Pension Funds No Longer Entitled to Payment of Tax Credits

Orders of the Day — Finance Bill – in the House of Commons at 7:15 pm on 16th July 1997.

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Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury) (EMU and the City) 7:15 pm, 16th July 1997

I beg to move amendment No. 15, in page 12, line 41, leave out from "section" to end of line 42 and insert

shall not take effect until Her Majesty's Government has published an assessment of the effects of this section on local authority finance for 1997–98, 1998–99, 1999–2000 and 2000–01.". The background to amendment No. 15 is our general concern about the Budget's advance corporation tax reforms. Because of anomalies and distortions, there is a good case for tax reform in this sphere. It has become clear in the very short time that has been made available to us that many of the anomalies that arise from the reforms have not been properly thought about. The specific matter that our amendment is meant to highlight is the impact the ACT reforms will have on local government. They will result not in a saving to the public sector but in a shuffling of resources within the public sector.

The reforms will affect a large part of the public sector. About 10 per cent. of the asset value of pension funds under management is accounted for by local authorities, so a large chunk of the pension industry and a very large number of people are affected. About 1.25 million people are paying into local authority pension funds and about 1.6 million people are local authority pension fund pensioners.

We are considering pension funds that are in a state of financial crisis, a large part of which was caused by the actions of the previous Government. Local authority pension funds were allowed to reduce their funding requirements from 100 per cent. to 75 per cent. Such a reduction in the private sector would have been excoriated as highly unethical. None the less, local authorities were encouraged to take that action to reduce poll tax bills. Consequently, many local authority pension funds are in dire financial trouble, which must be repaired.

Furthermore, local authority pension funds now have an additional cost to bear of about £300 million. The Local Government Association provided that estimate and, as it is Labour-dominated, one might assume that the figure is not over-estimated. Where will that additional money be found? How will it be paid for? Full understanding of the matter will not be possible until next March when, according to an answer provided by the Minister for London and Construction to a parliamentary question, an actuarial review is due. By next March or April, therefore, we should have a proper understanding of the state of local authority pension funds after the changes.

Our concern is that the Bill is being rushed through before those implications are properly spelt out. Logically, we can think of various consequences, one of which is that the burden will be borne in reduced benefits by local authority pensioners. Another possibility is that services will be cut to top up pension funds. Another is that the burden will be borne fully by the council tax. One estimate is that council tax might have to rise by, on average, 10 to 20 per cent. to make good the deficit.

As the Government have insisted on capping, it is very likely that local authorities will have to choose painful options. The context in which the very difficult decisions have to be made is that local authorities are, as we know, facing great financial difficulties. Many Labour Members come from local authorities under Labour control and have had responsibility for managing them. They therefore know the difficulties.

We estimate that there will be a real cut in local authority budgets of about 1 or 2 per cent. next year. As a result of questions put to the House of Commons Library, we have established that the impact of higher rates of inflation will be to take out of central Government support for local authorities about £570 million this year and double that next year. The Audit Commission report published this morning referred to a gap of about £5 billion in local authority capital spending; so the £300 million, which is the extra damage being inflicted on local authority pension funds, comes on top of considerable difficulties.

We appeal to the Government to give us a clear understanding of what the burden will be and how it will be paid for. Also, we want to hear that local authorities will be recompensed for the additional burden they will have to bear. I commend the amendment to the Committee.

Photo of Mr John MacGregor Mr John MacGregor Conservative, South Norfolk

I support the amendment. I know that the Committee wants to make progress, so I shall be brief.

I was so concerned about this part of the Budget proposals—as I am about all of those that affect pension funds and ACT—that I got in touch with the chief executive of Norfolk county council straight away. He informed me that, although it is a bit early for the council to be absolutely sure and that he hoped to have an actuarial view in the early autumn, his current assessment is that the change will require an additional contribution of £5 million a year from the county council for one pension fund alone to meet the extra bill for county council employees. That would be the current employer's contribution rate.

In accordance with the relevant regulations, the next effective date for increased contributions is April 1999. That seems to reinforce the point made by the hon. Member for Twickenham (Dr. Cable). There is great concern about what will happen in 1999 and what the effect will be by then of having to meet extra contributions earlier. County councils have very real concerns, and it is likely that the additional cost will have to be met from increases in council tax. It is therefore important to sort the matter out now so that county councils, local authorities and others know where they stand. I strongly support the amendment.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

I support the amendment. There is no doubt that all local authorities with funded pension schemes have faced an immediate and large cut in their pension fund income. That started from the actual date of the Budget, so it is already happening. The size of the cut is open to dispute, but it certainly amounts to several hundred million pounds a year.

The answer to a written question asked by my hon. Friend the Member for South Suffolk (Mr. Yeo) states that the local government pension scheme, to which I understand most local authorities belong, has an annual income of some £2.1 billion. If all that were invested in UK equities, the change would mean a drop in income of some £400 million a year. That may be unrealistically large, but even if we assume that only 60 per cent. is invested in UK equities, it still means an annual reduction in income of some £250 million.

My county, Somerset, has estimated that it faces having to make up a shortfall of some £2.1 million. That is for the Somerset fund as a whole, which includes the district councils. Devon county council reports a drop in income of at least £3.5 million in a full year.

The Local Government Association wrote to the Government estimating the drop to be about £300 million a year, and made the good point that it would be quite irresponsible to ignore the matter now. Government advice appears to be to ignore the problem at the moment and simply roll up the deficit in the hope that the Government make good the shortfall in two or three years' time. I suggest to the Economic Secretary that that is irresponsible. No commercial organisation would dream of ignoring a drop of that magnitude in its income; it would reserve for it annually. Local authorities therefore face having to make up the deficit by cutting services.

Somerset expects to be rate-capped later this week by Government order, so, even if it wanted to, there is no prospect of its placing the burden on the council tax payer. It has to cut services. Is it the Economic Secretary's advice that local authorities should ignore the consequences of the Budget and the shortfall in their pension funds, either because she does not think it is very important to maintain pension contributions and eventual benefits to members of funds or in the hope that the Government will make up the shortfall in due course? If the latter is the case, will she promise local authorities and the Committee that she will indeed make up the difference, preferably now? If she can provide no certainty this year, will she at least do so in due course?

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I congratulate the hon. Member for Twickenham (Dr. Cable) on managing to get the amendment selected. He has done rather better than the official Opposition who, despite their crocodile tears about this issue, have not been particularly successful in tabling amendments. It is interesting to hear Conservative Members express concern about local authorities—would that they had done so some time ago.

The hon. Member for Twickenham recognises that the purpose of the abolition of ACT is to deal with distortions in the taxation system. He also recognises that those distortions exist. However, the amendment would delay implementation of the clause restricting the payment of tax credits until after the Government had reported on the effect of the change on local authority finances. Were the amendment to be accepted, one effect would be to produce opportunities for pension funds to sidestep the change by getting companies to pay dividends in the meantime. That in itself would add to the distortion with which we are dealing.

I recognise the extent of the publicity about the abolition of tax credits for pension funds. I am aware of the good intentions behind the amendment, but it is wrong to seek to scaremonger. I share the concern about the impact on any pension fund, but we have to take into account the fact that there is to be a revaluation of local authority pension schemes in England and Wales in March 1998. I am conscious that the hon. Member for Gordon (Mr. Bruce) is in his place—in Scotland, the revaluation will not take place until the following year.

There will therefore be no impact on local authority budgets in England and Wales until 1999 to 2000. That means that there is no immediate need to provide increased support for local authorities. Indeed, there will be other factors to take into account, not least a valid point made by actuaries themselves, which is that, because of the changes in corporation tax, actuarial calculations will have to take account of the increased capital values of companies.

I must take up the point raised by the right hon. Member for Wells (Mr. Heathcoat-Amory) about local authority pension funds investing all their reserves in equities. That is unrealistic. I recognise that the right hon. Gentleman acknowledged that.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

I specifically did not assume that all the funds were invested in UK equities. I made a rough calculation on the basis that only 60 per cent. were—a fairly modest figure. Will the Minister give her estimate of the collective drop in income experienced by local authorities as a result of the Budget? She must have done that work. Her officials must have advised her during the planning of the Budget. The Committee would be grateful if she would impart the information, in the spirit of openness.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury 7:30 pm, 16th July 1997

I am sure that the right hon. Gentleman is being mischievous rather than naive. He is well aware that it would be bizarre to attempt to second-guess what will happen in equities markets. If I could do that, I would probably replace Mystic Meg on the national lottery programme.

One important effect of the abolition of tax credits is that it allows companies to take decisions on their future performance and to invest from retained profits, leading to growth in those companies. That growth will result in better dividends.

There is a bizarre obsession with the short term here. We are talking about a situation that will not come to fruition until 1999–00. The right hon. Gentleman invites me to say whether the Government are ignoring the advice of local authorities. It would be foolish for the Government to jump to conclusions before the revaluation of pension funds in March 1998—March 1999 for Scottish local authorities. I am surprised that someone of the right hon. Gentleman's experience should make that point.

The right hon. Member for South Norfolk (Mr. MacGregor) talked about increases in council tax bills. He is falling into the same trap as the right hon. Member for Wells, trying to extrapolate figures that no one can know until after the revaluations. After those revaluations next spring, actuaries will have to take into account the capital values of companies.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

The Minister is making an interesting point, saying that we should not worry about this until the actuarial revaluations have been done. Does she not acknowledge that, when a tax relief that has been in place for many years is removed, it is a reasonable assumption that contributions will have to go up? Will she give an assurance that, if local authorities have to find extra money, the Government, who control 85 per cent. of their revenue, will make up the difference, or at least undertake to take it into account?

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

The hon. Gentleman makes a valid point, but there is more to the revaluation than simply looking at the impact of the abolition of tax credits. Capital valuations also have to be taken into account. Any Government reviewing local authority settlements have to consider the broader picture. We shall do that in due course.

I therefore regret that it is not possible for the Government to accept the amendment. I hope that it will not be pressed to a Division.

Photo of Vincent Cable Vincent Cable Shadow Spokesperson (Trade and Industry), Shadow Spokesperson (Treasury), Liberal Democrat Spokesperson (Treasury) (EMU and the City)

We intend to press the amendment to a Division, because we do not believe that we are scaremongering by raising our concerns.

One of the useful aspects of this short but focused debate has been the additional colour that has been supplied. We have heard from Norfolk and Somerset, where councils are directly affected. Yesterday, Oxfordshire county council, which is controlled by Labour and the Liberal Democrats, produced a report estimating an additional £4 million cost resulting from the measure. Council treasurers throughout the country, who are not of any political leaning, are expressing great concern about the measure and the loss of income that will result from it. They want reassurance about how they are to deal with it when the time comes.

My hon. Friend the Member for Gordon (Mr. Bruce) has already said that, although an actuarial analysis will be made in due course, there will be a loss of income. That is why we want to push the amendment to a Division.

Question put, That the amendment be made:—

The Committee divided: Ayes 176, Noes 313.

