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Grand Committee

Volume 738: debated on Wednesday 11 July 2012

Grand Committee

Wednesday, 11 July 2012.

Arrangement of Business


My Lords, if there is a Division in the House, as noble Lords know very well already, we shall immediately adjourn for 10 minutes.

Behaviour Change: Science and Technology Committee Report

Motion to Take Note

Moved by

That the Grand Committee takes note of the Report of the Science and Technology Committee on Behaviour Change (2nd Report, Session 2010-12, HL Paper 179).

My Lords, I wish to thank the members of the Science and Technology sub-committee, many of whom are here in the Moses Room, for their excellent contributions to this inquiry and to the report and for making it such fun. I also thank our specialist adviser, Professor Charles Abraham, for his advice and our secretariat, who were superb throughout.

The Science and Technology Committee chose to begin an inquiry into behaviour change because understanding behaviour and how to influence it is an integral part of effective and efficient policy-making. So much of what the Government do or want to do involves influencing human behaviour, so their success will depend on their ability to change people’s behaviour in ways that will help them bring about their goals.

We know, of course, that government can influence behaviour in many different ways using a broad set of tools, from the provision of information at one end of the scale, through persuasion, be it by a GP or a marketing campaign, the provision of financial and other incentives and disincentives, to regulation, including taxation, at the other end. We were prompted, in particular, to start the inquiry by the rise in popularity of nudging, and the considerable interest in the book of that name, Nudge, by Richard Thaler and Cass Sunstein, which draws on findings from behavioural economics. The committee sought to explore how understanding better the sciences of human behaviour and disciplines including neuroscience, psychology, sociology and behavioural economics can help Governments choose the best tools for the job.

I shall try to give an overview of our principal findings, and I know that many of my colleagues will say more, and I will say something about our reaction to the Government’s response to our report. Perhaps the single most striking thing to come out of this inquiry was the discovery that although scientists can tell us quite a lot about the theory of behaviour—the interaction between different internal and external influences which causes people to act in different ways—there is very little hard evidence about how to develop this into policy interventions that will influence behaviour on a large scale.

It seems that this lack of practical understanding is a result of barely any properly evaluated large-scale behaviour change interventions. The notable exception to this is smoking cessation services in the United Kingdom, which are not only very successful but, because of good evaluation that has been there since the beginning, are continually improving. Insufficient allocation of departmental budgets to research is a big part of the problem, but the problem has also arisen because previous government policies that have aimed to change behaviour have often not been evaluated to a sufficiently high standard. You might argue that the rollout of government policies is perhaps the most obvious location where applied research in how to change behaviour can be carried out. It became increasingly clear to the committee, however, that there simply is not a strong enough culture of evaluation within government. A number of our recommendations were targeted at rectifying this fundamental problem.

Of course, there is some evidence available about how to change behaviour. That evidence points very strongly to one important, though perhaps unsurprising, conclusion: usually the most effective means of changing the behaviour of the population, or a significant group within the population, is to use a whole range of policy tools in order to influence a number of the many factors which impinge on or cause our behaviour simultaneously. Each intervention must be designed based on what we know about the different factors that influence the behaviour we are seeking to change.

As part of our inquiry, we undertook two case studies, the first into changing behaviour to reduce obesity and the second into reducing car use. Other members of the committee will speak in more detail about these.

On the whole our findings in these more specific areas reflected what we had heard more generally. Strong disincentives to discourage particular behaviours and changes to the environment in which decisions are made will often be required in addition to other interventions in order to effect significant behaviour change when important societal challenges, which require a change in the behaviour of the population at population level, are being addressed. Although the use of disincentives or restrictions are more controversial than nudges and have to be justified to, and accepted by, the public we believe there is a need for a proper debate within wider society about how to intervene appropriately to change behaviours in order to tackle some of society’s biggest challenges.

We were pleased to read in their response that the Government agree with the majority of our conclusions and recommendations. I much look forward to hearing from the Minister about how the Government will be taking them forward. The committee welcomes the coalition Government’s attempts to raise the profile of behavioural science. We hope that their efforts, together with our report, will result in a greater emphasis on social science research within a whole range of departments. We were particularly comforted to note that the Government agreed that nudges in isolation will rarely, if ever, achieve the desired effect. We hope we will begin to see this translated into policy. We were told in terms by Ministers that nudging is good because it is cheap, and therefore efficient. We would argue that, however cheap it is to roll out, a policy is only good value for money if it works.

I hope that the Minister will be able to clarify in his response just how the Government intend to ensure that policy-makers are aware of the range of interventions available to them, not just nudging. There are, however, some outstanding areas of concern following the Government’s response. In particular, I would ask the Minister to explain more fully the Government’s decision not to make traffic-light food labelling mandatory, nor to reconsider their position in relation to extending the ban on marketing unhealthy food to children. I also seek some clarification on the outcomes expected of the public health responsibility deals.

We have also thus far heard nothing about the recommendation to appoint an independent government social scientist to champion the importance of social science research and to improve the quality of social science advice across government. I look forward to hearing from the Minister what progress has been made towards this appointment.

Regarding obesity, excess weight costs the NHS more than £5 billion a year. A study by Cancer Research UK published in December 2011 showed that nearly half of all cancer cases could be wiped out if we followed healthier lifestyles. The Government published their strategy on obesity, Healthy Lives, Healthy People in October 2011. We were delighted to see that the Government’s strategy was grounded in the available evidence on changing behaviours to tackle obesity, and that it emphasised the importance of evaluation and building the evidence base on the effectiveness and cost-effectiveness of different interventions. We will watch with interest to see how these initiatives develop.

However, we were really disappointed that the Government still failed to address the wider environmental issues that affect obesity, or to outline how the effectiveness of the responsibility deals would be assessed. Many witnesses felt, as Dr Ian Campbell, medical director of Weight Concern put it, that,

“confronting the real commercial and environmental stimuli of obesity has not yet been achieved”.

We found two areas in particular in our obesity case study where there was promising evidence about how to change the obesogenic environment: food labelling and marketing to children. We were particularly struck by what we heard from Asda and Sainsbury’s on food labelling, and it is really important that people realise just what was said. Justin King, the chief executive of Sainsbury’s, told us that on the introduction of multiple traffic light labelling, against a comparable 12-week period during which fresh ready meal sales grew by 26.2%, sales of a Be Good to Yourself salmon meal, mostly green labels, grew 46.1% and sales of a moussaka, mostly red labels, decreased by 24%. Even over a relatively short period, the majority of the evidence at the moment shows that people definitely understand labels with traffic lights far better than percentages of recommended daily allowances and other such information.

It is important to note that not much research has yet been done on the extent to which better understanding translates into different behaviour for any labelling, but better understanding in the first instance is arguably more likely to result in success. We thought that was really important and were surprised that not more is being done about it. The Government do not appear to be acting on this evidence, or seeking to carry out further research to test these potentially important effects. In fact, their response to our report did not engage with the question of why they failed to pursue these policies around labelling. We were particularly disappointed to see that traffic light labelling was not adopted throughout the EU in the new EU regulation on provision of food information to consumers. We were pleased to see that the Government are currently consulting on the inclusion of traffic light labelling, but it is as an additional form of expression under the regulation. As the Government themselves note, business will not be compelled to follow the recommendation, if adopted. How is that supposed to work, and what plans do the Government have to ensure that such labelling is used consistently across industry?

On marketing of unhealthy products to children, the Government again fail to justify not expanding the current restrictions on such advertising. For instance, they did not say why they had not accepted NICE’s report on the prevention of cardiovascular disease at the population level and its recommendations to extend the regulations restricting advertising during children’s programmes of products high in fat, salt and sugar to cover a greater number of programmes and types of advertising. Why are the Government not putting more effort into tackling the behavioural issues surrounding these preventable diseases, interventions which would save them money in the long term in costs of NHS treatment?

Our other big concern was voluntary agreements to help tackle obesity, particularly through the public health responsibility deal network. Certainly, the evidence suggests that getting businesses to change what they do will make a real difference to our behaviour; we know that our environment is a major influencing factor in our behaviour and that, in turn, businesses have a significant impact on shaping that environment. But concerns were raised by a significant number of witnesses about attempts to change behaviour through agreements with businesses when potential conflicts of interest may exist. We recommended that to guard against conflicts of interest. First, we said that engagement with businesses should be on the Government’s terms and should outline specific outcomes that are expected within any given timescale. Secondly, agreements should be evaluated properly to establish their effect. Thirdly, agreements should be backed up with contingency plans for further intervention if the voluntary approach does not work after a given length of time.

We received a disappointing response from the Government about how this will be taken forward, and perhaps the Minister can clarify what measurable outcomes the Government have agreed with participants in the responsibility deals, how their success will be measured, and over what timescale.

In the committee’s report, the Government were criticised for their policy on minimum alcohol pricing. It was stated that there was good evidence about the effectiveness of alcohol pricing on reducing alcohol-related harm but that it had not fed through to government alcohol policy. Subsequently, the Home Office announced a ban on the sale of alcohol below the rate of duty, plus VAT. This policy has been criticised, because NICE guidance on preventing harmful drinking published in 2010 shows that at the minimum price level proposed by the Government of 21p per unit for beer and 28p for spirits, a reduction in consumption of between 0.1% and 0.4% could be expected. However, a minimum price of 40p per unit would reduce consumption by 2.4%, while minimum prices of 50p and 60p would reduce consumption by 6.7% and 11.9% respectively.

In March this year, the Government published their alcohol strategy, which stated that they would,

“introduce a minimum unit price … for alcohol meaning that, for the first time ever in England and Wales, alcohol will not be allowed to be sold below a certain defined price”.

The Government committed to consult on the level in the coming months with a view to introducing legislation as soon as possible, and to consult on a proposed minimum unit pricing of 40p. This is to be welcomed, but is at a level below that passed in the Scottish Parliament, which will introduce a minimum unit price of 50p per unit. Could the Minister respond and clarify whether the Government are also considering a minimum unit price of 50p per unit, given the situation in Scotland?

The last point concerns organ donation. One nudge recommended by the Behavioural Insights Team in government has been to opt out of organ donation rather than opt in. Once again, I am puzzled by the lack of evidence base for this because it is clear from the House of Lords inquiry into organ donation in EU Sub-Committee G, and other evidence that is around everywhere, that it is the organisation of organ donation, harvesting and transplant services that are the key elements in changing behaviour, rather than opting out or opting in. It would be good to know whether the Government’s Behavioural Insights Team at the heart of government is subject to peer review in respect of its policy recommendations as the key to much of this is evidence, or indeed the lack of it. I commend the report to the House. I beg to move.

My Lords, I congratulate the noble Baroness, Lady Neuberger, and her colleagues on the production of this report. It is excellent work and right up there in the top echelon of reports produced in your Lordships’ House. It is a shame that it has not drawn in more noble Lords to discuss it. However, the saving grace is that the ones who are here are notably distinguished and therefore we can anticipate a high-level debate.

The topic is manifestly extremely important as there are so many areas in which Governments want to promote behaviour change. Public health, as mentioned in the report with the case study of obesity, is a good example, but there are dozens of other fields. Today one might want to include bankers, for example, as all parties now want to produce a new culture of responsibility in the City. If that is not a massive behaviour change, I do not know what it is.

The work of Richard Thaler and Cass Sunstein is quite rightly given central place in the report because of the impact that their work has had, especially the book Nudge, which has been mentioned, which was a bestseller in the United States—it was right at the top of the New York Times list. Since then, Cass Sunstein has been working in the Obama Administration trying to debureaucratise American business, among other things. As noted in the report, the book has had a strong influence on the coalition Government here.

I find Sunstein’s work, in particular, interesting and I have followed it for many years. As most people here will know, he is a distinguished legal theorist. For example, he wrote a devastating critique of the precautionary principle in environmental politics which, for anyone who is interested in that, shows why there is no such thing as a precautionary principle.

I think everyone here will agree that the book Nudge is packed with provocative ideas and vignettes. For example, there is one about estate agents. If you are buying a house you should watch out because one of the things that estate agents do is first of all show you two rather crummy properties before they show you the one they want you to buy. This establishes a frame of tolerance, in Sunstein’s language. It demonstrates what they are writing about because it implies some degree of covert behaviour influence. In other words, if you knew what the estate agent was doing you would be in a position to block off that influence. The covert element of their work has received a great deal of critical attention in philosophical literature, as has the notion of their philosophy, which they describe as libertarian paternalism. Many people think that that is an oxymoron but they vehemently deny that it is. I do not share that political philosophy, even though I recognise the wealth of examples that have developed in their writings. I agree with the fairly heavy objections to it, which are developed in the report. They are more consequential for the Government than the noble Baroness implied, for reasons that I will come back to.

The report took a lot of evidence and concluded that the Committee,

“were given no examples of significant change … having been achieved by non-regulatory measures alone”.

The report also rightly questions whether non-regulatory measures are more respectful of the freedom of the individual than ones involving regulation.

The Government have often taken an activist and interventionist role to secure beneficial behaviour change. The one thing that we can all agree on is that purely informational approaches—this is documented in the report and many other sources—do not really work. For example, ads or literature spelling out the dangers of unhealthy diets do not work by and large, or they have only a marginal impact on those whom they are supposed to help. The report is lacking in a kind of analytical pattern, so I offer my own on why it is so difficult to change lifestyle habits, as it is almost always difficult to do so.

I have three points to make. First, most lifestyle patterns are not individual traits; they are embedded in wider cultural settings. We cannot persuade people to change their behaviour without altering the cultural traits that drive it. This is often extremely hard to do and almost always takes time. To my mind it universally involves regulation. If we go back to the case of corporate culture in the City when talking about a big deal, it is obvious that you will not do much nudging there; you need systematic restructuring of what happens in the City and it has to be pretty penetrating. It is true that in lifestyle patterns such as alcohol consumption or smoking there are ordinarily strong cultural factors involved in the groups in which the individual is a member. Not many individual traits of behaviour are individual at all.

Secondly, some forms of behaviour that Governments may wish to change are deeply addictive. As someone who has a long–standing interest in addictive and compulsive behaviour, I know that these elements apply to many lifestyle traits in contemporary culture. It is true, for example, of most harmful eating habits. Some are involved in obesity, or in its opposite, anorexia in which I have had a lot of interest through all the phases of my career. People starve to death in the middle of a society in which there is too much food to go round. The compulsive element of that habit system is very apparent. It means that the underlying emotional sources of such lifestyle forms of behaviour have to be grappled with. For that reason nudging might be useful in certain specific contexts, but it will not allow someone to change such behaviour. In my view, obesity has a strong addictive as well as a cultural component to it. It is true of many traits of behaviour that a Government might want to try to change.

Thirdly, in trying to change behaviour we often have to confront systems of power and established interests. By and large only Governments can do that. Smoking is an interesting example as it is one area in which we have made a difference. There has been a substantial reduction in the proportion of people smoking—not in the world, where it still goes on, but in several of the industrial countries. However, it took 30 years to achieve that and about 24% of the people in this country still smoke, nevertheless. One reason for this is the resistance of the tobacco industry and the long-standing battle that it fought, and that is very true of a whole range of areas where we need to secure behaviour. If we do not confront established interests and do not recognise that there is a power system involved, we are not going to get very far.

The report calls for more effective connections between policies in the social sciences. As a social scientist, I very strongly support that and this leads me to a couple of questions for the Minister. First, I repeat the question that was asked: what happened to the famous chief social scientist? It seems to be an important position to reinstate, as I understood it would be. Secondly, in spite of what the noble Baroness, Lady Neuberger, says, this report demolishes a good deal of the Government’s ideological position in that the reason why Nudge was so attractive to the Government was that it seems to indicate that you can downplay the roles of government and legislation and yet achieve significant change by other means. The report shows that, by and large, this is not the case and I do not therefore see how the Government can really endorse it with equanimity.

