New Clause 1 — Tax Credits for Individual Savings Accounts and Personal Equity Plans

Part of Finance Bill – in the House of Commons at 3:15 pm on 1st July 2003.

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Photo of John Baron John Baron Shadow Minister (Health) 3:15 pm, 1st July 2003

That is an excellent point. There is a short-termism about the tax measure that worries me. It will contribute to a decline in savings over the longer term and add to the pension problems that the Government are manufacturing by way of the pensions tax. It is a problem that the Government will have to face over the longer term.

There is little doubt that the tax change proposed by the Chancellor will undermine investors' confidence in ISAs as a tax-efficient form of savings, and may reverse the savings trend that we have seen. ISAs are a well-known "tax-free" product, but the tax levels will increase confusion among the public. That will serve no one's interest—neither the Government's, nor the public's, as I have suggested. It is interesting that in the United States, the Government seem to be moving in the opposite direction. The US is cutting tax payable on dividends and encouraging savings and wider share ownership, because it realises the benefits of so doing. The American economy has performed well, and we should look at that example as a means of encouraging savings and wider share ownership.

The measure goes against the Government's longer-term aim of changing the proportion of public and private retirement savings from 60:40 to 40:60. The measure will not serve that purpose at all. I shall be interested to hear from the Minister how the Government believe the tax measure will help to achieve that stated objective. Recent research suggests that if the tax-free benefit is reduced or abolished on stocks and shares in ISAs, only one in three savers will continue to invest in that tax-free environment. That figure must worry the Government, if they are intent on improving the balance between public and private retirement savings.

I shall put two other brief points to the Minister, and I look forward to the reply. There is another sense in which the measure will distort the market. A number of other hon. Members have touched on the point. By reducing the tax incentive for people to invest in equity ISAs, the Government will increase the incentive to invest in cash and bonds, not shares. That probably will not be appropriate for most people's investment requirements. There is a danger that the Government will inadvertently create a scenario where the tax tail is wagging the investment dog.

People will increasingly see that there is no tax incentive to invest in equity ISAs, and may think that investing in cash or bond ISAs producing a higher short-term income is more appropriate, and certainly more attractive. Over the longer term, equities have proved to be the better investment. People of the younger generation especially should have a good element of their overall investments in equities, rather than bonds and cash. I ask the Minister to address the issue, because there is a danger that by removing the tax incentive for equity ISAs, the Government will inadvertently distort the market.

One or two other hon. Members have touched on my final point, which is about the way in which equity investment in the longer term benefits the economy. The United States fully appreciates that, which is why it has very recently reduced the tax paid on equity dividends in that country. We all know that economies and the business environment are becoming increasingly competitive. Companies must be able to look to stock markets to raise additional capital, but if shareholders shun the equity markets, that process becomes more difficult. Ultimately that has real economic implications for our standard of living and for the profits that pay for the public services that we all want.

To revert to the intervention by my hon. Friend Mr. Bercow, I emphasise that a short-term measure such as the Government propose will in the longer term produce a negative effect on the economy as a whole and the standard of living of us all. People will shun equity markets, which will ultimately have a detrimental effect on companies wanting to raise additional capital on the stock markets.