. However, the Government made it clear when they introduced the REITs model that they hoped this would attract investment into the residential rented property world as well as into the commercial sector, thereby helping to meet the acute shortages of homes that are needed in this country, as identified by the review by Kate Barker at the Bank of England.

On this score, we must conclude—and the committee did—that the REITs regime has failed us. No new REITs of any kind have been formed. In particular, no new REITs have been formed to invest in residential property. This failure of successive Finance Acts means that the opportunity to draw in large-scale institutional investment into the private rented sector has so far been lost. REITs are of considerable importance in the USA and, with the unwinding of the buy-to-let market in the UK, there has never been a time in which investment in the private rented sector has been more needed.

We know from Kate Barker’s analysis that we need to build something like 240,000 new homes every year. Indeed, the independent National Housing and Planning Advice Unit has recently recalculated the figures and come up with a new figure of 257,000 homes that are required each year. Yet house builders building homes for sale are unlikely to do better than about 80,000 homes in the current year. That is far, far below the level that is needed. It seems likely, with house-building in the doldrums and the lack of available mortgage finance stretching into the future, that this low level of house-building for sale will be continued for some years to come. A healthy private rented sector could fill that gap and meet the needs of the growing numbers of people who cannot afford to buy and, for different reasons, do not want to take on mortgage commitments.

At present, we rely on individual small-time investors: the buy-to-let investor. According to a recent report for the Government by Julie Rugg of York University, there are now something like 1.2 million private landlords, very many of whom have a single property in their ownership. This produces considerable disadvantages in the quality of management that one can expect, compared with that of an institutional landlord who can afford the professional skills of proper larger-scale management. It means that a lot of investors are looking to the short term, rather than in the long term in which institutions are more interested. It also means that these small-time investors are not in a position to commission the building of new apartment blocks, as can institutions that are looking for large-scale opportunities in which to invest.

Without the REITs model working, we are missing out on the opportunity to bring in the huge sums of money that are so badly needed in housing and that are not likely to be found from simply building homes for sale, on which we have relied for the past 20 years or more. Moreover, the attractions to institutional investors of a residential investment model that works are considerable. Rents—noble Lords will recall that the Rent Acts were abolished more than 20 years ago—are likely to rise in line with earnings rather than with the RPI. That can match the requirements of institutional investors in property. Rents could rise that sensible margin ahead of the RPI in line with incomes each year; yet the institutions are steering clear of those investment opportunities because we do not have a real estate investment trust model that works for us. Market conditions have been blamed for any of the REITs failing to materialise for residential property investment. They were also blamed when property prices were rising rapidly and yields were falling correspondingly. Now, market conditions are again blamed for the absence of REITs when property prices are falling. This suggests that, as the committee concluded, it is the system itself that is not what it should be and not simply a matter of market failure.

The committee concluded that the modest measures on REITs in the Finance Bill are useful and welcome, but, as it says,

“no-one has claimed that they will make any … difference either to the number of REITs or to the recovery of the property market”.

Further changes, like the treatment of cash under the balance-of-business test and the payment of dividends other than in cash, are well worth further consideration, but the chief concern of the committee was the policy failure to see any residential REITs established. The committee’s report commented that,

“the official attitude appears to us to have bordered on the complacent and unduly cautious”.

Will the Minister take forward the committee’s firm recommendation that advantage be taken of the excellent consultative machinery that now exists between the Treasury, the British Property Federation and the Royal Institution of Chartered Surveyors to review the workings of the REITs system and see whether the huge potential for investment in residential property cannot now be unleashed?

My Lords, I thank the noble Lord, Lord Vallance, for what he has said and how fairly he has summed up the unanimous views of the sub-committee, on which I was happy to be able to participate. I will not deal with all four of the issues with which we dealt; I will deal just with pensions. As always, we did not look at these matters from a political standpoint. We did not have a Minister before us. We had only officials. I say “only”, but we had the people who matter on these occasions. HMRC was unable to answer for us what is happening, for example, on the effects of the policy—although we were not looking at the policy— on savings, on pensions and on the future of people who save. I declare a past interest as a substantial beneficiary, like many in professional activities, who invested through annuities, and received tax relief and benefits from it. I thank whoever was in charge at that stage.

After our committee had met, I put down a Written Question on whether the Government agreed with the CBI, which said that there was an effective tax rate of 150 per cent in some circumstances. The answer from my noble friend was that they did not agree, but it was a somewhat less than absolutely clear reply. He tried again this evening, but he did not altogether convince me then either. When he winds up, I should like him to have another go at perhaps 149 per cent or 100 per cent. What is likely to be the effect on, possibly, a small number? That small number is not unimportant because professional men and women prepare for their retirement in a variety of ways. This way is very important both personally and, from the point of view of the country as a whole, it is beneficial. I hope that my noble friend will give us a clearer reply.

However, I mainly want to say a few words about the economy. As one recognises on these occasions, the noble Lord, Lord Lang, made a great deal of his criticism of the present economic position of the country. I listened carefully to what he had to say—but unlike the unanimous views of the Select Committee, for which I thank him, on the Barnett formula where I absolutely agree with what it said—but tonight I found him less than constructive in his alternative proposals to what the Government are doing. No doubt, future speakers—there seem to be a great number of them on the Opposition Benches—will give us the benefit of those constructive proposals. The noble Baroness, Lady O’Cathain, is pointing to this side of the House, which I appreciate, but the Government have got my noble friend Lord Sheldon and me, and they are more than happy with the two of us.

On the economy, I very much agree with what the Government are trying to do. They have not, during the course of a recession, started to cut public expenditure and perhaps increase taxes. That would not reduce debt; it would be more likely to increase it. I very much agree with the Government, but that is about the only thing on which I will agree with them tonight. Precisely what do they propose to do—I know that my noble friend likes to be precise on these occasions—when the recession comes to an end? Incidentally, I was pleased to hear him say that—he told us about a sort of preview of the Pre-Budget Report—we are at the bottom now. I have forgotten his exact words, but he certainly implied that we were out of the recession. Perhaps I may add that he did not refer to green shoots. Outside the Government, economists almost across the board have come to the conclusion in their guesses—we all know that they are guesses—about the future of the economy that the recession is largely coming to an end. Unlike my noble friend, they seem to feel that when the upturn comes it will be rather slower than seemed likely even in the last Budget. Perhaps my noble friend would comment on that too.

When the recession comes to an end and we are in a reasonable upturn, the important question that faces any Government is how they will balance the books—except no one balances the books—and bring them more closely into line and make them sustainable. I should like to know whether my noble friend has seen the report—I have not—which was referred to in the press this morning, about the study on public expenditure by the King’s Fund and the Institute for Fiscal Studies. The Guardian had a headline, “‘Tax or axe’ warning on future NHS spending”. It is clear that with an ageing population—I am happy to say especially for Members of your Lordships' House—the National Health Service—whoever is in charge, private or public—will need to spend rather more than less in the years to come. In many areas of National Health Service spending more will need to be spent. The article quoted the study as saying that “across-the-board” there would need to be a,

“2.3%-a-year cut in spending”,

which did not exclude the National Health Service.

With £700 billion of public expenditure of course there is waste. Everyone talks about cutting waste. When I had some slight responsibility as Chief Secretary to the Treasury, public expenditure was a much lower figure and I had to cut it for five years almost, but there was waste. There is always waste. When £700 billion is being spent, there is bound to be waste even when it is being spent by the private sector, let alone by the Government. Everyone is in favour of cutting waste, but how it is done, and where and when, we have yet to hear from any of the major political parties.

We are told that all parties are telling us the truth about the fact that there will be a need for cuts after 2011. On the surface that is being honest and telling the public the truth, but just saying it does not tell us where people are going to be hurt, and when. Speaking for myself as a former, retired politician—an emeritus politician, unlike the Cross–Benchers in your Lordships’ House—I do not expect either of the major parties to tell us, before the election, where it will hurt. We will not hear the truth, but we will hear talk of honesty. But we will not hear anyone say precisely where the cuts are going to fall, on whom and when.

However, major cuts will have to be made when the recession is over, and very likely tax increases as well. I would be surprised if VAT does not go up substantially. VAT has been mentioned in this context, and if the recession is not really over, I do not know if the Government will seek to extend the cut for another year; it may be sensible to do so. Again, I wait to hear what my noble friend has to say. However, on public expenditure, on the tax front and on balancing the Budget, will my noble friend tell us whether it is the Government’s clear intention when we see a reasonable upturn in the economy—not a huge rise but perhaps 2 or 3 per cent, which were the average levels of the past—to make those precise cuts after the recession is over?

My Lords, as a member of the Finance Bill Sub-Committee of the Economic Affairs Committee, I pay tribute to our Chairman for the excellent way in which he chaired our meetings. I am also the chairman of several pension trustee funds, one of which is in a company which is a REIT. I want mainly to talk about pensions tonight, but will first say a brief word about the other two matters. The impression I gained from our witnesses is that there is clearly favourable progress on consultation, although an exception should be made for the measure on the duties of the accounting officers of large companies and the naming and shaming of serious tax defaulters. The first, especially, would have benefited from public consultation and I can see no reason why they could not have been subjected to that.

On the measures related to foreign profits and REITs, about which the noble Lord, Lord Best, has talked so eloquently—at least those in the Budget as distinct from those that were not—the comments were more favourable than unfavourable. With the pension proposals, it was an entirely different matter. I accept that this was not an issue for prior consultation. Had the Government done so, they would have received devastating criticisms of the sort we heard from all our witnesses except HMRC. It was not a lack of consultation that concerned the committee, but the substance. I have to say that I have rarely heard such unanimous, persistent and outspoken criticism. I have sympathy with HMRC which had difficulty in dealing with the criticisms because this was clearly a politically motivated decision driven by the need in the current economic and fiscal circumstances for whatever tax revenue the Chancellor can find. He identified this one as an easy political target that would not attract widespread criticism in most constituencies. After all, it is about people with incomes of £150,000 or over, and most constituencies have comparatively few of those.

That may explain why there has not been a major public fuss about it, except as expressed by the witnesses to our committee. It is a bit like the notorious ACT measure of 1997 in that its damage was not recognised by the wider public at the time, despite the efforts of many of us to draw attention to the consequences. Later, however, its devastating impact on pensions has become all too apparent. I agree that this particular set of measures is not on the same scale, but it will have something of the same impact. Many people with incomes much lower than £150,000 will feel the effects. As I listened to the litany of criticisms in our witness sessions, it became clear that this is likely to be a major mistake. The issues are summarised in paragraph 144 of our report, which states,

“the expectations raised by what had been said in 2004, the risk to pension savings, the comparatively low risk of forestalling in practice, the complexities of three regimes in five years. The need for a level balance between DB [defined benefit] and DC [direct contribution] schemes, the need to take account of special cases and the administrative and compliance costs”.

I want to single out just four of the criticisms, the first of which relates to forestalling.