Division No. 60][7.34 pm
Ainsworth, Peter (E Surrey)Gillan, Mrs Cheryl
Allan, Richard (Shef'ld Hallam)Goodlad, Rt Hon Alastair
Amess, DavidGorman, Mrs Teresa
Ancram, Rt Hon MichaelGorrie, Donald
Arbuthnot, JamesGray, James
Ashdown, Rt Hon PaddyGreen, Damian
Atkinson, Peter (Hexham)Grieve, Dominic
Baker, NormanGummer, Rt Hon John
Baldry, TonyHague, Rt Hon William
Ballard, Mrs JackieHamilton, Rt Hon Sir Archie
Beggs, Roy (E Antrim)Hammond, Philip
Beith, Rt Hon A JHancock, Mike
Bercow, JohnHarris, Dr Evan
Blunt, CrispinHarvey, Nick
Body, Sir RichardHawkins, Nick
Boswell, TimHeald, Oliver
Bottomley, Peter (Worthing W)Heath, David (Somerton & Frome)
Bottomley, Rt Hon Mrs VirginiaHeathcoat-Amory, Rt Hon David
Brady, GrahamHoram, John
Brand, Dr PeterHoward, Rt Hon Michael
Brazier, JulianHowarth, Gerald (Aldershot)
Breed, ColinHughes, Simon (Southwark N)
Brooke, Rt Hon PeterHunter, Andrew
Browning, Mrs AngelaJack, Rt Hon Michael
Bruce, lan (S Dorset)Jackson, Robert (Wantage)
Bruce, Malcolm (Gordon)Jenkin, Bernard (N Essex)
Burnett, JohnJohnson Smith, Rt Hon Sir Geoffrey
Burns, Simon
Butterfill, JohnJones, Nigel (Cheltenham)
Cable, Dr VincentKey, Robert
Cash, WilliamKing, Rt Hon Tom (Bridgwater)
Chapman, Sir Sydney (Chipping Barnet)Kirkbride, Miss Julie
Kirkwood, Archy
Chidgey, DavidLaing, Mrs Eleanor
Chope, ChristopherLeigh, Edward
Clarke, Rt Hon Kenneth (Rushcliffe)Letwin, Oliver
Lewis, Dr Julian (New Forest E)
Clifton-Brown, GeoffreyLidington, David
Collins, TimLilley, Rt Hon Peter
Colvin, MichaelLivsey, Richard
Cormack, Sir PatrickLloyd, Rt Hon Sir Peter (Fareham)
Cotter, BrianLuff, Peter
Cran, JamesLyell, Rt Hon Sir Nicholas
Cunningham, Ms Roseanna (Perth)MacGregor, Rt Hon John
MacKay, Andrew
Curry, Rt Hon DavidMaclennan, Robert
Dafis, CynogMcLoughlin, Patrick
Davis, Rt Hon David (Haltemprice)Major, Rt Hon John
Davies, Quentin (Grantham)Maples, John
Day, StephenMates, Michael
Donaldson, JeffreyMawhinney, Rt Hon Dr Brian
Dorrell, Rt Hon StephenMay, Mrs Theresa
Duncan, AlanMerchant, Piers
Duncan Smith, IainMichie, Mrs Ray (Argyll & Bute)
Evans, NigelMoore, Michael
Faber, DavidMorgan, Alasdair (Galloway)
Fabricant, MichaelMoss, Malcolm
Fallon, MichaelNicholls, Patrick
Fearn, RonnieNorman, Archie
Forth, Rt Hon EricOaten, Mark
Foster, Don (Bath)Öpik, Lembit
Fowler, Rt Hon Sir NormanOttaway, Richard
Fraser, ChristopherPage, Richard
Gale, RogerPaice, James
Gibb, NickPaterson, Owen
Prior, DavidTaylor, lan (Esher & Walton)
Redwood, Rt Hon JohnTaylor, John M (Solihull)
Rendel, DavidTaylor, Matthew (Truro)
Robathan, AndrewTaylor, Sir Teddy
Robertson, Laurence (Tewk'b'ry)Thompson, William
Roe, Mrs Marion (Broxbourne)Tonge, Dr Jenny
Ross, William (E Lond'y)Townend, John
Rowe, Andrew (Faversham)Tredinnick, David
Ruffley, DavidTyrie, Andrew
Russell, Bob (Colchester)Viggers, Peter
St Aubyn, NickWallace, James
Sanders, AdrianWalter, Robert
Sayeed, JonathanWardle, Charles
Shephard, Rt Hon Mrs GillianWaterson, Nigel
Shepherd, Richard (Aldridge)Webb, Professor Steve
Simpson, Keith (Mid-Norfolk)Wells, Bowen
Smith, Sir Robert (W Ab'd'ns)Welsh, Andrew
Smyth, Rev Martin (Belfast S)Whittingdale, John
Soames, NicholasWiddecombe, Rt Hon Miss Ann
Spelman, Mrs CarolineWigley, Dafydd
Spring, RichardWoodward, Shaun
Stanley, Rt Hon Sir JohnYeo, Tim
Steen, AnthonyYoung, Rt Hon Sir George
Streeter, Gary
Stunell, AndrewTellers for the Ayes:
Swayne, DesmondMr. Paul Tyler and
Syms, RobertMr. Edward Davey.
Abbott, Ms DianeChapman, Ben (Wirral S)
Adams, Mrs Irene (Paisley N)Chaytor, David
Ainger, NickChisholm, Malcolm
Ainsworth, Robert (Cov'try NE)Clapham, Michael
Allen, Graham (Nottingham N)Clark, Dr Lynda (Edinburgh Pentlands)
Anderson, Janet (Rossendale)
Armstrong, Ms HilaryClark, Paul (Gillingham)
Ashton, JoeClarke, Charles (Norwich S)
Atkins, CharlotteClarke, Eric (Midlothian)
Austin, JohnClarke, Rt Hon Tom (Coatbridge)
Banks, TonyClarke, Tony (Northampton S)
Barnes, HarryClelland, David
Barron, KevinCoaker, Vernon
Battle, JohnCoffey, Ms Ann
Beard, NigelCohen, Harry
Bell, Stuart (Middlesbrough)Colman, Tony (Putney)
Benn, Rt Hon TonyConnarty, Michael
Bennett, Andrew FCook, Frank (Stockton N)
Benton, JoeCook, Rt Hon Robin (Livingston)
Best, HaroldCooper, Yvette
Betts, CliveCorbett, Robin
Blackman, LizCorbyn, Jeremy
Blears, Ms HazelCousins, Jim
Blizzard, BobCranston, Ross
Boateng, PaulCrausby, David
Borrow, DavidCryer, Mrs Ann (Keighley)
Bradley, Keith (Withington)Cryer, John (Hornchurch)
Bradshaw, BenCummings, John
Brinton, Mrs HelenCunningham, Jim (Cov'try S)
Brown, Rt Hon Nick (Newcastle E)Cunningham, Rt Hon Dr John (Copeland)
Brown, Russell (Dumfries)
Browne, Desmond (Kilmarnock)Curtis-Thomas, Mrs Claire
Buck, Ms KarenDalyell, Tarn
Burden, RichardDarling, Rt Hon Alistair
Burgon, ColinDarvill, Keith
Butler, ChristineDavey, Valerie (Bristol W)
Byers, StephenDavies, Rt Hon Denzil (Llanelli)
Campbell, Alan (Tynemouth)Davies, Geraint (Croydon C)
Campbell, Mrs Anne (C'bridge)Davies, Rt Hon Ron (Caerphilly)
Campbell, Ronnie (Blyth V)Davis, Terry (B'ham Hodge H)
Campbell-Savours, DaleDawson, Hilton
Canavan, DennisDean, Mrs Janet
Cann, JamieDewar, Rt Hon Donald
Caplin, IvorDonohoe, Brian H
Casale, RogerDoran, Frank
Caton, MartinDowd, Jim
Cawsey, lanDrew, David
Drown, Ms JuliaKeen, Mrs Ann (Brentford)
Dunwoody, Mrs GwynethKennedy, Jane (Wavertree)
Eagle, Angela (Wallasey)Khabra, Piara S
Eagle, Maria (L'pool Garston)Kidney, David
Efford, CliveKilfoyle, Peter
Ellman, Ms LouiseKing, Andy (Rugby & Kenilworth)
Ennis, JeffKing, Ms Oona (Bethnal Green)
Etherington, BillLadyman, Dr Stephen
Fatchett, DerekLawrence, Ms Jackie
Field, Rt Hon FrankLaxton, Bob
Fisher, MarkLepper, David
Fitzpatrick, JimLeslie, Christopher
Fitzsimons, LornaLewis, Ivan (Bury S)
Flynn, PaulLiddell, Mrs Helen
Foster, Rt Hon DerekLinton, Martin
Foster, Michael Jabez (Hastings)Lloyd, Tony (Manchester C)
Foster, Michael John (Worcester)Lock, David
Foulkes, GeorgeLove, Andrew
Fyfe, MariaMcAllion, John
Galbraith, SamMcAvoy, Thomas
Galloway, GeorgeMcCafferty, Ms Chris
Gapes, MikeMcCartney, lan (Makerfield)
Gardiner, BarryMcDonagh, Siobhain
George, Bruce (Walsall S)Macdonald, Calum
Gerrard, NeilMcDonnell, John
Gibson, Dr lanMcGuire, Mrs Anne
Gilroy, Mrs LindaMcIsaac, Shona
Goggins, PaulMackinlay, Andrew
Golding, Mrs LlinMcNulty, Tony
Gordon, Mrs EileenMacShane, Denis
Graham, ThomasMactaggart, Fiona
Griffiths, Jane (Reading E)McWalter, Tony
Griffiths, Nigel (Edinburgh S)Mahon, Mrs Alice
Griffiths, Win (Bridgend)Mallaber, Judy
Grocott, BruceMarsden, Gordon (Blackpool S)
Grogan, JohnMarshall, David (Shettleston)
Gunnell, JohnMarshall, Jim (Leicester S)
Hall, Mike (Weaver Vale)Marshall-Andrews, Robert
Hall, Patrick (Bedford)Maxton, John
Hamilton, Fabian (Leeds NE)Michie, Bill (Shef'ld Heeley)
Hanson, DavidMilburn, Alan
Heal, Mrs SylviaMiller, Andrew
Henderson, Doug (Newcastle N)Mitchell, Austin
Henderson, Ivan (Harwich)Moonie, Dr Lewis
Heppell, JohnMorgan, Ms Julie (Cardiff N)
Hesford, StephenMorgan, Rhodri (Cardiff W)
Hewitt, Ms PatriciaMorley, Elliot
Hill, KeithMorris, Ms Estelle (B'ham Yardley)
Hinchliffe, DavidMountford, Kali
Home Robertson, JohnMudie, George
Hood, JimmyMullin, Chris
Hoon, GeoffreyMurphy, Jim (Eastwood)
Hopkins, KelvinNorris, Dan
Howarth, Alan (Newport E)O'Brien, Bill (Normanton)
Howarth, George (Knowsley N)O'Brien, Mike (N Warks)
Howells, Dr KimO'Hara, Edward
Hoyle, LindsayOlner, Bill
Hughes, Kevin (Doncaster N)O'Neill, Martin
Hurst, AlanOrgan, Mrs Diana
Hutton, JohnOsborne, Mrs Sandra
Iddon, Dr BrianPearson, lan
Illsley, EricPendry, Tom
Ingram, AdamPerham, Ms Linda
Jackson, Ms Glenda (Hampstead)Pickthall, Colin
Jackson, Helen (Hillsborough)Pike, Peter L
Jenkins, Brian (Tamworth)Plaskitt, James
Jones, Barry (Alyn & Deeside)Pollard, Kerry
Jones, Ms Fiona (Newark)Pond, Chris
Jones, Helen (Warrington N)Pope, Greg
Jones, Ms Jenny (Wolverh'ton SW)Prentice, Ms Bridget (Lewisham E)
Prentice, Gordon (Pendle)
Jones, Jon Owen (Cardiff C)Primarolo, Dawn
Jones, Dr Lynne (Selly Oak)Purchase, Ken
Kaufman, Rt Hon GeraldQuin, Ms Joyce
Keeble, Ms SallyQuinn, Lawrie (Scarborough)
Keen, Alan (Feltham & Heston)Radice, Giles
Rapson, SydStuart, Ms Gisela (Edgbaston)
Reed, Andrew (Loughborough)Taylor, Rt Hon Mrs Ann (Dewsbury)
Reid, Dr John (Hamilton N)
Robinson, Geoffrey (Cov'try NW)Taylor, Ms Dari (Stockton S)
Roche, Mrs BarbaraThomas, Gareth (Clwyd W)
Rogers, AllanTimms, Stephen
Rooker, JeffTipping, Paddy
Rooney, TerryTodd, Mark
Ross, Ernie (Dundee W)Touhig, Don
Rowlands, TedTrickett, Jon
Roy, FrankTruswell, Paul
Ruddock, Ms JoanTurner, Dennis (Wolverh'ton SE)
Russell, Ms Christine (Chester)Turner, Desmond (Kemptown)
Sawford, PhilTwigg, Derek (Halton)
Sedgemore, BrianTwigg, Stephen (Enfield)
Shaw, JonathanVaz, Keith
Sheerman, BarryVis, Dr Rudi
Sheldon, Rt Hon RobertWalley, Ms Joan
Shipley, Ms DebraWard, Ms Claire
Simpson, Alan (Nottingham S)Watts, David
Singh, MarshaWhite, Brian
Skinner, DennisWhitehead, Dr Alan
Smith, Rt Hon Andrew (Oxford E)Wicks, Malcolm
Smith, Angela (Basildon)Williams, Rt Hon Alan (Swansea W)
Smith, Jacqui (Redditch)
Smith, John (Glamorgan)Williams, Alan W (E Carmarthen)
Smith, Llew (Blaenau Gwent)Williams, Mrs Betty (Conwy)
Snape, PeterWills, Michael
Soley, CliveWinnick, David
Squire, Ms RachelWise, Audrey
Starkey, Dr PhyllisWray, James
Steinberg, GerryWright, Dr Tony (Cannock)
Stevenson, GeorgeWright, Tony D (Gt Yarmouth)
Stewart, David (Inverness E)Wyatt, Derek
Stewart, lan (Eccles)
Stoate, Dr HowardTellers for the Noes:
Stott, RogerMr. John McFall and
Stringer, GrahamMr. David Jamieson.

Question accordingly negatived.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I beg to move amendment No. 16, page 12, line 42, at end insert— '(4) Section 468Q of the Taxes Act 1988 (dividend distributions to corporate unit holder) shall be amended as follows—

  1. (a) In subsection (1) at the end of paragraph (b) there shall be inserted—
  2. "or is a pension fund as defined in section 231A(4)"
  3. (b) In subsection (2) the words "or income tax" shall be inserted after the words "corporation tax".".
I should at the outset declare an interest, in that I am a chartered accountant, a member of the Institute of Chartered Accountants in England and Wales, and I write a six-weekly article for Accountancy Age.

The amendment seeks to deal with an anomaly created by clause 19, which has been caused, like so much else in the Finance Bill, by the rushed and ill considered way in which the new Labour Government are proceeding. As such, and in the spirit of ensuring that the House produces well drafted legislation, I hope that the Government will accept the amendment.

The anomaly in question concerns the position of pension funds that invest through unit trusts. Clause 19 prevents pension funds from reclaiming the tax credits on dividend income—an outrageous change to the previous position, which all parties had accepted, that pension funds should be allowed to accumulate assets from income tax-free, thus encouraging the build-up of pension fund assets. As far as we know, it is not the Government's intention to tax other income within a pension fund, such as interest income and income from property. At the moment, all the Government intend to do is tax dividend income received by pension funds.

The problem arises when a pension fund invests in a unit trust that itself invests in bonds or property. Unit trusts themselves are taxable, but pension funds could effectively reclaim the tax by receiving the tax credits attached to the dividend paid by the unit trust. Now that pension funds are no longer able to reclaim that credit, investing in a balanced unit trust becomes unviable for them, because that would now be taxable. However, if the pension fund itself received the income, it would be non-taxable.

If the Government accepted the amendment, it would apply existing provisions in section 468 of the Taxes Act 1988 to stream income paid by a unit trust to reflect the nature of the income it receives, and enable the recipient to claim back only the tax on the income that, had it received such income directly, would not have been taxable. Applying those provisions to pension funds would deal with the problem.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I regret to tell the hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) that I cannot accept his amendment, but I congratulate him, as a new Member, on getting his amendment debated, albeit briefly. However, I do not see too much enthusiasm for his amendment among his hon. Friends. I do not accept his argument about the anomalous position.

I shall go into some of the background to the debate. Authorised unit trusts were introduced as vehicles for investment by individuals, and can be included in personal equity plans. Most PEP-ed investment is in authorised unit trusts and investment trusts. The tax rules are designed to ensure that tax-paying individuals do no worse by investing via an authorised unit trust than they would if they were to invest directly. Those rules involve treating authorised unit trusts like companies for taxation purposes, and the dividends that they pay out to pension funds are treated by clause 19 in exactly the same way as dividends paid to pension funds by a UK company. That is the structure for authorised unit trusts.

I come to my point of disagreement with the hon. Member for Bognor Regis and Littlehampton. I do not accept that the position of authorised unit trusts is anomalous. An authorised unit trust that pays dividends out of income it receives from a mixed investment portfolio is in exactly the same position as an investment trust or any other company that pays dividends out of profits arising from different income sources.

