Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 6:39 pm on 7th July 1997.

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Photo of Mr John MacGregor Mr John MacGregor Conservative, South Norfolk 6:39 pm, 7th July 1997

I begin by declaring my interests as in the Register of Members' Interests and in particular, a non-executive directorship of London and Manchester, a company which specialises in the provision of pensions and long-term savings especially for those at the lower end of the income scale. That is a point to which I wish to return later.

I want first to make three comments about the global figures and especially about the public expenditure side. My first comment concerns the education and health service figures which have already featured in the debate. In my spare time, I dabble in conjuring so I know that one aspect of sleight of hand is misdirection. In his Budget statement, the Chancellor showed himself, for a few hours, to be an expert in sleight of hand, but his misdirection was not strong enough and the replay has given the game away.

An increase in spending for education in schools of £835 million in England for 1998–99 was taken from the reserves. That mirrors almost precisely the figure that my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the previous Chancellor, introduced in his Budget last November for this year, 1997–98. The increase for patient care services, about which the Secretary of State for Health talked when opening the debate, is £1.2 billion for 1998–99. My right hon. and learned Friend, in November last year, announced for this year an increase of £1.6 billion for patient services. It is no good for the Secretary of State for Health to concentrate on what he describes as fraud measures and other savings of that sort because my right hon. and learned Friend had a figure of £525 million for increases in patient care resulting from efficiency savings this year in his Budget announcement last November.

I find it astonishing that so many Labour Back Benchers, at the end of the Budget statement, cheered vociferously the increases in expenditure on education and health when they railed against the increases that my right hon. and learned Friend the Member for Rushcliffe announced last November. I remember some of them, who were then in local government, saying how deplorable the increases were and how much they would affect services in their council areas. Why, when they heavily criticised the figures then, did they cheer the same figures for next year when the Chancellor made his statement? I think that one of the reasons was their newness and naivety. They will very soon discover that the Budget was sleight of hand and they will rumble it. They will discover that the figures that they thought were so tremendous were exactly the same as the figures we had. That may be the way in which the Labour Government show that health and education are their priorities. We had exactly the same priorities and exactly the same figures.

My second point—I am sorry that the Chief Secretary to the Treasury has left because I wanted to direct it particularly to him—is that those two sums are taken out of the reserves. That leaves the reserves for 1998–99 very close to the reserves that my right hon. and learned Friend the Member for Rushcliffe had for this current year—£2.8 billion for next year and £2.5 billion for this year. There is, however, a crucial difference, which is that my right hon. and learned Friend was making his provision in November last year, quite close to the new financial year. This time, the figures are being taken out of the reserves many months before the financial year begins.

As a former Chief Secretary. I say to the present Chief Secretary that he is treading on very thin ice because he has given himself little scope for dealing with all the issues—including inflation, but there will be many others—that will come to him between now and November. He is taking great risks with the reserves. One heave from the social security budget and he will go under the ice because he is now very much at the mercy of the social security budget. He will discover, if he does not know already, that that budget can move up very quickly in unpredictable ways. He must be extremely grateful for the measures that we took as a Government and in particular for the measures taken by my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) to control the social security budget.

Another sleight of hand by the Labour party is that the Chancellor and the Chief Secretary are continuing a number of those measures in the coming year and they will have to take legislation through the House to carry them through. I suspect that many Labour Back Benchers have not yet realised that. The danger comes from the fact that the decisions have been taken so long before the financial year begins.

My third and final comment on the global figures, because of the time shortage, is on the great new innovation of the five-year deficit reduction plan. That may be a good title. I was listening to the Budget on the radio and commenting on it as the Chancellor was announcing it. I had in front of me the five-year deficit reduction plan of my right hon. and learned Friend the Member for Rushcliffe, which was on page 17 of last November's Red Book. There is nothing new. The only difference is that the deficit reduction appears to be coming down rather more sharply, and I welcome that.

The major cause for that reduction, however, is the strength of the economy and the buoyancy of tax revenues. That is detailed in the Red Book—or the White Book, or whatever we call it—where the figures clearly show that the increase in revenue is by far the biggest element in the public sector borrowing requirement coming down. Again, that is a helpful inheritance from the previous Government. Given the Chancellor's strategy of taxing now and spending later, the deficit reduction plan is the one plan that I expect to go out of the window. I believe that we shall find that to be true in future years.