I recognise that the Government made some changes at the Committee stage in the other place, particularly on irregular payments, but we heard a good deal of evidence about the effect on those who have been made redundant and in many cases are in receipt of a pension contribution over the figure envisaged in the Bill, in particular those who had been planning for retirement. People were expecting to make a major contribution to their pension contributions to achieve a higher figure just prior to retirement, but had not made the same level of contributions in earlier years. With great respect, I thought that the Minister was floundering in answer to my noble friend Lord Forsyth when he said—I think I have it right—“Nobody was given an assurance that those rates will remain in perpetuity”. He certainly said the words “in perpetuity”. I have to say to him that there was certainly no expectation that there would be change so soon and so quickly, and many people were planning for retirement not very far ahead on the assumption that they would remain. I would be grateful if the Minister would comment on that because there are areas of forestalling that have not been tackled and are still unfair.

The second point is that I just do not believe that this measure will raise the tax revenue predicted by the Government for it. A very high tax rate is now applied to those who have been affected by the changes, and there is no doubt that among many companies and advisers a great deal of discussion is going on to bring forward proposals on substitute schemes for compensation packages. In other words, people will not be making maximum contributions to pensions; they will be putting the money elsewhere where it will have a better overall effect. HMRC has substantially underestimated the range of alternatives for many who are affected and therefore overestimated the revenue.

Thirdly, as we all know, defined benefit schemes are already in a fragile state. It sometimes seems that companies, including major companies, are closing them down not only to new employees but to existing employees almost every month, if not every week. Time after time we hear of major companies that are making major changes to their defined benefit opportunities. This is just another nail in the coffin. The effect of the key decision-makers in companies disengaging themselves from company schemes and finding them less attractive can only accelerate that process. As we put in our report, while the numbers directly affected may be small, among them will be individuals who are influential in determining the pensions policies of many companies.

The most worrying of all, and by far the most important, is my fourth criticism. After long consultation, the new regime, commencing with the A-day measures in April 2006 following the Finance Act 2004, was widely welcomed and hailed for its simplicity and flexibility. The Government hailed it as a transparent, consistent system, giving everyone for the first time—I challenge the “everyone”—the same opportunity to make tax-relieved pension savings over a lifetime. Above all, it was put over and accepted by everyone in the pension industry—companies, pension advisers, potential pensioners and pensioners—that there was a guarantee and an assurance of certainty in this new regime and an end to the chopping and changing of pension tax regimes. Now, after only three years, this has been broken and, combined with all the other non-tax issues that are currently adversely affecting pensions, even this assurance of continuity in the scheme has gone. A precedent has been established that the A-day tax regime is not certain; that if it can be attacked by a desperate Chancellor so soon, will there not be other changes year after year? In particular, a precedent has now been set for taxing employer contributions. Even the long-established fiscal rule that pension contributions are tax free because pension payments are taxed at one’s marginal rate when one becomes a pensioner has been undermined.

I shall quote from three witnesses who appeared in front of us. The CBI said that the net effect will be to disincentivise pension savings completely. The Chartered Institute of Taxation expressed a worry that it will mean a complete reappraisal as to the value of pensions provision. The National Association of Pension Funds said that it will be a disincentive for employers to contribute, particularly to defined benefit schemes but to defined contribution schemes as well.

In justifying the introduction of this measure, the Chancellor said that it was difficult to justify how a quarter of the cost of pensions tax relief went to the top 1.5 per cent of earners. But surely, after such a long period of consultation and gestation before the introduction of the regime, the Government had worked that out and knew what they were doing when they introduced the new regime. I do not think that that is in any way a proper justification of what has been done.

The decline of defined benefit started in 1997 when another ill thought-out measure removed £5 billion a year from pension funds, now, cumulatively and compound; a huge sum. I accept that some of the reasons for the decline in defined benefit schemes—some of them substantial—are not the consequence of any actions by the Government: on the asset side, the effect of increased longevity in the mortality rates; on the liabilities side, an accounting and actuarial system based on gilt rates so that when they come down the liabilities rise. That can fluctuate widely even over a short period and so one has substantial changes in the apparent deficits.

On top of all that, this is another serious blow to defined benefit schemes. Many people recognise that defined contribution and personal pensions do not offer the same advantages. As a result, we now have two nations—the private sector pension provision and the public sector pension provision. Now is not the time to repeat all the comments about the unfairness and huge future costs of public sector pension schemes. The Government clearly will not tackle this in the remainder of their time and in their enfeebled state. This makes this financial measure, which will not raise the tax revenue the Chancellor predicted and which will add even more to the decline of private sector schemes, even more unbalanced and ill thought through.

My Lords, I add my congratulations to the noble Lord, Lord Vallance, and the sub-committee Although I serve on the Economic Affairs Committee, I escaped being on the sub-committee because I had been drafted by the noble Lord, Lord Barnett, on to the Barnett Select Committee, which produced an excellent report last week.

So here we go again, with another Finance Bill in two volumes—500 pages of stuff. Despite the Government’s commitment to simplify the tax code, having doubled that code, and with us now having the longest tax code in the world—longer even than India’s—we get another 500 pages of stuff. It has come to this House having not been scrutinised properly by the other place and, judging by the Minister’s speech, has not even been fully understood by those who are responsible for the implementation of the legislation.

And what are we doing? We are debating the Bill at a late hour on the eve of the time when Members of the House of Commons will disappear with their buckets and spades until October. Given the seriousness of the economic crisis, which my noble friend Lord Lang set out in his excellent speech, it is shameful that we should be reduced to doing this at this hour. Given the hour, though, the Minister will no doubt be relieved to hear that I will resist the temptation to use this as an opportunity to critique the Government’s economic policy. I shall focus on the committee’s report and some aspects of the Bill.

The Minister is beginning to get a bit of a reputation for not being completely straightforward in taking criticism. In his speech he was keen to point out the parts of the report that praised the Government’s record on consultation, but he neglected to mention the criticism of the consultation process on the shaming of defaulters and on the duties of accounting officers at large corporates. If he is going to raise what the committee had to say about consultation, he should not just pick out the cherries that show the Government in a good light; the point of these debates is to address the criticisms and inform the House what he is going to do to ensure that it does not happen again.

The Minister drew attention to the anti-forestalling measures. I do not know if he has had a chance to read the evidence that was given to the sub-committee. I was particularly struck by the evidence from the Association of Taxation Technicians—not a particularly exciting organisation, I would have thought, nor a particularly partisan one, but the criticisms that my noble friend Lord MacGregor has pointed out are searing and scathing, such as those on anti-forestalling.

Had the Government not had these anti-forestalling measures, we would have saved no fewer than 13 pages of legislation and 52 pages of guidance. That is what the anti-forestalling legislation that the Minister referred to adds to the tax code. In the evidence, the memorandum from the Association of Taxation Technicians says about the Government’s anti-forestalling measures:

“The Government’s position here is entirely without logic. If they wish to restrict relief to 20 per cent only from 2011, why introduce provisions which in effect apply that restriction immediately? If they truly wish to restrict relief with immediate effect, why not simplify the legislative process by eliminating both the deferral to 2011 and the ‘anti forestalling’ rules? On grounds of simplification alone, surely the post-A Day pensions regime has already suffered enough from needlessly over-complex legislation?”.

What are this Government doing if they are not listening to representations of this kind? We heard nothing—perhaps the Minister will deal with this in his wind-up—that dealt with the considerable concerns that have been expressed.

I should perhaps declare an interest, as I may well be affected by the changes to the pension regime that are contained in the Bill. Does the Minister have any idea how much this has undermined confidence in our pension system throughout business in this country? In every boardroom now, senior executives, particularly if they are still hanging on to a final-salary pension scheme, are considering how they are going to remunerate their senior staff because it no longer makes any sense for them to make a contribution to the pension scheme if this regime goes ahead after 2011. Does he recognise how creating this uncertainty means that people no longer have faith in the system, and will look for other ways where they will have more control over saving their capital?

I noticed that in his speech the Minister said that the measures were aimed at the wealthiest. Are the people who are immediately about to retire, the unemployed, the self-employed and entrepreneurs the wealthiest? All of them, according to the evidence that was given to the committee, will be seriously damaged by these changes.

The most important thing here is the breach of principles. I thought that it was an established and agreed principle across the parties that you did not pay tax when you made a contribution to a pension fund but that you paid the tax when it came out. The Government are breaching that principle. As my noble friend Lord MacGregor pointed out, it has gone almost unnoticed that a new principle is being established, which is to treat employers’ contributions as an emolument for the first time. That creates a new seam from which this profligate Government will be able to mine further revenues. The Minister might say that it affects only the very wealthiest, but he has breached principles, which will enable the Government to continue taxation of people on lower incomes, just as they have done with national insurance.

I agree with my noble friend that it is just extraordinary that we could have had a simplification of pensions, for which I praised the Government at the time: I think that eight or nine different schemes were brought together, and we had A-day. I do not know whether the Minister was able to escape the City in time, but, for the rest of us, a cap was put on the amount that we could put into our pension funds, which was accepted. The capped benefit was the Government’s attempt to deal with high earners and to ensure that there was balance in the system. Everyone accepted that, and then, three years on, here is the Minister tearing up the plant and changing it. That is deeply disturbing, and would be even if we had a scheme which was workable and not destructive, as this Bill makes it.

The Minister’s response to my earlier intervention was completely unsatisfactory. He said that there was never any intention to give people who were making a final contribution in their year of retirement a kind of blank cheque for the future. Why did the 2004 Act make provision to remove the limit entirely for people who were crystallising their benefits in their year of retirement if it was not the Government’s intention to encourage it? That legislation was implemented in April 2006. People who were planning their retirement and planning how they would build up that fund—not wealthy people who get big bonuses in the City—now find themselves completely undermined by the Government who brought in the legislation. What are we to make of the thinking that is going on?

As the proposals stood, someone who was made redundant and wanted to invest their £30,000 redundancy cheque in their pension fund could find themselves having to pay tax on it because of the anti-forestalling measures. I do not know whether the change to the £30,000 limit that has been made in the other place would affect that. Perhaps the Minister could reassure me in his reply.

Then there are the self-employed, who have good years and bad years and put money aside as and when they can. How on earth are they supposed to average their contributions, and why is it necessary? The splendid people from the Association of Taxation Technicians set out very clearly in their document—I hope that the Minister might find time to read it; I shall not detain the House—why the anti-forestalling measures are entirely unnecessary and counterproductive in their effect.

People who find themselves made redundant and unemployed—they may have been on a high salary and then get a job—will find that, because they had no income in the previous year, the averaging scheme discriminates against them. What an extraordinary thing, to penalise people who have lost their jobs by preventing them making up to their pension scheme what they were unable to contribute because they had been without employment and income.

I have not seen the Minister’s answer to which the noble Lord, Lord Barnett, referred—that was remiss of me—but he suggested that it was not entirely clear. The CBI states on page 39 of the evidence that,

“the total tax rate levied on pension saving by the new system, taking into account reduced tax relief, lifetime allowance charges and tax paid in retirement, will be in the region of 70-80 %”.