Furthermore, most pension fund investment through unit trusts in real property is done through unauthorised rather than authorised unit trusts. The treatment of interest and rental income flowing through unauthorised unit trusts to pension funds will not be affected in any way by our proposals. It is now open to many pension funds to invest through pension fund pooling vehicles—a type of unit trust that receives a completely transparent tax treatment.

The justification for the amendment is not clear. I know that the change has been touted by the Association of Unit Trusts and Investment Funds, which has written to my hon. Friend the Paymaster General on the subject. However, it is not apparent that the issue is a major one, not least because pension funds can and do invest in real property through unauthorised unit trusts rather than authorised ones.

I can give the hon. Member and the Committee an assurance that we will review the position should compelling reasons emerge why a pension fund investing in property through an unauthorised unit trust or pension fund pooling vehicle might be placed at a real disadvantage compared with one investing through an authorised unit trust. I am sorry that that sounds so convoluted, but it is better to get the clear position on the record.

We see no justification for the amendment, and we do not accept that the change it would make is especially necessary. Pension funds can take action to avoid being disadvantaged in the way that has been suggested. The amendment would also have repercussions, because pension funds would want similar treatment for other dividends, and it would run counter to the whole thrust of the tax credit changes. The Government cannot accept the amendment.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I am grateful to the hon. Lady for accepting that, without the amendment, pension funds will be put at a disadvantage if they continue to invest through authorised unit trusts. The Government's position will be a great disappointment to the industry, because that is another unintended consequence of the proposals, which will require the pensions industry to make sweeping changes to its investment policy as a result of one Budget measure. However, in the interests of later debate, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I realise that the Opposition were anxious to have a wide debate on this issue, and I am willing to allow them as much time as possible. I will take on board any points they make, and sum up in some detail later. I stress that the purpose of removing tax credits is specifically to ensure that we remove a distortion from the tax system. The previous Government started the process, and we seek to promote a tax system that is fairer and that encourages longer-term investment in companies.

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

I am glad that the Financial Secretary will answer the debate in some detail, because we have several questions that remain unanswered. So far, we have been unsuccessful in getting the Government to come clean about what really happened on Budget day to their promises on taxation. More specifically, the Government have not come clean about the damage they have done to millions of people who contribute to pension schemes.

Nowhere was the Government's pledge not to increase taxes more quickly—and deceitfully—broken than in clause 19. I wish to establish beyond dispute that the abolition of dividend tax credits for pension fund contributors was a huge tax increase. From Budget day, all pension funds investing in UK equities suffered an immediate and serious drop in their income. I say immediate because the provision took effect from Budget day.

The Government will get an extra £5 billion a year from the change. There is no magic about that—the money has to come from other people. The new Government have a large majority and can repeal many things, but they cannot repeal the laws of arithmetic. If the Government take £5 billion a year from the income accruing to pension funds, clearly that will have an impact on the millions of ordinary people who contribute to those schemes. They will be hit by an eventual reduction in their pension benefits or by the need to increase their contributions.

I make no apology to the Committee for returning to the stated view of the Government on the effects of their proposals. The words of the Financial Secretary were: The measure"— she was referring to the abolition of advance corporation tax credits— is good for pensions and pensioners… People should understand that our reforms will benefit pension funds."—[Official Report, 3 July 1997; Vol. 297, c. 507.] Those words have gone unamended and uncorrected in the ensuing days, so that remains the official Government view of the effect of these tax changes on pension funds. This enormous tax hit is a benefit for pensioners and pension funds.

It is almost breathtaking that the Government can continue to assert that taking £5 billion a year from those who contribute to such schemes is good for them. If that is new Labour economics, we have been warned.

The Chancellor was hardly any better on Budget Day. He airily dismissed the matter by saying that pension funds were mostly in surplus, so no one would really be any the worse off. I have news for the Government. More than three quarters of UK pension funds are money-purchase schemes. They do not have surpluses. There is no pot of gold in money-purchase schemes that enables the Government to raid them without anyone noticing. The Budget simply reduces the prospective pensions paid for by those money-purchase schemes, or it will require contributors to them to increase their monthly payments.

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Typically, a 30-year-old with such a money-purchase scheme will now have to pay between £12 and £20 a month extra to maintain his or her benefits. To be told by the Government that that change is good for contributors is an insult.

As the hon. Lady is clearly anxious to respond, I invite her to repudiate the words of the Financial Secretary, or to explain how it can be good for someone to have to pay in between £12 and £20 a month extra for the same prospective pension.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I am grateful to the right hon. Gentleman for giving way. I shall deal first with the second point—payments into money-purchase schemes. Will the right hon. Gentleman inform the Committee on what basis his sums were arrived at? Anyone who knows money-purchase schemes knows that there are different impacts at different ages.

Secondly, on the point made by my hon. Friend the Financial Secretary, it is a well known fact that the strength of British companies is mirrored in the performance of pension funds. Indeed, her point is perfectly correct. If companies perform better and are stronger, with more stable long-term growth, that inevitably benefits pension funds. Will the right hon. Gentleman explain why, whenever the previous Government reduced tax credits, there was no mention of pension funds at that time?

Photo of David Heathcoat-Amory David Heathcoat-Amory Conservative, Wells

I am afraid that that simply will not do as an apology or explanation for the extraordinary remarks of the Financial Secretary on 3 July. The Economic Secretary has not explained how it is good for pensions and pensioners to have a sum of £5 billion a year extracted from the schemes.

The hon. Lady asked where my sums came from. I can explain in outline that, if there is a 20 per cent. cut by the abolition of ACT credits accruing to a pension fund, it follows that that income stream, discounted to the present day, has been cut by 20 per cent. Therefore, a pension fund investing purely in UK equities has been affected by that amount.

I generously recognise, however, that most UK pension funds do not invest only in UK equities. I therefore assume, for the sake of argument—the figures have been prepared for me by actuaries and outside commentators—that 60 per cent. is a reasonable figure to assume that many pension funds invest in UK equities. If that is so, the reduction is 12 per cent., not 20 per cent.

It is entirely fair for me to suppose that a man or woman contributing £100 a month to a pension scheme will have to increase contributions by the sum I mentioned. If the hon. Lady has alternative figures, we would be grateful to hear them. There has been a terrible dearth of information about the real reduction in benefits, or the necessary increase in contributions. All we have had is the daft assertion that it is all good for contributors, and that paying in additional sums is somehow helping them to build up higher pensions for their old age.

I concede that a minority of pension schemes are final-salary schemes. Some, at least, have the ability to be in surplus. The National Association of Pension Funds conducted a survey, which showed that most of its members do not have such surpluses, but some do.

The bottom line is that millions of people investing in thousands of pension schemes will have been hit badly and immediately by the Budget. It is deceitful to try to disguise that. I use that word deliberately and with care.

On Budget day, the Government issued "The Pocket Budget", which was designed to be a summary or distillation of what we in Committee know as the Red Book. It is designed to make the Budget clear and easy to understand. It was published so that people could see how the Budget would affect them, and to make it understandable and accessible to people outside.

All are agreed, I think, that the pension fund change was central to the Budget. It is the unexpected tax change in the Budget and the largest one. When it is up and running, it will raise more each year than the windfall tax will raise in total.

The only reference in "The Pocket Budget" to that colossal tax change affecting millions of people is: the Budget… makes other tax changes to encourage companies to invest profits in the future". If that is not deceitful, I do not know what is, especially as it comes from a Government who go on about trust, openness and accountability. Earlier on the same page from which I have quoted, the following is stated: Openness. The Government is committed to building trust. They could have started in the very booklet in which those words appear.

There is nothing in "The Pocket Budget" about the affect on pension funds. There is no figure. Of course there are plenty of figures to show how the money will be spent. Billions and hundreds of millions of pounds bandied about on the expenditure side of the Budget are explained in the booklet, but there is nothing about this huge tax-raising measure on pension funds.

Even the possibility of investment is a smokescreen. I read out the reference that supposes that the entire purpose of the pension fund tax changes is to encourage investment.

That is not true, because many companies will have to pay more into their pension funds now, and as a result will have less to invest. Companies, especially some of the larger ones that still have final salary schemes, will have to make up the lost income with their own contributions; so a company having to make up the deficit will have less money to invest in plant and machinery, not more. Therefore, even the excuse, or description, offered, incomplete and misleading as it is, is untruthful.

I hope that, when the Minister replies to the debate, which she said she would do with some care and at some length, she will agree that that publication is a disgrace. It is published at public expense, yet it is clearly designed to disguise rather than to illuminate the true nature of the Budget.

I have a practical suggestion about how the Government could compensate for the crime. They should certainly withdraw the "The Pocket Budget" from circulation, but does the Minister agree that the members of pension schemes, even at this late stage, have a right to know what has happened to them? The Government are promising a "right to know" Bill in the next Session, and they could start to implement their words now, by giving the members of pension funds the right to know what the Government have just done to them.

Indeed, if the law of Bristol, South is true, and more taxation really is good for pension funds, perhaps the Government will want to send a letter to all pension fund members explaining exactly how good the Budget was for their pension funds and their eventual pensions.

I hope that the Minister will take the suggestion seriously, and use the fact that pension funds write to their members regularly in any case. If the Government were to help with funding, I am sure that the funds could be persuaded—perhaps they should be told—to explain to all members what happened to them on Budget day.

There are several other unanswered questions about clause 19. One concerns the relationship between the clause and the state earnings-related pension scheme. More than 5 million people have opted out of SERPS, and many did so on a calculation of comparative advantage, having measured SERPS against alternatives such as taking out a personal pension.

A particular aspect of that calculation concerns the national insurance rebates that we made available to those who left SERPS and made alternative arrangements. In the Budget, the Government reduced at a stroke the attractiveness of the alternative personal pension, and that has rendered the original calculation invalid.

I am not talking about anyone being missold a pension; I am describing people who were properly, rationally and objectively advised that the SERPS scheme offered less good prospects than taking out a personal pension, helped by the national insurance rebates. The Government have now rendered that advice invalid.

In previous debates, we have heard that the Government will not increase the rebates. It is the Opposition's contention that the Government are guilty of misselling pensions on a colossal scale. I should like the Minister to return to that issue and explain how she can avoid the charge that she has retrospectively let down the millions of people who took a decision about their future pension provision on what has turned out to be a false prospectus.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

It is rather rich for the Opposition to talk about pensions misselling, because they blatantly ignored the pensions misselling that took place when they were in government, and completely failed to take into account the fact that 600,000 people at or near retirement had been missold pensions. The people who were missold pensions under the aegis of the previous Government deserve an apology from the right hon. Gentleman.

Mr. Heatheoat-Amory:

The misselling of pensions is always a serious matter, and the Conservative Government put in place a mechanism to find out what had happened and recompense the victims. I draw a clear and immediate contrast between that and what the Government are now doing deliberately to millions of people, in which the Minister seems to take some pride. I hope that, when she replies to the debate, she will deal with the national misselling of pensions scandal on the part of the Treasury Bench, which is taking place before our eyes.

The Government are attempting a pensions robbery on a scale that makes Robert Maxwell look like an amateur. It means less investment in British industry, lower pensions and higher contributions. Almost the worst of it is that they have tried to cover it all up by describing it as a minor tax change—something to do with company profits. That has now been exposed, and people know what has happened, so I look forward to hearing the Minister's apologies.

Photo of Yvette Cooper Yvette Cooper Labour, Pontefract and Castleford 8:15 pm, 16th July 1997

I have a strange sense of deja vu, rising in the House to speak about pensions and tax credits all over again, but I shall resist the temptation simply to read from Hansard my contribution to the previous debate on pensions.

Again I find it strange, in discussing the tax credits, to listen to Conservative Members talking about their concern for the plight of future pensioners, when they did so little for the future pensioners who suffered so badly from the misselling of pensions. In their objection to the clause, they seem to be trying to claim two things—first, that the tax credit is good for the economy and for investment, so that to abolish it would be terrible for both, and secondly, that to take it away would be bad for future pensioners.

Both those claims are wrong. Is the tax credit really as good for the economy as Conservative Members profess? Consider a company that has made profits. What should it do with those profits? Where should it invest them? Should it give them back to the shareholders, probably including a few pension funds, who are breathing down its neck? Or should it put the profits into investment, into expanding jobs and the future value of the company for those with shares in it, including those very pension funds?

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

Does the hon. Lady not realise that it is not necessarily best for capital to remain within the company where the profits were earned? Surely it is better for the capital to go back into the capital market, and for independent assessors of the best use of it to decide where it would be best invested. That does not always mean that the profits should reside where they were made.

Photo of Yvette Cooper Yvette Cooper Labour, Pontefract and Castleford

That is an interesting claim, which several Conservative Members have made. They seem to argue that capital is always best used by the pension funds. In some cases, it may be. There may be good pension fund managers who are good at investing capital wisely—but there may also, as today's Office of Fair Trading report points out, be some who are not quite so good at making such decisions.

Equally, there may also be managers of companies who are good at making investment decisions. Others will not be quite so good. The problem with the tax credit is that it distorts the decision. Instead of allowing managers, pension fund managers and shareholders to make the best decisions about whether the money should go into investment, into dividends, or elsewhere, the Government and the taxpayer intervene, giving one group a subsidy to shunt the money out as dividends. That does not allow the managers simply to make a balanced decision about what is best.

It may be best to keep the money in the existing company; it may be best to take it out. We should at least let the managers make the best decision, according to the full information that they have about the state of the market at the time, rather than distorting the decision and letting the Government intervene to say, "We know what is best. We shall subsidise a particular use of that money." That is not a sensible or effective procedure for a Government who want to encourage investment and sensible decisions.

The tax credit has been used as a subsidy, and Britain pays out a huge proportion of its national wealth—double the proportion paid out by the Americans—in dividends. That is no wonder, when we have a tax credit that distorts the system. The Americans reinvest an awful lot more into their companies, and that might account for our low rate of long-term sustainable growth.

We have now allowed companies to take their own decisions about where best to spend their money. To balance the removal of the tax credit, we have cuts in corporation tax to encourage companies to make the best use of their resources. Our corporate tax rate is now lower than that of most countries in the industrialised world. That is a positive boost for investment.