Another illusion in the Budget is that it is a Budget for manufacturing industry. I know that the Chancellor emphasised that and for a brief moment, some people in industry were fooled when they first heard the announcement of the reduction in corporation tax. It is clear now, however, that the reduction in corporation tax is dwarfed by what industry will have to contribute to the windfall tax and by the advance corporation tax bills. It will also be dwarfed by the higher interest rates that we shall see shortly and by the effect of the level of sterling. This Budget is certainly not one that is good for industry and investment in industry because most of the pain is being taken by industry.

Like several of my right hon. Friends, I have argued for some time that this is an unnecessary Budget in that we did not need a Budget at this time. One effect of the timing, which I am surprised has not been commented on much so far, is that as this Budget is the second in a single year, we are getting two tax takes in one year. That is especially true of fuel duty.

In the November Budget, my right hon. and learned Friend the Member for Rushcliffe announced a 5 per cent. increase in real terms in fuel duty over a year. This Budget has added another 6 per cent. in real terms so that we now have, instead of an increase of 3p per litre on petrol in one year as my right hon. and learned Friend originally intended—an increase of 5 per cent. in real terms—a 7p per litre increase in one single year. That means a big increase—£730 million in tax revenue compared with £230 million which was the original anticipation. The increase will have a substantial effect on rural areas which will increasingly come through. It was unnecessary to make that second tax hike in a single year.

As I have argued that this is an unnecessary Budget, I cannot object to the fact that the Chancellor introduced many reviews. I know that he has been criticised for the fact that many aspects of the Budget proposals are simply reviews, but I fully understand why he could not introduce changes in some of the areas that he is reviewing. He simply did not have time, which is another reason why it was a great mistake to have a Budget so soon. I accept, however, that it is right to indicate reviews and to take one's time in trying to reach conclusions on them. It would have been very much better, however, if the Chancellor had done that in relation to advance corporation tax, for example, to which I shall refer in a moment.

I now turn to two of the reviews, both of which deal with savings, and this is the main substance of what want to say tonight. I make it clear that on the savings front, there are two aspects of Labour policy that, in principle, I welcome. The first is the suggestion of a two-rate capital gains tax—short-term and long-term—and the second is the individual savings account. I welcome those aspects in principle.

On the capital gains tax review, I have long felt that the sensible solution to capital gains tax—I entirely agree with the principle of taxing short-term more heavily than long-term and of taxing long-term capital gains very lightly—combined with the need to simplify capital gains tax, which is still very complicated, is tapering. I was never able to persuade the Treasury or the then Chancellor of that when I was there, and I never accepted all the arguments against it. I still think that to tackle capital gains tax on lines similar to the tapering out of inheritance tax—removing the tax altogether after a given number of years—would be a much simpler way to deal with CGT and its inflationary element than the present complex system. I hope that that will be considered seriously in the CGT review.

I want to concentrate on retirement. Most hon. Members know about the problem of funding pensions for future generations. We all know about the demographic time bomb. While we are better placed than the rest of the European Union put together, in that we have £650 billion of funded occupational pension schemes, that will not be enough to provide the sort of pensions that people increasingly look to on retirement, given higher standards of living throughout their working lives. We all know that those are the big issues.

I am astonished that one of the Government's first acts was to go entirely in the reverse direction and hit pension funds and pensioners, both current and prospective. That flies in the face of the general consensus that was emerging on pension reform. The right hon. Member for Birkenhead (Mr. Field) has referred to the matter on several occasions. He must be feeling pretty sore at the way in which he has been so undermined so early by that act when the need lay in the opposite direction. We all know that we need to encourage many more people to make much bigger savings at a much younger age for their retirement, and that the state pension scheme will not suffice.

The Chancellor's argument that dealing with advance corporation tax as he did will help investment was bogus. It will have the opposite effect. It was a cloak for his desire for extra revenue, but what an extraordinary way to raise it. The fact that £5.4 billion per annum will be taken out of pension funds, institutions and elsewhere can only damage pensioners. I note from the Red Book that almost four fifths of the revenue from the abolition of tax credits will come from pension funds and the life assurance industry. That means long-term savings. I shall briefly spell out the serious implications of that.