It rightly concludes:

“This figure, when combined with a significant tax charge on the employer contribution, will make it sensible for most senior managers in firms with defined benefit schemes to leave the pension schemes, or to seek shorter time working arrangements to avoid triggering a punitive tax regime”.

What a terrible condemnation of the Government. What drives this vendetta? People who do not buy annuities at the age of 75 are already subject to an 82 per cent take in tax. The silly regime which the Government are introducing will see people facing tax rates of more than 100 per cent. I do not know how the Minister can assume that is not the case, because on page 65 of the committee’s evidence he will see some worked-up examples which show how people end up with a marginal rate of tax of 100 per cent and more.

So what will happen? What will these wealthy people about whom the Minister is concerned do? They will go out and buy buy-to-let properties and their gains will be taxed at 18 per cent and not at high rates of tax because of the stupid capital gains tax regime that the Government have brought in which has created such a huge differential between tax on income and now tax on moneys which are put into savings. All of this is occurring at a time when, according to Deloitte, the FTSE 100 companies have deficits on their pension funds which have doubled to £300 billion since January.

This is the last of these Bills before the Government need to face the judgment of the electorate, and for that we must be thankful. I was quite struck by the front page headline of the Sunday Times this Sunday. It stated:

“Lord Myners attacks bankers’ greed and finds God”.

It said that the noble Lord,

“was increasingly exercised and concerned with the fact that we have compromised our lives. This is very evident in the financial community—that money has become everything. People have lost their sense of purpose”.

I have to say to him that people want stability; they do not want uncertainty and they want the Government off their back. If the noble Lord is concerned about the Gospel, he might turn to Matthew on the subject of Judgment Day where it is said that Jesus tells us that the sheep will be separated from the goats. The goats are deserting this Government in droves. I suggest to the Minister that this might be time for a sharp exit. Presiding over legislation like this does no end of harm to his reputation. At least some members of the Government will be able to plead that they did not understand what they were doing. He has no such excuse. He says that we must live within our means and yet in a reply to me on 17 June at Question Time he assured me that now that he was in charge of the Government debt office there was no need to worry about raising the £900 billion extra in debt without there being a substantial increase in interest rates. I am with my noble friend; I think there is considerable cause for concern.

Last week the IMF said:

“The United Kingdom has been getting the benefit of the doubt both in the government bond market and also the foreign exchange market. The benefit of the doubt is not going to last for ever”.

The United Kingdom may have the benefit of the doubt but the Minister has lost it.

My Lords, as we have heard, each year since 2003 the finance sub-committee of the Economic Affairs Committee has inquired into selected aspects of that year’s Finance Bill. The resulting reports are always of a very high standard and do much to increase understanding of the rather arcane nature of the Finance Bill. I suspect that the sub-committee is not greatly loved by the Government. In passing, I make the observation that, if the sub-committee’s work were to be extended to inquire into more than three aspects of the Bill, there would be a commensurate increase in understanding and almost certainly a similar increase in government irritation. The chairman and members of the sub-committee are to be congratulated on giving great service to this House and contributing to the general awareness of issues that are normally put into the “too difficult to understand” box.

In my few words this evening, I intend to concentrate, like several previous speakers, on pensions. I declare an interest as a pensioner, although I say in my defence that I have been concerned about pensions long before I became a pensioner. Pensions have always—at least until recently—been a most successful way of saving. Savings are one way in which an individual who is capable of working hard and who has been blessed with talents, education, opportunities and health should be responsible and not rely on the state to support them in their old age. My noble friend Lord Lang of Monkton was strongly critical of the likely effect on the attitude of people to savings of the taxation of pensions suggested in the Finance Bill.

The 17 pages in the sub-committee’s report, in chapter 3, on the taxation of pensions should be required reading for those who have a suspicion that the Government rate pensions as an easy target—a gold mine that yields untold riches for the Government without too much digging and mining. Why? Because each raid on pension schemes and each change of the rules is couched in massively opaque terms and is virtually incomprehensible to all but the ever mushrooming group of pension consultants.

The pension section of the Finance Bill 2009 is no exception. It truly is par for the course and the sub-committee has done a great service in throwing some light on it. We have been reminded several times this evening that, when the overhauled regime of the taxation of pensions came into effect in 2006, the Government maintained that the reform would,

“bring simplification and increased flexibility that will ensure a transparent, consistent and flexible system that is readily understood, making it easier for people to concentrate on deciding when and how much to save for retirement”.

Three years later, the new system that was designed, I repeat, to “bring simplification”, be “readily understood” and make it,

“easier for people to concentrate on deciding when and how much to save for retirement”,

was shunted aside and a punitive disincentive that threw people into confusion was introduced.

The greatest casualty in the recent financial meltdown has been trust. The latest pension proposals—this action by this Government—further erodes trust, or is there any trust left? The witnesses from the private sector who appeared before the sub-committee expressed concern that the measures introduced would have a significant impact on the scheme introduced just three years earlier; my noble friend Lord Forsyth clearly and cogently made that point. The 2006 changes were made after much consultation, which was acknowledged by all as a very good thing. What consultation was undertaken on this change, or is consultation another casualty of the financial meltdown? I heard what the noble Lord, Lord Vallance, said in acknowledging that it would have been difficult. I am sure that that is correct, but should that absolve the Government from undertaking a thorough analysis of the likely impact of the changes, or are they just dismissive of the essential contribution of those most likely to be affected?

The Government will state that the changes apply to only 2 per cent of the workforce, so is that all right? No, it is not. Do the Government not realise that in any organisation the introduction of different levels of incentive—or disincentive in this case—will have a destabilising effect? Those down the line will look at what is now being seen as a target group ripe for government penalty. How will that encourage others—the younger, ambitious staff who willingly contribute to pension schemes—to act in a responsible manner and hope not to have to rely on the state during their old age? I am not so sure that, along with the effect on trust and on the concept of consultation, this action will not have a deleterious effect on the savings inclination of further generations.

Much has been made of the effect of this move on people who can and may move overseas. But gone are the days when graduates entering the workforce joined a company and stayed there for life. Mobility is an ever present reality and many young, ambitious professionals have almost complete flexibility to move overseas. The sub-committee’s comment, repeated by the noble Lord, Lord Vallance, that the,

“precedent may be seen as the thin end of the wedge”,

and could risk,

“a reduction in pensions savings”,

is surely a valid one. I wonder what the Minister feels about that. There is hardly anyone better placed to have firm views on it.

The sub-committee’s report highlights the risk that the highly paid may look for other means of saving instead. Some of those means have been mentioned here this evening, but it could also take the form of payment in kind rather than an increase in salary. Do we want to return to the days when the higher-paid executive spent an inordinate amount of time devising ways of circumventing pay restrictions? The most farcical one that I encountered was the collection on a weekly basis of suits—yes, suits, but gentlemen’s suits—for dry-cleaning. The most politically incorrect one was the payment of public school fees, but that was in the days before political correctness. What is sure is that there is an army of compensation consultants ready to give advice on how compensation should be fixed to avoid being penalised by reaching the point at which taxation on pensions kicks in. Will that help the country pull itself out of the deepest recession for decades? I think not.

My Lords, the noble Baroness, Lady O’Cathain, was quite right in pointing out the way in which the Government have tried to simplify the pension scheme. It is very difficult to do. It is such a complicated area and there are so many ways in which people earn their money and put their money in. I am afraid that this is one of those things that we will have to live with for many years to come and look at these points again and again. My noble friend Lord Myners pointed out the situation in the other G7 countries—3.8 per cent in Germany, 2.2 per cent in Italy and 1.4 per cent in the United States—and the unexpected decline in the United Kingdom. Of course we have had it even worse in some ways. So this will be a problem that we will live with for a very long time.

In the Second Reading debate on the Finance Bill in the House of Commons, there was a defence of the Government’s measures for guiding Britain out of the recession. It was said that a failure to act would cost us more in the long run and that these were vital measures to help the economy now and to support Britain’s long-term prosperity. It was also said that the world’s economy was shrinking for the first time in peacetime since 1932. This is one of the great changes that we have seen. It was a financial change and nobody could expect that the decline in the world’s economy would go in that kind of way. It is the first time that five major banks were, as we saw in some astonishment, rescued by their national Governments, demonstrating the scale of the international challenge that we are facing. We did not expect anything like that—to see such a decline in banks which had such a very high reputation but which went very rapidly into some decline. Investment in manufacturing industry has been waning, but we hope to see it increase.

One important part of the Bill is the introduction of the new 50p rate. It will be introduced in 2010 as one of the measures in the Bill and will bring borrowing back down once the economy is growing again. I myself have been uneasy about the 40 per cent level for the extremely large capital and income coming from people with considerable wealth. Keeping 40 per cent over such a long period was quite unjustifiable. I hoped to see an increase. We had to wait a long time to see it and we will have to wait a little while yet.

There is also a gradual reduction in the personal allowance for those earning more than £100,000 and a reduction in pension tax relief for those on more than £150,000. This is another thing that we will see. It will echo the kind of requirements that people feel are justifiable. It is right that those on the highest incomes should pay more because, over the past 10 years, we saw the earnings of those on the very highest incomes increase by an average of much more than we might have expected over the period.

The detailed legislation on tax avoidance and evasion will bring in some valuable revenue. A number of comments have been made that dealing with tax avoidance and evasion takes an awful lot of legislation. Of course, it does not last all that long because things change, so you have to make changes and get further legislation, which is more complicated and less reliable. That is a consequence of how these things operate. It is right that those concerned must take these matters into account.

The important point of our April Budget is that there has been a greater instability than at any time for generations. The real problem is that investors assumed that the considerable and long-term growth rate would continue indefinitely, as did the banks. In their efforts to win much of the business from investors, the banks provided loans at exceptionally low rates of interest. As a result, there were many who invested much more than they would otherwise have undertaken. The big rise in unemployment meant that those who had invested at the top of the market lost a substantial amount. A major consequence has been a strong downturn in the housing market.

What is not clear is how long the downturn is going to last. One important Minister said that the downturn will not conclude until 2017. That may be the kind of result to expect, but it is much worse than we had ever anticipated.

The Bill deals with evasion and avoidance in great detail and we have heard the consequences of, and some of the problems that arise from, that. My noble friend Lord Myners pointed out that the £11 billion VAT cut would be over at the end of this year. That is a substantial amount. There has been too much criticism of it. I think that it is going to be rather valuable by the end of the year. The introduction of 15 per cent VAT for the current year was an important step in countering the economic downturn. The advantage of this move was its quick injection into spending by consumers. It may not have been seen as an important step but it was a change in the economic situation that would be difficult to effect quite so rapidly in other ways. Other methods can be introduced, but the delay in their effect on the economy means that there would be little consequence on the situation. At the end of the year, we will see a big spending increase as we approach Christmas. I expect that a combination of Christmas, the end of the year and the expectation that prices will rise in 2010 will see a considerable increase in expenditure. That will have some effects on the markets as well.