Conservative Members argue that the measure is a massive blow to future pensioners, who will suffer terribly. That is a bizarre argument. They say that pension funds should inform all their current members of the potential impact, but how is that impact to be calculated? Surely it depends far more on what happens to the economy over the next five, 10 or 20 years than on anything that happens in this Budget. We should look to the long term rather than trying to pluck figures out of thin air.

The biggest blow to pension funds and the corporate sector in the past five years was the recession, which could have been avoided but was escalated by the Conservatives' mismanagement of the economy. If we really want to protect the future of pension funds, we must take into account the effect of the overall economy on their performance.

Conservative Members seem to have few qualms about triggering another recession. Their position in the run-up to the general election was that the Bank of England did not need to take operational control of interest rates and that no tax increases or cuts in Government borrowing were necessary. They are not quite prepared to commit themselves, but they now seem to be saying that no interest rate increases were necessary.

Given the escalation in consumption, Conservative Members' refusal to act on all those matters would probably have encouraged the economy into another boom, followed by another recession. That would have done far more damage to British pension funds than anything of which they are accusing the Government.

I always wondered why Conservative Governments never seemed all that concerned about escalating into a boom or going into a recession, or about the long-term future of the economy. They did not seem to want to get us out of the boom-bust cycle. It is clear from Conservative Members' speeches today that they do not recognise the impact of the business cycle on pension funds. Presumably they also think that it has no impact on companies or on all the people who lose their jobs. We believe that that is a huge issue.

Labour Members believe that the boom-bust cycle that Britain has been in for so long has had a massive impact on pension funds. That is why the measures in the Budget are based on the long term, and not on the short-term quibbles that we have heard from Conservative Members today. I support the clause.

Photo of Malcolm Bruce Malcolm Bruce Shadow Spokesperson (Treasury)

The hon. Member for Pontefract aud Castleford (Yvette Cooper) has rehearsed arguments that we have heard before. If the issue is so massive, one wonders why it did not manage to get into the Labour party manifesto in advance of the general election. That is what causes so much concern about the proposals and the way in which they are being introduced.

The hon. Lady has advanced arguments that many of us would accept as having some plausibility. They are a matter of opinion, and time will tell whether she is right, but the real concern is that, although the measure was not a manifesto pledge and the issue has not been widely debated, it is being rushed through in a matter of days before people have had a real chance to calculate the impact.

The shadow Chief Secretary has asked questions and expressed concerns that the Economic Secretary refutes. In a sense, that is logical. The right hon. Gentleman says, "We think this might happen"—and the Economic Secretary says, "We don't think so"—and the reality is that we all make a judgment about a dynamic situation the consequences of which we cannot entirely foresee. That justifies the case for fuller consideration of the matter in the context of a general review of corporate taxation, to ensure that we get the balance right.

If I have a criticism, it is not that the measure is fundamentally wrong—it may or may not be—but that the Government are implementing it in such a hurry that nobody has a chance to consider the impact and get the questions aired and explored.

I can testify to the fact that the outside interest groups that are affected have barely had time to digest the complex impact. I have in my hand some suggested amendments that arrived too late to be tabled for debate today. They were sent by some of the people affected who want some answers, but they will not get them unless we manage to bring the matter up on Report, when there is strict timetabling.

I suspect that many people will begin to realise the implications only after the Bill becomes the Finance Act 1997. As has happened so often before, a new Finance Act in 1998 or 1999 will amend the mistakes. That is what we spend most of our time on in Finance Bill Standing Committees, year in, year out, because of the way in which we go about things.

The argument that it is simply a matter of changing the corporate tax system to make it more efficient and to encourage companies to retain profits that would otherwise be paid out in dividends and to invest is not as yet proven or provable. It certainly is not the whole answer, and no Labour Member is suggesting that it is. The hon. Member for Pontefract and Castleford was clearly advancing it only as one of the building blocks of her argument.

It is naive in the extreme to suggest that the measure is merely a change in corporate taxation: it is a form of personal taxation. Closing a tax loophole amounts to putting up taxes and means that people have to pay more. Effectively, therefore, it is a tax increase. As the exchange between the Economic Secretary and the shadow Chief Secretary demonstrated, the impact is not foreseeable and will be uneven. Some pension funds may be able to redistribute their funds in a way that reduces or eliminates the impact, and others may not.

The Government's arguments would have been more persuasive if they had not introduced the tax with effect from Budget day, which meant that there was no possibility of making any forward provision. I understand the reasons for that, but it means that even better management is required, to try to improve performance and offset any possible losses. The reality is that if, as the National Association of Pension Funds suggests, the measure could lead to an average increase of, say, 15 per cent. in contributions for people who are paying their own occupational pensions or personal pensions, with or without employers' contributions, it could easily be the equivalent of 1 p or 2p on the standard rate of income tax, which will be deducted from their salaries to bring their pensions up to the final salary calculations that they thought they were paying for.

8.30 pm

The Economic Secretary and other Labour Members will not be surprised to hear Liberal Democrats saying that it would have been more honest for the Government to put up income tax rather than finding a back-door method of doing exactly the same thing unevenly. Effectively, that is what is happening. My worry is that the Government think that taxing the corporate sector does not affect individual citizens, when clearly it does. Certainly, the way in which this measure is being applied will do so. I might ask the Economic Secretary whether that is wise or whether a compensating adjustment is coming down the track.

The Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field), is charged with a comprehensive review of social security and pensions, which could clearly lead to a recommendation—most of us expect that it will—that individual citizens should make a substantial compulsory contribution to the pensions industry to achieve future top-up pensions to replace SERPS and provide care in the community and for people's care in their old age. As a consequence, the financial institutions will, potentially, have massive additional income. Perhaps they are being persuaded to back off and swallow this measure quietly because of the benefit that may come at a later date.

If that were the case, it would be regrettable, because those are real issues—one for the long term and one for the here and now. The here and now is that people will almost certainly have to find additional money to get the same pension benefit that they started paying for when the tax relief was built in.

I have some sympathy with the argument that tax reliefs are a distortion in the marketplace. I hope, however, that the Economic Secretary will not quite follow the line of argument of the hon. Member for Pontefract and Castleford, who has the ear of all sorts of people who influence policy and who suggests that all tax reliefs are a bad thing and a distortion and should be abolished. Or are only some of them bad?

What is a good or a bad tax relief is a subjective analysis, as is the effect of such reliefs. It has always been an accepted part of Government policy that tax and tax reliefs are not merely revenue-raising powers but are about altering people's behaviour—for example, to encourage saving or to discourage the buying of polluting equipment, and so on. Ministers put forward those arguments on many occasions. Indeed, the Chancellor of the Exchequer chose to argue that the massive and additional increase in the petrol tax in the Budget was an environmental measure. Of course, it was nothing of the kind—it was a revenue-raising measure. The argument used to justify it was that it would discourage the use of cars, which was good for the environment—the consequence is not arguable.

I hope that the Government do not believe that all tax allowances are equally bad. It would be helpful if they gave us a broad indication of which allowances they think are good and which bad, so that we can anticipate those that might be strengthened or introduced and those that might be abolished or reduced. We are all beginning to have to second-guess Government thinking.

This is a serious issue. I do not dispute that the Government have some valid arguments on their side, but introducing the measure at short notice, without full consultation and the opportunity for all the implications to be assessed and for those affected to get answers to their questions, was not wise, desirable or the right way to do things.

I hope that I can give the Government the benefit of the doubt—they thought that in their first Budget they had to do something that would bring in extra revenue, that this was the way to do it and that they were likely to get away with it now. We have on the record Ministers' suggestions that, in future, they intend to consult about tax changes. They intend to have a consultation on the future of corporate taxation. I hope that we will be able to have proper, informed debates in the House and with organisations and interested parties outside it, so that never again will a major tax change, which will bring in £5 billion a year for the foreseeable future, be forced through the House in a matter of days before any of us have had a full opportunity to assess its implications. Fundamentally, that is why we will vote against the clause.

Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North

I should be more persuaded by the Opposition's claim that they are the pensioners' friend if my hon. Friend the Economic Secretary to the Treasury did not have to spend so much of her time clearing up the mess left by the previous Government because of the huge misselling of pensions. I should also be more persuaded if the Office of Fair Trading had not published a report this morning on the nature of the pensions industry and the extent to which it has not been adequately regulated.

Opposition Members have mentioned our manifesto in this and previous debates. I am prepared to give way if they can tell me how many of their 22 tax rises between 1992 and 1997 were mentioned in their 1992 manifesto—I suspect, none.

The background to this measure is this country's imputation system. We attempt to avoid the double taxation of dividends. Other countries do not have the same approach. ACT is a product of our system. For example, the United States does not have our imputation system.

Photo of John Swinney John Swinney Scottish National Party, North Tayside

Is the implication of the hon. Gentleman's opposition to double taxation that he wants to wipe away the double taxation treaties that this country has with a variety of other countries, to try to get some consistency in the taxation system?

Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North

The hon. Gentleman completely misunderstands. The imputation system was designed to avoid double taxation in the sense of taxation when the moneys are in the hands of the company and then in the hands of shareholders when they receive dividends. That has nothing to do with double taxation treaties between different countries.

As the American experience demonstrates, our system is not universal or sacrosanct. The result of our imputation system, however, is that, in the case of pension funds and charities, a tax credit is paid. Base rate taxpayers do not have to pay anything in taxation on dividends because of the system, but pension funds get paid a credit.

As my hon. Friend the Member for Pontefract and Castleford so lucidly explained, that leads to a distortion in the way in which decision makers, such as pension funds, invest. They invest in United Kingdom equities to a greater extent than they would otherwise have done because of the tax credit. It also means—this is one of the themes of the Office of Fair Trading report—

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

Will the hon. Gentleman explain his last statement, which I, and I suspect many hon. Members, do not understand? Given that pension funds receive a tax credit on receipt of dividend income because the tax fund is not a taxable entity, so the interest and property income that they receive is not taxable, how can the imputation system give pension funds an incentive to invest in UK equities—all the income that the funds receive is tax-free?

Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North

I am pointing out that the measure affects the portfolio decisions of pension funds. As we have seen in recent days, the speculation is that pension funds will turn from UK equities, for example, to commercial property, foreign equities or gilts.

The OFT report has underlined that the present system gives protection to inefficient fund managers. We know that fund managers have been able to produce good results and to charge high fees—I must be careful, because of the previous occupations of some Conservative Members—and we know also that fund managers have been able to earn extremely large salaries, even when particular funds have performed less well than funds that have merely tracked the FT stock exchange index. The current system leads to distortions in investment decisions taken by pension funds and to other inefficiencies.

Photo of Mr Denzil Davies Mr Denzil Davies Labour, Llanelli

I do not follow my hon. Friend's argument. It has already been said that pension funds used not to pay tax on dividends, rents from property developments or gilts. In future, they will pay tax on dividends but not on rent from property development and gilts. The anomaly, if there is one, lies in the fact that until now all the investment income of pension funds was tax-free. That has nothing to do with the imputation system.

Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North

I find that intervention helpful. If my right hon. Friend reads the report of my speech in Hansard, he may follow my argument, which I hope and trust is correct.

The economic health of pension funds turns in the long run on the state of the economy. In other words, it turns on general economic conditions, including the stable long-term growth of the economy, and the Government have taken steps to ensure that there will be stable long-term growth. My hon. Friend the Member for Pontefract and Castleford has alluded to some of the measures that have been taken, such as the steps to ensure the operational independence of the Bank of England.

In assessing claims of the losses that pension funds will suffer, we must give some attention to how pension funds are valued, which is on a discounted cash flow basis. In other words, actuaries measure cash assets earned through dividends, which are discounted in accordance with ordinary accounting practice. There is growing pressure from international accounting groups to move away from that approach and to use market valuation, which is to value the assets and then to adjust them, for example, for inflation.

The present method of valuation means that the company that pays a dividend will be treated differently from the company that distributes capital in an authorised way, or which, for example, distributes to shareholders by buying back shares. It seems that the method of assessing the losses that pension funds suffer—there has been wild speculation about this—must be discounted to some extent because of the discounted cash flow method that is currently used in this country to value pension funds.

As far as final salary schemes are concerned, pensioners are protected. It is up to their employer to make up any shortfall as a result of these measures.

8.45 pm

The Budget introduces a cut in corporation tax. There are other benefits for corporations, which, to an extent, will allow companies to make up any shortfall that might occur as a result of these measures. In some cases, companies have been taking substantial pension holidays. They will have no difficulty in making up the shortfall.

Labour has said that, in the long term, there is a need for a new savings account for individuals which will build on the experience of TESSAs and PEPs, and will encourage long-term savings, which would be encouraged through tax relief. I very much look forward to the day when it will be introduced.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

It is always a pleasure to follow the hon. Member for Dudley, North (Mr. Cranston), who always makes my speeches sound interesting.

I was disappointed that the Government felt unable to accept the amendment that I tabled. The measure will cause additional alarm in the pensions industry, as it is still reeling from the disastrous effect of the abolition of credits on dividends. The additional concern—the right hon. Member for Llanelli (Mr. Davies) hinted at this—is whether the Government ultimately intend to tax other income received by pension funds, such as interest income and income from property. They have already broken the principle that pension funds should be tax-free vehicles. The Labour party may now think why not go the whole hog and tax everything that a pension fund receives. That would be a nice little earner to fund the Labour party's next spending bonanza.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

Perhaps the hon. Gentleman will tell the Committee whether in his election manifesto he supported the previous Government's proposal to take away the tax-free contribution of employees' pension contributions. Does he believe that that is an effective way to deal with employees' pension contributions?

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

There was no mention in my manifesto on that issue. I shall continue.

I refer hon. Members to clause 19(4), which provides a definition of income. It says: 'income", in relation to a pension fund, means income derived from investments or deposits held for the purposes of the pension fund". Why does it say "investments" and "deposits" and not simply UK equities? After all, only UK equities are being taxed in the clause. Is this a Freudian slip, revealing the Government's long-term plans for pension funds? The industry, pensioners and people contributing to pension funds would appreciate a statement on that from the Minister—a statement that categorically rules out any intention further to tax pensions in the future, or at least during the lifetime of this Parliament.