First, there are company pension funds—occupational pensions that are final-salary schemes. The Chancellor tried to justify the move by saying that such schemes were in surplus, that some had had contribution holidays and that they could therefore easily afford the tax. It is true that many occupational pension schemes are in surplus, but those surpluses will not last. A large income reduction will be taken annually from those funds. In the not-too-distant future, even funds in surplus will face problems.

Many occupational funds are not, or are hardly, in surplus. I have seen estimates that suggest that up to half of them will go below the minimum funding reserve soon. They will soon face serious challenges. A decision to top up from employers would take from the resources available to companies for other purposes. One implication of that is lower investment—precisely the opposite of what the Chancellor said that he was doing. The alternative is that the pension funds will seek higher dividends from companies to keep the income flow coming through and maintain the level of pension funds. If that happens, it will again be at the expense of the what the Chancellor seemed to want—more investment by companies rather than higher dividends. Again, he will not achieve his objective.

Whatever company pension schemes with final-salary, defined-benefit schemes do, the effect will be to accelerate the move away from such schemes. I think that that is inevitable, but to accelerate it is damaging because there can be no doubt that final-salary, defined-benefit schemes are best and give the best results for employees. I would not be at all surprised if most final-salary company pension schemes moved, for new employees, towards being money-purchase or defined-contribution schemes. That is one direct result of what the Chancellor has done.

The hon. Member for Gordon (Mr. Bruce) mentioned the position of local authority pension funds. I agree that many local authority funds, which are often not clearly in surplus, will face the choice of reducing their employees' pensions—I will be interested to see how Labour Members react to that—or of increasing council tax to fund their pension schemes. That is another implication of that ACT move that did not come out at first because no one understood what the Chancellor was doing.

The most serious implication is for people with personal pensions and group money-purchase schemes. They have no way out. Their ultimate pensions depend entirely on the size of their individual investment funds. Overall calculations are difficult because individual funds differ, but it is clear that something like 10 to 15 per cent. a year more in contributions will be required from individuals if they are to maintain their pensions. It will vary depending on age and circumstances, but it will certainly be substantial. To maintain their pensions, they face what is in effect a significant tax on them because they will have to raise the higher sum themselves from their income. If they do not, their pensions will be reduced when they retire.

What will the Government do about the state earnings-related pension scheme? If the impact on personal pensions is what I have described, many people will not find it so attractive to stay in such schemes. The Government have not yet addressed that implication. Above all, at a time when we all acknowledge that we need to encourage millions more people to put much more money into retirement schemes at a much earlier age—something that I thought that the Government supported—I find it astonishing that their first steps are in the opposite direction.

I welcome the review of individual savings accounts. I am on record in pamphlets and speeches as recommending something along those lines. As we need to encourage individuals, including people at the lower end of the income scale, to save more for their retirement, it makes more sense to give tax relief to schemes that encourage them to keep their money in savings for a much longer period. One of the disadvantages of tax-exempt special savings accounts and personal equity plans is that they do not do that. With TESSAs, savings come out after five years and there are other problems. With PEPs, savings can be withdrawn at will.

I favour the principle of a review but have two warnings. First, it is important to allow the holders of existing PEPs and TESSAs to continue to have the tax reliefs available to them through those until the completion of the TESSA or PEP involved. To do otherwise would be to have encouraged people to go into the schemes and then to have changed them halfway through.

Secondly, if reliefs are passed into individual savings accounts, as seems to be suggested by the press releases so far, there is an important implication for the permitted ceiling. I am worried about the emphasis on encouraging people in the lower earnings range to be more involved in individual savings accounts. I agree with the principle, but I am worried about it being done at the expense of everyone else. I hope that this is not right, but there was a hint that it would be done by putting a sharp ceiling on the funds that one could hold so that people with significant PEPs could find that the successor individual savings accounts were nothing like as attractive as what they have now. If that were to be the case, it would be a backward step.

I am also worried that the annual ceiling that people are able to contribute to individual savings accounts may be lower than the current PEPs one of £9,000. If that happened, it would be a retrograde step because we need to be concerned not just about those on lower incomes who are saving for retirement, but those on middle incomes.

I for one would not object to an individual savings account, subject to those serious reservations. I certainly would not object if the holders of such accounts had to keep them for a good deal longer than five years—they should hold them until retirement. Above all, one of the most serious objections to the Budget is that if there are to be changes to individual savings accounts and provisions for retirement by 1999, the steps taken on ACT are the most disastrous run-in to those changes.