In the Times, my noble friend Lord Myners has said that banks and their “grossly over-rewarded” executives are partly to blame for causing the economic recession. He has said that the,

“golden days of huge bonuses”,

are over. Executives had,

“no sense of the broader society around them”.

He said that the bank system came close to collapse last October, before the rescue package:

“There were two or three hours when things felt very bad, nervous and fragile”.

We have now seen a move to a more stable situation, but it is not a very happy one. The United Kingdom is now in recession, which has had a considerable effect on the economy. The widely accepted definition of a recession—two consecutive quarters of negative economic growth—was met last year and it was something that we had not expected or seen for nearly 20 years. The worse-than-expected contraction sent sterling to a 24-year low, with the pound buying $1.355. Meanwhile, the FTSE index fell almost 2 per cent to below 4,000 points. We hope that, by the end of 2009, we will have introduced some hopeful expectation. It will not be rapid, but at least it will be an improvement on what we have seen this year.

My Lords, reading the Evening Standard after lunch today, I came across a story which alleges that the Treasury’s accounts have been qualified for the first time in 350 years. I view that with some scepticism since I do not think that the National Audit Office has been in existence for that long, but in all events the error appears to be in the area for which the Minister is directly responsible, namely the banks and so on. Perhaps he could clarify the situation for us. In particular, why does some unnamed official say, “Don’t worry, it’s a technicality. We have”—I was going to say “written off”—I think he said “signed off the accounts”? Perhaps the Minister could clarify that.

To try to find some guidance about what was in the Bill, I looked at the Second Reading debate in the other place. I found an extraordinary situation where the Chief Secretary did not so much make a speech as engage in a conversation. She seemed to have no idea whatever of how to control a debate. She was constantly interrupted and, at the end of the day, clearly had not made the speech that she intended to make. I was rather short on illumination as to what the Chief Secretary thought the important issue was. Be that as it may, the interruptions certainly concentrated very much on the 17.5 per cent rate of VAT. I am very sensitive about VAT. A long while ago, I had the job of steering the whole of the legislation through the other place. At that time we set a rate of 10 per cent, which was sufficient to make up the revenue that was lost from abolishing two very bad taxes—purchase tax and selective employment tax. Alas, successive Chancellors—including, I am bound to say, Conservative Chancellors— have put it up to 17.5 per cent, but I think the temporary reduction that the Government have introduced is a serious mistake.

In his opening remarks the Minister quoted an organisation—I forget which one—which said that the temporary cut in the 17.5 per cent rate was “value for money for taxpayers”. I have been trying to work out what on earth such an expression might mean. How is a temporary reduction in tax extraordinarily good value for taxpayers? It has meant something like £11 billion or so—mere chicken feed nowadays. None the less, it is completely offset by borrowing, on which the same taxpayers will have to pay interest in due course. More particular concern was expressed in the other place about timing and the fact that, apparently, the rate will go back up to 17.5 per cent at what is likely to be the busiest time of year for the retail trade. No information on this point was given in response to the numerous interruptions. Perhaps the Minister can tell us whether the Government have had any further thoughts on the exact timing.

It will also have a curious effect on the CPI. The CPI has finally reduced to below the Bank of England’s target rate of 2 per cent. In his Budget Statement, the Chancellor said that he expected the rate to fall to 1 per cent by the end of the year. At that moment, there will be an increase in value added tax, which will of course increase the rate. Whether this is a conspiracy whereby the Bank of England can get back to its target rate, having finally reduced it far enough, is not entirely clear. However, it seems that this measure is misconceived and has been a mistake, which was recognised as such, particularly against the background of the overall borrowing side of the management of the economy and the Debt Management Office, which the Minister, I am pleased to say, is in charge of. At least, if we cannot give it back to the Bank of England, which we certainly should do, management of the debt is something that he can look after with some expertise.

A number of my noble friends have commented on the size of the Bill. Its size is absolutely appalling. However, we should be glad that the sub-committee in the House of Lords is looking at detailed proposals and can be selective in what it studies. The Select Committee on the conventions between the two Houses came down strongly in favour of the House of Lords having a role in this respect. The fact that we are restrained on financial matters has gone beyond the stage where we should think seriously about it. It is right that we should engage ourselves more—not least because there is vastly more expertise on financial matters in this place than there is in another.

I want to say a word or two about the report of the Joint Committee on Human Rights as regards retrospection. I have always been strongly of the view that one must distinguish between tax avoidance and tax evasion. We have had exchanges across the Floor on this matter. It is clear that tax avoidance is legal and that tax evasion is not; but as a result of sophisticated accountants working on various schemes, from time to time we find ourselves in a situation whereby the Revenue has to catch up with the schemes that have been devised. In that context, the report of the Joint Committee is very worrying. It may be felt, in extreme circumstances, that there should be retrospection, because the Revenue did not catch up immediately on particular schemes, even though the Revenue is now informed of them. However, the report points out that it is extraordinary that we are introducing retrospective legislation which involves going back seven years. There might be a case, if a cunning scheme is discovered, that the Revenue could say, “We can’t catch this immediately; it is a bad thing and we will go back a year or so”; but to let a matter run for seven years and then clobber people is extraordinary. The Joint Committee points out that people are going bankrupt as a result of this, having operated for seven years on what they believed to be a perfectly legal basis. Perhaps the Minister can give his views on that.

Finally, perhaps I may say a word or two about the general economic situation. One of the features of this year’s Budget was the extent to which people—indeed, people almost universally, if there is such a concept—regarded the Chancellor’s forecasts as overoptimistic. Noble Lords may recall that he said,

“I am forecasting growth of 1.25 per cent in 2010”.

He went on to say:

“From 2011, I am forecasting that the economy will continue to recover, with growth of 3.5 per cent from then on”.

He then used an odd expression. He said:

“To account for the impact of the global shock, I have further adjusted trend output—the productive potential of the economy. But in future years, the economy will recover towards a trend rate of growth of 2.75 per cent”.—[Official Report, Commons, 22/4/09; cols. 239-240.]

Given that any Budget speech is crawled over in great detail by officials and Ministers, this strikes me as a very odd passage that illustrates serious confusion between growth in aggregate demand and growth in productive potential. The forecast may turn out to be right as regards what happens to aggregate demand, not least because of all the measures that are being taken on quantitative easing.

What will be difficult to deal with in managing the economy now and in the immediate future is what has happened to productive potential. The Government have said that it has been growing steadily at 2.75 per cent to 3 per cent. This is what the Treasury has said for the past 30 to 40 years. However, there has been a very serious, once-and-for-all drop in productive potential, not least of the City of London, on which we are far more dependent than is the case with other countries and their financial sectors. Perhaps the Minister will comment on this. The loss of productive potential as a result of the recession that we face makes it very difficult to balance what ought to be done about the level of aggregate demand in relation to productive potential, and reinforces my view that the action on monetary policy taken by the Government is likely to result in a sudden increase in inflation after a period when it is comparatively quiet. The situation is worrying; we will have to see how it works out. The overall situation seems to be recovering slightly. However, the difficulty of managing the economy in the next couple of years will be very great.

My Lords, the Economist this week described what has happened as,

“the biggest economic calamity in 80 years”—

and so it is. At such a time, it is obvious that our country needs real leadership; that is, leadership with strength, competence, integrity and vision. Sadly, since Mr Brown moved into Downing Street, there has been remarkably little of any of those. The Prime Minister needs strength to face the facts. He spent months denying that there was a problem. Fuelled by high-octane hubris, he then claimed that Britain was leading the world. Shortly afterwards, he repeatedly claimed that Britain was saving the world. Until very recently, he insisted that public spending is continuing to rise. It is not; it cannot and it should not.

Funding public spending is one of the great problems that we face. Our present levels of spending are based on massive borrowing, which will amount to more than 100 per cent of GDP over the next four years. Several of my noble friends have mentioned the VAT cuts. What the Government failed to realise when they made their decision to spend £12 billion on cutting VAT was the opportunity cost. You can do different things with the same money. If I had wished to spend the equivalent of that tax reduction, I would have spent the extra money on defence and on the National Health Service. That would have given a much greater stimulus to the economy than merely putting it in the hands of domestic shopkeepers who are selling VAT-taxable goods that are largely imported, particularly in the sectors of electronics, white goods and motor cars, nearly all of which are imported—and, of course, food is not subject to VAT.

Now we are faced, on the latest estimate, with a fall in GDP this year of 4.5 per cent. The noble Lord, Lord Myners, who I am sorry to see is not in his place at the moment, indicated that he thinks that the recession may be coming to an end. My worry is that we may have got to the bottom but we may well spend a long time bumping along the bottom, which is a very uncomfortable place to be.

Unemployment has already reached 2.4 million and is rising, and we have to remember that it is the direction rather than the level of unemployment that has an impact on economic activity. When the level of unemployment rises, those without work feel little prospect of getting jobs, and those still in jobs are worried about joining the dole queue. When unemployment starts to fall, hope is restored and anxiety is diminished, but consumer demand is likely to be very fragile until unemployment turns.

Let us look at employment. The great boom in jobs has been in the public sector, which now employs no less than 5.8 million to 6 million people, or about one in five of the working population. That is not entirely surprising because, with the help of Brussels, over the past 12 years we have seen a deluge of new rules and regulations, many of which have been gold-plated by our Civil Service, and the creation of endless new quangos and inspectorates. Of course, several people have referred to the Finance Bill as the sort of thing that causes extra employment. I hope that when my honourable friend Mr George Osborne becomes Chancellor, his target will be to cut as many pages out of the financial legislation as this Government have put into it.

By contrast, I remind the Minister that manufacturing in the United Kingdom now accounts for only 13 per cent of GDP. Mr Ed Miliband is trying to reduce it more by insisting that a significant proportion of our energy should be generated from wind power, which is no greener than nuclear power but less reliable and twice the cost. That is the way, as the Prime Minister might put it, to price British workers out of British jobs.

We were challenged a few moments ago by a most distinguished former Minister about the scope for spending cuts. Perhaps I may give an example which I mentioned last week. Now that the new Home Secretary has announced that ID cards should be voluntary, there is no possible excuse for setting up a new ID card system with its own database. We have a perfectly good voluntary passport system with its own database, so we could abandon ID cards in favour of passports and that would save hundreds of millions of pounds. There are plenty more ideas where that came from but I do not have time to give them now.

Finally, we come to the top tax rate of 40 per cent, which has survived for 20 years and, I believe, has played a real role in giving the City of London the opportunity to become one of the world’s great financial centres. The noble Lord, Lord Sheldon, particularly singled out this rate of tax but I am reminded that the House of Commons, for the only time ever, had to be suspended in disorder during a Budget speech, such was the rage of the Labour Party when my noble friend Lord Lawson, then Nigel Lawson MP, introduced that rate in 1988. Interestingly, the Labour Party subsequently felt that it had to give an undertaking in three successive election manifestos that it would not raise the top rate above 40 per cent. Of course, it has now broken that promise. I wonder whether, in its next manifesto, it will guarantee not to raise income tax above 50 per cent.