The Government's decision to confiscate 11 per cent. of the value of pensions has already had a very damaging effect on confidence—the confidence that people feel when they are paying into a pension fund that was formerly considered a safe haven.

Photo of Professor Ross Cranston Professor Ross Cranston Labour, Dudley North

Can the hon. Gentleman provide evidence to support his claim that the figure is 11 per cent?

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

The same calculations have been used before. It can be assumed, for example, that about 55 per cent. of the assets of an average pension fund are held through United Kingdom equities. If 20 per cent. is applied to that figure, the total is roughly 11 per cent.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton


As I was saying, pension funds were considered a safe haven, but they are now deemed a reasonable quarry for an ever-hungry Labour Government.

The Government have not given enough thought to the severe consequences of their decision to abolish tax credits on dividends. They have not thought about, for instance, the circumstances of someone who is self-employed or in non-pensionable employment and is already paying the maximum 17.5 per cent. of his net income into a personal pension fund. Thanks to this measure, that person will now need to increase his contributions to maintain the value of his pension, but the law prevents him from increasing his contributions beyond 17.5 per cent. if he is to receive a tax deduction. Why have the Government not raised the limit?

I note from page 46 of the Red Book that the Government have considered the impact that the Bill will have on companies. As is made clear in paragraph 2A.7, businesses will have to make higher pension contributions, and that will have an effect on corporation tax receipts. I can only say "Well done" to the Government—but what about the effect on local authorities? Why have the Government not made extra provision for higher local government contributions to employees' pension funds?

What will happen to councils that are already spending up to their capping limits? Should they cut services? Should they make people redundant? Or should they—as the Prime Minister suggested to the House, and as the Economic Secretary to the Treasury reiterated in the debate—simply rely on the fact that local government pension funds are not due for revaluation for a year or two, and do nothing about it until then? Is that the conclusion that the Government reached once they got round to considering the consequences of this measure? If so, I hope that no responsible local authority will follow that advice.

Why did the Government decide to allow higher-rate and basic-rate taxpayers to keep the tax credit on dividends, but refuse to allow non-taxpayers to reclaim it? Was it yet another deliberate attack on pensioners, two out of three of whom are non-taxpayers, or was it yet another unforeseen consequence of an ill-considered and ill-thought-out policy?

This one clause is the most damaging and far-reaching clause in the Bill. It will raise £3.95 billion in 1998–99 and £5.4 billion in 1999–2000. That is more than the windfall tax raises, and it is an ever-recurring annual event. It is equivalent to a 3p rise in income tax. It will result in millions of people paying more into personal and occupational pension schemes, and in companies having to pay higher employer pension contributions. It will take 11 per cent. off the value of the nation's pension fund assets, and it will cause pension fund managers to switch whole swathes of investment—billions of pounds—out of equities and into other assets. As we discovered earlier, they will be transferring their money from authorised unit trusts, for instance.

That will force local authorities to sack staff or raise the council tax. It will undermine confidence in the sanctity of pension funds as a way of saving. It will increase the likely level of state dependency in the decades ahead, which will feature an ever-aging population. It vandalises one of the great successes of the past 18 years of Conservative government—the fact that the country has built up £650 billion in private pension fund assets.

The clause was introduced in a rush, as a wheeze to raise billions of pounds for future spending plans, but its unforeseen consequences are hugely damaging to pensioners and to the country as a whole. I urge hon. Members to throw it out.

Photo of Geraint Davies Geraint Davies Labour, Croydon Central

I would not describe that speech as interesting.

Let us put this matter in context. Who is the pensioners' friend? What legacy did we inherit, and what does that legacy mean for pensioners? On 1 May, we inherited a situation in which Britain was falling down the skills league and the earnings per head league, so that, of the 15 member states of the European Union, only Portugal, Spain and Greece were below us. Was that good in the long term for pensioners investing in UK equities? UK plc became weaker and weaker under the Tories because of under-investment, year after year, in human and physical capital. The big challenge we faced was to put pensions on firm ground for the future.

We also inherited an enormous public sector debt, which we had to control. The Tory legacy meant future tax rises, which threaten future pensions. That is the real economics of the situation. The short-termist, accountancy approach taken by the Conservatives has taken Britain down the economic league of countries. In the present unstable consumer boom, the economy is disabled by undercapacity due to under-investment, and there is a propensity for inflation to increase and for interest rates to zoom up, which is not in the interests of home owners or of investors.

As for Conservatives being the pensioners' friend, we all know that, in the past, because of their economic mismanagement, they increased VAT on fuel, which hurt pensioners, and then tried to do it again. More than half a million people were missold pensions, and that problem was never sorted out. We need no lectures from Conservative Members, given their legacy of short-term chaos and long-term inadequacy.

I have said before and I shall say again that the Chancellor boldly created conditions in which pension funds could prosper. They can prosper only if UK plc is profitable in the long term. The delegation of responsibility for setting interest rates to take the risk premium out of investment in Britain and thus reduce long-term borrowing rates was a great move for pensions. The reduction of corporation tax to the lowest level in Europe, which will make the United Kingdom attractive again for international investment, was another brilliant move, as was the tax reduction for small and medium-sized enterprises. Those changes will help the prospects of pension funds that invest in British industry.

What is advance corporation tax and where did it come from? In the first instance, ACT was a neutral measure to speed up the payment of corporation tax. Under the previous Government, tax credits were used to subsidise dividend payments to pension funds. On the face of it, that seemed very good, but it created a distortion. The judgment about what proportion of operating surplus should go into dividends—into the City—and what should be reinvested in research and development, future products and profitability was distorted in favour of the former. Other major trading nations, such as Japan, the United States and Germany, do not have such a distortion: they invest more in research and development, in innovation and in new products. It is not surprising that those countries are going up in the skills league.

We need to think carefully about the distorting effect of the subsidy and whether it is in everybody's interest, as has been asserted. I suggest that it is not. It may be in the short-term interests of some pension fund managers, but the history of the professionalism of pension fund management in Britain is not inspiring. Many pension funds and managers are characterised by excessive fees and charges and by salaries and bonuses to managers who are incapable of increasing their fund value above the FTSE average.

Most funds do worse than the average. I was on a pension fund board, and anyone who knows anything about the distribution of numbers will realise that that is possible. [Interruption.] Conservative Members laugh. Some of them are obviously in the industry. The board to which I referred employed some managers for a local authority who consistently failed even to track the average, and we changed them.

9 pm

Photo of Graham Stringer Graham Stringer Labour, Manchester, Blackley

Would my hon. Friend be surprised to learn that I was told by the chairman of one of Britain's leading manufacturers that he spent his time trying to hide from the City the amount of research and development that was carried out in that company? If the City had known about the large percentage of potential pension funds being spent in that way, it would have put pressure on him to reduce his company's research and development.

Photo of Geraint Davies Geraint Davies Labour, Croydon Central

Unfortunately, I am not surprised to hear that. My hon. Friend's example is characteristic of the disgraceful activity throughout United Kingdom industry. Before I ran my own business and was in a multinational business, I found that there was an increasing propensity to have short-term financial returns. There was no longer an annual return, because every quarter the marketing and advertising spends, which were strategic investments, had to be cut to hit the City's requirements, its hunger for dividends. As hon. Members have said, such actions were carried out at the expense of long-term strategic investment.

Who is best equipped to make long-term strategic investment in research and development? Is it the people who create profits for companies in the first place, the managers and directors who invest their time, life, skills and energy fighting in competitive markets and delivering returns, or is it the City, which behaves in an accountancy fashion and just wants to drain the lifeblood from British industry?

It is obvious that a balance must be struck between dividends and research and development and reinvestment. The distorting effect of the subsidy has led to inadequate performance by many pension funds, and has allowed massive bonuses and the starvation of companies that want to invest and succeed. The balance is not right for our long-term economic prospects and, therefore for the economic well-being of pensions and pension funds.

The new Government bring with them a new culture to support the one that I have mentioned, which relates to investment, innovation and long-term thinking. It supports company directors and managers who want to succeed and does not simply respond sheepishly to the voice of the City.

In an earlier debate, Opposition Members spoke about the subsidies to private health care. People quoted industry sources which were subsequently shown to be inaccurate by reference to the Inland Revenue. In its own interests, the voice of the pension fund industry is prone to exaggerate the results of the Government's changes. We all know that the predictions about the impact on pension fund values derive purely from a calculation that is based on dividend flows which, in actuarial terms, do not stand up to scrutiny, because they will be unable to account for the likely capital growth of pension funds.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

How does the hon. Gentleman think the capital values of companies are calculated if not from their income flows?

Photo of Geraint Davies Geraint Davies Labour, Croydon Central

It is now acknowledged by consultants in the industry that one has to give some idea of companies' future values in terms of stock market value and the like. That is not ascertained simply from the dividend flow. There have, on average, been large increases in stock value since the Labour party came to power, and those will continue if the Government create an environment, in terms of the Bank of England, research and development and corporation tax, in which we can expect rapid growth of investment and profitability in UK plc.

Future values should be factored in. Basically, the word on the street is that they will now have to be. The hon. Gentleman can use his somewhat simplistic arithmetic in this debate, but in a year or so, that will be inadequate and those changes will be made. Time will tell, but that is clearly the industry's view.

The simple fact is that, again, a small scatter of the Opposition have been cobbled together to talk about the short-term impact, warning that there will be victims, as if there were an election next week and they were still trying to pull themselves together. They are unable to confront the fact that the new Government, unlike the previous one during their 18 years of office, have a long-term policy that will deliver economic and social benefits for pensioners, other people and future generations.

Photo of Mr Peter Brooke Mr Peter Brooke Conservative, Cities of London and Westminster

I am pleased to follow the hon. Member for Croydon, Central (Mr. Davies). To his credit, he has been in the Chamber for much of the Committee, but he repeated the old canard about VAT on fuel hitting pensioners, when pensioners were the one element of the community that were protected from the tax's effect.

I spoke on this subject during the Budget debate. Yesterday, the Paymaster General rebuked us for not raising different points from those that we had made during the Budget debate, on Second Reading or, in the context of this debate, in the pensions debate. Plenty of hon. Friends wish to make new points, so I will confine mine, whether new or old, to three.

Before I do, may I say that it was a pleasure to welcome the right hon. Member for Llanelli (Mr. Davies), who I am sorry has now left the Chamber, to the debate? It is one of the signs of the new Government's overweening confidence that they thought that they could manage without the right hon. Gentleman, who was a distinguished Treasury Minister when Labour was in power before 1979.

First, the Government have given us remarkably little justification for their confidence that, if the payment of dividends is made less attractive, investment will be more likely. In one respect, I am in the Government's debt, as the subject is not one with which I have had to get to grips since I was a postgraduate student at Harvard business school 40 years ago. The baldness of the Government's confidence that their measures will have a particular long-term effect has driven me back this month to the academic literature, even if a fair amount of the latter comes from those modern seats of earning, the business schools.

I have also studied the 1994 Select Committee on Trade and Industry report on the competitiveness of UK manufacturing and industry. Interestingly, there were many fewer and much briefer recommendations in the chapter on the City and industry than in some of the other chapters, but it will not surprise the Committee if I recount that there were charges of short-termism, to which the hon. Member for Croydon, Central referred.

The Procrustean circumstances of the abbreviated and accelerated procedures in the Bill have still allowed me to read "Short-termism on Trial" by Professor Paul Marsh of the London business school, which was published by the Institutional Fund Managers Association, which is regularly quoted in the Select Committee's report, but which effectively finds the City not guilty of the charge as made.

I fear that, due to the accelerated procedures on the Bill, I have not been able to get hold of Mr. David Miles's "Testing for Short-Termism in the UK Stock Market", published in 1992 as Bank of England working paper series No. 4. I am sorry for that failure, but I blame the Government's business managers more than me. It is an omission, because, in paragraph 174 of the Select Committee's report, the argument over whether share prices properly reflected the value of long-term investment is primarily underpinned by Mr. Miles's study. I have already confessed that I have not had the opportunity to read it, but I have been advised that the working paper does not comprehensively underpin the conclusion that the Select Committee drew from it.

Interestingly, one immediate consequence of the Government's actions has been to drive funds out of manufacturing equities and into property, as the hon. Member for Dudley, North (Mr. Cranston) conceded. I hope that the Economic Secretary will say why the Government are so confident about the effects of their measure. In particular, if the Government are wrong, the national price will be heavy.

My anxieties are compounded by the relative unfamiliarity of Ministers with their briefing under pressure. The words of the Financial Secretary have been quoted by my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) and others during the debate. My suspicion is that the Financial Secretary did not expand on the simple words she used because she would have got herself into deeper and unfamiliar water.

Even the Economic Secretary startled me when she was being cross-examined by Mr. James Naughtie on the "Today" programme on the subject of personal pensions in the context of this clause. She suddenly threw in the fact that pension funds were in surplus—which had nothing to do with the immediate price of eggs, in answer to the question asked by Mr. Naughtie.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I am surprised at the right hon. Gentleman's ungraciousness. I have always listened closely to his speeches. The point that I made specifically to Mr. Naughtie related to occupational pension schemes, which are a critical part of the mix in resolving pensions misselling. That is why I was discussing funds in surplus and the ability to rectify pensions misselling. I cannot believe that the right hon. Gentleman is comfortable in his soul with the way that the previous Conservative Government, in which he served, behaved on pensions misselling.

Photo of Mr Peter Brooke Mr Peter Brooke Conservative, Cities of London and Westminster

The Economic Secretary is entitled to come back on such points, but the fact remains that she was deciding the agenda with Mr. Naughtie. She switched the argument to a subject on which she felt she was on safer ground—she was not responding to the question that he specifically asked her. [Interruption.] We can readily examine the transcript.

I am struck by the Government's confidence that companies that retain their earnings will do better. The Government are stripping the windfall tax from companies where investment is requested and regarded as important. Some Minister—I cannot remember who—said that the utilities could afford to pay the windfall tax out of their borrowings. I am struck by the difference between that use of borrowing and the Chancellor's golden rule, as expressed in the Budget, on what borrowing should be used for, at least in the public sector. I am left with the sense that the man in Whitehall knows best.