Finally, on obesity and other dietary concerns, I return to the issue of power. We live in a society where there is highly developed corporate power, which takes the form of corporations influencing people through advertising, especially children. Corporations do not pick up the social and medical costs of what they do. It is the NHS that picks up the costs of the obesity epidemic, which is staggering in its consequences for type 2 diabetes and a whole range of other disorders. Should not the food industry be taxed more substantially, in order that it makes a bigger contribution to the very harmful forms of behaviour over which it has so much influence?

My Lords, like the noble Lord, Lord Giddens, I pay tribute to the chairman of our committee, the noble Baroness, Lady Neuberger, for her enthusiasm and for keeping us to the task, which was not easy because it wa s a very broad task. As she did, I also thank Professor Charles Abraham and the secretariat, who served us extremely well. I also declare my own interests as noted in the register and in the report: as a retired consultant psychiatrist and as president of ARTIS Europe, a research and risk analysis company.

One could pick up on many things in the report itself, but I would like to pick up two or three of its broad principal outcomes and apply them to areas that were not referred to in the report. In particular, I will look at the important work of government in foreign and Commonwealth affairs and in the Ministry of Defence. My reason for doing so comes out of the very principles that emerge from the report.

First, there was remarkably little research into how one might affect population behaviour change, as distinct from the behaviour change of individuals. I came to understand this over a number of years. My own background and training was in the understanding of individual psychology and psychopathology and in attempting to bring about behaviour change with individuals, but when I tried to apply some of those understandings to the political field, particularly in conflict resolution, while there were important elements of read-across there are also differences in the way that groups function. One of these was referred to in passing by the noble Lord, Lord Giddens, when he said that culture was an important element. Culture is important for the individual but it is essentially a shared phenomenon. I sometimes liken culture in the group to the personality of an individual, but the same rules do not apply in an absolute read-across. Unless we do research that demonstrates an evidential outcome, we simply operate by our own prejudices and rule of thumb. I will come back to that, because we may come to wholly wrong conclusions on that basis.

The second thing that the report pointed out was that it is unlikely that change can be brought about by non-regulatory interventions on their own—that regulation is relevant and important. That is clearly true and cannot be ignored. That takes me to the question of defence and foreign and Commonwealth affairs. Why? One thing that has become manifestly clear, if it was not clear before, is that the capacity of this country and others to create real change in the international community by the use of force is limited, at best, and ever more limited. It is not at all clear that we yet have an international process of law that can enforce itself, despite considerable efforts which I very much hope continue.

The capacity of the most powerful country in the world, the United States of America, to bring about its wishes by the use of hard power has been strikingly unimpressive in a whole series of events. Even if they had been successful, the strategic defence and security review and the more recent announcement of the reduction of our armed services to something like 80,000 full-time persons demonstrates that even if it were possible to make those changes, those possibilities are no longer open to this country because we do not have the capacity to enforce. That means that, however much in principle we would like to include regulation and force, in matters of defence and particularly in diplomacy and foreign and Commonwealth affairs, we are forced to look at non-regulatory methods—nudge, sometimes weaker than nudge, sometimes stronger than nudge but certainly non-regulatory and non-force elements must be brought to the fore.

I found it surprising when I started to look at these matters that the United States of America, which has much the strongest capacity to use force, spends enormous amounts of money—directly through the Department of Defense and through the various establishments of the navy, the air force, the marines and the army—commissioning external research. I remember, when I was training, being struck by the attributions at the bottom of many psychological papers that they were paid for by American defence organisations. However, in this country, where we do not have the capacity to use force, almost no money is spent on commissioning external research by the Ministry of Defence or other organisations. At best, it is modest and, in many cases, it is internal. One thing that we know scientifically is that if we do the research internally and do not share it with the rest of the scientific community, validation is doubtful.

It is critical, particularly in those areas of governance where enforcement is at its weakest, that we undertake research to find out what is the best that we can achieve in that way. Here I come to the non-intuitive outcomes of the limited research that has been done. Let me give a couple of examples.

In the Middle East, there are those who believe that change can be brought about by economic improvements for the population. For example, if we take Palestinians who seem highly unlikely to be able to achieve right of return, if they were given some resource—perhaps even a lot—would that help them to get over their problems? A couple of my colleagues went to do some research on the matter. They interviewed people at all levels of the community on the Palestinian side and the Israeli side and inside and outside the community and asked them some questions. First, if they did not get right of return, would some economic reward pay them for that? Secondly, if they did not get right of return, would lots of economic reward help them? Thirdly, if they did not get right of return, but the Government of Israel said: “We understand the pain that you have gone through as a community because of the decisions that we have taken and felt that we had to take”, what would their response be?

The realpolitik—those from outside such circumstances—would likely say, as they frequently have, that economic development in such a circumstance is bound to be helpful. The results of the research, however, were that when economic betterment was offered as an alternative to right of return, the response was anger; when substantial economic benefit was offered instead of right of return, the anger was much increased; and when no economic benefit was offered but there was a degree of apology and understanding, the response was that that was the basis for a conversation. There are many other examples of research that have demonstrated that the rule-of-thumb, rational approach that we might adopt may not always be correct and may even be counterproductive.

I know that the Minister has a particular interest in defence, development and foreign and Commonwealth affairs. Given the report’s clear indication that research into how we change populations rather than individuals is lacking and should be funded, and that in the areas that I am speaking of, force and regulation are not serious options, are the Government prepared to look more thoughtfully at how the Ministry of Defence and the Foreign and Commonwealth Office might address questions of population and behaviour change?

My Lords, I, too, wish to thank the noble Baroness, Lady Neuberger, for chairing the committee and for leading us to produce an excellent and important report.

The idea of using insights from behavioural science to affect public policy is by no means new. Back in the middle of the last century, the influential American psychologist, BF Skinner, wrote a utopian novel, Walden Two, in which he described a society in which, to use a phrase often quoted by the Prime Minister, everyone was persuaded to do the right thing through what Skinner called behavioural engineering. So we are not talking about new territory but about a different approach to the territory of using insights from behavioural science to affect public policy.

As has already been mentioned by the noble Baroness, Lady Neuberger, a traditional approach, apart from banning activities, is to use financial incentives, taxes or subsidies to persuade people to do the right thing—carrots or sticks—or to use information campaigns to appeal to our sense of reason. If we are told it is bad to smoke or bad to drink and drive, the reasoning human being will perhaps stop doing so. Certainly taxation, in the right setting, has an effect; information campaigns have a rather limited effect, as has already been said.

However, the newer approaches that we looked at, as the noble Baroness, Lady Neuberger, said, draw on insights from disciplines such as marketing—how companies persuade consumers to buy more of their products—insights from behavioural economics and insights from psychology, all of which converge on tapping-in not to our thinking mind but to our reflexive, semi-automatic responses and inbuilt biases. For example, all of us in this Room have a bias discount into the future: rewards now are more valuable than rewards in the far distant future. All of us are more averse to losses than we are to gains. It is more painful to have someone take £100 away from you than to have someone never give you £100 in the first place.

All of us are influenced by social mores. Why did I buy an iPhone two or three years ago? It was not because I needed an iPhone but because all my friends had an iPhone—apart from my noble friend Lord May—and I felt that I had to have one.

Another aspect on which this new area of research into human behaviour has focused is identifying barriers. We live in a society in which we are confronted with choice, but choice is often illusory. Going back to mobile phones, how many noble Lords in this Room know whether they have the best phone tariff? The answer is that none of them does. There are estimated to be at least 7 million possible tariff combinations, so how can you possibly make an informed choice? We therefore use simple rules of thumb such as opting for a brand that is familiar. The question is whether these insights into human behaviour are effective in influencing public policy.

At lunchtime, I went over to talk to David Halpern, the head of the Behavioural Insights Team at No.10, informally known as the “nudge unit”. There are two bits of good news that I have to convey. First, the nudge unit is carrying out proper, randomised control trials through different government departments. One point that we drew out in our report on lack of good evidence is beginning to make progress. Secondly, there are some clear successes using these insights into human behaviour, such as increasing the proportion of court fines paid and positive responses to requests for income tax, as well as encouraging people to relicense their cars and take up loft insulation. So there are some success stories as a result of using these new insights into human behaviour.

I want to talk about one of our two case studies to which the noble Baroness, Lady Neuberger, has already referred, on obesity. Will the softer approaches using our subconscious biases, preferences and rules of thumb help to tackle this massive health problem? I do not need to repeat the facts, but I will. It is estimated by the Government that 40% of adults in this country will be obese by 2025; the estimated cost to the NHS, already referred to by the noble Lord, Lord Giddens, is £2 billion a year by 2030. Of course, the reason for that is that many non-communicable diseases are influenced by obesity, and in the United States it is considered the second largest cause of preventable premature death after smoking. So it is an immense public health problem, not just in this country.

Our report highlights two things. First, not just this Government but successive Governments have made little or no progress in tackling this major health problem at the population level. So it is a huge challenge, which we have not yet managed to conquer. Secondly, on a point that has already been summarised by others, we saw little or no evidence that the softer approaches—the nudges—will really have an effect on their own.

I refer to two examples that have been alluded to by the noble Baroness, Lady Neuberger—traffic lights and advertising to children. When I was chairman of the Food Standards Agency, I was involved in trying to persuade the Government and industry to behave responsibly on food labelling and advertising food to children. The mere fact that the food industry was averse to traffic lights gave me the answer. If the industry does not like traffic lights, they must tell consumers something that consumers would like to know but that the industry does not want consumers to know about its food. We did a review at the Food Standards Agency into the impact of advertising and promotion of food to children, and the food industry commissioned its own review to show that advertising has no effect. I said to people in the industry, “Then why on earth are you spending all this money doing it if it has no effect whatever?” I rest my case.

So what does work with obesity, if it is not going to be nudging and the softer approaches? There are three recent reviews in the British Medical Journal. One is on the effectiveness of different kinds of nudges, or providing information. One that may have some effect is the one that we have alluded to—simple nutrition labelling. Another that may have some effect is portion sizing. There is good evidence that if you serve smaller portions people eat less. Since part of the obesity problem is eating too much, that would be a good thing to do. There is some modest evidence on positioning, and that if you put sweets low down at the checkout counter, as Marks and Spencer does in Oxford, it encourages young children to eat sweets. There is some evidence that priming, or giving people alerting signals before they start to eat in a restaurant on what their dietary goals might be, can have modest effects. But all these are relatively modest.

Another review looks at a measure that does have a significant effect and is exactly parallel to a measure alluded to by previous speakers on alcohol—namely, taxation. Eleven countries have now introduced taxes on fattening foods that contain a lot of sugar or fat. These include Denmark, Hungary, France, Finland and 23 states in the United States. The review in the BMJ suggests that a tax level of at least 20% is required to have an effect, rather like the minimum price for alcohol to which the noble Baroness, Lady Neuberger, referred. One advantage of taxing unhealthy foods is that it would drive the industry to reformulate foods to avoid the taxes, just as the campaign that the Food Standards Agency started and the Department of Health has taken over to reduce salt in food has caused companies to reformulate their processed food to take salt out of it. Is the taxation of unhealthy foods a regressive tax? After all, those who consume these high-fat, high-sugar foods tend to be the poorest in our society. One could argue that if it dissuades them from eating such food, we are helping the less well off and furthermore, the Government could use the revenue to support the poorest in society. So measures could be taken to tackle the obesity crisis but they are tougher than nudging.

The noble Lord, Lord Giddens, referred to smoking. The change of prevalence in smoking in this country has been brought about by a combination of taxation, legislation and education. There are two other success stories of government policy in changing behaviour in the population, the first of which is drink-driving. When I was a student at Oxford University we would go to a pub in the country and the landlord would say, “Would you like to have one for the road, sir?”. That is inconceivable today. Why has our drink-driving culture changed? It is because of the introduction of legislation and the breathalyser as part of that legislation. The third example, on top of smoking and drink-driving is the wearing of seat belts. It was not just “Clunk Click, Every Trip” from Jimmy Savile, but people could be fined or penalised for not wearing a seat belt. Now most people when getting into a car wear seat belts without thinking about it.

Does the Minister consider that stronger measures will have to be taken to deal with the problem of obesity and would the Government consider following the 11 other countries in introducing a tax on unhealthy foods as an instrument to achieve change? Nobody has yet talked about transport but that is the other case study in our report. Does the Minister agree that softer approaches such as nudging will not really move people out of their cars on to public transport, their bikes or their feet? Success stories from other countries show that Copenhagen spent £40 per person year on year to achieve a modal shift in transport to get people on to bikes or walking. The average local authority in this country spends one-fortieth of that—£1 per person per year in providing alternative forms of transport. I hope that the Minister will answer those questions for us.

My Lords, I welcome this report and the discussion with esteemed colleagues. Outside colleagues are also quite impressed with this. I am sorry that I did not give evidence. I was asked whether I did not hear about it—I am not asleep all the time—but I wonder whether all Members of the House of Lords receive e-mails requesting evidence. I have never had an e-mail requesting that I give evidence to the committee.

Many branches of central and local government will use this report from the House of Lords Science and Technology Committee on how policies can be more effective in considering and influencing how people can change their behaviour. I commend the committee for taking a broad scientific look at this approach to developing and implementing policy. As always, a new catchphrase can usefully draw attention to old ideas, as we saw with tipping points and now see with nudge. Innovative decisions always show that quite small changes to governmental commercial practice can have quite large effects. Sometimes they can be predicted; sometimes they can be beneficial; sometimes they can have unintended adverse consequences.

The noble Lord, Lord Giddens, commented, as did outside colleagues, that this report has all sorts of worthy things in it, but there is a slight lack of an intellectual theme. Curiously, for the modern day, it does not particularly emphasise how data are an integral part of this whole approach, nor the use of modern telecommunications, the internet and so on.

From a scientific point of view, behavioural change can be considered as one component of the system dynamics approach to policy-making, to which behavioural scientists have contributed greatly, as have natural scientists, mathematicians and so on. For example, Sir Alan Wilson—a fellow of the British Academy and the Royal Society, and a former vice-chancellor of Leeds University—showed how system approaches could work for commercial purposes and many others.

The methodology referred to here—as is so common in Whitehall—is evidence-based decision-making, which is just one component of system analysis. The noble Lord, Lord May, might touch on this. From the first studies of models and statistics of complex systems, including societies, species and countries, such as the one in the 1930s by Lewis Richardson on conflict using statistics and modelling, it was clear that behaviour can change quite suddenly. An example is when some threshold is reached or barrier is formed, as the noble Lord, Lord Krebs, pointed out, or a particular disturbance is introduced.

To give a parliamentary analogy, I have an Icelandic friend who tells me about the Icelandic Parliament: it is the earliest in the world, founded in 1000. A bored parliamentarian used to throw gold coins in the air. He was blind and getting bored in the debate so everybody got out their sword and had a tremendous sword fight on the floor of their House of Commons. He enjoyed that. The trouble is that now they do not know where he stored all his gold coins—that is still a problem for Iceland. That example is not totally dissimilar to changing expenses rules in this House, but that is another point.

To come back to systems thinking, many of the recommended policies here involve people in networks,— for example, WeightWatchers. Networks, as we can see, lead to beneficial effects or problematical ones, as we saw last night with the secret Conservative vote, which is a new network that suddenly appeared on the scene. Therefore, networks are an important part of this process.

I wanted to emphasise that the European Commission is sponsoring several projects around Europe about the use of system thinking and system dynamics as a general framework for governments and organisations. I hope that we will have more connection in that way.