It was very interesting to hear the noble Lord, Lord Sheldon, because I remembered that he and the noble Lord, Lord Barnett, were the two acolytes of one of our most distinguished—in some respects, at any rate—former Chancellors, the noble Lord, Lord Healey. The noble Lord, Lord Sheldon, was Financial Secretary from 1975 to 1979; the noble Lord, Lord Barnett, was Chief Secretary from 1974 to 1979; and the noble Lord, Lord Healey, was Chancellor from 1974 to 1979. When the noble Lord, Lord Sheldon, was speaking, I almost wondered whether I could hear the noble Lord, Lord Healey, squeezing his orange juice.

When I last spoke—in our economic debate on 7 May—I raised points on credit card debt. I pointed out that in the UK alone, the debt on which interest was being paid was well over £40 billion. As the interest rates on credit card debt are very high indeed, I suggested that much of that debt could prove to be toxic. I then made some suggestions about what the Government should do to prevent excessive exuberance in the use of credit cards. It is perhaps no coincidence that, last Wednesday, American Express announced that it had stopped its pension contributions to its 60,000 employees worldwide, which includes its 6,000 UK staff. Frankly, stopping paying your staff is hardly an indicator of financial viability. I suspect that the toxicity lurking in the unpaid credit card debt, which is therefore subject to interest, could explode into a fresh drama in the financial world. Is the Minister able to say whether HMG are more relaxed than I am at this prospect?

Today I received the Minister’s letter dated 14 July, for which I thank him, in which he referred to the consumer White Paper published on 2 July which set out proposals to improve protections for credit card borrowers. Although I am grateful for his letter, I wish I had not had to wait 10 weeks for it and indeed that I had received it earlier than the day of our debate. It would seem from the White Paper, which I welcome, that the Government are now minded to move along some of the lines I suggested. Perhaps I should congratulate the Government on reading Hansard for 7 May. However, the White Paper does not deal with all my points, especially two crucial ones. I would therefore very briefly like to refer to my original proposals.

First, credit card companies should be required to do due diligence before issuing a card. That would include checking on what other cards an applicant has, which means a central record of credit card systems, as implied in the White Paper. Perhaps that will come. Secondly, young people should not be allowed more than one credit card. I do not know the Government’s view of that. Thirdly, the balances on all credit cards should be cleared at regular intervals, and failure to do so should result in suspension of further credit. That appears to be signposted in the White Paper. Fourthly—and most importantly because it would avoid the Government getting involved in supervision of any of this—a credit card debtor who could show that his credit card company had failed to follow the rules would not have to repay the debt. That fourth proposal would be a real incentive for the credit card companies to, as the jargon has it, put their house in order. Perhaps the Minister would comment on that.

I have one final point. If the Prime Minister were prepared to face reality, he would tell the British people that under his watch he allowed a huge and unsustainable level of consumer credit. The figure in the White Paper is £1.4 trillion, the vast majority of which is mortgages but there is £230 billion of non-mortgage debt, of which the credit card debt is put at £53 billion in the White Paper.

The Prime Minister should also emphasise that to prevent total collapse he has had to mutualise much of the debt; that is, transfer it to all UK taxpayers. That is £493 billion just for the four banks that would otherwise have gone bust. In addition, Mr Brown has allowed a rapid growth of public spending to raise the need for public borrowing well above what may be possible to finance at anything like present interest rates. A number of my noble friends have referred to the potential crisis in funding the national debt.

The British people face years of austerity under whichever party is in power. The financial competence of my honourable friend George Osborne is well illustrated by his decision—and the detailed plans in his policy White Paper on sound banking, which was published today—to transfer ultimate control over prudential supervision of the financial sector from the FSA to the Bank of England. I wonder how long it will be before Mr Brown has the confidence to ask the British electorate whether it feels that his experience—in other words, his track record—fits him to be the best steward of this situation, or whether it might prefer a young and vigorous Conservative Government to pick up the pieces. It would at least start with a clean sheet, as have the Obama Administration in the United States.

My Lords, I declare an interest as chairman of Invesco Recovery Trust 2011, quite an apt title for this debate. I would like to be associated with the speeches made by my noble friends Lord Lang, Lord MacGregor and Lord Forsyth. I shall not cover the ground that they have already covered.

I want to highlight three things. The first is savings, which I hold dear. They are the neglected vital ingredient for a successful society. Long ago, when I read economics at Cambridge, Keynesian philosophy was drummed into me. It is basically that savings equal investment and once those savings are made they flow through to good investment. Today, we have a savings ratio of just under 3 per cent. It should be nearer 8 per cent or 10 per cent to be the least bit successful. The only incentive to make anybody save at the moment is the fear of unemployment or the recession. As one looks through the Bill, there are no incentives for savings. There is nothing to encourage the family unit that is in employment to save, or anything about looking to see whether the tax on dividends should be reduced to improve the return on equities and thereby improve the profitability or viability of pension funds. There is nothing about inheritance tax. Why is it that over half the countries in the rest of Europe have already got rid of inheritance tax? It is because they know that inheritance tax is a tax on the family and means families’ well earned lifetime savings being double taxed. There is nothing in the Bill about real safety for personal or family savings. There ought to be a flat rate of £100,000 or something of that order.

I said that I would say nothing about savings, but I declare an interest as a trustee of the parliamentary pension fund and remind noble Lords that today the average pension of a former Member of Parliament is £16,160. That is hardly gold-plated, as most of the press seem to think.

My Lords, my noble friend says that he does not believe it. Those are the facts, and the trouble is that there are people in the press who do not believe it either. Presumably, my noble friend joins them, but those are the figures in the annual report so he will have to accept them.

My Lords, the reason I expressed surprise is that it seems to me that the figure is likely to be much lower than that. I served for 33 years in the Commons and bought eight additional years; even so, my pension is barely the amount my noble friend said, and I must be way above the average.

My Lords, my noble friend’s calculations are incorrect, and I draw his attention to the annual report, which he was sent and should have read. He clearly has not done so yet, so I shall send him another copy.

The second thing I want to raise is tax and incentives. I do not want to be too hard on the Government, but they really are the Government who know how to tax. Never have a Government managed to tax the way the Prime Minister Gordon Brown learnt to tax when he was Chancellor. It all started with the £5 billion tax on pension funds. That was the killer blow for defined benefit pensions. Even in last week’s press we were told that we will pay £20,000 in tax to contribute to care homes—not ours but someone else’s; there is no guarantee that that £20,000 tax on your pension will provide one for you. In the past few days, we have had all sorts of wonderful suggestions for new green taxes on this, that and the other, which frankly are badly thought through.

I turn for a few moments to our present predicament. I re-emphasise that the Prime Minister’s strategy, which was geared to ending boom and bust in the trade cycle and financed by borrowing without the means of repaying, has failed. It always will fail, and it was always destined to fail. Now we face the full horror of massive debt. The first rebuilding plank—I hope the Minister will cover this when he replies—is to have a credible spending review now, not at some time in the future when everything is allegedly in position. Now is the time to do it. If it is not done, and if there is to be a delay of six or nine months, overseas creditors, as sure as day follows night, will depart and sterling will fall. Other noble Lords have already made that point. Total government spending in 1993-94 was £283 billion. Today, it is £623 billion. If you allow for inflation, which is perfectly fair, it is £404 billion. That is almost £200 billion of extra public expenditure. Perhaps it is not all wasted, but a huge amount is.

A number of my noble friends know that I am not really a financial man but a marketing man by profession. We in the marketing world learnt long ago that you build on success. Where are the incentives in this Finance Bill to help to rebuild our nation’s successes and to encourage entrepreneurship? There is none. The VCT and EIS schemes were two pretty good schemes to encourage private investors, but they have been removed in favour of a flat-rate capital gains charge. Nor is there anything in the Finance Bill to encourage the pharmaceutical industry, advanced electronics, engineering developments, architecture, entertainment, the law or advertising—all successful industries in this country.

Even more important is our biggest industry, the financial services, which is in absolute turmoil at the moment. Back in 1980, the industry accounted for 18 per cent of our value-added measure of GDP. In 2007, it had risen to 32 per cent. How are we going to sustain and rebuild faith in that largest of our industries? We have the expertise in that industry and a lot of advantages; we have a free exchange rate and good lawyers and good financiers who are experienced across all these areas. That creates a unique advantage for this country that we cannot and should not throw away.

My final point relates to a particular aspect of the industry: the banking system at the moment. Higher banking reserve ratios are being required that clearly will diminish the return on equity unless the return on assets increases. An increased return on assets means that the users of the banking services need to pay more, which in turn is likely to depress the general recovery.

Of course, the banks’ return on equity can fall, but if they have to increase their reserve ratios and fund some sort of future contingency fund, they will act as they see fit and where they see profits. We know that the banks at the moment are determined to reduce their risk and to lend only where it is highly profitable. That is not what the economy needs, but it is inevitable unless the authorities realise that their current actions are making the situation worse. The failings of the past regulatory system do not need to be solved overnight. If we need higher reserve ratios they do not need to be installed immediately. But the immediate application of higher reserve ratio requirements that took place last year significantly contributed to the near-collapse of the banking system. Unless the Government understand that, our recovery will be delayed even further.

My Lords, I always start by welcoming positive items in the Budget. This year, I give praise for the increase in first-year capital allowances, the deferral of business rate payments, the strategic investment fund—provided that it is managed in a sensible fashion—and the car scrappage scheme. I also warmly welcome the increase in ISA limits. They are all small beer in the scheme of things, but they are still welcome. My speech will focus on the economic background to the Finance Bill. Then I will look at one of the main tax-raising measures. Finally, I will move on to discuss once again the excellent Economic Affairs Committee report issues.

The 2009 Budget was delivered against the background of the Budget deficit, as a share of the economy both this fiscal year and next, being the largest since World War II. This year alone the Government will borrow a breathtaking £175 billion, representing 12.4 per cent of GDP. There has also been the worst fall in national output since 1945 and the fastest rise in unemployment in our history. In his opening remarks, the Minister sounded rather complacent. He said that output was stabilising, that public finances would be stabilised for the future and that we would be living within our means. Most worrying is the level of public borrowing. Already this year the Government have borrowed £30 billion. According to June figures, total outstanding government debt has risen to £775 billion, which is no less than £150 billion more than one year ago and equal to 55 per cent of UK GDP.

According to independent forecasters, the latest highest forecast for the debt figure this year is £202 billion, which is already a 15 per cent increase over the Budget forecast of the £175 billion which has already been mentioned. In May, the rating agency, Standard & Poor’s, warned that soaring UK public debt levels had led it to put Britain’s credit rating on notice that it could be downgraded. Standard & Poor’s said that the UK’s triple-A rating was at risk without a credible plan to put its debts on a “secure downward trajectory”.