There is reasonable agreement that one effect will be to make final salary schemes less attractive and therefore drive people into money payment schemes. The irony is that those investing in money payment schemes are themselves penalised by the arrangements. I have never been enamoured of the phrase "double whammy", but the consequence of the Government's actions appears to be one. I suspect that the issues of short-termism and long-termism are ones that we will revisit in this Parliament. I hope that in the future, including tonight, the Government will afford us more argument and less asseveration than we have had so far.

Photo of Vernon Coaker Vernon Coaker Labour, Gedling

It is remarkable to be attending the Committee stage of the Finance Bill and to hear Conservative Members pretend to be the friends of pensioners. During the recent election campaign, we discovered that pensioners were concerned about their circumstances and their prospects.

The Conservative party is portraying itself as the friend not only of today's pensioners but of future pensioners. However, the previous Administration's record—Conservative Members want nothing to do with that—show exactly what Conservative Members did for tomorrow's pensioners. Since 1979, the number of active members in occupational pension schemes has fallen. Moreover, hundreds of thousands of people were encouraged to leave occupational pension schemes and to take out personal pension schemes, for which many of them are still awaiting compensation.

Nevertheless, Conservative Members say that they represent future pensioners. Where were Conservative Members when pensions were being missold?

Photo of Vernon Coaker Vernon Coaker Labour, Gedling

The hon. Gentleman says that, but why should today's or tomorrow's pensioners trust Conservative Members, who failed so miserably in their obligation and responsibility to help pensioners when they had the power to do so? Conservative Members will have to answer that question.

Conservative Members have offered idle speculation on the consequences of the Budget's tax reforms and talked about Labour's scaremongers—but who are the scaremongers?

Photo of Ms Lorna Fitzsimons Ms Lorna Fitzsimons Labour, Rochdale

Does my hon. Friend agree that Opposition Members would not be scaremongering if they genuinely cared—as they profess to do—about pensioners? Conservative Members had 18 years in which to prove in deed and in word that they cared about pensioners, whereas VAT on fuel is a testament to their hypocrisy. Do you therefore agree that Conservative Members are shedding crocodile tears and are more in favour of pension funds?

Photo of Alan Haselhurst Alan Haselhurst Deputy Speaker and Chairman of Ways and Means

Order. The hon. Lady is not conducting a conversation with one of her colleagues; she is addressing the Chair.

Photo of Vernon Coaker Vernon Coaker Labour, Gedling

I thank my hon. Friend for her intervention, because she has made point that I was trying to make. When Conservative Members were in power, they did nothing to protect future pensioners. As she said, now that we have a Government who are determined to take action for the benefit of the entire community, Conservative Members disagree and offer idle speculation to frighten people and to undermine the Government's proposals.

Much of the basis of the argument offered by Conservative Members reminds me of my time at university, when I was studying economics. Our economics lecturer stood in front of the class and drew models, saying, "If you keep this, this and this the same, the outcome will be that." We asked what would happen if we changed one part of the formula, and he said, "You can't change one of the variables, because that would spoil it." Conservative Members refuse to accept the Government's argument that the value of pension funds is determined not only by the amount of money paid into them but by many other variables.

My hon. Friend the Economic Secretary to the Treasury has said in this debate that pension fund values are determined not only by the income paid into them but by economic confidence and growth and generally by how people feel about the economy. All those factors will affect pension fund values and prospects.

If Conservative Members want to lower pension fund values, they should continue talking down pension funds and trying to undermine economic confidence. Future pension fund values, on which so many workers rely, will be affected by such activities.

Like all my hon. Friends, I support the Government's measures. They are designed to encourage investment and to do something to tackle the blight that we see all around us. We have a new Government, and it is incumbent on Conservative Members to remember that the new Government have different priorities and are determined to do things differently.

The tax changes outlined in the Budget, including the ACT proposals, are part of a package that aims to serve the whole community and put people back to work. It is about investment in the economy and about rewarding that investment rather than rewarding speculative gain.

Finally, I remind hon. Members that what the Labour party promised during the election campaign, and what the Labour Government are now delivering, is a fairer tax system which encourages and rewards investment and which, through that investment, generates a fairer society in which there are opportunities for all.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

You may not be surprised to hear, Sir Alan, that I do not intend to take up the invitation issued by the hon. Member for Gedling (Mr. Coaker) to share his views.

I believe that clause 19 should be withdrawn. It goes hand in hand with a Budget which is, by and large, full of carelessness and broken promises, although I admit that in that respect this clause is something of a surprise. Throughout the election, and in the run-up to it, we were treated to a series of promises by the Prime Minister and the Chancellor of the Exchequer. They told us, quite fairly, that there would be windfall tax, and we can find it in their deliciously framed manifesto and prospectus. When pressed on whether there would be other tax increases, the answer was, "Absolutely not—we have declared all our taxes and you will find in our manifesto everything we will do."

In the Chamber on Tuesday, however, my hon. and learned Friend the Member for Harborough (Mr. Garnier) repeatedly pressed the Financial Secretary to assist him in his inquiries, trying to find a reference in the Labour party's prospectus to the abolition of the ACT credit for pension funds. The Financial Secretary seemed to be having some difficulty answering his question. I believe that the Financial Secretary did not answer his question. Indeed, I would go so far as to suggest that she probably could not answer his question, because there is no such proposal in the Labour party manifesto—if there is, I shall be more than happy to give way to the Economic Secretary so that she can tell me where I can find it.

Out of nowhere, the Labour party will produce a bonanza to fund its spending programme by abolishing the ACT credit. The aim is, of course, laudable. There cannot be one hon. Member who does not think that one of the most important tasks of anyone in politics is to create employment—[Interruption.] I am sorry to see the hon. Member for Dudley, South (Mr. Pearson) shaking his head as I suggest that our task should be to create employment. He could learn a few lessons by looking back at what the previous Government did to create employment.

Every other European country has rising unemployment but, just today, we have celebrated yet another fall in unemployment because of Conservative policies of the past few years. Those policies have created real jobs, not phoney or subsidised jobs that will disappear when the subsidy goes. If the hon. Gentleman wants to learn how to create real jobs, I suggest that he looks hard at the work of the past few years.

Photo of Geraint Davies Geraint Davies Labour, Croydon Central

Will the hon. Gentleman accept that only one in six of the new jobs created in the final year of his party's failed Government were full-time jobs and that the rest offered poorly paid, part-time or temporary work which was inherently insecure and in which, in many instances, people were stripped of their pension rights and other benefits? Those are not real jobs—they are bogus jobs.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

The hon. Gentleman asked me simply whether I agree. No, I do not.

The aim of the clause—welfare to work—is laudable, but the means are crude.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

No, I shall not give way for the moment. At best, the clause is careless; worse than that, I believe that it will produce instability in the economy, depriving it of investment and creating uncertainty—not just for the pensions industry, where there is huge uncertainty as a result of the Budget, but for pensioners. I am sure that hon. Members on both sides agree that one of our most important tasks is to provide certainty for people in their old age and as they approach old age. I hope that Labour Members agree that the building up of more than £650 billion of pension funds in the United Kingdom—whomever we give the credit to—is a considerable achievement and reflects well on the country.

Photo of Geraint Davies Geraint Davies Labour, Croydon Central

The hon. Gentleman has just asserted that the best prize that we could give the British public is certainty. Is it not the case that the only certainty that the previous Government brought was uncertainty? All that we saw was a cycle of boom and bust: in the housing market, in recession and unemployment—the list goes on. The Budget will bring about stability, certainty, long-term investment, security, wealth, prosperity and fairness for the British people for the new millennium.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

The hon. Gentleman will not be surprised that, yet again. I do not agree with him. I am sorry to disagree with him, but I am afraid that I have to.

There was huge uncertainty a week before the election when the right hon. Member for Sedgefield (Mr. Blair) went around the country terrifying pensioners. He ran around saying that the Tories were going to scrap the basic state pension. He was challenged for evidence. Did he find it? No, yet he went on repeating the scare. I do not believe that anybody should scaremonger and frighten old people for the sake of it. The Conservatives want to talk about the clause in detail because, most of all, we want proper consultation before such measures are taken.

It is ironic that the right hon. Member for Sedgefield made those claims about the future of pension. We have a Labour Government

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

No, I will not give way. I have given way to the hon. Gentleman twice.

The Government are robbing not the few, but the many. The only equitable aspect of this careless tax is that it will hit every fund and everyone. Sooner or later we shall all, like Mother Hubbard, find ourselves going to the cupboard only to find it bare—emptied by the Labour Government as they look for every opportunity to take money from success.

The accountancy firm Kidson Impey said of the Chancellor in The Independent on 3 July: What he's really done is to steal from every person and business who pays into a pension. The chairman of the Association of Consulting Actuaries, which represents pension fund consultants, said that abolishing the ACT credit would lead some companies, especially small companies, to abandon sponsorship of occupational pension schemes. He said: Any employer considering introducing or extending occupational pensions may now be dissuaded from doing so. He went on: This move is in direct opposition to the Government's stated aim of increasing private funded pensions to reduce reliance on the state.

Photo of Mr Ivor Caplin Mr Ivor Caplin Labour, Hove

Will the hon. Gentleman address the important issue of pension holidays? I have heard nothing so far in the hon. Gentleman's eight minutes—or from any of his Conservative colleagues—about the massive pension holidays that took place. That money could have been reinvested to benefit pensioners, but no, the companies had the right to pension holidays.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney 9:30 pm, 16th July 1997

The hon. Gentleman is obviously excited about what I have said and what might be coming in my speech. He will indeed find that I shall refer to other matters concerning pensions.

Firm after firm report that this careless clause is damaging and vindictive. It is planned for short-term gain but will do long-term harm. Just at the time when Britain is emerging as Europe's most successful country in building up pension provision, along comes the Chancellor and whack—he raids the kitty.

To be charitable, the Government—or some Ministers—may not have not quite understood the impact. Obviously, the Financial Secretary to the Treasury does not quite understand. On 3 July, she told us: The measure is good for pensions and pensioners, not bad for them. Furthermore, the existence of pension fund contribution holidays demonstrates that there is scope to absorb the measure. Hon. Members may be forgiven for being a trifle nervous about the hon. Lady having such responsibility, given her failure to comprehend not how good the measure is for pensions but just how bad it is for them. I will give some examples of how bad it is.

ICI says that the cost of the shortfall to its company alone will be tens of millions of pounds. The Post Office fund reckons that the cost of abolition is some £130 million. To take an individual—Labour Members spend a great deal of time talking and thinking about individuals—a 35-year-old who has accumulated a fund of £20,000 on contributions of £1,000 a year will now pay an extra £315.10 a year to make up the shortfall. That is an extra £26.26 a month. Is that good or bad? The Financial Secretary says that the measure is good for pensioners, but to me that extra cost does not seem all that good.

Chantrey Vellacott has shown that, on average, the 19 million members of company or personal pension schemes—probably even more members than there are of the Prime Minister's fancy club in Sedgefield—will require an average increase in contributions of £190 a year. Is that good or bad? It is bad.

Photo of Mr Teddy Taylor Mr Teddy Taylor Conservative, Rochford and Southend East

Is my hon. Friend aware of the huge problems and worries facing local councils such as Essex county council, which has found and announced only yesterday that it will have to spend several millions of pounds extra on cut services? Is it not rather silly to engage in politics when real problems are facing real councils in providing real services to people, including pensioners and poor people? Would it not be better to stop talking politics and realise that local councils are facing huge problems due to this silly scheme?

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

My hon. Friend is of course correct and makes a very important point. It is a great shame that Labour Members, in their precipitate haste to hit the ground running, have not considered the impact of the measure on local authorities.

I find the Financial Secretary's conclusion that the Budget will be good for pensioners extraordinary. It demonstrates a fundamental lack of understanding of the economics of the pensions industry and a careless disregard for pensioners themselves.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

I am sorry that the hon. Gentleman thinks that that is rubbish. Pensioners will not think so in years to come when they find that the money that they thought was there is not there because the hon. Gentleman's party has raided the store.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

I will not.

As individuals up and down the country start to calculate just how much money Labour is robbing from their pockets for the future, they will seek out those responsible and those who patronisingly told them, as the Financial Secretary did: The measure is good for pensions and pensioners, not bad for them. The Financial Secretary of course has a defence. She said: the existence of pension fund contribution holidays demonstrates that there is scope to absorb the measure."—[Official Report, 3 July 1997; Vol. 297, c. 507.] If we look at the figures, however, as my right hon. Friend the Member for Wells (Mr. Heathcoat-Amory) did earlier in the debate, we see that three quarters of UK pension schemes are money purchase schemes. They have no surplus. Unfunded, final salary schemes such as the civil service and health pension schemes also have no surplus. Just like the smash and grab raid on the utilities, with the tax on water, gas and electricity, Labour now turns to rob the pensioners. The Chancellor called the Budget a people's Budget. Does he not realise that pension fund money is the people's money?

Photo of Ms Lorna Fitzsimons Ms Lorna Fitzsimons Labour, Rochdale

The hon. Gentleman mentioned certainty for pensioners, and we agree with the need for that, so would he care to comment on the lack of certainty that 18 years of Tory government gave to those people who relied on the constant value of the state earnings-related pension scheme? It was halved in those 18 years, when the Tory Government had responsibility for establishing the certainty that the hon. Gentleman thinks is so important for pensioners.

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

The hon. Lady knows full well that, after those 18 years, pensioners were considerably better off than they were when we took office. We should remember that when Labour was last in government it froze the state pension for two years in a row. This time, within eight weeks, it is taking more money from pensioners.

Photo of Ms Lorna Fitzsimons Ms Lorna Fitzsimons Labour, Rochdale

Will the hon. Gentleman give way again?

Photo of Shaun Woodward Shaun Woodward Conservative, Witney

I will not.

The Financial Secretary believes that there is a lot of surplus about. There may be a lot about, but why? It is because the Conservative Government created financial conditions under which companies in Britain could do well, and British pension funds have done well.

What do we see now that the Labour party is in government? We see old Labour. Its attitude is, "If it's successful, tax it." Its motto, amply demonstrated in the Budget, is, "If it is a company that should succeed, tax, tax and tax again." As a result, millions of pensioners will be markedly damaged by the tax on savings and investment.