I want to make four points and to illustrate them from my own experiences as a scientist acting variously as a city councillor, an environmental consultant and an executive. The first is how to find good ideas for economical ways to encourage behaviour change for the purposes of policy-making and implementation. This is also particularly valuable in developing countries, as the noble Lord, Lord Alderdice, pointed out, where local innovation can be very effective and indeed extremely ingenious methods are often found. DfID should be part of the discussion taking this forward.

The next point concerns obtaining effective data and the communication of data to the public, and from the public, to help policy through behavioural change, which is not much emphasised in the report. With modern electronic methods you can give information and receive it back and the many possibilities of social media are only just beginning to be used. The other important point that is touched on in the report on page 49 is the use of pilot schemes to explain in a sort of vivid, practical way how behaviour change can work, particularly in local areas, and then to demonstrate the effectiveness of unfamiliar ideas. Local pilot schemes often enable people to understand the wider implications of policy. We should make a greater connection between local pilot schemes for energy saving and the global importance of climate change.

Here is another story. In Cambridge in 1971 we had double-decker buses in tiny medieval streets. They knocked bits off the buildings as they went down the road and were responsible for incredible levels of pollution. What could be done? As a scientist I suggested we first measured the air pollution in these narrow streets and publicised it. That got people interested and then, being a scientist, I said there would be arguments about it and that we should have an experiment. The city council closed the street for a month and then, following the instructions of this report, we did a survey. The survey was done by students and we had a Stalinist result of 99% in favour and so the process went ahead. The other point made by the noble Lord, Lord Giddens, was that culture changes slowly. It took the taxi drivers in Cambridge 20 years before they decided that pedestrianisation with preferential arrangements was a good idea. That was a top-down initiative, but surveying was essential.

Over the past 40 years, many small initiatives in local communities in Britain have transformed family life, particularly on housing estates—which are, after all, probably where most people live. My wife is a landscape architect. One curious thing is that by the choice of planting schemes—having prickly bushes in some areas and green grass in others—you can guide or move people. That can transform the behaviour level and behaviour patterns on housing estates, as can the use of roads and dead ends. That is remarkable. You can go to many areas of Britain where you see quite different social behaviour as a result of those small, extremely inexpensive and economical methods.

The other important point is that many of those small changes can now be tested electronically. You can ask people on the internet. There was a good example in the east end of London, reported in a book that I edited on London’s environment, which noble Lords can find in the House of Lords Library. Increasingly, communication of information in a timely and local way changes behaviour and is a vital part of public policy. London leads the world—other countries are following—in providing detailed forecasts of air pollution sent to individuals. For example, adverts on the No. 73 bus say that if people are having breathing difficulties and want information about air pollution, they should ring this number to obtain it. That is an example of using sophisticated data, coming from satellites, models and fine linear data. It enables people to use their drugs appropriately and change their exercises. Some of those ideas have also been tried in the United States.

Now that approach is being extended to local temperatures. Another important example is the question of heatwaves in cities; that is not a problem for us this summer but, in 2003, 20,000 people died in France. Mortality varied from one kilometre to another depending on the exact temperature in an area of Paris. It is therefore important to be able to inform people about the temperature but also to find ways in which you can control it. The Lord Mayor of Westminster, who is a green Tory—I admire her greenness—explained to me how, on very hot days in the street where she lives, she draws her curtains so that, when she comes back in the evening, her house is cool. Most people do not draw their curtains and they remain very hot. That is an example where the nudging process can have a considerable effect. Now that such people all have air conditioning, it is a question of whether you turn your air conditioning on. That is an example where energy behaviour could be changed.

Finally, the noble Lord, Lord Krebs, mentioned transport, which is covered by the report. I have had very unsatisfactory communications with the Department for Transport on the question of nudging of information. The UK Government are much less ready than those in France or Germany to use information on roads to change behaviour. On French motorways, the electronic notices inform drivers that excessive speed is not only dangerous but leads to greater carbon emissions. In Germany, notices on motorways near housing inform drivers about noise. The DfT refuses absolutely to put environmental data on our screens. Indeed, it does the reverse: it encourages drivers to go at 70 miles an hour. It says, “If you go at 70 miles an hour, you will get to Bristol in 25 minutes”, or some damn thing. Excuse me, that is unparliamentary language. That is a case of negative behavioural change produced by government. I hope that that can be changed.

My conclusion from those examples and those in the report is that there could be a more systematic approach to optimal behaviour change: first, by studying through models and experience how different nudges and types and levels may be effective—or ineffective, if not dangerous; secondly, by evaluating the data provided and the feedback of information; and, thirdly, by assessing what kind of pilot schemes are necessary and how best to design them.

My Lords, the idea of government seeking to change our behaviour is inherently controversial. I should begin by saying what a pleasure and privilege it was to be associated with this inquiry, so ably led by the noble Baroness, Lady Neuberger, with that expression being no less sincere for its conforming to established ritual. The report begins by asserting that, in any instance, the Government should always explain why and what the problem is. They should then go on to make it clear what the evidence is about the problem—what we know and what we do not know—and to make it equally clear what the evidence is for the efficacy of the proposed actions, which is perhaps the most important and difficult thing. All that is a lot easier said than done.

Some of the difficulties have been exposed in an interesting report by the MORI poll organisation, which although it was begun in 2010 was published after our report. It was a study of 18,500 people in 24 different countries and found some paradoxical things. For one, and this is not surprising, public support for intervention is much higher if it is seen to be a problem that directly affects lots of other people—for example, smoking in public places. There is much less support if the problem seems personal—for example, obesity, which is so often seen, although inaccurately, to have just a personal cost as distinct from the large cost that there is to the National Health Service. In another kind of paradox, it found large majorities of public support for many different kinds of specific interventions. However, more than half of those same people then said that they did not think governments should get involved in people’s choices.

To give another example, about one in three of those 18,500 people who filled out the study said that governments should take tougher actions. Yet they also said that the state should not get involved in individuals’ choices about the four particular things being surveyed: eating/obesity, saving for retirement, smoking or sustainability. The report had a wonderful phrase for this, which I was unfamiliar with. It called it cognitive polyphasia, which is more simply summarised as saying that people want their Government to stop the bad behaviour of other people but not necessarily their own behaviour. I should emphasise that there was in those 24 countries a good deal of variation. For example, distinct affirmation for outright prohibition as a measure commanded assent at a level of 87% in Saudi Arabia and India, while at the other extreme it was less than one-third in the United States. In the UK, it was intermediate. In all countries, there was more support for actions and policies aimed at businesses and corporations than those aimed at individuals, forgetting ultimately that businesses and corporations are made up of individuals.

I turn briefly to the report itself to reiterate some things that have already been said and one that has not. As the noble Lord, Lord Alderdice, reminded us it is often hard to get good evidence at the population level for how effective an action will be. Such information as we have is often ambiguous and cloudy. That should not stop us from rigorously following the advice on scientific advice in policy-making that was formally articulated in this country in 1996. It was subsequently reviewed in a report that has grown from a few pages to a semi-fat book and reaffirmed several years later by a Select Committee chaired by the noble Lord, Lord Jenkin.

The advice emphasises that you should always make it clear what the evidence is and how you have consulted widely and openly, and that you acknowledge openly the uncertainties as well. It points in the direction, as the report does, that this should always deliberately involve the Government’s Chief Scientific Adviser and the chief scientific advisers in the individual departments. In particular, it points out that we should renew the position of the chief social science adviser—and with a really good person this time. These people have to be outsiders who are now insiders, not cosy appointments of civil servants from within, as happened with the Treasury.

The Government also have an obligation, as the report emphasises, to explain how the proposed actions relate to the science advice. This is made especially difficult when they do not. We had some examples of that recently. The dissonance between the expert scientific advice on drug classification and the political decision, with which I have some sympathy, should have been handled much better. The policy direction we are heading in with badgers and bovine TB is basically in flat contradiction of the best scientific advice, so it is very difficult for the Government to explain how they have taken the advice and why they are doing what they are doing when in that case too many people were after policy-based science rather than science-based policy.

Against this background, I re-emphasise how you need to be aware of the state of the science, which often is very partial and incomplete, and, even more importantly, you need to be aware of and explain the evaluation that you are planning for the intervention. One of the things that we found in the inquiry is that all too often the ex post facto evaluation of the measure set in train was not carefully planned in advance. It has to be part of the initial plan.

Finally, a point that deserves revisiting yet again is the question of partnerships between government and business in pursuit of particular interventions. We need to be much more frankly aware of the conflicts of interest involved. In the report, we identified a particular example, the public health responsibility deal network—a wonderful example of the networks my noble friend Lord Hunt referred to—where the pledges that were mooted about marketing alcohol gave explicit priority to the industry’s views, as a result of which six of the health organisations failed to sign up as they were explicitly dissatisfied with that issue and, frankly, I think more health organisations should have refused to sign up.

Rather than end on a rousing peroration, I thought I would read Recommendation 8.24, to which many speakers have already alluded, verbatim because it is a particularly important recommendation about which nothing much has happened yet:

“We invite the Government to explain why their policy on food labelling and marketing of unhealthy products to children is not in accordance with the available evidence about changing behaviour. Given the evidence, we recommend that the Government take steps to implement a traffic light system of nutritional labelling on all food packaging. We further recommend that the Government reconsider current regulation of advertising and marketing of food products to children, taking a more realistic view of the range of programmes that children watch”.

I look forward to the Minister’s reply to this point, and I have sympathy for him. I spent five years of my life as chief scientist in the strange culture of the Civil Service and five years in the Royal Society. I dealt with good conscientious people, but I never ceased to marvel at the confusion that you find there between having a report and lots of committees and actually doing something.

My Lords, I, too, thank the noble Baroness, Lady Neuberger, our special adviser and, of course, the secretariat. This was a complex report to get together. The evidence was unusually disbursed, and I cannot say that we got together all the sorts of disbursed evidence that would be relevant. Here and there, I caught a note of disappointment that certain sorts of evidence had not been covered. I think that that is right. We took, if I may put it this way, a dipstick approach. We were looking for evidence and where it has not been collected there is no systematic picture of evidence. We did not look at what is delightfully called “renorming”, where you tell people what is the proper thing to do about something—what is the norm. For example, noble Lords have no doubt stayed in hotels where they are informed that their guests use their towels on average X number of times, as opposed to throwing them on the floor for the laundry. That is said greatly to reduce the demand for laundry and reduce laundry bills and energy expenditure because people think that the respectable thing to do is use their towel for three or four days and not throw it on the floor immediately.

In one way the Government’s response to the report is rather gratifying as they agree to a fair number of the central recommendations, but in another way it is not at all gratifying because, although they agree, they do not then explain clearly what they will do or suggest a timetable. The disappointment is that the Government have not specified what action they will take on the very measures that they agree are relevant within a specified timeframe. I have every sympathy with the Government on one point. Behavioural changes might—I say “might”, not “will”—provide an excellent solution to many problems from smoking to obesity or the excessive use of cars to the excessive drinking of alcohol. The question addressed by the Committee was the rather sobering one of whether and how well they actually work. We should remember that behavioural solutions are nevertheless appealing because if they work individuals will change their behaviour to some degree without the need for enforcement or penalties and the problem goes away. Choice is preserved, harms and ill health are avoided and costs are minimal—if it works. It is said that all that is needed may be a nudge, a minimal intervention that leads people to view a different, less harmful or healthier way of behaving as the default option—indeed, ideally as their preferred option—and they will change their behaviour accordingly. However appealing it may be it is not very useful if it does not work.

The patchy evidence that the committee heard, and the two detailed case studies of obesity and car use that it undertook, repeatedly showed two things. First, there was a dearth of evidence about the effectiveness of many behavioural interventions and, with that dearth of evidence a lack of robust evaluation. Secondly, there was insufficient evidence of the staying power of behavioural interventions, either taken individually or in interaction with other interventions. That was particularly marked in some of the evidence about the efficacy of exercise in addressing obesity.

The Government have pointed out in their response that they are funding the Policy Research Unit on Behaviour and Health, based at the University of Cambridge and directed by Professor Theresa Marteau to undertake rigorous evaluations. This work is admirable, but it is on a small scale. Often an intervention shows promising results but unless its cost and its efficacy are carefully compared with other approaches across various contexts in combination with other interventions, and its staying power after the intervention is monitored, promising initial results may turn out to have limited staying power. I hope that we will find policies that use behavioural interventions but provide robust and generalisable evidence of the efficacy of those interventions across situations. We need a broad and systematic approach, as other noble Lords have said.

Moreover, as others have also said, the report did not find much evidence of the efficacy of behavioural interventions taken in isolation. I make no apology for quoting that it noted that,

“the evidence supports the conclusion that non-regulatory or regulatory measures used in isolation are often not likely to be effective and that usually the most effective means of changing behaviour at a population level is to use a range of policy tools, both regulatory and non-regulatory”.

I suppose that that is hardly surprising. We have huge experience of the sheer difficulty of changing entrenched behaviour when we consider the more than half a century of strenuous efforts to reduce smoking. So far they have had a marked yet still incomplete effect, despite deploying a complex combination of behavioural, fiscal and regulatory interventions. This difficulty of achieving change, even using a mix of measures across a long time, is despite the reality that, as an editorial in the Journal of Public Health of February 2011 nicely put the matter:

“Tobacco is clearly an exceptional product; no other consumer product kills one in two users when used exactly as intended”.

Many of the changes in behaviour that the report discusses are of comparable complexity to giving up smoking. Although the harms they address appear less straightforwardly lethal, they are very significant harms. The same editorial in the Journal of Public Health suggests that while smoking and alcohol in combination account for fewer than 20% of deaths in high-income countries, the six most serious diet-related risk factors account for 17.5% of deaths in high-income countries. The figures are not as different as you might expect. This is not an area in which there is reason to hesitate about using fiscal or regulatory interventions if behavioural interventions are known not to be sufficient. The matter is urgent, and rising obesity and diabetes are heralds of a public health tsunami.

The Government’s response argues:

“It is not a question, therefore, of the use of regulation being ruled out altogether, rather that regulation is only used when satisfactory outcomes cannot be achieved by alternative approaches, or where alternative approaches would involve much higher costs”.

Evidently the Government are pinning quite a lot of hope on the efficacy of behavioural interventions or on finding effective ones, but they have also pinned quite a lot of hope, as others have mentioned, on the so-called responsibility deal with the food industry, by which it agrees to reformulate products to make them healthier. Yet the committee was told by Mr Justin King of Sainsbury’s that voluntary agreements were sometimes unsatisfactory. He said:

“There was an attempt by the industry to coalesce around a voluntary agreement together with the FSA … and we felt very strongly that it was coalescing around a lowest common denominator, when our customers had clearly told us they expected something more and better. And when we made the change”—

because Sainsbury’s did make a change—

“we were not the most popular people in the industry”.

How long are we to wait to establish whether behavioural approaches work? How much faith can be put in responsibility deals that have to be sold to the least as well as the most responsible companies in the food industry? The public health problems created by overeating an affluent diet are grave, and delay in taking effective steps to prevent these problems would be serious.

I shall finish with two questions for the Government. First, what steps are Her Majesty’s Government taking to ensure that food served in public institutions, where the available menu in any case limits consumer choice, does not contribute to the obesity and related epidemics? In particular, what steps are they taking to ensure that meals in schools, in prisons, in the armed services and in canteens catering to public services do not contribute to these epidemics? Will they rely on behavioural interventions in these contexts where more direct interventions are readily available and are, in effect, being made every day when menus are chosen? If not, what reasons can they give for offering unhealthy meals when healthy meals can provide equivalent choice, and need be no more expensive? A lot of meals are eaten in public canteens in this country every day.