Judging by the article in the Sunday Times even the Minister may be getting disillusioned and perhaps relying on divine intervention to help out. What are the Government planning to do about the debt problem to rein in spending? The answer is that they plan to do very little in the short term. According to table A1 in the Red Book the impact of the Budget for 2009-10 is to increase net index spending by £5 billion. In 2010-11, there will be little change to net Exchequer spending and in 2011-12, there will be a decrease of £5 billion. The Table A1 figures are made on very optimistic assumptions for economic recovery. GDP growth is assumed at 1 per cent for 2010, which may be achievable, but the 2011 forecast of 3.5 per cent still looks very optimistic. If the growth figures are not achieved, and the Treasury Committee in its report on the Budget is particularly cautious on the Chancellor’s 2011 forecast, the debt situation will be much worse. As my noble friend Lord Naseby stated, we need a spending review, and we need it now.

One of the main tax-raising measures in the Budget is the increase in the top rate of income tax to 50 per cent from 2010-11. The Pre-Budget Report last November had originally proposed a new top rate of 45 per cent a year later. The Institute for Fiscal Studies, commenting on the top rate of the original 45 per cent plan, argued strongly that it will cost the Exchequer rather than raise money as it will encourage avoidance schemes and persuade many high earners to leave the country for a lower tax regime. Anatole Kaletsky in the Times of 27 April took the same view, saying it was,

“likely to be self-defeating, or at best utterly futile”.

He went on:

“Even in the unlikely event that Mr Darling’s pre-election tax gesture did manage to raise the odd billion, these sums would be far too small to have any impact on public borrowing projections … the decision to rush forward this reform amidst a recession will do serious damage to the economy and the public finances. Hopes of quick improvement in UK economic conditions assumed by Treasury forecasts rely more than ever on maintaining the City’s role as the dominant centre of global financial and business services”.

The Financial Services Global Competitiveness Group, set up by the Treasury, produced a report in May, on the very day of our last economic debate, which the Minister did his best to keep away from us. One of its important conclusions was that,

“maintaining a stable, sustainable and competitive tax system is important for ensuring that business and financial centres can continue to provide an attractive location for international financial institutions”.

Can I ask the Minister how that rock-solid report squares up with the shifting sands of a top rate of tax changing in the PBR from 40 to 45 per cent for individuals which then only a few months later in the Budget goes up to 50 per cent? Or how the extra tax on non-domiciles is in line with this report? As Anatole Kaletsky pointed out, the Budget Red Book says that the financial sector provided 25 per cent of the £47 billion of Britain’s total corporation tax revenues before the recession, plus a

“significant proportion of income tax and national insurance receipts”.

But these receipts are expected to decline by £25 billion during this financial year. That is more than half of the total decline expected in tax revenues as a result of the recession. Overall, the new higher rate of tax seems to be deliberately designed to stop the UK’s financial and service sectors returning to the predominance they enjoyed. Can the Minister tell the House if this is the Government’s deliberate intention?

I now move on to the Economic Affairs Committee report. The first issue tackled is the foreign profits reform package. This is a very complicated area and I am no tax expert, but I quote from a Deloitte Budget commentary:

“One of the most competitive features of the UK tax system in the past has been the lack of any general limitations on the tax deductibility of interest”.

There is now proposed a worldwide debt cap on tax deductibility of interest. This, according to the shadow Financial Secretary Mark Hoban in another place will mean that there is,

“a risk of incentivising debt at the expense of international businesses that use their own resources to fund inward investment”.—[Official Report, Commons, 8/8/09; col. 1073.]

Will the Minister say whether the Government will take on board the recommendations of the Economic Affairs Committee and delay implementation of the worldwide debt cap until sufficient consultation has been undertaken? Also, can the Government give assurances that they will not have to resort to retrospective tax legislation in future as a result of the repeal of Section 765?

I now turn to the second major issue covered—REITs. I welcomed their introduction in 2007 as a means of enabling greater efficiency and flexibility in the UK property investment market. However, to date, no residential property REIT has been established. The Economic Affairs Committee concluded that,

“officials should take a more flexible and responsive approach. HMT and HMRC should look again at proposals by representative bodies especially for the residential sector. The official approach seems complacent and unduly cautious and there could be reconsideration of, for example, the total entry charge, now that there is more than two years’ experience of REITs’ operations’.

The accountants Deloitte also agreed that not enough had been done to help REITs. Does the Minister agree that reforms to REITs did not go far enough?

I turn now to the final topic the committee considered—the pension special annual allowance. The committee reported that,

“making a significant change so soon after the major redesign of the whole system significantly detracted”—

as my noble friend Lord Forsyth said—

“from the simplicity, consistency and certainty which are hallmarks of a good tax system. The undermining of the regime may very well set a precedent and sap confidence. Given the potential effect on savings we found this regrettable”.

In summary, the Budget does little to give assurance that the Government are on top of a parlous economic situation. We may be over the worst of the banking crisis but serious economic problems remain and the major tax-raising measure is being introduced more for political short-term reasons than for sound long-term planning. This is not the way to ensure economic recovery.

My Lords, I thank my noble friend Lord Vallance and his colleagues on the Economic Affairs Select Committee sub-committee for their report on the Finance Bill. I had the dubious pleasure of serving on the sub-committee in the first two years of its existence at a time when the then Chancellor did everything he could to starve it of information and to try to kill it off. I am pleased to see that it is now such a robust and thorough plant, if a plant can be thorough.

A number of themes have run through every report the sub-committee has produced; the question of consultation has been one of them. It is fair to say that over the seven years since the sub-committee was established, the track record of the Treasury has improved in that there has become a realisation, I suspect, that you cannot get away with no consultation on changes without at least there being public criticism of it, which was not the norm even seven years ago, or at least not to the same extent. We have heard today and can see from the report that there are some areas where there has been a lack of consultation this year for no apparent reason; the clause relating to accounting officers and the naming and shaming clauses have been mentioned. But the number of areas on which there has been no consultation appears to be reducing year on year, and it is an important function of the sub-committee to keep the pressure on in that area.

The other issue of contention which the sub-committee has discussed is that of the taxation of pensions and the reduction of the high-rate relief for income earners of more than £150,000 a year. There has been much discussion of whether this is the thin end of the wedge. As noble Lords will know, we on these Benches represent the wedge. We have been advocating an end to higher-rate tax relief on pensions tout court for some considerable time and one of our main objections to the Government’s proposals is that they do not go far enough. Of course, being this Government, they have introduced the measure in the most complicated way and with the maximum amount of legislation, which, in most respects, will serve little purpose.

On the Finance Bill itself, we obviously cannot amend it and it is not usual to discuss minor aspects of it. However, I would like to raise one aspect, very briefly, because it is unfinished business from the Commons end. This relates to the slightly arcane issue of the air passenger duty and the way that it affects different territories. Noble Lords may be aware that the Government have introduced a banding system for the air passenger duty. The costs incurred by passengers depend on the distance that they travel from London. Unfortunately, the calculations are based on the situation of capital cities, and a major anomaly has arisen with regard to the Caribbean, which is in a band that incurs a higher charge than flights to the US even though, if you are travelling to Alaska or Hawaii, you are travelling considerably further than to the Caribbean.

That is a major concern in the Caribbean, where people feel that they are at a disadvantage with this tax on travel compared with the US at a time when the tourist trade is in severe difficulties and when some of their existing and traditional industries, particularly agricultural ones such as bananas and sugar, have already largely disappeared. These small countries, with which we have close links, have increasingly become a source of drugs as a result of previous economic failures. There is a fear that this change will exacerbate that problem as well as causing significant hardship for visiting friends and relatives travelling to the Caribbean.

On Report in another place, the Exchequer Secretary said that the matter was not closed and that she had,

“asked my officials to consider the matter further”.—[Official Report, Commons, 8/7/09; col. 1016.]

Has any further such consideration yet been given? When might we expect to hear the outcome of those deliberations?

At the time of the Budget we were preoccupied in large measure by the costs that the Government were incurring in propping up the banks, and indeed by the situation in the banking sector as a whole. It has been striking today that that has not been a major feature of the debate. Rereading the Financial Statement and Budget Report, though, one is reminded of the sheer scale of government investment in the banks, whether through improving liquidity or through recapitalising the two now largely nationalised banks. I have a couple of questions for the Minister about the quid pro quo for that recapitalisation.

Shortly before the Budget, both RBS and the Lloyds Banking Group signed a lending commitment agreement with the Government. The agreement has been published on the Treasury website only within the past couple of days, so I have not had the chance before today to ask the Minister about it. There are two specific questions, one of which we have already partially discussed. At the time of the banking White Paper Statement, I asked why the Government were requiring the banks to lend at 90 per cent loan-to-value ratios. The noble Lord, Lord Myners, said that,

“we have not given any instruction to the RBS about making loans in respect of 90 per cent of loan to value. We leave that matter in the hands of those at the Royal Bank of Scotland”.—[Official Report, 9/7/09; col. 776.]

However, the lending agreement, which is now available on the Treasury website, says that:

“the Participating Institution will ensure that … a reasonably competitive range of residential mortgage products are available for residential mortgage applicants … up to at least 90 per cent loan-to-value”.

In February, why did the Government think that it was appropriate for the nationalised banks to be lending at more than 90 per cent loan to value at a time when property prices were falling and, indeed, may continue to fall? Is that not exactly the kind of risk that we were trying to avoid?

My second question is this. The agreement explains the amount of additional lending that the bank has to undertake but, in respect of the specific components of lending to SMEs, mid-corporates and large corporates, the phrase,

“its lending to Large Corporates will be at least *** above the amount shown in the baseline budget”,

has asterisks in it. Why have the Government redacted—to use that horrible word—the subtotals of the additional lending that the nationalised banks are required to give to SMEs and others? Surely it is in the public interest that we should know.

The dominant issue, which the Budget began to address but which has become more prominent since then, if that is possible, is the dismal state of the public finances. The record levels of borrowing which the Government are now undertaking have increasingly been seen to be structural and not cyclical—or indeed the famine following the feast over which the Chancellor presided—even to such an extent that we were running up significant deficits even when growth was strong and tax receipts were buoyant.

It is generally believed that the Budget’s claims for growth for next year and the Government’s plans more generally for the public finances are too optimistic. It is now clear that there will need to be a tight squeeze on public expenditure over many years and, in all probability, increases in taxation as well. We on these Benches agreed with the noble Lord, Lord Barnett—and the Government have done it—that we needed a fiscal stimulus this year but that, in coming years, that stimulus could not be maintained. We did not agree that the temporary VAT reduction was the most appropriate way to do it, because it leads to a short-term increase in consumption, whereas an equivalent amount spent on investment could have led to long-term benefits to the economy.

However, there will undoubtedly have to be reductions in public expenditure, about which the Government seem largely to be in denial. The Prime Minister explained in a recent interview with Nick Robinson on a train that public expenditure cuts could be adequately dealt with by asset sales and efficiency savings, which is clearly ridiculous. While he is saying that about expenditure on the one hand, Cabinet Ministers are, on the other, almost lining up to say that, whatever happens, their areas will not be affected—we have had that in education; we have had it in health; and now the noble Lord, Lord Mandelson, who I had not realised until today was Defence Secretary along with his many other titles, has said that defence, too, will be ring-fenced. We therefore find ourselves with a Government who are increasingly out of touch with reality on public expenditure. Similar pressures are on the Conservative Opposition, where an increasing number of areas are already being ring-fenced. We all know that that is not realistic.

