Clause 27 - Commencement
Child Trust Funds Bill
11:00 am
Mr David Laws (Yeovil, Liberal Democrat)
Amendments Nos. 145, 147 and new clause 5 should be taken together, because amendments Nos. 145 and 147 are essentially enabling mechanisms for new clause 5. New clause 5 invites the Treasury to lay before each House of Parliament a report setting out the Treasury's estimate of the net increase in saving that will result from the provisions of the Act. There was a significant exchange between the Minister, her officials and the Treasury Sub-Committee on this matter. I have given the Treasury Sub-Committee enough publicity during the course of the Committee hearings, so I will not go over the questioning once again, including that by the hon. Member for Bury St. Edmunds (Mr. Ruffley).
We detected an unwillingness—although no more than that—on the part of the Financial Secretary and her officials to indicate whether they thought that the Child Trust Funds Bill would work in practice. I recall that the Financial Secretary talked about evidence-based policy making. However, policy making in respect of the Child Trust Funds Bill does not appear to be evidence-based at all, but rather based largely on speculation. Surely, if the child trust fund account is to be of any success at all, we must have not necessarily a target for additional saving—the Minister said that she does not want to get tied to that, which I understand, given the relative failure of many other Government targets—but an impression of how much the Government believe the measure will affect the total stock of savings in the United Kingdom. We have no estimate of that at all. If this is evidence-based policy making, the Government will have done work on how much additional saving will result from the Bill. Otherwise, why would we need it at all? If we simply wanted to give a stock of financial assets to a young person at the age of 18, then, as the Institute for Fiscal Studies has pointed out, this convoluted mechanism would not be needed—we could send them a cheque at that age. We could improve financial education through the education system, which might be more effective than allowing parents to manage the accounts, presumably, as we have heard, with little involvement on the part of the child.
Before the Bill is enacted, the Government owe us an explanation of how much effect the fund will have on savings, and of the basis for such an estimate. I hope that the Minister will touch on the implications not only for child trust fund holders' savings, but for the national balance between savings and investment.
It will occur to many Committee members that the Government do not have any of their—or our—money to place in the child trust fund accounts and boost individual savings. Due to the huge public borrowing racked up by the Treasury, the Government will have to go to the international financial markets to fund the scheme and, presumably, issue gilt-edged stock. The Minister will borrow money, presumably for five or 10 years, to place in the trust fund accounts on behalf of the trust fund holders. I have not checked the yield on gilts today; perhaps it is 5 per cent., or something of that order. Then she will invite child trust fund holders to invest the money. Some may invest in deposit accounts, but unfortunately they will be borrowing at 5 per cent. and depositing at perhaps 3 or 4 per cent. Others may be persuaded by the Financial Secretary's enthusiasm for equity investments, from which they will hope for yields of 6, 7 or 8 per cent.
The Government are inviting society to take a huge punt—to borrow money from the international financial markets at 5 per cent. and invest it in equities, in the hope that they will go up. If that works, it will be fantastic, although the money borrowed would have to be repaid in future years. The savings would not be net savings, but short-term savings on long-term debt. We would be borrowing money in the long term and investing in equities in the short term, hoping to make money. However, if the equity market were to fall, as it has in many countries including Japan in recent years, we would increase our debt as a society, borrowing at about 5 per cent. and investing in equities that go down. The Minister may be inviting us to take a massive punt on which we may lose money.
We have invited the Minister to say how much additional individual saving will be initiated by the Child Trust Funds Bill; we also ask her to consider the implications for savings in the United Kingdom as a whole, and to remind us that to put the money into the child trust fund accounts as savings, we will have to go out and increase our borrowing. There will be no increase in the net savings of society as a whole merely as a consequence of putting money into child trust fund accounts. It would have an effect only if there was a second-order benefit, and other people decided to redistribute their income between consumption and savings. That means that, for many years to come, we will pay back the interest income on money that is supposedly used to boost savings. If the Minister gets her punt wrong, and the equity market performs unimpressively over the next 10 or 20 years, society will be poorer as a result of the Government's decision to borrow money in a financial market and encourage us to invest it in the equity market.
Those are two fundamental issues about the purpose of the policy, and I hope that the Financial Secretary will accept new clause 5 and agree that we need evidence-based policy making before the Bill is enacted.