Secondly, what steps are Her Majesty’s Government taking to evaluate the efficacy of the public health responsibility deal with the food and retail industries, and what benchmarks and timeframe have they set for the industry to demonstrate that the deal is effective? It would be unfortunate if the responsibility deal turned out to have created one more last chance saloon, in this case for the food industry rather than for the media, allowing the less scrupulous performers to spend a decade pretending to produce healthier food while continuing to peddle excess fat, sugar and salt.

My Lords, I think I should start my contribution with a confession: I arrived at this debate as both a novice and a sceptic, to start with. I found the report and the debate itself absolutely fascinating. It has been extremely enjoyable and interesting. When I first heard about the Government’s new Behavioural Insights Team, I was very sceptical—partly, as today’s debate has drawn out, because it is very difficult to assess what factors influence behaviour. First, on an individual level, which I appreciate is not what the Behavioural Insights Team is about, what people say the factors are that influence their behaviour are often not the ones that influence them but the ones that they want the questioner to think influence their behaviour. Because any policy initiative is unlikely to involve just one intervention, it is also difficult to isolate different policy interventions and decide which one has had the impact and what that impact has been.

For this nudge theory to have any real credibility and weight it needs effective evaluation, as the report makes very clear. I pay tribute to the committee chaired by the noble Baroness, Lady Neuberger, and to her team because I found this report to be very readable and enjoyable. It illuminated as much in what it did not say as in what it did, which I think was the point that the noble Baroness drew out a moment ago. The committee has been extremely helpful to the Government on behavioural change in its recommendations, and helpful also to the Government’s Behavioural Insights Team or nudge unit. Clearly, the Government were very attracted by the Thaler and Sunstein book, Nudge, which argued that a range of non-regulatory interventions can influence individual and public behaviour. Given that the Government have set up the unit, this is an extremely welcome contribution and not just to a debate, because it has to be more than that. It has to be something practical. The report brings a kind of detailed scientific analysis to what can become a very theoretical debate.

Part of my scepticism at some of the press reports that I read before on the value of Nudge—or nudge alone, which the report drew out as well—was the problem of evaluation. When the National Audit Office was looking at this even the Minister, Oliver Letwin, told it that it was,

“open to question whether any of this will have any effect whatsoever”.

He continued,

“I don’t want to pretend that behavioural science is a sufficiently developed science to give us complete confidence or even sort of 95% confidence that any given technique will produce given results”.

I am pleased to hear that the BIT is now looking at evaluation, because to move any further forward without evaluation would be a big mistake. However, the National Audit Office itself found that there was no evidence that government departments were taking up the theory or the background of nudge, so this debate is very timely and will bring some clarity to the issue.

For me, the report emphasises that the need for evaluation has to be evidence-based. There are recommendations on the way forward, but I have to confess to your Lordships that part of my scepticism is about what is meant by a nudge and how it is defined. I appreciate that the debate has different facets on different issues. However, if I have understood correctly, it is essentially about what the levers are that drive and lead behavioural change, and what the relative merits or otherwise are of rules and laws to lead and force that change—as regulatory intervention or as campaigns, provision of information, et cetera, which is non-regulatory intervention. My understanding is that the provision of information, advice and knowledge can lead individuals or society as a whole, or groups in society, to make those changes.

That is the nudge concept theory, if I have understood it correctly. But in all that I have read, including this report and other information that I have sought there is still no definite answer as to what constitutes a nudge and what counts as a regulatory intervention. What does it really mean? I have seen different interpretations but, for me, if it is to be a non-interventory way of changing behaviour, it has to be about providing information, leading by example and giving the individual a free choice while seeking to influence that choice. It could be argued that it is more empowering for the individual to make that choice than for a wider group in society to make choices. I looked at table 1 in the report, where Nuffield takes the view that a regulatory intervention that is not directly aimed at the individual whose behaviour they are seeking to change is a nudge rather than regulatory change. I do not know whether noble Lords have looked at table 1, but I had some issues because of the examples used. It argues that changes to the physical environment would be a nudge, and gives the example:

“Altering the environment e.g. traffic calming measures or designing buildings with fewer lifts”.

To me that is more like an intervention, because action has been taken to change behaviour. The behaviour change is not a free choice—it is making one choice more difficult than another choice. If we install speed humps cars will go more slowly in that road. If we have fewer lifts in buildings, more people will walk. So it might be a nudge in changing an individual’s behaviour, but in making a collective difference I struggle to see that as nudge behaviour rather than something more interventory.

I have a new theory. I think that it is more like a shove; it does not give the individual the opportunity to opt in or out. I cannot see that it is giving information or empowerment to make a choice, but by regulation it limits choice to influence behaviour. So it is not a nudge but a shove, because I lean towards a nudge being about giving power for choices to be made. An intervention, whether targeted at an individual, a community or business, such as speed humps, removes choice. I am not saying that that is bad in any way, but I am trying to acknowledge the difference. I am not saying that one is less effective, but we have to clear up what a nudge is.

Business has to have legislation to inform customers, and we have heard about the traffic light system—and then there is information about obesity, which the report looks at as well. It has to be presented in a way that is easily understood, showing the potential danger of problems from a product. That becomes an intervention. When the noble Lord, Lord Krebs, was making the argument about phones, I looked at my iPhone. I have no idea whether I have the best tariff for my iPhone; I had a choice, but I was certainly nudged to make a certain choice. I suspect that I have not got a particularly good deal.

The issue of smoking was raised, as well, by the noble Baroness, Lady O’Neill. I am more likely to agree with her on that issue. Various warnings on packets of cigarettes over the years and numerous advertising campaigns have had a marked but incomplete effect, as she said. There have been interventions, saying that, “Smoking can damage your health” and “Smoking kills”. They are all interventions, however mild, to try to influence behaviour. We can argue that they had a limited impact or effect, but we cannot consider it a success at this stage, because we are still talking about what interventions to take. Although it was not referred to as a theory at the time, various evaluations that have taken place over many years have not said that those interventions on their own were a success because further interventions had to be taken. There has been initiative after initiative, and it is still going on. What really did influence and drive change was something that was very much an intervention from Governments banning smoking in public places. You could argue that levels of taxation have had an impact as well. It is far more regulatory than nudging.

The noble Lord, Lord Krebs, referred to drink-driving. The seriousness of the problem was recognised long before any significant action was taken; there were various awareness campaigns. I am told that when the breathalyser first came in, by those who were drivers at the time—I hasten to add that I was not—they were told that three or four or even five pints would put them within the breathalyser limits. So what was the influence on behaviour? It could be the thought that drivers could be prosecuted and lose their licences. That is what made a collective and significant difference. Part of the difficulty is that there needs to be a significant change in collective behaviour to make an effective assessment of whether an intervention is effective. It is also very difficult to isolate one specific aspect of a range of interventions to try to say which intervention was successful. We need a critical mass of change to indentify cause and effect.

I worry, and this was mentioned by other noble Lords, that at a time when the Government are making huge and very significant cuts in public expenditure the proposal of a nudge theory to change behaviour, without other interventions and without any real evidence base of success, could be a cheap alternative to effective and efficient actions by Government that could really make a significant difference. That is why I think the recommendation in the report for a social scientist is very important. Unless the Government make an assessment and know what works, then nudge interventions really have no value.

The report was very clear that to affect behaviour and make a difference, a range of interventions is needed, not nudge or even shove alone. The key points I took from the report were that non-regulatory intervention should be used when there is evidence that it works, not because it is cheaper or easier. It should not be used without any assessment of its effectiveness, nor because it fits somehow with the Government’s philosophy or policy to cut expenditure and look at ways of changing behaviour rather than having formal regulatory interventions. There has to be an independent, quantifiable, evidence-based assessment of the value of any non-regulatory intervention, particularly if the Government intend to use it to replace regulation or regulatory intervention.

I did not get from the Government’s report— I would not have expected it in the S and T report—where they see the balance, if they have ascertained that yet, between regulatory and non-regulatory intervention. The Government have to look at it and it is quite a serious issue for them—it is a wider issue than across one department. If the Government are seeking to influence behaviour in one area they have to recognise that actions taken across government as a whole, and other agencies, all contribute to the result and can often be contradictory. The reason for taxation on fuel has been to support the environment and to try to reduce car use. However, at the same time the Government support significant above-inflation increases in train fares and many people who would go by train are forced off the train and into their cars because it is cheaper for them. Governments have to work across departments to have a holistic policy that makes a difference rather than one department acting against another one.

We can accept that nudge does have some impact. Commercial organisations have used it for years alongside other strategies. However, they also recognise, as the Government have to in public policy making, that different problems require different solutions. One size does not fit all. One thing that I saw in this was the carrot-and-stick approach, I think the noble Lord, Lord Hunt, referred to that as well. If we look at traffic in London and our numerous attempts over the years to reduce the congestion, what has worked, it seems to me, is the carrot—ensuring that there are more buses and better public transport. That has an impact. The congestion charge had an even bigger impact initially. One of the problems with fiscal interventions is that their impact reduces over time as people get used to them. There has to be an assessment of whether regulatory interventions lead to long-term behaviour change or whether once the impact of the intervention is lost the impact lessens. We have to look at new ways of trying to influence behaviour.

I appreciate that I have added a new concept and am perhaps making it slightly more complicated, but at what point does a nudge become a shove and does it matter? If an intervention works does it matter if it is a nudge, a shove or a regulatory intervention? There seems to be an assumption, and I am not suggesting for a moment it was from the committee, that a nudge to influence behaviour is better than regulatory influence. I am not sure whether that works or is relevant. What matters is what works. If a change in behaviour is necessary, what is the best way to achieve that change? Without an evidence-based evaluation of the different approaches it is very difficult to make that judgment.

Several noble Lords referred to the fact that this is not new. Perhaps articulating the concept of nudge is new and different, but the idea that we are inventing a nudge theory is not: Governments have been using it for many years. The noble Lord, Lord Kreb, made a similar point about seeking to use it in a different, perhaps more conscious, way, but it has been used in the past and will continue to be used. However, the willingness to try to understand what works, and why is new.

I congratulate the committee and the noble Baroness, Lady Neuberger, in particular. The report brings clarity and common sense to the debate, which is welcome. The danger for the Government—I am looking forward to the Minister’s reply—is that this matter should not be allowed to become an academic discussion. There should be a practical response about whether or not there are interventions through nudge that the Government can make. I am not clear from the printed response about the degree of determination and clarity with which the Government intend to take this matter forward.

I thank the Committee for giving me the opportunity to read further and in more depth about this fascinating subject. I have met the team on many occasions; I know its director and admire a good deal of his work, much of which I have read.

I start by declaring an interest. I am a social scientist and I have spent my career between universities and think tanks arguing with others of my own discipline about how they needed to pay attention to their relationship with government. I remember as a young academic going to a meeting in Chatham House—it must have been 30 years ago—in which the chief inspector of the Diplomatic Service was asked to address the question of the relationship between the study of international relations and government. He began his speech with the wonderful statement, “I am not quite sure what the discipline of international relations—if indeed there be such a thing as a discipline of international relations—might contribute to the practical business of diplomacy”. Happily, in terms of government attitudes to social science, we have moved on some way from there and most, but not all, academic social scientists have become a little more open to having a constructive two-way relationship with government.

We see here an attempt to build on academic insights and government efforts to widen the use of evidence in policy-making by the establishment of the Behavioural Insights Team. As several noble Lords have said, this is not new—there is a reference in the report to the NICE report of 2007—but is something that Governments have been doing in practice in the past. What Thaler and Sunstein did, as did many social scientists, was to make more explicit what people were doing implicitly, make us think about it more systematically and, therefore, use it more systematically.

I am glad that the academic community is working with government and I note that the British Academy held a seminar with the Behavioural Insights Team last month on how we might take this further. We are now into the whole question of the relationship between science, broadly defined, and government and how evidence gathered by government-sponsored research in policy-making can be used.

There are a number of obstacles to this. I have taken part in debates on several occasions in the past year about how far you can allow the Government to use the data they collect across different departments for other purposes. On organ donation, for example, there have been some very delicate discussions on how far you can use evidence collected by the DVLA for Department of Health purposes. Happily, the Government have now secured a protocol for sharing the relevant data between the different agencies of government. We look forward to publishing our findings in this area, which we routinely do in each of our major work areas, as soon as we are able decisively to establish the impact of each of a number of changes that have been made to questions about organ donation on the DVLA site.

We also recognise that social science is softer than a number of other sciences. The problems of experimentation and evidence collection are often a good deal more complicated, and on obesity, the timescale over which one will establish that interventions have worked has to be measured in decades rather than in months. So there is a range of problems in assessing the utility of the evidence even when one has collected it.

There are a number of other obstacles. We have the most highly educated electorate we have ever had but it is often very resistant to evidence, as we see in the debate on climate change and in the resistance of the car-owing public to everything told to them about the greater benefits of walking and about why paying more for your petrol is good for you. It is not something that the public are particularly keen on. Road pricing is, of course, a highly desirable development. I well recollect that the previous Government left it to Ken Livingstone—and then pretty well hung him out to dry—to try road pricing in London, and only when it succeeded did they at least take it on. Local government elsewhere has been hesitant about imposing road pricing in cities because it is not popular.

Much of what we want to do in regulation is not popular, so part of what the new unit is doing is to expand on what the Nuffield Council on Bioethics calls the “ladder of intervention”. If there is an ideology for this Government—and I am not at all sure that I recognise a single ideological position for any Government, whether this Government, the previous Government or their predecessors—it is that you should look at the ladder of interventions, see how far voluntary measures can take you and only then move up to the harder end of the spectrum, regulation—the hardest end being prohibition—and financial disincentives when your voluntary interventions do not work. So limited government, working with social and economic actors as far as possible and recognising that all of those share responsibility, is the position from which we come.

As the noble Lord, Lord May, said, the idea of government seeking to influence behaviour is inherently controversial. Two generations ago, there were other moral leaders in society who helped to set the social norms. Part of what has happened in our society is that as the traditional moral leaders outside government have lost influence, so advertising, the media and the corporate sector have come to set social norms rather more strongly. That raises the difficult question of how far government should be attempting to prescribe and enforce behaviour. That is the area we are in. It is a fundamental issue about the role of government and how far it should be an active interventionist and an enforcer. I recognise that in the health area most of all—smoking, obesity and so on—there is a very strong lobby for enforcement among the professionals and a very strong resistance among the public to that.

The ladder of interventions and a range of policy tools are what this is all about. We are not saying that we do not want regulations; we are saying that where possible we want to investigate what works. In the debate, I was asked, I think by the noble Lord, Lord Giddens, whether there are any examples of behaviour being changed by non-regulatory interventions alone. There is the example of HMRC letters that were redesigned to say “most people pay their taxes”, which improved the extent to which people made their returns. We are having a debate in another context about electoral registration in which it is being urged on the Government that if you put at the top of each letter, “You must fill in this form. £250 fine”—I will not go into the fine—it will radically improve the number of people who fill in the form. This is a debate we are about to have in another sector but we all recognise that the way you design forms and convey messages has a positive or negative impact on behaviour.

Loft insulation is another instance in which you discover that, if you ask people why they have or have not gone along with the policy, there are interesting obstacles on the way. If you volunteer to empty their loft they are much more likely to say, “Fine, now you can insulate it”.

The Behavioural Insight Team is now looking at energy tariffs and mobile phone tariffs because it is clear that most people simply give up long before they have begun to investigate which tariff is best for them. It intends to work with industry and to talk about how simplification of tariffs might make choices easier.

I defend the attempts by the Government to limit how actively they intervene and the number of prohibitions we impose on society. That is a debate that we have all had to have, in the previous Government and in this one. We are talking about the range of intervention.