We have said that we need to begin to identify areas where there will have to be real cuts of whole programmes. We have identified a number of them, from small ones such as the child trust funds to larger ones such as a major review of the cost of public sector pensions.

I am sure that whichever incoming Government we find ourselves with will have to face the question of how to make better use of the level of public expenditure that we can afford, whatever it is. One of the annoying aspects of the huge increase in public expenditure in recent years is that it has been accompanied by a fall in productivity in the public sector. This area will simply have to be addressed. There are major problems in doing this, of course, of which culture within the Civil Service is possibly the most significant. There is no culture of looking to adopt best practice from elsewhere; there is no culture of continuous change; and, indeed, during this period of falling productivity, increasing levels of bonuses have been paid almost across the board to senior civil servants. That will have to change. We on these Benches welcome the initiative being taken by the noble Lord, Lord Sainsbury, and Sir Michael Bichard in this area, and we are particularly pleased that they are doing it on a non-partisan basis.

This will be the last normal Finance Bill of this Government which we will consider in your Lordships' House. It represents the end of an era in many ways. It will almost certainly be the last Finance Bill for many years to show a fiscal stimulus rather than a fiscal tightening and will, in that respect at least, represent a watershed. As the noble Lord, Lord Forsyth, mentioned, at the end of his sojourn on the government Benches the Minister is considering becoming a student of comparative religion. He has some advantages in this respect in that he already knows something about the subject. He embodies the principle that the Labour Party owes more to Methodism than it does to Marx. As he contemplates his future, I hope that he does not behave like a sheep and follow the other goats out of the Government. The current trend is doing nothing for the reputation of goats.

My Lords, several weeks ago we provisionally scheduled this debate on the Finance Bill for a quiet afternoon on the day before the House rises for the Recess. As it turns out, we have been overtaken by other business and find ourselves concluding our debate at nearly 10 o’clock in the evening. This is partly because the Government have devoted much of today to discussion on one of the most ill conceived Bills of recent times. The only purpose of the Parliamentary Standards Bill is to allow the Prime Minister to boast about reforming Parliament. However, I predict that the history books will not record this Administration as a reforming one. Rather, they will record a period of government characterised by disastrous economic policies, an inability to carry through any meaningful public service reform and, of course, the most disastrous loss of trust in politics of any Government in the modern age.

The Finance Bill is emblematic of this Government. It arises from a Budget that revealed in gory detail what 12 years of Labour Party rule does to our economy. The Bill tinkers with various bits of the tax system, achieves little and in some places does actual harm, but it does nothing to deal with the problems that people face in their everyday lives.

I am delighted that so many of my noble friends have chosen to speak today and have stayed into the evening. Led by the comprehensive critique of my noble friend Lord Lang, my noble friends have delivered a damning verdict on this Government’s economic policies and on this Finance Bill. I endorse what they have said.

I pay tribute to the work of the Economic Affairs Committee on the Finance Bill, led by the noble Lord, Lord Vallance. I remind the Minister that this is one report from a committee of your Lordships’ House to which the only response that the Government make is in the related debate, such as the one that we are having this evening. I am not sure that the Minister has so far given a comprehensive response. I hope that he will reflect further on that before he winds up this evening. My noble friend Lord Forsyth and the noble Lord, Lord Barnett, gave him a couple of steers on areas where one or two outstanding points remain.

As the Minister is aware, your Lordships’ House is not able to amend the Finance Bill. When a Finance Bill contains things that we think are foolish or wrong, we can do little but express our regret. If my party forms the next Government, it remains a clear part of our policy that we will implement reforms developed by my noble friend Lord Forsyth and my noble and learned friend Lord Howe of Aberavon. First, we will publish draft tax clauses after the Pre-Budget Report and subject them to proper scrutiny by way of a committee that would, importantly, include Members of your Lordships’ House. Secondly, we will create an office of tax simplification, which will be tasked with the creation and maintenance of a system of tax that eschews complexity.

This is not the longest Finance Bill that we have considered in the past 12 years, but it is full of complexity. There are 67 pages of clauses that cover 380 pages of schedules—over 80 per cent—which is where all the complex stuff is hidden. We can see a wearisome pattern of tax incentives surrounded by complex legislation to prevent incentives from becoming a tool of tax avoidance, followed by amending legislation to counter more deemed avoidance. The habit of complexity is toxic. It damages our competitiveness. That is the clear view of the Confederation of British Industry, the Institute of Chartered Accountants and many others. A major shift in attitude and approach is needed if we are to break out of this soul- and value-destroying process of tax law.

The Finance Bill lays the ground for the 50 per cent rate of income tax. Few outside the Treasury believe that it will raise the £2.4 billion of revenue that the Treasury projects. It creates top rates that are about as bad as they get on a global comparison. It might have temporarily raised the spirits of those dejected souls on the Back Benches of the Labour Party in another place, but even they must see that it is bad for Britain’s competitiveness and deadly for the motivation of individuals. The Bill does not include the 0.5 per cent increase in national insurance contributions from next year as announced in the Pre-Budget Report. That is a tax on jobs and a tax on the many and it will not help our economy to climb out of the recession that the Government’s own policies have exacerbated. There is probably a small cheer from business over the decision not to raise the small company tax rate, as was threatened, and not to tax foreign dividends, but the debt cap proposals, as has been pointed out this evening, leave a major uncertainty overhanging the attractiveness of the UK as a location for business groups.

My noble friends Lord MacGregor, Lord Forsyth and Lady O’Cathain concentrated their speeches on the pension provisions of the Finance Bill. The changes betray the certainty promised by the pension simplification of a couple of years ago. The changes are unfair for the reasons given by my noble friends. They will contribute to the decline in private sector pension provision and discourage savings. My noble friend Lord Naseby also referred to the lack of incentives for savings. The epitaph of this Government could well be that they completely destroyed the pension aspirations of a generation.

The Bill has other follies. I agree with my noble friends Lord Higgins and Lord Marlesford that the VAT reduction was not a sensible policy, but it is stupid to ignore the clear advice from the retail sector that absolutely the worst time to increase the VAT rate back again is 1 January, which is what this Finance Bill contains. There are ill conceived revisions about finance directors signing for tax accounting. Those will add considerable cost and yield little. There is an extraordinary attack on the bingo industry, which will likely be taxed out of existence. None of that adds up to a coherent set of policies, but we long ago gave up on searching for coherence in this Government.

I shall now address some remarks to the economy. This Finance Bill is derived from the Budget in which the Chancellor was forced to own up to the scale of the problems facing our economy. Many believe that he is still hiding behind unrealistic assumptions. Principal among those are the growth assumptions. As my noble friend Lord Higgins reminded us, the Budget said that this year’s growth would be a negative figure of 3.5 per cent but that there would be a bounce back to 1.5 per cent positive next year followed by a 3.5 per cent positive in 2011. Since the Budget, data and forecasts have cast doubt on those figures. The ONS said that the first quarter decline was the highest ever recorded, at 2.4 per cent. The IMF’s recent forecast for this year is negative 4.2 per cent and this morning’s ITEM Club forecast is even worse at 4.5 per cent. The independent forecasters summarised in the Treasury’s own booklet are almost all more negative than the Chancellor in the figures for both this year and next and, as my noble friend Lord Marlesford said, the timing of a recovery is far from certain. Back in 1991, the current Prime Minister said of the then Prime Minister:

“He is seeing things that we know aren’t there and living his whole life as if they were there—a textbook case of an otherwise sane man hallucinating a whole economic recovery”.

Well, the boot is on the other foot now.

The danger is that the Prime Minister and the Chancellor are so set on their own forecasts—which themselves produce unprecedented levels of deficit, borrowing and debt—that they have no understanding of the possibility that they are understating the scale of the problem. My noble friend Lord Northbrook reminded us that if, as seems likely, the Government’s trampoline growth assumptions prove to be optimistic, the deficit, borrowing and debt figures will be even worse, which will make all the more urgent the need for a credible plan to restore the public finances. The Governor of the Bank of England and the IMF, inter alios, have backed our call for a proper exit strategy. Blind optimism is not good enough.

That is why we have been calling for a debate on the need to rein in public spending and to search not only for things that can be done better but also for those that need not be done at all, while of course protecting front-line services. I am pleased that the noble Lord, Lord Barnett, is up for this debate. However, the Government still are in stubborn denial. They say that they will not cut public spending, despite the fact that their own figures as set out in the Budget book show that in real terms the Government already plan to cut total spending by 0.7 per cent over the period 2011-14. That translates to cuts in departmental limits of 7 per cent once debt interest and benefit payments are taken out. We suspect that the Comprehensive Spending Review was cancelled only because the Prime Minister will not face up to the fiscal facts of life. I agree with my noble friend Lord Naseby that we need a Comprehensive Spending Review now.

The Government have carried out one of the most wasteful periods of expenditure in history. The ONS has recently shown that in the decade to 2007 there was negative productivity growth of over 3 per cent in public spending. That compares with whole-economy productivity growth over the same period of around 20 per cent. The Government have no credibility when it comes to public spending.

The Prime Minister implemented his boom-and-bust policies and brooked no criticism. We warned of the imprudence of an economy built on debt, both governmental and personal. We highlighted the constant erosion of our international competitiveness and the accumulating trade deficit as well as the increasing decline of the manufacturing sector. Now we have the result of boom and bust in terms of real-life tragedies. Unemployment is 2.4 million and still rising and young people are bearing the brunt of this. The numbers of children living in poverty had been rising even before the recession, and the Government will miss their 2010 target of halving child poverty by a country mile. Their only response is a Child Poverty Bill which is full of targets and duties but no action.

This Finance Bill, and the Budget that preceded it, have no answers to the questions that need to be addressed. There is some marginal help for businesses but no sound foundation for a post-recession era. Pensions have been further damaged and Britain’s competitiveness continues to slide. If this House had the power, we should refuse to give the Bill a Second Reading and tell the Government to come back with something better. If only.

As the noble Lord, Lord Newby, pointed out, this is likely to be the last Finance Bill taken through all its normal stages in Parliament before the next general election. Then there will be an opportunity for voters to pass their judgment on the economic competence of the Government. That cannot come soon enough for these Benches.

My Lords, this House has long respected the rights and privileges of our colleagues in another place in relation to financial matters. As a Bill of aids and supplies, it does not fall to us to debate the detail of individual clauses of the Finance Bill, or to propose amendments to it. But I am sure that your Lordships will all agree that this convention has in no way dampened today’s debate, which has been fascinating, wide-ranging, well informed and spirited.

I would like to thank all noble Lords who have brought their experience and wisdom to these discussions—particularly the serried ranks of supporters who sit behind me, for whose unreserved support I express my deepest gratitude.