Much has been made by Labour Members, including the hon. Members for Manchester, Blackley (Mr. Stringer) and for Croydon, Central (Mr. Davies), about investment in research and development, but this is not a Budget for investment. The National Association of Pension Funds has said: companies which pay dividends are more likely to invest in research and development. The research and development of dividend-paying companies is also significantly higher than that of non-dividend paying companies. The idea that UK companies sacrifice research investment in favour of excessive dividend payments should be set aside in the face of that research, unless Labour Members wish to dismiss the work of the National Association of Pension Funds.

The measure will take an extra £50 billion of pension contributions in the next 10 years—money that would otherwise have gone into research and development, investment and creating real jobs, not subsidised employment schemes that will end when the subsidy goes. Far from allowing more money for investment, the measure will hit companies hard. Companies with final salary pension funds will increasingly be required to find additional contributions from businesses, further diverting funds from investment. That will be the case for funds that are not now in surplus and, in the longer term, in most cases as fund surpluses are used up.

The clause is short-termism run amok. Labour has seen a pot of gold to fund its new culture—as Labour Members called it earlier—its new Jerusalem. With all the feather-like delicacy of a sledgehammer, Labour has smashed the pot and grabbed the gold in the hope of playing Robin Hood. However, the only Robin in this story is the robbin' of the savings of every pension fund in the land by Labour.

We have seen the twinkle in Labour Members' eyes and their excitement as they spot the potential to raid the money from pension funds, but the tax has all the properties of a Paul Daniels magic show. Like the magic candle on a child's cake, no sooner have they robbed the funds of £5 billion one year than they will rob them of £5 billion the next. The Labour Government are clearly exposed as serial raiders, but they will discover themselves to be false raiders.

The money is set aside for real long-term investment, a subject about which Labour Members do not care, understand or worry about much. In words and rhetoric, in manifestos, prospectuses and little handouts for the Budget, they care—but as we have seen so ably demonstrated in the Budget and in this specific clause, they do not understand the substance.

When the Labour Government came to power, they said that they would hit the ground running. The only thing that the Government have proved that they will hit running are the elderly. The brutal raid on the pension funds will cause lasting damage to our economy.

Is it not ironic that, wherever they turn, the Government say, "Let's have a review"? Wherever they move, they say, "Let's have a working party." But on this one issue, was there a working party? Was there a review? Was it in their manifesto? No. Why not? Why no consultation? Why no mention in the manifesto? The Association of British Insurers has sensibly called on the Chancellor to put the proposal into abeyance pending consultation. The association has rightly pointed out that it is a major change to taxation policy in the corporate sector. It is a significant change in taxation in our country. What is to be lost by proper consultation? The Government believe in reviews and in working parties, so why is there no working party on the proposed change? Why is there no review?

The clause abolishing the ACT credit is full of potential problems. One cannot ignore the advice from all the bodies in the City that have built up successful funds. To do so is wilfully negligent.

In closing, I ask the hon. Lady to bear in mind the request—not from Conservative Members, but from those who have successfully created pension funds—to put the proposal into abeyance until full consultation has taken place.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I am glad to have the opportunity to respond to the debate. I should tell the hon. Member for Witney (Mr. Woodward) that the Carnegie medal for children's literature was awarded today. I get the impression that that is what his contribution was aimed at achieving. Given that he is a former director of communications for the Conservative party, he has obviously made a career out of saying things that he does not believe.

There has been a more mature debate this evening than we have had on previous evenings. Perhaps the playmates are engaged elsewhere, but we may see them before 10 o'clock.

There has been a brittleness about some of the contributions of distinguished Conservative Members. I am thinking in particular of the shadow Chief Secretary to the Treasury, the right hon. Member for Wells (Mr. Heathcoat-Amory), and the right hon. Member for Cities of London and Westminster (Mr. Brooke), both of whom are distinguished Members in their own right. I recognise that I am a junior Member and it is not for me to criticise, but I have to admit that I feel that there is still an inability to come to terms with the scale of the defeat that the Conservative party suffered on 1 May. I was surprised at some of the remarks that were made.

I shall deal with the points raised by the shadow Chief Secretary—[Interruption.] I see that some more hon. Members have joined us. That adds to the atmosphere in the Chamber. The right hon. Gentleman referred to "The Pocket Budget". In another context, the word "sophistry" was used—and it was the word that came to mind in the middle of his speech. I shall return to that in detail later.

If we look at the substance of the clause, we see that its purpose is to take away pension funds' ability to obtain payment of a tax credit, with effect from 2 July. That is part of a two-stage process under which payable tax credits will be removed from the tax system in April 1999.

As I said at the beginning of the stand part debate, the purpose of the change is to remove a damaging distortion from the system while reducing levels of corporation tax. Several Opposition Members have referred to Labour saving up for a spending wheeze in the future. What utter nonsense. The move is part of a Budget that has significantly reduced corporation tax, permitting a better climate for business. I shall develop that idea later, when I talk about what was said by the right hon. Member for Cities of London and Westminster.

9.45 pm

My hon. Friend the Member for Dudley, North (Mr. Cranston) referred to the imputation system. As my hon. Friend pointed out, the tax credit system is designed to mitigate the double taxation of distributed company profits—once at the company level and again in the hands of the shareholder. That is what the system does, continues to do and will still do after the 1999 changes.

However, the old system that we seek to change went further. Some shareholders, such as pension funds, could claim payment of the tax credit. That means that the system did more than relieve double taxation; it effectively reduced the rate on company profits when those profits were distributed. That meant, among other things, that there was an incentive to invest in companies that distributed a high proportion of their profits rather than in those that reinvested profits to build up their capital.

The right hon. Member for Cities of London and Westminster talked about his time some years ago at the Harvard business school. I wish that I had had the opportunity to study there, but I shall refer him further back, to the days of the industrial revolution.

After the industrial revolution, there was a decline in Britain's industrial performance because subsequent generations did not reinvest their profits. Basically, the present change is designed to create a climate in which companies can again, of their own volition, through decisions based on their own judgment, reinvest their profits.

We have heard numerous references to short-termism, but most graphically and eloquently from my hon. Friend the Member for Pontefract and Castleford (Yvette Cooper). The climate of short-termism has been the cause of considerable concern to people in British business.

The right hon. Member for Cities of London and Westminster, as a defender of the City of London—in my role as Economic Secretary I, too, have cause to defend the City—says that it does not necessarily breed short-termism. I must tell him that the pressure on companies to maximise dividend payments and the pressure that the tax system puts on them to distribute their profits in payments to pension funds breed a forced short-termism in the performance of company executives and boards. That in itself is a significant distortion.

The right hon. Member for Wells said that £5 billion would be lost to pension funds. His figures are wrong. The figure that I have is about £3.6 billion. I think that the right hon. Gentleman may have taken into account shareholders' dividends, some of which are not distributed in the United Kingdom, at the same time. That is the only conclusion that I can draw from the figures he used.

The right hon. Gentleman's peroration was not in character, as he is said to have a reputation for intellectual honesty. I can only conclude that, for want of a better argument, he has stooped to trying to frighten people who are saving for their pensions. That is especially offensive, in view of the misselling of pensions that took place on such a massive scale, without correction, during the life of the Government of which he was for so long a member.

It is important that pensioners have a clear view of exactly what the proposals are. The previous Government made a similar change in 1993, reducing the rate of tax credit from 25 per cent. to 20 per cent. Last year, they took action against some of the more blatant exploitation encouraged by the distortion of payable tax credits by removing them from share buy-backs and certain special dividends.

I am tempted again to refer to the remarks made by the right hon. Member for Hitchin and Harpenden (Mr. Lilley), who pointed out that the Government had sought to raise revenue in a way that did the least economic damage, but I will resist the temptation to develop that point. The previous Government did not use any of the money that was raised to cut the rate of corporation tax, as we have done.

The hon. Member for Gordon (Mr. Bruce) asked why we were making the change now: it is because, according to the Government Actuary's assessments, many pension funds are in surplus by as much as £50 billion. In combination with the current high level of the stock market, that means that there is a much greater opportunity for funds to absorb the change without any great difficulty.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I shall give way to the hon. Gentleman in a second, because I know that he did not get a chance to contribute to the debate.

I reiterate the point that pension funds should benefit substantially from the improvement in company performance as a result of the Budget.

Photo of John Swinney John Swinney Scottish National Party, North Tayside

I am grateful to the Economic Secretary for giving way. There is undeniably a surplus in many pension funds. Can she give the Committee a guarantee that there are no solvency questions over any pension funds that may be affected by the proposed change?

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I believe that the hon. Gentleman is referring to the minimum funding requirement for pension funds. The vast majority of funds are comfortably above that, and my right hon. Friend the Secretary of State for Social Security keeps a close watch on such matters, so we are alert to any possible problems.

The Government did not take the decision on the abolition of tax credits lightly. Several references have been made to our election manifesto. I am sure that Conservative Members have copies of it—indeed, I can see that the hon. Member for Witney has one in front of him—and if they would care to turn to page 13, they will see that the penultimate paragraph says: We will review the corporate and capital gains tax regimes to see how the tax system can promote greater long-term investment. That is a clear sign of the Government's intention, which was flagged up two years before the general election by my right hon. Friend who is now Chancellor of the Exchequer.

The hon. Member for Gordon spoke of the possibility of compensating adjustments in the comprehensive review of pensions. It is not my place to refer to what the Under-Secretary of State for Social Security, my hon. Friend the Member for Southampton, Itchen (Mr. Denham) is doing in that comprehensive, long-term review. I am sure that hon. Members in all parties will acknowledge that it could not be in better hands. Announcements will be made in due course. I am grateful to the hon. Member for Gordon for acknowledging that the Government have valid arguments.

My hon. Friend the Member for Dudley, North made a good point about how pension funds are valued, which is an area of considerable debate both here and internationally. As he said, valuation is often by reference to discounted cash flow. A number of commentators—not least in the press today, as a consequence of the Office of Fair Trading report—have said that that method is outdated. Indeed, in the United States, much more regard is given to share values.

A number of companies are considering, with their fund actuaries, whether the basis of valuation should be changed. There is certainly an argument. The time has come for companies to consider seriously the basis of valuation.

The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) referred to the tax privileges of pension schemes. Whenever I intervened to ask him whether he had referred in his manifesto to cutting tax relief on employee contributions, he seemed confused about what I was getting at. The party of which he is a member—indeed, the previous Government—was going to cut the tax relief on employee contributions to occupational pension schemes. My right hon. Friend the Chancellor of the Exchequer said clearly during his Budget statement that this Government will not proceed with that move because we believe that it was a wrong decision on the part of the previous Government.

The hon. Member for Bognor Regis and Littlehampton also referred to the fact that pension funds are tax vehicles. Pension funds' tax exemptions have always been limited and there is a good reason for that. For example, they have never been tax exempt on trading income or other income from investments or deposits. If funds have excessive surpluses, they are also taxable on excess income. They are not, however, being taxed on dividends. We are stopping a subsidy received from the Exchequer.

On a number of occasions this evening we have discussed pensions misselling. I do not contend that it can possibly be right that the victims of pension misselling should, by their own tax payments, be subsidising pension funds. They really are caught in what the right hon. Member for Cities of London and Westminster described as a double whammy.

The hon. Member for Bognor Regis and Littlehampton also made a number of points about the Red Book. It allows for extra pension contributions by companies because that affects the yield from corporation tax. Local authorities do not pay tax, so there is no similar need to refer to them on page 46 of the Red Book.

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I shall give way if the hon. Gentleman will be brief. I am conscious of the time.

Photo of Nick Gibb Nick Gibb Conservative, Bognor Regis and Littlehampton

I realise that, but the point is that if the Government have made an allowance for companies to pay higher contributions into their pension funds, why have they not somewhere else in the Red Book, on the expenditure side, made allowance for the fact that local authorities will have to make extra contributions to their pension funds?

Photo of Mrs Helen Liddell Mrs Helen Liddell Economic Secretary, HM Treasury, The Economic Secretary to the Treasury

I refer the hon. Gentleman to the debate on local authorities that we had about two hours ago. I do not want to go over that ground at the moment, because I am anxious to answer the other points raised by Opposition Members.

The right hon. Member for Cities of London and Westminster made claims about windfall tax damage. As my hon. Friend the Paymaster General made clear in a number of debates on the Budget and the Finance Bill, the Government believe that liable companies can find the means to pay the windfall tax without needing to curtail investment.

To return to the general point that the Government and I have made throughout this debate, our purpose in the clause is to remove a significant distortion. We want to create the sort of system in which companies, particularly those that might be involved in investments that do not necessarily have a high return at the beginning, for example in new technology or research and development, can fund those investments from their own resources. That is a sound way for companies to make their business grow.

In effect, that is what lies at the heart of the change that the Government are introducing in the Bill. We are committed to ensuring that, as Britain enters the 21st century, our companies have the revenue that will allow them to invest for the long term. That is one of the reasons we have reduced the level of corporation tax from 33 to 31 per cent., and from 23 to 21 per cent. for small companies. We want to move away from short-termism, a move that will benefit business generally. I commend the clause to the House.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 334, Noes 182.