I was asked a large number of questions about obesity and the traffic light issue. As noble Lords will know, that is partly a question of what can be done compulsorily at EU level. If the EU has not passed a regulation that everyone must have traffic light interventions, we have to work voluntarily with the supermarkets. The Government are talking to supermarket companies and others, and some have responded differently from others. As a believer in limited government, we had to demand that companies behave responsibly. That is part of the dialogue that we must have. One way in which we change social norms nowadays is by having Commons committees which pull the heads of banks and companies up before them and ask them what are their social norms and acceptable behaviour. Not all of that has to be done by government prohibition.

I was also asked how the Behavioural Insights Team is itself monitored. It has an academic advisory council which monitors how it behaves. It was set up for a two-year period and is now coming up to its two-year review. It was entirely appropriate that it should be set up for a limited period—we do not necessarily want something that goes on forever—although I think that it is likely to be extended. On the question of the use of evidence, I hope that some Members of the Committee may have read the recent publication, Test, Learn, Adapt: Developing Public Policy with Randomised Controlled Trials.

The Minister has talked a lot about evidence and performance but there are people in Whitehall who say: “What has data got to do with policy?”. Data and information are very important. We receive very little information from government. They want to give us a good form but does not the Minister think that the programme of examples that I tried to give him of telling people much more about the information will help to make decisions? That is largely absent from the government response?

I take the noble Lord’s point that perhaps the government response should have taken more care with the question of data. There is another debate to be had—I encourage all Members of the Committee to participate in it more actively—about government data collection, government data sharing and access to government data which relates to the census and questions of privacy. We all need to engage in that debate because government is now collecting a great deal more data, as are private actors. Government behaves with much more caution about the use of that data than Tesco or Marks and Spencer. As with obesity, there are important questions as to how far we lower privacy issues in government in order to gain benefits in public health and elsewhere.

I mentioned the White Paper Test, Learn, Adapt, which has been recommended by Ben Goldacre and Tim Harford. That suggests to me that there are those in the media who recognise the importance of government data and at least think we are attempting to move in the right direction.

The noble Lord, Lord Giddens, talked about corporate power and how to confront it. That is also part of a much larger issue. We are left with business and the media setting a large amount of what becomes the social norm. The power of advertising—and advertising is absolutely about covert nudging as opposed to overt messaging—is an issue that again we cannot answer here. It is fundamental to our debate about the balance between government, society and market, in which that we all need to engage. I look forward to the noble Lord’s next written contribution on that fundamental issue.

The noble Lord, Lord Alderdice, talked about the international dimensions of behavioural influence and cultural change and whether we should be following US research. There is a fair amount of independent research in this area. The German Marshall Fund does some very good research, which I follow. There are some mildly puzzling outcomes. From the surveys that I have seen, the most pro-Western public in the entire Middle East is the urban population of Iran. Whether or not that suggests that the behavioural impact you should be having is to impose sanctions on the regime, it raises some very large questions about what policies and interventions you pursue and what you get back in return. I will feed that back in.

The noble Lord, Lord Hunt, raised a number of questions about transport, which I have touched on. Government studies have shown that cost, time and reliability are clearly very important factors. There is some evidence for providing better, simple information. The new signs at bus stops which tell you when the next bus will arrive increase the number of people who wait for the bus. That is another nudge if you like. Information helps.

David Halpern, the head of the Behavioural Insights Team, is very interested in the built environment and how far it impacts upon behaviour. That is a really difficult, long-term issue, the sort of thing that the noble Lord, Lord Hunt, was talking about. Redesigning public spaces and how you design footpaths and cycle ways help with this, but part of the answer to improving the urban environment and encouraging people to walk rather than use cars is persuading them to live more closely together and not to wish to live 10 to 20 miles from where they work.

Another area in which the provision of information would help—and here government has a great deal further to go—is on the concreting of front gardens, which over the past 20 or 30 years has contributed very substantially to the problems of urban flooding. The provision of information about the utility of digging up your front garden again and providing green spaces through which the water can drain is clearly something that government can do without enforcing it.

I love the term “cognitive polyphasia”. We are all stuck with that. As someone who, when in opposition, campaigned for the pedestrianisation of further squares in London and, in particular, of Parliament Square, I am conscious that there are a number of people who think that it is very good to have pedestrianisation so long as they can still get their limousine to take them to St Margaret’s for weddings and do not have to spend two to three minutes longer in their taxi from Smith Square. Individuals often resist things that in the long run will be to their advantage.

This is a broad initiative of government—I stress of government because it is not a partisan move from this Government. We all want to find ways in which the range of government interventions—from information through to pressures and financial disincentives to tighter regulation and, in some cases, prohibition and penalties, as in seat belts and some areas of health—will help to change behaviour. That is not something that the Government can do alone. We have to work with publics whose attitudes are often highly contradictory and whose willingness to accept evidence when presented as mediated through the media is sometimes relatively limited.

What I hope that the Committee is persuaded of, into which the report provided a useful insight, is that this is one of the many tools available for government which helps government to be more self-conscious. The Behavioural Insights Team is in the Cabinet Office to provide a resource across government and its many departments to encourage them to use more of those interventions to affect behaviour. On that basis, I give way to both noble Lords.

Will the Minister respond specifically to my question about the 11 countries that have introduced taxes on foods that specifically contribute to obesity—high sugar, high fat foods? Might the Government follow the lead of other countries in tackling the obesity crisis by that measure?

My question was going to be the same but adding the encouraging rider that, as I mentioned, studies show that the public is much more amenable to asking corporations and business to do something than to asking individuals to do something. In the specific case of Recommendation 8.24 about marketing garbage food to children, I should like to hear that something is to be done.

The Minister said that the measures we want to take for public health are not popular and that is one reason why we do not have to do that. A lot of regulatory measures that have been taken have been popular by the time they are taken. You may have to work to get that popularity, as others have suggested. You have to give the public information as to why things are being done.

This is turning into more of a seminar than a debate. I felt when I was getting my briefing from the Behavioural Insights Team that I was attending a seminar rather than receiving a briefing. Let me attempt to answer the question on sugar, salt and so on. That is certainly an issue that the Government are considering. We have not yet come to any conclusion. Having a public debate on the options helps to considerably further the debate, so I encourage all those interested to pursue the issue and aid the Government in making our recommendations.

On the question of school meals, we are all aware, again, that we need a mixture of interventions. We need Jamie Oliver out there campaigning. We need schools that are experimenting, often against initial parental opposition. We can all remember the parents who came to bring chips for their children because the school was giving them this nasty healthy food. There, we are slowly moving things around

One final point and then I will have to sit down because I am well over 20 minutes. When I first joined the House of Lords, if I went into the Lords restaurant at breakfast time I saw many of our security staff eating enormous English breakfasts. I was in there the other day and I saw our security staff eating light breakfasts. In small ways, attitudes are changing and some of the message is beginning to get through. The full English breakfast is still provided in the River Restaurant but fewer of our security staff are taking it. That is an interesting example of where social norms are evolving in one way or another, but all of us in our position as social scientists or scientists, as well as politicians, need to address the question of how we shape the public debate and public attitudes in a range of different areas. Government has a role in that but not everything which government does should be done through taxation or prohibition. Where government can encourage and inform, it should do so first before it moves up the ladder of intervention.

I thank all noble Lords who have spoken. There have been some memorable phrases. I am particularly interested in behaviour change for bankers and interventions will clearly be programmed as a result of today’s debate. I was slightly disappointed with the Minister’s response, particularly given that he is a social scientist. He did not answer the question put to him about when, if ever, a chief social scientific adviser will be appointed within government. I hope that he will deal with and answer that point.

I apologise. I should have answered it but so many points were made in the debate that it was extremely difficult to cover all of them. This question is being discussed within government and will shortly be decided on. It is not a dead question; it is a live one.

I thank the Minister very much indeed. We are much encouraged to hear that and I hope that we will continue to be brief on that subject. Will he perhaps take back the question on traffic light labelling of food, which was asked again and again, particularly as evidence came from some corporations that they were doing something about this? It is something that could be pursued through a business network and the Government could lean harder on that. We would still like a serious response on advertising on foods harmful to children. I hope that the noble Lord will write to me and other Members of the Committee. I thank everybody who spoke and the Minister for his response. I beg to move.

Motion agreed.

Financial Transaction Tax: European Union Report

Motion to Take Note

Moved By

That the Grand Committee takes note of the Report of the European Union Committee on Towards a Financial Transaction Tax? (29th Report, Session 2010-12, HL Paper 287).

My Lords, I am delighted to have the opportunity to introduce this debate on the report of the European Union Committee entitled Towards a Financial Transaction Tax? This report was based on work undertaken by the Sub-Committee on Economic and Financial Affairs, which I chair. The report was published in March and was based on evidence received from campaigners, representatives of the financial sector, academic experts, think tanks, MEPs, the Financial Secretary to the Treasury Mark Hoban MP and Algirdas Semeta, the EU Commissioner for Taxation and Customs Union, who appeared before the committee in February. I also thank all our witnesses who contributed to this inquiry and my clerk, Stuart Stoner, for mastering, as ever, a complex subject with consummate skill.

Since the global financial crisis erupted in 2008, there has been a continuing debate about the role of the financial sector within the economy. As recent events here in the UK have again brought into focus, many have criticised the perceived light-touch regulation of financial practices and of the markets. There is also a common perception that the financial sector does not pay its fair share, as well as widespread anger at the level of pay and bonuses in the sector at a time of economic austerity. In this context, there is an understandable desire to see the financial sector make amends for its perceived mistakes and shortcomings.

The proposal for some form of financial transaction tax is nothing new. Indeed, were the noble Lord, Lord Skidelsky, here, he would doubtless tell us the thoughts of John Maynard Keynes in that direction. In the early 1970s, the Nobel Prize-winning economist, James Tobin, brought forward an eponymous proposal to levy a tax on every amount exchanged from one currency to another to reduce short-term currency speculation. The idea was not adopted at the time, but it has returned to the agenda on a regular basis ever since. In the aftermath of the recent financial crisis, the European Commission has been actively considering the case for a financial transaction tax, or FTT. In September 2011, it published its proposals for a tax on the value of single transactions of a broad range of financial instruments, including equities, bonds, currencies and derivatives. EU leaders including Germany’s Chancellor Merkel and the former French President Nicolas Sarkozy advocated such a tax, while the Commission President Jose Manuel Barroso promoted it as a question of fairness. A wide-ranging campaign, spearheaded by the Robin Hood tax campaign here in the UK, has also called for a tax in order to tackle poverty and climate change.

Yet support for an FTT is far from universal. Leading economists have criticised the proposals, and several world economic heavyweight Governments, most notably the USA, remain implacably opposed to its introduction. The UK Government, while stating that they do not oppose a global tax, have remained consistently opposed to its introduction at EU level. The Prime Minister has called the tax madness, and the Chancellor of the Exchequer described it as,

“a bullet aimed at the heart of London”.

Even after we have published the report, we are still getting information, for instance from the City of London Corporation. It drew its own analysis of the tax, highlighting concerns and worries, and concluded that:

“This is not helpful to the European recovery and the jobs and growth agenda”.

It was in this febrile atmosphere that the committee’s inquiry into the Commission’s proposals took place. We were disappointed in what we discovered. We found the Commission’s proposed model wanting in many respects and unlikely to fulfil the objectives that the Commission had outlined. We found key elements of the Commission’s model to be fundamentally flawed, and advised the Government that they should refuse to agree to the proposal.

Why did we come to such a stern conclusion? We began by examining the Commission’s five stated objectives. The first was to avoid fragmentation in the internal market for financial services; secondly, to ensure that financial institutions make a fair contribution to covering the costs of the recent crisis and to ensure a level playing field with other sectors; thirdly, to create appropriate disincentives for transactions that do not enhance the efficiency of financial markets; fourthly, to create a new revenue stream for the EU budget; and, fifthly, to contribute to the continuing international debate on financial sector taxation and, in particular, the development of an FTT at global level.

We were not convinced that the Commission’s proposals would meet any of these objectives. Given the opposition to an FTT in the USA, the suggestion that the Commission’s proposal would pave the way for a global tax was, in our view, wholly unrealistic. We noted that the case for using an FTT as a new revenue stream for the EU budget was contentious even among its own supporters, many of whom favoured revenue being put to other uses, such as tackling global poverty and climate change. While we found there was a stronger case for asking the financial sector to make a contribution to the cost of the crisis or, indeed, for seeking to deter certain capricious transactions, in neither case did we find the Commission’s arguments persuasive. While we acknowledged the strength of public anger directed against the financial sector and the widespread view that those who contributed to the current financial crisis should contribute to its clean-up costs, we found that this FTT was the wrong way to meet such demands.

We next considered the detail of the Commission’s proposals. We concluded that the Commission’s model was impractical and unworkable. For instance, the proposed residence principle, defined as taxation in the member state of establishment of the financial institution regardless of where the transaction took place, was subject to widespread criticism, including from advocates of an FTT. There was, in our view, a significant likelihood that a tax so designed would lead to financial institutions relocating outside the European Union in order to avoid the tax. Only an FTT implemented on a global scale would prevent EU-resident institutions being placed at a significant competitive disadvantage in comparison with other leading global competitors. Yet, for the reasons I have outlined, the chances of a global tax being introduced are extremely thin.

We also concluded that it was uncertain who would shoulder the burden of the tax incidence. We pondered what the impact would be on consumers who might have the tax passed on to them. In addition, although the headline rate of the tax was relatively low, there was a danger of a potential cascade effect increasing the potential tax burden by the tax being levied at each stage of the financial instrument’s journey.

Much criticism focused on the Commission’s impact assessment, which indicated that the proposals seemed destined to have a substantial detrimental effect on the EU-wide GDP. In the context of the current financial crisis and the economic pressures being faced by many member states, we found this undesirable. We concluded that if a proposal of such importance as this is to be seriously contemplated, it is imperative that any such proposed tax is as well designed as possible. In our view, the Commission’s proposal failed this test.

The consequences of such a poorly designed tax, both on the United Kingdom financial sector and the EU financial sector as a whole, could be very serious indeed. Divergent views were put to us concerning the potential impact. We found such uncertainty about the outcomes alarming and so, I repeat, we were deeply concerned that an EU-wide FTT could have a serious detrimental impact on the United Kingdom, in particular by giving financial institutions an incentive to relocate away, principally from London. We heard evidence that over 70% of the revenues from an FTT could come from the United Kingdom, and we questioned the appropriateness of a proposal that would have such a disproportionate effect and impact on one member state above all others.

The United Kingdom Government have made it consistently clear that they would oppose an EU-wide tax. Given that EU-wide taxation proposals require unanimity among member states, we found the likelihood of such a tax being introduced extremely remote. Speculation has therefore grown that an FTT might be adopted by a smaller group of member states centred on the euro area from which the United Kingdom would almost certainly stand apart. However, the impact of such a tax on the United Kingdom cannot be ignored. If, as is likely, a directive covering a smaller number of member states equates the UK with third countries, there would still be a significant effect on the United Kingdom financial sector. UK financial institutions entering into a financial transaction with euro area financial institutions would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the regular provisions of joint and several liability. We urged the Government to work to ensure that UK financial institutions are not so damaged and that the United Kingdom tax authorities’ workload is not increased by an FTT introduced by an advance pioneer group of member states.

The Government’s response to the committee’s report has been received, for which we are grateful. However, we found the response to that point complacent. It merely states that the Government,

“will continue to contribute to discussions on the proposal with these issues in mind, and will continue to highlight that unless applied globally, FTTs risk relocation of business activity to countries not applying the tax”.