Of course, my Lords, in the time allotted to me for this short closing speech, it would not be possible to mention every contribution made to the debate, let alone to answer all the points that have been raised. In the event that I do not answer a technical point or a question which requires a factual answer, I will ensure that I study Hansard and reply to the noble Baroness or noble Lord as appropriate.

However, several specific issues that were raised seemed particularly pertinent and I will do my best to address them. First, the noble Lord, Lord Lang of Monkton, brought his great experience to bear in an excellent contribution to our debate. In addressing some of his points, I will refer to other Members of the House who touched on them. He reminded us of the preference for consultation. Indeed, the noble Lord, Lord Newby, noted that there had been a significant increase in the amount of consultation that was taking place, and that the number of areas on which consultation had not taken place but where it was believed that it would have been possible has been declining. I would encourage that trend and wish to see it continue. However, we have no intention at this stage of delaying the implementation of the debt cap, which was a particular point raised by the noble Lord, Lord Lang, under that heading.

The noble Lord, Lord Lang, also raised questions about REITs. It is quite difficult to reach a judgment on the experience of REITs after such a short period of time when the commercial real estate market has been going through such significant valuation change. I say that as a former chairman of the largest REIT in the UK—indeed, the second-largest quoted property company in Europe. However, we will take account of the representations that have been made. The noble Lord, Lord Best, asked that we remain open to representations from the British Property Federation and the Royal Institution of Chartered Surveyors, and my noble friend Lord Sheldon made similar points. We certainly do not regard the REITs story as being closed. I will revert to that in a moment when I deal with some of the comments made by my noble friend Lord Best.

I do apologise, my Lords. He is a man of friendly disposition, and therefore easily described as a friend, but, by convention, the noble Lord. Ours is an open party; the noble Lord is always welcome.

Comments were made about the reduction in VAT. I find this quite curious because, on the one hand, those who say that it will not be effective now also say that they do not want to see it revert to the original rate—particularly retailers; I had Sir Phillip Green on the telephone to me on this subject only a few days ago. The advantage of VAT was, as my noble friend Lord Sheldon said, that it is rapid, can be effectively implemented very swiftly, and is to the benefit of all members of the community. I noted that the noble Lords, Lord Marlesford and Lord Newby, and the noble Baroness, Lady Noakes, were less in agreement. I found the disagreement of the noble Baroness, Lady Noakes, somewhat odd, since the right honourable Kenneth Clarke—who has been brought in to strengthen the Conservative Front Bench in the other House to make up for its youthfulness and inexperience—said that this was absolutely the right thing to do.

The noble Lord, Lord Lang, said that we should spell out our plans for the future and the route that we are going to take. That is precisely what we have done. We have done so by painting a projection of public sector borrowing which, as a percentage of GDP, will decline quite rapidly once we are past the worst of the world recession. In the mean time, questions were asked not only by the noble Lord, Lord Lang, but by the noble Lords, Lord Forsyth and Lord Naseby, about the funding of the public sector debt. I remind noble Lords that the Government are currently borrowing at record low rates of interest, in both nominal and real terms, which seems to be inconsistent with the words of caution that we are hearing. The markets are expressing their confidence that the Government’s commitment to returning to fiscal sustainability is something from which they can draw great encouragement.

The noble Lord, Lord Lang, also gave us a number of economic statistics on productivity, investment, imports, exports and employment. I think the noble Lord, Lord Forsyth, might accuse him of cherry picking, in only giving the most positive representations. In all cases, the trends that the noble Lord, Lord Lang, highlighted are evident in almost all developed economies. This is because we are in a global recession. Of course one would expect productivity to decline. Of course you would expect the rate of export activity to decline, although in that case it is interesting to note that our balance of trade is improving dramatically as our exporters gain an increasing share of what is clearly, at the moment, a constrained market for industrial export goods. The noble Lord, Lord Lang, referred—in connection with the funding of public sector borrowing—to the fact that we would be in competition with other Governments issuing significant amounts of debt. Of course, that is because other countries are following exactly the same policy that we are. That is, that the public sector can support economic demand, activity and output during a time when private sector demand is being affected by the global recession. That is why this policy is absolutely right for our country.

The noble Lord, Lord Lang, then raised several questions about pensions. Those were also raised by the noble Lords, Lord Forsyth and Lord Vallance, and a number of others in the House. I recognise that this is a sensitive subject and I am grateful for the interventions of the noble Lord, Lord Forsyth, on this point. I am also reminded by the noble Lord, Lord Higgins, that it is not wise to accept interventions in a speech from the Front Bench if you are intent on getting across a coherent story, which the noble Baroness, Lady Noakes, says is so important. The Government need to ensure that pension tax relief is targeted, sustainable and affordable. The changes affect only those pension savers with the highest incomes, who are comparatively better placed to make their own pension provision. It would be difficult to design and apply a rule that continued marginal rate relief for genuine pre-retirement top-ups, while excluding those who seek to abuse such a rule. If it were possible, we would have done so. Individuals can make higher contributions with the benefit of tax relief now than under certain of the pre-FA 2004 rules, when contributions were limited to the percentage of capped earnings. The noble Lords, Lord Vallance of Tummel and Lord MacGregor of Pulham Market, also observed that these were areas in which it would have been difficult to have pre-consulted.

It was suggested by a number of noble Lords from the opposition Benches that the announcement showed that the 2006 pension simplification had been a failure, and that we were changing rules which we had set down only three years ago. The underlying structure of pension rules remains the same. The advantages that the new pension rules have brought about continue for pension schemes, and the vast majority of pension savers are unaffected by the new rules. For the vast majority of pension savers, Schedule 35 and the main 2011 measures change nothing. Even at A-Day, the Government said that pension tax relief has to be sustainable and affordable. At the upper levels of income, this is no longer the case. In particular, it has become clear that the very wealthiest of savers have disproportionately benefited from the A-Day changes. This is not affordable in the current fiscal climate. The changes that are being made affect only high-income individuals. These are the very wealthiest people in society and those who require at least tax incentives to stay.

The anti-forestalling provisions on which noble Lords spoke extensively strike a reasonable balance between providing for fiscal neutrality, allowing the continuation of most forms of normal pension contributions and preventing undue administrative complexity. There is evidence that forestalling activity was already occurring by the morning of the Budget day, because of increasing expectations that the Government were to take action on pension tax relief. The Government do not encourage forestalling. Without such legislation, tax revenues of £2 billion were at risk. This is not the low risk suggested by the noble Lord, Lord MacGregor of Pulham Market, and, I suggest to the noble Lord, Lord Forsyth, justifies 13 pages of legislation and 52 pages of guidance. In the language of the Conservative Party, £2 billion is certainly not “chicken feed”.

The noble Lord, Lord Forsyth, treated us to a speech which showed all his signature of warmth and goodwill towards those who sit on the government Benches. It is always a pleasure when I see the noble Lord rising to his feet. My journey, as described in the Sunday Times yesterday, is encouraged by the warmth that I have come to associate with the noble Lord. He also raised questions about the anti-forestalling regime. I emphasise that it does not stop people going ahead with planning. All that the rules do is to limit the amount of subsidy provided by the Government in the form of higher-rate tax relief.

The noble Lord, Lord Best—the friendly Lord Best—raised a number of very informed questions about REITs. I may well wish to write to the noble Lord, because I do not think that I can do justice to the breadth of his contributions in the short time available. I agree with him that the rental market is growing and is becoming more institutionalised. This will become an increasing trend in British society. More people, particularly younger people, will choose to live in rented accommodation, which is more suited to a flexible lifestyle than we in our generation aspired to. This approach to providing accommodation is to be found in many other parts of the world. People will choose to invest in other ways the money that otherwise they would have invested in property. We would like REITs to be available for residential property, and we will be working on ways in which we could see the REIT model extended to that area. I also take account of the comments of the noble Lord, Lord Northbrook, on REITs. Significant changes have been suggested to almost every aspect of the REITs regime since it was introduced, in particular to boost the prospects for residential REITs. However, it is important to note that, while the changes have no guarantee of success, each condition under the current REITs regime is there for a very good reason, in particular to prevent tax avoidance, and that any proposal to include residential property under REITs would have to take that into account.

I should refer to the noble Lord, Lord Barnett, as “my noble friend”, but it is not always evident from the questions that he asks. The noble Lord, Lord Barnett, introduced a focus on economic matters that was welcome, given that most of the contributions to which I have referred focused on a narrow group of high earners and high-rate taxpayers. I salute the noble Lord, Lord Barnett, for introducing an economic perspective that drew upon his great experience and raised the standard of our debate on the economic outlook. I will not be drawn into responding to the noble Lord’s speculation about what may occur in future announcements by my right honourable friend the Chancellor of the Exchequer. However, I will reiterate that we are committed to sustainable public finances, and that we will reduce public borrowing as a percentage of GDP.

On other issues, the noble Lord, Lord Barnett, must await the PBR. We are building on significant fiscal consolidation, announced in the last PBR, and the Budget sets out tax and spending measures that will reduce borrowing significantly by 2013-14. The noble Lord, Lord Barnett, referred also to the CBI speculation about a tax rate. The level of extra tax depends on the extent to which an individual makes additional contributions after the 2009 Budget. I cannot speak to the specific example that he gave, for which his source was the CBI.

The noble Lord, Lord MacGregor of Pulham Market, brought a wealth of experience on pension matters, on which he is very informed after working in this area for many years. I take note of what he says about the outlook for defined benefit pensions, although I note that that observation, as the Turner report on pensions showed, is global and not confined to the UK. I note also that pensions continue to enjoy very substantial tax incentives. However, we had to do something about a situation in which 25 per cent of the tax relief going to pension contributions was for the benefit of less than 2 per cent of the population, who were the wealthiest members of the population—a situation that would be indefensible for any Government.

The noble Lord, Lord MacGregor, also raised the old canard about the £5 billion tax reduction in 1997. The first bite at this cherry was taken by the noble Lord, Lord Lamont of Lerwick. This is conveniently forgotten by the Opposition Benches, as is the fact that it was done to finance a reduction in corporation tax that was greatly welcomed at the time by the business community and investment markets.

I will move on. There were so many good contributions—for example, from the noble Lord, Lord Marlesford, on credit cards. His was a wonderfully anti-business, anti-liberal argument in favour of restricting the availability of credit cards. I assure the noble Lord, Lord Higgins, that if he studies Hansard from the other place, he will find a detailed discussion of the issues of retrospectivity in tax matters. We would only ever propose anything that was retrospective in response to the most heinous forms of tax avoidance, as was clearly the case with regard to certain measures that we announced in January.

Many other points were raised in what, as I said, was an excellent debate, but I know that Members of the House are keen to move on to the next item of business. As I said, if I have failed to answer questions of detail, I shall write to noble Lords, but I hope they will agree that this is a good Finance Bill and that it is an important step forward in our journey towards a stronger, fairer and more prosperous Britain. I commend it to the House.

Bill read a second time. Committee negatived. Standing Order 47 having been dispensed with, the Bill was read a third time and passed.