Division No. 61][9.59 pm
Abbott, Ms DianeBlears, Ms Hazel
Adams, Mrs Irene (Paisley N)Blizzard, Bob
Ainger, NickBlunkett, Rt Hon David
Ainsworth, Robert (Cov'try NE)Boateng, Paul
Allen, Graham (Nottingham N)Borrow, David
Anderson, Janet (Rossendale)Bradley, Keith (Withington)
Armstrong, Ms HilaryBradshaw, Ben
Ashton, JoeBrinton, Mrs Helen
Atkins, CharlotteBrown, Rt Hon Nick (Newcastle E)
Austin, JohnBrown, Russell (Dumfries)
Banks, TonyBrowne, Desmond (Kilmarnock)
Barnes, HarryBuck, Ms Karen
Barron, KevinBurden, Richard
Battle, JohnBurgon, Colin
Beard, NigelButler, Christine
Beckett, Rt Hon Mrs MargaretByers, Stephen
Bell, Stuart (Middlesbrough)Caborn, Richard
Benn, Rt Hon TonyCampbell, Alan (Tynemouth)
Bennett, Andrew FCampbell, Mrs Anne (C'bridge)
Benton, JoeCampbell, Ronnie (Blyth V)
Best, HaroldCampbell-Savours, Dale
Betts, CliveCanavan, Dennis
Blackman, LizCann, Jamie
Caplin, IvorGerrard, Neil
Casale, RogerGibson, Dr lan
Caton, MartinGilroy, Mrs Linda
Cawsey, lanGoggins, Paul
Chapman, Ben (Wirral S)Golding, Mrs Llin
Chaytor, DavidGordon, Mrs Eileen
Chisholm, MalcolmGraham, Thomas
Clapham, MichaelGriffiths, Jane (Reading E)
Clark, Dr Lynda (Edinburgh Pentlands)Griffiths, Nigel (Edinburgh S)
Griffiths, Win (Bridgend)
Clark, Paul (Gillingham)Grocott, Bruce
Clarke, Charles (Norwich S)Grogan, John
Clarke, Eric (Midlothian)Gunnell, John
Clarke, Rt Hon Tom (Coatbridge)Hall, Mike (Weaver Vale)
Clarke, Tony (Northampton S)Hall, Patrick (Bedford)
Clelland, DavidHamilton, Fabian (Leeds NE)
Coaker, VernonHanson, David
Coffey, Ms AnnHarman, Rt Hon Ms Harriet
Cohen, HarryHeal, Mrs Sylvia
Coleman, Iain (Hammersmith)Henderson, Doug (Newcastle N)
Colman, Tony (Putney)Henderson, Ivan (Harwich)
Connarty, MichaelHeppell, John
Cook, Frank (Stockton N)Hesford, Stephen
Cooper, YvetteHewitt, Ms Patricia
Corbett, RobinHill, Keith
Corbyn, JeremyHinchliffe, David
Corston, Ms JeanHoey, Kate
Cousins, JimHome Robertson, John
Cox, TomHood, Jimmy
Cranston, RossHoon, Geoffrey
Crausby, DavidHope, Phil
Cryer, Mrs Ann (Keighley)Hopkins, Kelvin
Cryer, John (Hornchurch)Howartti, George (Knowsley N)
Cummings, JohnHowells, Dr Kim
Cunningham, Jim (Cov'try S)Hoyle, Lindsay
Cunningham, Rt Hon Dr John (Copeland)Hughes, Kevin (Doncaster N)
Hurst, Alan
Curtis-Thomas, Mrs ClaireHutton, John
Dalyell, TamIddon, Dr Brian
Darling, Rt Hon AlistairIllsley, Eric
Darvill, KeithIngram, Adam
Davey, Valerie (Bristol W)Jackson, Ms Glenda (Hampstead)
Davies, Rt Hon Denzil (Llanelli)Jackson, Helen (Hillsborough)
Davies, Geraint (Croydon C)Jenkins, Brian (Tamworth)
Davies, Rt Hon Ron (Caerphilly)Jones, Barry (Alyn & Deeside)
Davis, Terry (B'ham Hodge H)Jones, Ms Fiona (Newark)
Dawson, HiltonJones, Helen (Warrington N)
Dean, Mrs JanetJones, Ms Jenny (Wolverh'ton SW)
Dewar, Rt Hon Donald
Donohoe, Brian HJones, Jon Owen (Cardiff C)
Doran, FrankJones, Dr Lynne (Selly Oak)
Dowd, JimKaufman, Rt Hon Gerald
Drew, DavidKeeble, Ms Sally
Drown, Ms JuliaKeen, Alan (Feltham & Heston)
Dunwoody, Mrs GwynethKeen, Mrs Ann (Brentford)
Eagle, Angela (Wallasey)Kemp, Fraser
Eagle, Maria (L'pool Garston)Kennedy, Jane (Wavertree)
Efford, CliveKhabra, Piara S
Ellman, Ms LouiseKidney, David
Ennis, JeffKilfoyle, Peter
Etherington, BillKing, Andy (Rugby & Kenilworth)
Fatchett, DerekKing, Ms Oona (Bethnal Green)
Field, Rt Hon FrankLadyman, Dr Stephen
Fisher, MarkLawrence, Ms Jackie
Fitzpatrick, JimLaxton, Bob
Fitzsimons, LornaLepper, David
Flynn, PaulLeslie, Christopher
Foster, Rt Hon DerekLewis, Ivan (Bury S)
Foster, Michael Jabez (Hastings)Liddell, Mrs Helen
Foster, Michael John (Worcester)Linton, Martin
Foulkes, GeorgeLivingstone, Ken
Galbraith, SamLloyd, Tony (Manchester C)
Galloway, GeorgeLock, David
Gapes, MikeLove, Andrew
Gardiner, BarryMcAllion, John
George, Bruce (Walsall S)McAvoy, Thomas
McCafferty, Ms ChrisRuddock, Ms Joan
McCartney, lan (Makerfield)Russell, Ms Christine (Chester)
McDonagh, SiobhainSawford, Phil
Macdonald, CalumSedgemore, Brian
McDonnell, JohnShaw, Jonathan
McGuire, Mrs AnneSheerman, Barry
McIsaac, ShonaSheldon, Rt Hon Robert
Mackinlay, AndrewShipley, Ms Debra
McNulty, TonyShort, Rt Hon Clare
MacShane, DenisSimpson, Alan (Nottingham S)
Mactaggart, FionaSingh, Marsha
McWalter, TonySkinner, Dennis
Mahon, Mrs AliceSmith, Rt Hon Andrew (Oxford E)
Mallaber, JudySmith, Angela (Basildon)
Mandelson, PeterSmith, Rt Hon Chris (Islington S)
Marek, Dr JohnSmith, Miss Geraldine (Morecambe & Lunesdale)
Marsden, Gordon (Blackpool S)
Marshall, David (Shettleston)Smith, Jacqui (Redditch)
Marshall, Jim (Leicester S)Smith, John (Glamorgan)
Marshall-Andrews, RobertSmith, Llew (Blaenau Gwent)
Maxton, JohnSnape, Peter
Meacher, Rt Hon MichaelSoley, Clive
Meale, AlanSquire, Ms Rachel
Michie, Bill (Shef'ld Heeley)Starkey, Dr Phyllis
Milburn, AlanSteinberg, Gerry
Miller, AndrewStevenson, George
Mitchell, AustinStewart, David (Inverness E)
Moffatt, LauraStewart lan (Eccles)
Moonie, Dr LewisStoate, Dr Howard
Morgan, Ms Julie (Cardiff N)Stott, Roger
Morgan, Rhodri (Cardiff W)Strang, Rt Hon Dr Gavin
Morley, ElliotStringer, Graham
Morris, Ms Estate (B'ham Yardley)Stuart, Ms Gisela (Edgbaston)
Mountford, KaliSutcliffe, Gerry
Mudie, GeorgeTaylor, Rt Hon Mrs Ann (Dewsbury)
Mullin, Chris
Murphy, Jim (Eastwood)Talyor, Ms Dari (Stockton S)
Norris, Dan
O'Brien, Bill (Normanton)Thomas Gareth (Clwyd W)
O'Hara, EdwardTimms, Stephen
Olner, BillTipping, Paddy
O'Neill, MartinTodd, Mark
Organ, Mrs DianaTouhig, Don
Osborne, Mrs SandraTrickett, Jon
Pearson, lanTruswell, Paul
Perham, Ms LindaTurner, Dennis (Wolverh'ton SE)
Pickthall, ColinTurner, Desmond (Kemptown)
Pike, Peter LTwigg, Derek (Halton)
Plaskitt, JamesTwigg, Stephen (Enfield)
Pollard, KerryVaz, Keith
Pond, ChrisVis, Dr Rudi
Pope, GregWalley, Ms Joan
Pound, StephenWard, Ms Claire
Powell, Sir RaymondWatts, David
Prentice, Ms Bridget (Lewisham E)White, Brian
Prentice, Gordon (Pendle)Whitehead, Dr Alan
Primarolo, DawnWicks, Malcolm
Purchase, KenWilliams, Rt Hon Alan (Swansea W)
Quin, Ms Joyce
Quinn, Lawrie (Scarborough)Williams, Alan W (E Carmarthen)
Radice, GilesWilliams, Mrs Betty (Conwy)
Rapson, SydWills, Michael
Raynsford, NickWinnick, David
Reed, Andrew (Loughborough)Winterton, Ms Rosie (Doncaster C)
Reid, Dr John (Hamilton N)Wise, Audrey
Robertson, Rt Hon George (Hamilton S)Worthington, Tony
Wray, James
Roche, Mrs BarbaraWright, Dr Tony (Cannock)
Rogers, AllanWright, Tony D (Gt Yarmouth)
Rooker, JeffWyatt, Derek
Rooney, Terry
Ross, Ernie (Dundee W)Tellers for the Ayes:
Rowlands, TedMr. John McFall and
Roy, FrankMr. David Jamieson.
Ainsworth, Peter (E Surrey)Hague, Rt Hon William
Allan, Richard (Shef'ld Hallam)Hamilton, Rt Hon Sir Archie
Amess, DavidHammond, Philip
Ancram, Rt Hon MichaelHancock, Mike
Arbuthnot, JamesHarris, Dr Evan
Ashdown, Rt Hon PaddyHarvey, Nick
Atkinson, Peter (Hexham)Hawkins, Nick
Baker, NormanHeath, David (Somerton & Frome)
Baldry, TonyHeathcoat-Amory, Rt Hon David
Ballard, Mrs JackieHoram, John
Beggs, Roy (E Antrim)Howard, Rt Hon Michael
Beith, Rt Hon A JHowarth, Gerald (Aldershot)
Bercow, JohnHughes, Simon (Southwark N)
Blunt, CrispinHunter, Andrew
Body, Sir RichardJack, Rt Hon Michael
Boswell, TimJackson, Robert (Wantage)
Bottomley, Peter (Worthing W)Jenkin, Bernard (N Essex)
Bottomley, Rt Hon Mrs VirginiaJohnson Smith, Rt Hon Sir Geoffrey
Brady, Graham
Brand, Dr PeterJones, leuan Wyn (Ynys Môn)
Brazier, JulianJones, Nigel (Cheltenham)
Breed, ColinKey, Robert
Brooke, Rt Hon PeterKing, Rt Hon Tom (Bridgwater)
Browning, Mrs AngelaKirkbride, Miss Julie
Bruce, lan (S Dorset)Kirkwood, Archy
Bruce, Malcolm (Gordon)Laing, Mrs Eleanor
Burns, SimonLeigh, Edward
Burstow, PaulLetwin, Oliver
Butterfill, JohnLewis, Dr Julian (New Forest E)
Campbell, Menzies (NE Fife)Lidington, David
Cash, WilliamLilley, Rt Hon Peter
Chapman, Sir Sydney (Chipping Barnet)Livsey, Richard
Lloyd, Rt Hon Sir Peter (Fareham)
Chidgey, DavidLuff, Peter
Chope, ChristopherLyell, Rt Hon Sir Nicholas
Clark, Rt Hon Alan (Kensington)MacGregor, Rt Hon John
Clark, Dr Michael (Rayleigh)MacKay, Andrew
Clarke, Rt Hon Kenneth (Rushcliffe)Maclean, Rt Hon David
McLoughlin, Patrick
Clifton-Brown, GeoffreyMalins, Humfrey
Collins, TimMaples, John
Colvin, MichaelMates, Michael
Cormack, Sir PatrickMawhinney, Rt Hon Dr Brian
Cotter, BrianMay, Mrs Theresa
Cran, JamesMerchant, Piers
Curry, Rt Hon DavidMichie, Mrs Ray (Argyll & Bute)
Davey, Edward (Kingston)Moore, Michael
Davis, Rt Hon David (Haltemprice)Morgan, Alasdair (Galloway)
Davies, Quentin (Grantham)Moss, Malcolm
Day, StephenNicholls, Patrick
Dorrell, Rt Hon StephenNorman, Archie
Duncan, AlanÖpik, Lembit
Duncan Smith, IainOttaway, Richard
Evans, NigelPage, Richard
Faber, DavidPaice, James
Fabricant, MichaelPaterson, Owen
Fallon, MichaelPrior, David
Fearn, RonnieRedwood, Rt Hon John
Flight, HowardRendel, David
Forth, Rt Hon EricRobathan, Andrew
Foster, Don (Bath)Robertson, Laurence (Tewk'b'ry)
Fowler, Rt Hon Sir NormanRoe, Mrs Marion (Broxbourne)
Fraser, ChristopherRoss, William (E Lond'y)
Gale, RogerRowe, Andrew (Faversham)
Garnier, EdwardRuffley, David
Gibb, NickRussell, Bob (Colchester)
Gillan, Mrs CherylSt Aubyn, Nick
Gorman, Mrs TeresaSanders, Adrian
Gorrie, DonaldSayeed, Jonathan
Gray, JamesShephard, Rt Hon Mrs Gillian
Green, DamianShepherd, Richard (Aldridge)
Greenway, JohnSimpson, Keith (Mid-Norfolk)
Grieve, DominicSmith, Sir Robert (W Ab'd'ns)
Gummer, Rt Hon JohnSoames, Nicholas
Spelman, Mrs CarolineTrend, Michael
Spicer, Sir MichaelTyler, Paul
Spring, RichardTyrie, Andrew
Stanley, Rt Hon Sir JohnViggers, Peter
Steen, AnthonyWallace, James
Streeter, GaryWalter, Robert
Stunell, AndrewWardle, Charles
Swayne, DesmondWebb, Professor Steve
Swinney, JohnWells, Bowen
Syms, RobertWelsh, Andrew
Tapsell, Sir PeterWhitney, Sir Raymond
Whittingdale, John
Taylor, lan (Ester & Walton)Widdecombe, Rt Hon Miss Ann
Taylor, John M (Solihull)Willis, Phil
Taylor, Matthew (Truro)Woodward, Shaun
Taylor, Sir TeddyYeo, Tim
Temple-Morris, PeterYoung, Rt Hon Sir George
Thompson, William
Tonge, Dr JennyTellers for the Noes:
Townend, JohnMr. Nigel Waterson and
Tredinnick, DavidMr. Oliver Heald.

Question accordingly agreed to.

Clause 19 ordered to stand part of the Bill.

Bill (Clauses 1, 15, 17 and 19) reported, without amendment; to lie upon the Table.