The deleterious impact of a euro area FTT on the UK could be very serious. I should be grateful if the noble Lord, Lord De Mauley, could provide us with a more considered response to those concerns. How are the Government seeking to address them? Who are the Government currently talking to and canvassing? Which MEPs and fellow Council members inside and outside the euro area are the Government talking to?

We were dissatisfied with the Government’s position on an FTT in one other respect. In his evidence to us, the Financial Secretary to the Treasury argued that the Government do not support an EU FTT but do not object in principle to a global FTT. The Government’s support for a global tax has been lukewarm at best. If the Government support the introduction of a global tax, they should make a sound case for it. If, however, their true position is that they oppose a financial transaction tax in principle and in practice, they should say so in thunder. The Government’s response argues that their position is clear, but we found it as clear as mud and acting to the gallery of those who seriously believe in the benefits of a Robin Hood tax.

Beyond all that, it is imperative that Her Majesty’s Government remain fully engaged in the debate. Discussion on whether and how the financial sector should be taxed cannot be ignored. In our report, the committee considers other models, including a financial activities tax or an EU-wide tax on the model of UK stamp duty, which appeared to be gaining traction when the report was published. We found that such models may bear further exploration. Since the report was published, the debate has moved on further still. The Compact for Growth and Jobs annexed to the conclusions of the European Council meeting on 28-29 June states at paragraph 3(j) that the,

“proposal for a Financial Transaction Tax will not be adopted by the Council within a reasonable period. Several Member States therefore will launch a request for an enhanced cooperation in this area, with a view to its adoption by December 2012”.

What update can the noble Lord, Lord De Mauley, give us on the current state of negotiations on the adoption of an FTT?

The leaders of Germany, France, Italy and Spain are reported as remaining in favour of an FTT. Which member states are expressing an interest in pursuing its adoption under enhanced co-operation? Given the implications for the United Kingdom, to which I have referred, what role are the Government playing in seeking to influence these discussions? I look forward to hearing the contributions on this important proposal, not only from the noble Lord, Lord De Mauley, but also from noble Lords on all sides of the Committee. I beg to move.

My Lords, I speak in this debate not as someone who participated in the production of this report and the discussions which took place among the committee, but simply as an interested and keen observer of the problem that the committee examined and as someone who has, of course, read the report and considered the matter in great detail. My noble friend Lady Maddock, who was a member of the committee, is unfortunately unable to be here this afternoon.

This is a very impressive report. I have rarely read a report where the committee appears so united and strong in its condemnation of the topic it was asked to examine. The report makes a compelling case for the Government to do all in their power to resist this tax, even if it were to be applied only to the euro area. It is understandable at a time of deep financial crisis—a world crisis where emotions are running high against the bankers, particularly in this country—that there are proposals to tax the financial services industry. The FTT or Tobin tax, or the Robin Hood tax—that last name giving you a flavour of how this tax is viewed—is that rare kind of tax, one which easily wins the hearts and minds of the public. Very few taxes are popular with the public but in the public mind, for many people, the Robin Hood tax will solve the problem they see. In my view, and I am very persuaded by the report, it is the wrong tax at the wrong time and in the wrong place.

It is the wrong tax because its design is so flawed. For example, the residence principle is, as the committee says, impractical and unworkable. We all know how difficult it is to stop companies moving out of this country and relocating to the country they see as being of most tax advantage to them. One company which has recently made the press in this respect is Amazon, locating its headquarters in Luxembourg and paying very little tax in this country despite doing billions of pounds of business here. That same principle applies to the financial services sector, especially where the companies concerned will have everything to gain and nothing to lose by locating outside the EU.

I felt that there were some extraordinary aspects to the details of this tax: the double incidence, for example, if both parties in the transaction are in the EU. It is an unusual tax if you pay it twice simply by accident of location. It is important to remember that FTT is not the only option. As the noble Lord, Lord Harrison, has stated, there are realistic alternatives, including the UK stamp duty option and the financial activities tax, so the urge to tax the financial sector can be achieved in other ways.

I stated that this is a tax at the wrong time. The Commission’s own impact assessment states that there would be a long-term total decrease of EU GDP of between 0.5% and 1.76%. I note that the Government’s letter in response to the committee’s report points out that, at the top end of that range, that would equate to a reduction of more than €200 billion in EU GDP and would mean the loss of nearly half a million jobs. Possibly the Government’s estimate of jobs is quite light—it could be more than that. Therefore, it is pretty extraordinary that the Commission is proposing what is, effectively, a tax on growth at a time when the EU is uniformly suffering from very low growth and, in some cases, negative growth. If you could identify the problems of the EU, at the very top of the list would be its problems with growth at this moment. It is a fairly extraordinary proposal to come forward with in this situation. Imposed suddenly—and by its nature it must be imposed suddenly—it could reduce liquidity and have the adverse effect of increasing market volatility. The Commission is talking about using it to reduce the high-velocity trading, but it could increase market volatility. The noble Lord has already referred to the cascade effect, which could intensify these problems.

One point of concern is that the FTT is being seen as all things to all men. Different groups are clutching at it to fund their own, individual pet priorities, mostly things that we would agree are very worthy and worthwhile, and which need funding. However, out of one tax you cannot fund the EU’s main revenue stream at the same time as funding international development, assisting with international poverty or counteracting global warming. It is unrealistic and ill thought out not to have a clear process for deciding where this funding would go. Clearly, it cannot do all those things, but the danger would also be that the relocation of businesses out of the EU as a result of the tax would mean that the yield is much lower than expected. In any event, the government response argues that the incidence will be passed on to manufacturers and therefore, ultimately, to consumers.

Finally, I stated that this is a tax in the wrong place. I am an enthusiastic pro-European and sometimes get irritated that we in Britain always say that it is all right for the rest of Europe but we are different. However, in this case I am firmly convinced that this is a tax that will have particularly adverse consequences. The committee points out, absolutely rightly, that the impact on the City of London and the UK financial services sector in general is so disproportionate that it must be revisited. There is a great deal of concern in the coalition Government, and rightly so, at the unbalanced state of the economy and that we as a nation rely far too much on financial services. Yet one has to accept that that is where we are in our economy and that turning it into a different shape will take decades.

We want to grow the rest of the economy. We do not want to destroy the financial services that are so important to us. Therefore, the threat from this tax to the pre-eminence of our financial services sector is considerable. I remind noble Lords of the Commission’s own figures. If you derive the proportions from them, the revenue raised in the UK would be 4.6 times higher than the revenue raised in Germany and 10.9 times higher than that raised in France. That is how we get to the figure of 71.3% of all revenue from this tax coming from the UK, to which the noble Lord referred. This effectively means that it is a UK tax masquerading in EU clothes. Eighteen per cent of the revenue that would be raised from this tax within the UK would be transferred to other EU states if it were to be divided up in the process that the Commission suggests. That would not be fair, effective or wise.

I hope that this excellent report assists the Government in their efforts to resist this tax, whether it is proposed for the whole of the EU or simply for the euro area. Can the Minister assist us by giving us an updated assessment of whether the Government consider that the financial transaction tax is likely to go ahead in the way envisaged when this report was written?

My Lords, I pay tribute to the work of the noble Lord, Lord Harrison, and his colleagues. In recent months, their sub-committee has produced a string of reports on these financial issues that are so troubling the whole world but, in particular, Europe and the eurozone. We owe a debt of gratitude to them.

The Commission’s proposal for an EU financial transaction tax seems, alas, to have as many lives as Rasputin. No sooner is it pushed under the ice, as it was at a recent ECOFIN council, than it pops up again in the conclusions of the June Council, this time as a possible tax in the eurozone alone or perhaps, in the eurozone-plus if countries, such as Sweden, which burnt their fingers so badly on a single-state version of the tax in the 1990s are not more cautious on this occasion, so we certainly cannot afford to be complacent and assume that the problem has passed us by nor, as the Government seem to do—here I join the noble Lord, Lord Harrison, in his view—to assume that such a tax levied by the eurozone countries alone would have only positive consequences for us, no negative ones.

I should make it clear at the outset that, unlike noble Lords who have spoken before me, I am not a fan of even a genuinely worldwide FTT, such as the Tobin tax idea, to which the Government pay lip service without, it must be admitted, much sign of enthusiasm. Like the taxation of tobacco, its protagonists never seem able to decide whether they are really trying to to deter a nasty habit or to raise the maximum amount of money for good causes. In any case, a worldwide FTT remains a pipedream. Can anyone seriously foresee the US Congress, either the present one or one likely to be elected this November, voting in favour of an FTT? If that is the correct judgment, we need to face up, as the Commission lamentably failed to do, to the risk of displacement, of transactions simply moving off to New York, Geneva, Tokyo or Singapore, leaving Frankfurt, Paris and perhaps even London deprived not only of the proceeds of the tax but of the employment and corporate revenue tax benefits from the businesses carrying out the transactions.

Experience shows this to be no idle risk. Not only did Sweden, which I have mentioned already, suffer in this way in the 1990s, but the whole episode of the euro-dollar market which sprung up in London almost overnight when the Americans made an unwise fiscal decision is there as an awful warning. Europe needs a stronger, deeper capital market if its economy and single market are to prosper, not a shallower, feebler one, which it would be all too likely to end up with if any variant of an FTT on a Europe-only basis were to be introduced.

The Government are right to resist the Commission’s proposal for sound European reasons, not only British reasons. I wish that the Government would put the argument in those terms, not depict it simply as a heroic defence of the City of London. When the Minister replies to the debate, I hope that he will explain why the Government are so confident that there will be no negative consequences for the UK from a eurozone-only variant of the FTT. I am no banking expert but that proposition looks to me to be not entirely convincing.

As to whether there are alternative, less harmful ways of taxing at least some financial transactions—here I follow the course of the previous two speakers—of course there are. The stamp duty on share transactions such as we already levy in this country is one such. I do not see why the Government, in their reply to the excellent report of the noble Lord, Lord Harrison, felt the need to be so negative about such an approach at the EU level. I do not even see why we should jib at having an EU minimum rate for such taxes, as our rate is well above the level which any member state which currently does not have one is ever likely to impose. After all, that is what we have for value added tax.

The need to avoid a race to the bottom, or the creation of tax havens within the EU, deserves to be taken seriously. As long as the Commission’s even more unwise initial suggestion that the proceeds of an FTT should be earmarked as a resource for the EU budget—an idea which must, in any case, be dead in the context of a eurozone-only FTT—is not revived, would not the stamp duty on share transactions route be worth encouraging more?

The Government can rightly feel, from the trend of this debate and from the report we are discussing, encouraged by the support from the EU Committee of this House for their resistance to the Commission’s proposal for an FTT. That case would be all the more persuasive if it was not so often linked to references to Britain having a veto and being determined to use it. We would do much better to advance the case on the grounds of compelling logic and for the reasons that previous speakers have mentioned, such as the loss of GNI to the European Union at a time when it needs to gain it, and many other arguments of that nature.

My Lords, I also congratulate the noble Lord, Lord Harrison, and his colleagues on the report. However, I have some disagreements with it and therefore my position is different from that of previous speakers.

A tax on currency transactions, as was noted by the noble Lord, Lord Harrison, was mooted by James Tobin in 1972 in a now famous lecture at Princeton shortly after the US dollar was no longer tied to gold. Tobin’s proposal was a tax operating on a global basis that would dissuade speculators from trying to profit from very short-term rate fluctuations. In perhaps one of the most famous phrases in economics, he said that the point was to throw some “sand in the wheels” of currency markets—a quotation that has been repeated many times since.

It is important to recognise that the notion of a Tobin tax has gone through many different versions since then. We are discussing one such version now, which has surfaced in the form of a generalised financial transaction tax—the FTT. It is a big mistake—although I recognise the motives involved—to call it a Robin Hood tax, because it was produced by a Nobel prize-winning economist with a view to having an impact on world financial markets and we should keep that in view.

There are basically two reasons why an FTT has come back on the agenda. The first is obvious—the need to cope with systemic weaknesses in international financial markets. I know that I am not a substitute for the noble professor of economics who was referred to, the noble Lord, Lord Skidelsky, but JM Keynes made this point very well when he said:

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation”.

He was very good when writing about such issues.

The second contextual reason is obviously the one that we are here to discuss—the specific problems of the EU after 2008 when financial markets had homed in on real or perceived weaknesses of the euro. The report, as has been said, levels an array of criticisms at the proposals for a European FTT made by the Commission a while ago. The report was produced a while ago; it still refers to President Sarkozy, and so on, and a few things have happened since then. As such, it is a valuable contribution to the ensuing debate over those proposals and their subsequent elaboration within EU circles. However, I do not think that it is as conclusive in its critique as the noble Lords who are its authors seem to think.

It also worries me that, in the report, the views of individuals and groups who have clear special interests seem to be given the same weight as those who are likely to be more impartial. For example, in the summary near the beginning, it says that

“leading economists have criticised the concept—

of a European FTT—

“as fundamentally flawed”.

It then says that,

“the financial sector has been fervent in its opposition to the idea”.

Those two statements do not have the same status in my eyes. Moreover, many leading economists, such as Joseph Stilitz, have endorsed the idea of a European FTT, or have certainly stressed that it should be taken seriously.

I would therefore argue in contradistinction to the report that consideration of a European FTT will and should stay on the agenda. President Hollande and Chancellor Angela Merkel both endorse it, as do a number of other eurozone states’ leaders. It is right that the proposals should be further considered and developed and the risks and benefits scrutinised in detail before a decision is taken by the interested eurozone countries who might very well participate in such a tax. The issue of the FTT still needs to be scrutinised but it will stay on the agenda and it is still possible that it could be instituted.

I have one or two questions for the Minister in respect of these observations. First, near the beginning of the report, high frequency trading is discussed. What is the Government’s view on the desirability—which, after all prompted the original work of James Tobin—of throwing some sand in the wheels of high frequency trading? I found the discussion in the report rather inadequate. It does not offer evidence either way; it simply quotes one or two opinions. In my view, high frequency trading is, as the noble Lord, Lord Turner, says, largely socially useless and creates systemic risk in financial markets. I not think that the report discusses this adequately.

Secondly, there is the issue mentioned by the noble Baroness and stressed strongly in the report that if an FTT is introduced, businesses will move away from Europe. I spent some of my academic career studying this issue and I am not at all convinced that the evidence for it is strong. One has to look at it systematically, not just take specific examples. There are many reasons why it would be difficult for financial companies to move away from Europe and get a better financial position, wherever they went, because certain other taxes exist in other areas of the world to which they might move. In June, the Commission looked at this issue in detail and rejected the idea that there would simply be an outflow of companies from Europe. Speaking as a social scientist and an economist, I think that the issue is still much more moot than in the casual opinions which are mentioned in the report. I would like the Minister to comment on that. It is plainly part of the Government’s position but I do not see that there is systematic evidence either way, when one spends some time studying it.

Finally, I ask the Minister to respond to the same question that the noble Lord, Lord Harrison, raised. Do the Government support a global Tobin tax? That was where we started in 1972; Tobin said that it should be a global tax. There seems to be a certain contradiction, as the report says, between the Government’s view of this in regional and in global terms. It is obviously possible not to support a regional tax but to support a global tax but, as the noble Lord said, the Government should decide whether they are a strong advocate of a global tax of some kind. My view is that this debate still has a long way to go and that a lot of work is needed on it from academic economists. We have to look at the whole thing with more scrutiny before deciding on these issues, either regionally or internationally.

My Lords, the national debate on the Commission’s proposal operated at a lower level of academic rigour than what we have just heard from the noble Lord, Lord Giddens. I thought that three myths infected the national debate. First, there was the myth that this was an EU tax, in the sense that it was a tax the proceeds of which would be used to help fund the EU budget. That was widely believed in this country and is completely untrue. There was a gleam in the Commission’s eye but it is clear from the preparatory text and the background that the proposal itself was for a series of national taxes collected by national tax authorities and going into national budgets. That myth produced a very adverse reaction in this country.

The second myth produced a strongly positive reaction. That was the Robin Hood myth: that it was to be a hypothecated tax, which was to be used for international development or to combat climate change. This was completely untrue and it was a bit implausible that at a time of concern about deficits, to put it mildly, Governments would be so altruistic. Anyway, no Government said that they would and the Commission did not propose that they should.

The third myth produced a strongly negative reaction in this country. It was the myth—fed a bit, I fear, by government—that the FTT proposal was a dagger aimed at the heart of London and that it was a malicious proposal from a malign commissioner and designed deliberately to damage the City. Usually, the Commissioner was said to be Barnier, although in fact he was not the commissioner involved at all. This was completely untrue but it was encouraged a bit—possibly because the more ferocious the dragon looks, the more valorous St George must be when he slays it. There was absolutely no doubt that we could slay this dragon whenever we chose, because unanimity is required for tax proposals.

I disagree slightly with the noble Lord, Lord Giddens, on his criticism: “Some FTTs could be quite good, so why were we so against an FTT?”. The members of the committee—I was lucky enough to serve under the noble Lord, Lord Harrison and we were unanimous in producing this report—were not attempting to argue that all FTTs are by definition bad; what we were unanimous about was that this proposal, this FTT, was unwise and unworkable, for reasons that are, to be fair, set out in some detail in the report.

The motivation of the proposal was none of those in our midst; it was, I think, a general wish to see the financial sector contribute in part to the cost of the crisis that it had caused and a particular wish to discourage high-frequency trading as inherently evil. I do not want to cross swords with the noble Lord, Lord Giddens, on high-frequency trading and whether it is indeed inherently evil. I do not think the committee reached a view on that. In fact, I do not think we attempted to reach a view on that issue in this report.

The report quotes someone from the Treasury who says that it is not harmful and it appears to endorse that. It is just an opinion from someone in the Treasury.

I do not think we addressed the issue of whether high-frequency trading is or is not a good thing in this report, but there is no doubt that in the Commission’s mind it is a bad thing and that one of the purposes of this tax is to reduce it.

As the noble Baroness, Lady Randerson, said, the proposal was extremely oddly timed. I do not need to repeat the argument she made so eloquently. Setting out deliberately to reduce EU GDP by, it says, 0.5% seems an odd thing to do at a time of sharp recession. I think that 0.5% seriously underestimates the effect on GDP because the relocation effect was not taken into account in that part of the calculation.

Where are we now? First, I would like to consider whether St George fought well. I fear that I am in the school of the noble Lord, Lord Hannay, on this. I do not think we fought terribly well. I think the arguments we should have used were European Union arguments: arguments about the possibility of having one great financial market between the Asian market and the American market; arguments about London being the candidate; or arguments about damage to London being damage to the EU. I find such arguments play pretty well in many parts of Europe, although not in all. The best argument against a financial transaction tax that we should have used was the EU argument. Instead, we tended to wave the Union Jack, invoke Dunkirk, denounce Barnier and then, on 9 December, tried to make a UK opt-out from an FTT that the others could have if they wanted, a carve-out for us, a condition for our agreement to their move to the fiscal union to which we were urging them to move. It struck me as a really odd position to have got ourselves into.

However, that is all in the past. What do we do now? The dragon is not dead. I can reassure the noble Lord, Lord Giddens, on that. The dragon is alive and well. The noble Lord, Lord Hannay, has read out the European Council conclusions. Since the proposal would not be adopted EU-wide, several member states would instead seek to bring it in among themselves under the enhanced co-operation procedures—that is Article 20 of TEU and Article 329 of TFEU. So the Commission will produce a new proposal, presumably very similar to the one it produced for the Council as a whole. Those who wish to introduce such taxes will aim to agree a common scheme, and they have set themselves a target of the end of the year.

Should we mind? If they succeed, will they just damage themselves? Will the London market benefit at the expense of Paris and Frankfurt and anybody else who joins in? Should we, in the Prime Minister’s phrase, simply roll out the red carpet and cheer? I do not think so. Although our report was written some time ago, the Select Committee thought not. We noted that if the situation, which is now foreseen by the European Council, came about, UK financial institutions entering into transactions with institutions in FTT levying states would still be liable for the tax and if financial institutions from FTT levying states conducted transactions between themselves but in the City of London, they would be liable for the tax. In both cases, it would be for the UK authorities, HMRC, to collect the tax and forward it to the appropriate national fiscal authorities. We did not much like the sound of that. We would land the costs of collecting the tax but no revenue from it and, more seriously, the relocation effect would still be real. There would be a deterrent to transactions here and hence damage to the City. That is why, in our report, we said:

“We urge the Government to work to ensure that UK financial institutions are not damaged, and that UK tax authorities’ workload is not increased, by an FTT introduced by certain EU Member States”.

That seems to me to be the key message we should still be conveying to the Government. It was a point not really addressed, as the noble Lord, Lord Harrison, has noted in the reply we had from the Financial Secretary to the Treasury. In particular, he did not address our concern at the UK having to collect in London a tax from which we would not benefit. I hope the Minister will deal with that point more substantively tonight.

Is the die cast? Are we now out of the game? Is it all over? Can we go home? No. Under the enhanced co-operation procedures which they intend to use we have a seat in the room. Only those proposing to introduce the tax will have a vote but everybody will be entitled to speak and if we want to we can seek to influence what we do. In my view, provided we make EU arguments, not exclusively UK ones, they are likely to listen because the health of the City, as a lot of them recognise, matters to them too. We need to be there, sounding constructive, influencing the debate. I hope the Minister will assure us that is what the Government intend to do as this enhanced co-operation is pursued. I really hope we do not just climb onto our charger and ride off.

I have one additional point. Under Article 20 we do not have to leave the others to devise the tax without any advice from the representatives of the biggest financial market. As the others, possibly a slightly different group of others, go ahead with trying to work out some form of banking union, and they are proposing to do that under Article 127, precisely the same arguments apply. Article 127 is the Council as a whole. We would not be able to vote but we would be able to speak. We could be there. We cannot be the banking capital of Europe and let a negotiation about a banking union in Europe go on without our being there. You have to be in to win. We have got to be there.

The other day, Mats Persson of the Open Europe think tank—who is slightly more Eurosceptic than me and whom I would not normally cite—said of the risk of a eurozone banking union that it,

“is probably necessary in the long term, but is also a potential minefield for the UK. First, will it create barriers to UK financial firms doing business in the eurozone in turn fragmenting the single market? Secondly, will supervision spill over to regulation, with the eurozone effectively writing the rules for all 27 countries?”.

These are extremely good questions and the only way of making sure that the answers the European Union comes up with are the right ones is for us to be active participants. I was worried by the Prime Minister’s delight that he had he managed to strike out from the European Council conclusions all references to a common supervisory structure. They pop up in the eurozone annexe to the conclusions but they are to be discussed and negotiated in full Council with everybody there. I really hope we will occupy our seat and use it well.

My Lords, I shall refrain from giving my usual congratulations to my noble friend Lord Harrison and his committee because this comprehensive demolition of the case for a European FTT is a demolition of the more general case for FTTs other than national ones. I am normally an admirer and fan of the work of the European Select Committee, but not quite so much of one this time.

After reading the report, with its relentless attacks on all the points made for a European FTT, I was reminded of a time in the Ministry of Labour during the Second World War when Ernest Bevin asked for a paper which set out the case for minimum wages in a number of key industries. He received a report from the Civil Service which gave 36 good reasons why it was totally impracticable. He said to the key civil servant, “You are a very clever person. Now give me 36 good reasons why this is a good thing”. He got his way in the end.

I do not know whether or not there are 36 good reasons for this proposal but the case is rather better than the one which is acknowledged by the committee. As others have said—I shall not repeat it—the FTT is not a new idea. After Tobin and as the century went on, the idea was put to one side. Things were going well—financial services were booming in the British and United States centres in particular—and “if it ain’t broke, don’t fix it” was very much the maxim.

However, the world changed in 2008 and that financial model has had a cardiac arrest. At the present time, much of the sector is kept on life support, courtesy of the taxpayer, with the cost of what has had to be done currently estimated at £20,000 per taxpayer and rising. It will cause problems for our children—and perhaps our grandchildren even—in years to come, and what were widely praised innovations and examples of Britain’s creative genius look rather more like seedy scams in the cold light of the experience of the past four years or so. A prized national asset is currently in danger of looking more like a liability.

I will not mention the scandals which seem to arise with some rapidity at the moment, but the sector must expect to come under close, intense, tough scrutiny and pressure. As Vince Cable recently acknowledged, we must recognise the strength of the lobbying that the City and other financial institutions are able to command, which is the subject of various newspaper reports at the moment. However, their trophy room is full of bright ideas that they have shot down which might have had an effect on the way in which the financial sector in London is regulated and works at the present time. I do not want the concept of a financial transaction tax to be put in that trophy room by the successful lobbying for which the City is noted.

Recent examples of successful lobbying include the weakening of the Vickers proposals, the cuts in UK corporation tax and taxes on banks’ overseas subsidiaries, and even the Financial Services Authority has been deployed to oppose the idea of a financial transaction tax.

I concede that the arguments are well set out in the report but perhaps I may address one or two of them briefly. There may be no chance of a global tax, but is there any chance of a global agreement on the environment? Are the United States Congress, the Australians and the Canadians likely to give in on that? I am not sure. They certainly were not at the start, but you have to keep on raising the issues and keep the pressure on. US supporters such as Warren Buffett, Bill Gates and so on continue to make the case for a global tax. I know it is very difficult, but do not give up, because things can change. It is important that we take a positive approach to the idea of a global tax, not a negative one.

The next point is: do not use the US Congress’s position as an excuse for European inaction. Europe still constitutes 30% of world GDP; it may be shrinking as other countries grow at a much greater rate than we do, but it is still the biggest single part of the world economy, if we can call it a single part. Giving a lead, as the EU can do, when it is well judged and well supported, is important. We in this House should not dismiss the argument with contempt but encourage its development in more practical ways.

There is already some development on the argument about how to spend the money raised, some agreements between President Hollande and President Barroso on global solidarity—it is a vague phrase, but we begin to see where it might go. Of the countries concerned, nine are committed, 10 are likely or possible and, as others have said, if we are not engaged they can go ahead without us. That poses all the problems which are the continuing story of the UK in the European Union: are we better inside trying to influence things or do we stand aside through opt-outs? I mention one area which is rather uncomfortable for the Labour side of the House, which is that when Britain was inside the social chapter, it was far more difficult from the union point of view to get anything through than when Britain was outside. I make that point with some discomfort about those years.

The next argument is about the role of London, which could lose a lot of prosperity and work through such a tax. That is a pretty powerful argument against any national tax or regulation. Those winning work are those with the least regulation and taxes. This week, my football club, Manchester United, located itself in the Cayman Islands. Thank you very much to the Glazers for that. They are the latest of many doing that. The search for the cheapest and least regulated jurisdiction is relentless. The concept of the Tobin tax or FTT is to stop that by having a world level playing field, at least to some extent. The quest needs to go on.

The final argument to which I shall labour some opposition is that such a tax will affect growth. That depends on its level. If it is a small tax, I agree that it may not be very effective in raising revenue, but if the levels are modest initially, I do not think that the effect on growth will be as lurid as painted in the report. The FTT is a good, simple idea—very complex to introduce, for sure. I hope that we will encourage work on that good idea rather than add to that list of moribund good ideas on display in some trophy room in the City. Where there is a will, there is a way, and we should not turn back in the search for a scheme that can work globally and that takes on the tax havens which are undercutting nearly all of us in the European Union. There may even be one or two in the European Union who are in the undercutting business.

I finish with a question which is similar to others which have been asked. In the Minister’s view, if there is an FTT in several big countries—Germany and France in particular—does he think that London will lose or gain?

My Lords, I thank the noble Lord, Lord Harrison, for having chaired the committee so effectively and for having produced a clear report on a difficult and—dare I say it?—somewhat tedious subject. It is interesting that the membership of that committee has differing views on the whole Europe issue, but they were unanimous in their view on the FTT proposal. I think that most speakers, though not all, echoed that today, but I particularly appreciated the robust contributions of the noble Baroness, Lady Randerson, and the noble Lords, Lord Hannay and Lord Kerr.

In summary, it is economically flawed as a way of raising taxes, which John Chown, our tax expert, explained very clearly. It does not meet any of its five targets. We know what the residence issue is, and not all but many of the objections there are to a global version as well as to a particular country version. I think that it has now become part of what one finds in parts of Europe—blaming the Anglo-Saxon economic model for all the world’s horrors, such as the banking crisis and the collapse of the eurozone. This is an emotional stick with which to beat the UK. It is mistakenly seen as a form of moral cleansing when people know that the loss of GDP and tax revenue is greater than the FTT would raise, which is surely a foolish position.

It is ironic that the UK has stamp duty which, although it is not an FTT is a tax on securities that works. I happen to disapprove of it because it is simply a tax on everybody’s pension savings. Some time ago, in better days, the Government had a commitment of sorts to abolish it, and I wonder what the thinking is when better days return. There is the irony that the most efficient way of raising tax, at least from the banking sector, is bonuses, where income tax and employer and employee national insurance are a 62% tax charge and where banks are obviously paying little or no corporation tax, given their historic losses. I am not recommending that, but it is a great irony in the whole debate.

The noble Lord, Lord Kerr, made the most important point that this is unfinished business. The proposals for an EU-adjoined country-by-country tax seem to require that the UK, as a third country, collect and pay over the tax when an EU resident in a country that had this was the counterparty in London. That is absolutely not on. I understand that the USA would be treated as a third party in the same way and I think it would tell Europe where to go. I rather doubt that this will ever proceed because I do not think that individual member countries will want to sustain the loss of employment and GDP for very modest tax revenues. It is substantially a propaganda exercise, but the most important issue on which we have not had satisfactory responses from the Treasury is: how are the Government dealing with the potential proposal that there would be a burden, a liability, on the UK to collect the levy on qualifying EU parties?

My Lords, I am grateful to noble Lords for allowing me to speak in the gap. I had intended to speak at greater length, but I knew that I would be detained in a committee elsewhere in your Lordships’ House, which was indeed the case. I shall keep my remarks very brief, as is the convention. I should also say that I am a Member of the European Union Committee which produced this report, and my thanks go to the noble Lord, Lord Harrison, for heading that inquiry and writing the report.

I will confine my remarks very much to headlines, bearing in mind the time constraint by speaking in the gap. First, I agree that the financial transaction tax design, as proposed by the Commission, is seriously flawed. It smacks of being hasty and not well thought through, and it is contradictory in places. It leaves us with doubts about its viability.

Despite the very strong case put forward by the noble Lord, Lord Giddens, I believe that there is a likelihood that financial institutions could migrate and relocate away from the EU to avoid paying the tax. Personally, I am especially concerned that the proposal might lead to a reduction in the GDP within the EU. In fact, the Commission forecast a negative impact of 1.76% of the total GDP in the EU, which it says equates to a loss of €200 billion or half a million jobs. That is not something that one should put aside lightly.

Moving from the general to the particular—and this is a point already made by noble Lords—the implications for the City of London are considerable. As we know, it is the largest financial sector in the whole of the EU and it is a core element in our own economy. In the Minister’s response, I believe that the Government should declare their position on this tax with greater clarity. There is already some ambiguity in this country and elsewhere in Europe; people have talked about “supporting the tax in principle”, and different variants of the FTT have been discussed which leads to confusion and doubt. I turn to the Minister to reassure the Committee that the Government will continue to play a constructive role in this debate. The implications for the EU in general and the UK in particular are too great to allow less than full attention to be paid to this issue. Here I echo the concluding remarks of the noble Lord, Lord Kerr of Kinlochard, in asking the Minister to reassure the Committee that that is the approach that the Government will pursue and that they will pursue it with greater clarity and vigour.

My Lords, I begin by thanking the noble Lord, Lord Harrison, for his chairmanship of the committee, which has produced such an incisive report, and for his opening speech today, which covered accurately the committee’s conclusions on the issue of the tax proposed in Europe. As has been said, some aspects of the presentation by the Commission on the tax have been clumsy in the extreme, giving the committee a fairly straightforward and easy target. But I side with those noble Lords who have spoken today who have indicated that we ought not to drown the concept of this form of taxation, usually termed the Tobin tax, because this particular proposal has relatively few merits.

The noble Baroness, Lady Randerson, mentioned the emotion in Britain about the financial and economic situation in which we find ourselves. She even indicated that it was more intense in Britain than elsewhere. Are we really saying that we are not aware of the emotional responses of the Greeks, the Spaniards and the Italians, just to cite three countries where enormous popular concern has been shown—in Italy leading to the imposition of a Government on a democratic country? Is it surprising that from Europe comes an attempt at a condign punishment on bankers and a challenge to the financial system that has produced these circumstances?

The noble Lord is really taking my words out of context. My very first sentence of significance related to my understanding that there was an emotional attachment to this tax. At no point in my speech did I say that I was opposed to it on a worldwide basis. I explained very clearly that I understood that there was a public popularity for this tax.

I accept that entirely from the noble Baroness. I am grateful for her intervention—but let me respond, if I may. I am merely indicating that this is not just a British reaction but is Europe-wide, which is why we have to put these proposals into some kind of context. People are responding to the crisis that was visited on us four years ago, for which all our fellow citizens, both here and elsewhere in Europe, are paying the price today.

Does the noble Lord not agree that the problems of the eurozone are down to the faulty design of the euro, that the problems of public finances are largely about Governments having been spending too much and not taking a circular view of public spending, and that the problems of the banks are largely the result of money having been too easy for too long in the UK and elsewhere? History shows that banks always start doing foolish things if there is too much money.

If the noble Lord is suggesting that the banks carry no responsibility for the economic and financial crisis that we have suffered since 2008, I am surprised at the proposition. Is he really saying that we do not understand that the massive increase in short-term transactions that rendered the banks so very vulnerable when some of the debts began to be called in—those developments in which bank balances far outweighed the whole resources of the British GDP—did not create a situation of colossal instability? When the financial crisis broke, it is clear that Governments were caught out too and some had somewhat overreached themselves, but as for the British position the problem was the massive drop in tax receipts after the crisis rather than extra spending before it.

The noble Lord seems to be accepting my point that mistaken monetary policy led to bank balance sheets and lending being excessive. These things can happen only when monetary policy is wrong.

Well, my Lords, then the noble Lord has to say that of each and every Government, because each and every society has suffered from this financial crisis and each and every Government were equally guilty of pursuing exactly the wrong framework of monetary policy. I have no doubt that it was the case that from deregulation onwards, Governments lost the capacity for some kind of control of the financial sector. I have no doubt at all that Governments rode the good years with light regulation, which was wished upon them by every area of political opinion in the countries involved. Certainly, that was the case in the United Kingdom. If it is suggested that Labour in government was too enthusiastic about light regulation, we have only to look at what the Opposition were saying to us at that time—that regulation was too tight.

Of course, I accept the strictures of the committee on the limitations of the proposals from the Commission. In particular, I am very grateful to the noble Lord, Lord Kerr, for demolishing some of the myths around that mistaken proposition by the Commission. A passing reference to the fact that the resources would go to the European budget was certainly not the core of the proposal; it was much fairer than that towards the Governments who would collect the taxation.

It has not been mentioned in the debate that the tax would produce vastly greater resources to the taxpayers of each country and the Governments representing them than the existing structures of taxation. Taxpayers think that the financial sector owes them a great deal in terms of the direction of resources. Given that we have had to rob money from our taxpayers in order to sustain banks that are too big to fail, it is obvious that taxpayers expect the Government to take the kind of action which will help to restore those resources to the taxpayer.

The financial transaction tax is at this stage a distant objective. We all know that it cannot be introduced in one country and that it is not likely to succeed within a limited framework of countries—certainly if it were within only the eurozone countries and certainly if it was based upon the principles that the committee has so effectively criticised. The likelihood of it being effective—and looking anything other than being directed at the City of London—would be fairly remote. However, that does not alter the fact that the arguments may change. The United States may change its perspective on this issue. If it were to do so, and if Europe reflected on the concepts of which the committee is critical, the United Kingdom would look very odd indeed if we said that, because of the significance of the City of London and our financial institutions to our economy, we were staying outside any framework for the development of such a tax.

I congratulate the committee because it has identified a rather forlorn initiative which I cannot see making successful progress in Europe because of the faults that have been accurately identified. However, I would be dismayed if the work of the committee led to a position where the whole concept of a financial transaction tax was regarded as completely outwith any government interest or action. I hope the noble Lord replying on behalf of the Government will at least give some hope in that respect.

My Lords, I thank the noble Lord, Lord Harrison, and the Economic and Financial Affairs Sub-Committee for its work and its comprehensive report into a proposed financial transaction tax. I thank all noble Lords for their, in some cases unexpectedly passionate but in all cases interesting, contributions to the debate.

The United Kingdom remains firmly opposed to the European Commission’s proposals for an FTT. It would have significant negative economic impacts on the EU, damaging growth and employment at a time when it is critical for the EU to pursue policies which enhance the opportunities for that very growth and employment. The Commission’s own analysis suggests that relocation of the sector out of the UK, and therefore out of the EU, would, as the committee pointed out, be very significant. That is why we believe that broad-based financial transaction taxes could be contemplated only at a global level. As the noble Lord, Lord Harrison, said and the committee concluded, the proposal is flawed. It would damage our economy at a critical time and it would, as several noble Lords have said, damage the economy of the EU.

The Government agree with the EU that creating employment and delivering economic growth must be a priority during these difficult times. If an FTT were introduced, it would undermine the competitiveness of the EU. It would increase costs for manufacturers, savers and insurers. It would damage up to half a million jobs across the EU according to the Commission’s own analysis.

As several noble Lords have observed, the UK has the largest financial sector in Europe, so this EU-wide tax would disproportionately impact us. The UK would indeed face the most severe impacts, so we cannot support it. Supporters of the tax argue that it will stabilise financial markets and raise significant revenues, but both claims are flawed. As my noble friend Lady Randerson said, there is no evidence to back up the claim that an FTT would reduce market volatility or that it would effectively target the most speculative, risky activity. Like the committee, we are also doubtful of the revenue-raising potential of this tax. Its very significant negative growth impacts would lead to losses in other taxes. Income tax would raise less, as would corporation tax. The proposal requires the abolition of our stamp duty, so £3 billion would be lost to the Exchequer immediately. Overall it is possible that the tax might raise no money at all for the Exchequer. Not only that, it is inefficient. Based on the Commission’s own figures, every pound raised would cost 93p.

For these reasons the Chancellor said no to this proposal, and we will not accept it. Some member states wish to introduce an FTT through enhanced co-operation, as several noble Lords said. We will not join any such move, but before coming to a firm view about whether we should try to block it, we would need to see the detail of any proposal, what the scope of it will be and what would happen to the revenues.

The noble Lord, Lord Harrison, thinks we have been a bit mealy-mouthed in our response. The Government have been clear in our discussions with our EU partners. The UK does not and will not agree to the Commission’s proposal. There has been no ambiguity on the UK position. In answer to the question asked by my noble friend Lady Randerson, it is now accepted, as I think the noble Lord, Lord Harrison, said, that unanimity on this dossier will not be achieved, which is why there are moves by some member states to seek the introduction of an FTT through an enhanced co-operation procedure, to which I will return in a moment.

The Government fully believe—and perhaps in this, at least, I am in line with the noble Lords, Lord Monks and Lord Davies—that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and the wider economy. In his first Budget, the Chancellor introduced a bank levy with effect from 1 January 2012 that is designed to raise £2.5 billion each year. The UK has no objection to financial transaction taxes in principle. We have one in the shape of stamp duty, to which my noble friend Lady Randerson referred. We continue to be engaged with international partners on this issue. We would consider any proposal before forming a judgment. However, we think it is unwise to institute any FTT unless it is done globally due, as the noble Lords, Lord Hannay and Lord Davies, said, to the risk of activity relocating to jurisdictions not applying the tax, but it was clear from discussions at G20 meetings last year that the necessary international consensus does not currently exist.

The noble Lord, Lord Harrison, explored the impact on the UK of a euro area-only FTT. As I think I have said, no proposal for a euro area FTT has been tabled, but we are aware that France, Germany and Austria have outlined their support for using enhanced co-operation. Before taking a firm view, we would need to see the detail of any proposal, including its scope and what the revenues would be used for, so the Government continue to discuss this through the relevant EU fora. FTTs have been on the agenda at recent ECOFIN and European Council meetings. The UK has taken a full and proactive part in discussions, and yesterday the Financial Secretary affirmed the Government’s opposition at ECOFIN. Specifically to the noble Lord, Lord Kerr, I say, yes, we will continue to engage in a reasonable way. Nine or more member states can submit a proposal for enhanced co-operation to the Commission. We cannot assess how much the UK would be affected until we see what any proposals are. It is important, as ever, for us to be involved and to engage with the process to ensure that we are not disadvantaged.

The noble Lord, Lord Hannay, asked why the Government were so confident that there would be no negative impact on the UK and the noble Lord, Lord Monks, asked a similar question. The Government accept that a euro area FTT would impact the UK economy but, as I have said, no proposal has been tabled so we really cannot speculate yet on how it would impact on us.

I think it was the noble Lord, Lord Kerr, and it was certainly my noble friend Lord Flight, who asked whether we could be forced to collect a euro area FTT on behalf of other Governments. No, we could not be forced to administer a tax on behalf of another Government. As with any other tax, the UK tax authorities could be asked to assist other EU tax authorities in collecting known tax debts from specific taxpayers.

The noble Lord, Lord Giddens, asked whether such a tax would impact on market volatility or could be used to reduce it. There is no evidence that FTTs effectively reduce market volatility. In fact, a 2011 report from the Institute of Development Studies, reviewing academic studies on FTTs, concludes that they may in fact contribute to market volatility. He also asked about high-frequency trading, which is a very important and complicated area. In general, the evidence is mixed about the impact of algorithmic trading on financial markets; in fact, research identifies both risks and benefits. Early conclusions from the Foresight programme’s project on computer trading suggest that liquidity has improved, transaction costs are lower and market efficiency has not been harmed by computerised trading in regular market conditions. The project has so far found no direct evidence that high-frequency trading has increased volatility. However, the early work identifies various risks to market stability posed by potential positive feedback loops, as they are called. The Foresight programme’s final report is expected in the autumn of this year.

I want to be clear that I have understood the answer that the Minister has just given to the point in paragraph 128 of the report. I drew attention to that and I was supported by the noble Lord, Lord Flight. In paragraph 128, the report says:

“UK financial institutions entering into financial transactions with euro area financial institutions”—

those that were applying the FTT—

“would still be liable for the FTT, which could be collected through EU mutual assistance for the recovery of tax or as a result of the provisions of joint and several liability”.

I recall that the committee took legal advice. That was not simply our view but our view on the best legal advice of the House. Is the Minister saying that that statement is untrue?

No, my Lords, I do not think I was addressing that point but rather than delaying the Committee this evening, I will look into it and write to the noble Lord. It is a complicated area.

I would like to disagree, quickly, on high-frequency trading and what the Minister seemed to say about it. There is simply an ongoing debate among economists about how you best model it. I do not think it is at all the case that, as he said, the issue is resolved. It is still a matter of ongoing modelling and economists are reaching different conclusions about it.

I hope that when the noble Lord reads my words, he will not see that I said that anything was resolved. In fact, I said that we are expecting a report this autumn, which is not quite the same thing.

Could I mention that the noble Lord, Lord Boswell, the chairman of the committee, in fact wrote to the Financial Secretary on 20 June, posing precisely the question that the noble Lord, Lord Kerr, proposed and which I echoed? However, we have had no reply yet.

I think I am aware of that. I apologise; the letter is still working its way through the system and a response will be sent.

I move on to the issue of relocation, on which the noble Lord, Lord Giddens, specifically challenged the concept that a tax, unless applied globally, would force relocation. The noble Lord, Lord Monks, gave a rather graphic example of how such things can happen—but I am being slightly frivolous. The committee’s report, at paragraph 64, itself refers to the experience of Sweden as an illustration of the risk of relocation. Sweden introduced a 0.5% tax on the purchase or sale of shares in 1984. By 1990, 30% of all Swedish equity trading had moved offshore—more than 50% of it had moved to London—and the volume of bond trading had declined by 85%. That is an interesting answer.

The noble Lord, Lord Kerr, asked about our approach to banking union. That is wide of these evening’s debate, but I will ensure that his comments are heard at the Treasury. I think that my noble friend Lord Flight asked whether we would do away with stamp duty.

There was a commitment at the time of the Conservative Party’s policy considerations a few years ago which proposed to abolish stamp duty—not on property but on transactions—as a tax on savings and pensions.

My Lords, we keep all forms of taxation under review, but compared to the proposed EU FTT, stamp duty is easy and cheap to collect and raises £3 billion a year.

We firmly believe that the financial sector should pay its fair share. That is why we have introduced a permanent bank levy. Our bank levy raises more than the bank levies in France and Germany combined and, as discussed, we already have stamp duty on shares. During these difficult times, the focus should be to deliver growth and jobs. The Commission’s proposal is inconsistent with that objective. It would damage growth and jobs in the UK and the EU; it would risk business relocating outside the UK and Europe; and we therefore continue to be clear in discussions.

I add my sincere thanks to the noble Lord, Lord Harrison, the committee and all noble Lords who have spoken this evening. I am very grateful for the points raised in the debate.

My Lords, I am most grateful to the Minister for answering all colleagues who joined the debate this evening. I am particularly grateful to two of my colleagues from Sub-Committee A, the noble Lords, Lord Dear and Lord Flight, for speaking in the gap. It is one of the joys of the House of Lords that no sooner is one professor of economics unavailable then another springs to his place and offers an adumbration of the points I was making about John Maynard Keynes and James Tobin. Therein lies the reason why this interesting examination of the FTT proposed by the Commission fell at the first hurdle, because in each case—that of Keynes and Tobin—a single objective was being attempted, not the suite of five ideas we were offered by the Commission.

Let me bring joy to the heart of my noble friend Lord Giddens and tell him that in our most recent report, published on Monday, Markets in Financial Instruments Directive II, on which I am sure that the Minister is looking forward to answering later, we analyse the question of high-frequency trading and algorithmic trading and make a distinction between the two. I am pleased that the Minister gave us some prior information about the Foresight group, from which we will hear later. The noble Lord, Lord Kerr, made the point that the committee rejected the proposition for FTT. Others may come to the fore which we will examine.

Finally, if noble Lords are interested in this area, they should read the Commission’s impact assessment, which was dreadful in the way that it castigated and condemned the proposals before us. In the mean time, I am particularly grateful to all those who have contributed to a debate to which we will need to return.

Motion agreed.

Committee adjourned at 7.30 pm.