I beg to move,
That this House
notes that household indebtedness has now reached £1 trillion;
is concerned that the household savings rate has halved since 1997; and believes that the Government, through the extension of dependency on means-tested benefits in retirement, its attack on the tax advantages of savings vehicles, and its £5 billion a year raid on pension funds, has diminished incentives to save.
Two issues arise from the motion. One is short term and the other is long term. The short-term issue is indebtedness or household debt and the long-term issue is savings or their lack. I begin with household indebtedness. We have almost certainly reached the £1 trillion level of household indebtedness, which is broadly equivalent to our gross domestic product. That fact has become increasingly interesting to the media. A set of changes underlies that state of affairs.
Household indebtedness has recently increased annually by approximately 12 per cent., despite having slowed a little from an even higher figure. Much of that has been in the form of mortgage indebtedness or secured lending. According to the latest reckoning, some £818 billion of mortgage debt forms part of the £1 trillion total. Mortgage debt, at around 13 per cent. a year, has been growing even faster than overall household indebtedness, although it, too, has slowed slightly.
Surely that is not a problem, provided that people can finance their debt. Were we not simply rising out of a low level of debt after the collapse of the exchange rate mechanism and emerging from the recession that the right hon. Gentleman's party created?
I agree that a given amount of debt is not a problem for those who can easily manage it. I shall shortly refer to those for whom there is a problem, but I also want to tackle the question of whether the current indebtedness causes a general problem for the economy as a whole. I hope that the hon. Gentleman will intervene again when we reach that part of my remarks, because I believe that ample evidence shows that there are problems on both those fronts. I want first to present the facts.
Clearly, none of us wants mortgage rates to increase, and it is therefore regrettable that they had to rise recently and that they are likely—it is not certain—to increase in the near future. I would have thought that the hon. Gentleman and I agreed on that. I shall describe why the recent increase in mortgage payments is by no means purely an accident and how the actions of members of the Treasury Bench have partly created it. I hope that he will join me in regretting those actions.
The four increases in interest rates have had an impact on mortgage lending. Secured lending increased by its lowest amount for nine months in May—significantly less than in April. It appears that people are capable of dealing with such debt and spreading it out.
The hon. and learned Lady is right that, as I said, the rate of increase has slowed slightly. That is welcome. Unfortunately, as I also said, it is currently approximately a little more than 13 per cent. on an annualised basis and that figure is high. I fear that I do not follow the hon. and learned Lady's logic and that is unusual. Even when I do not agree with her, I can normally follow her logic and have done so in many debates. However, I cannot understand the argument that the fact that we have annual increases of "only" 13 per cent. in mortgage lending means that people will always be capable of fulfilling their obligations. I shall shortly outline why I believe that there is an increasing problem.
Lending is not the only problem. A considerable amount of mortgage equity withdrawal is also happening. That was negative in the mid and late 1990s, but it is now running at about £60 billion a year. Our fellow citizens are drawing down on or adding to their mortgages by about £60 billion a year at present. Some of that is going on consumption, and some is undoubtedly being spent on the expansion of assets, as people add to their housing stock by enlarging and improving their houses.
Would my right hon. Friend like to comment on the fact that a significant proportion of that equity release is going to people who have retired and who require it for consumption? They are certainly not using it to acquire additional assets.
My hon. Friend is undoubtedly right: a substantial proportion is almost undoubtedly going for consumption. I say "almost undoubtedly" because there are no reliable figures available. Perhaps Ministers will tell us to the contrary tonight, but I know of no reliable survey that has been carried out into how much of that mortgage equity withdrawal is going on consumption and how much is going into assets. I fear that my hon. Friend is probably right to say that a substantial proportion is going into consumption.
Labour Members are clearly gagging to hear what the problems are in this regard. We have set out the facts, and everyone knows the figures. Ministers undoubtedly have even more up-to-date figures. They probably receive updates every 24 hours; I do not know. In any event, we can all agree on the broad facts, but the question is: what do they mean? We do not have to take a flier on this, and we do not have to trust the views of politicians. Indeed, I do not suppose that many of our fellow citizens trust the views of politicians of any colour on these matters, alas.
Shocking it may be, but it is nevertheless the case that politicians are not much trusted in Britain today. However, some people are trusted, and one such person is the Governor of the Bank of England. One reason he is trusted is that he is the Governor of the Bank of England. Another is that he is the man he is. That powerful combination means that he is highly trusted, and he has said some remarkable things recently.
The Governor of the Bank of England is a very subtle individual—more subtle, I suspect, than any of us in the Chamber tonight or, indeed, than any politician in Britain. Of course, it is in the nature of governors of central banks that they should be exquisitely subtle. I believe that it was Lord Cecil, under Elizabeth I, who was described as being so subtle as to be invisible. The Governor of the Bank of England, though exquisitely subtle, is not invisible, however. Indeed, he has recently become quite surprisingly visible. Governors of the Bank of England have frequently sought to be invisible, but he is not such a Governor. He has made himself visible by making remarks—admittedly, exquisitely subtle remarks—which, in their pointedness, have been perfectly well understood in the City of London by the economic fraternity, by journalists and, I suspect, by the Government, although they would certainly not admit it.
What has the Governor said? In effect, he has said that the very large rise in household indebtedness, and the very large rise in house prices that is intimately linked with that, have not come about by accident. They are associated with the activities of the Chancellor of the Exchequer in enlarging Government. We have a bigger Government, more spending and more borrowing. The Governor of the Bank of England has said that he is not persuaded that there is a sustainable path in place—or at any rate, that is what he has, in his exquisite subtlety, suggested.
The right hon. Gentleman seems to be suggesting that, if the Government have a fairly generous fiscal policy—with which I totally agree—the Governor of the Bank of England should intervene and introduce high interest rates to dampen the economy with monetary policy. Would that not be a dangerous intervention in politics? Would not the Government be right to say, "Hang on. Dealing with inflation is one thing, but countering Government policy is another."?
Oh dear, oh dear! I shall have to save the hon. Gentleman from his wit and, indeed, from those on the Treasury Bench. I hope that I shall be able to provide him with sufficient armour plating in case he should meet the Chancellor in the near future, because what he has suggested runs counter to the entire structure that the Government established—rightly, I may say—when they established the independence of the Bank of England. The whole point of that independence is that it acts as a check on undue extravagance or fiscal laxity on the part of the Government, and it is acting in just that way now. The Governor is not disobeying his remit; he is fulfilling it. He is doing what the Chancellor of the Exchequer asked him to do when the Bank of England was made independent and an inflation target was established.
I expect that the Chancellor has frequently congratulated the Governor on what he has done. I imagine that he has been sending messages to the Governor over the past few weeks to thank him for his advice and to let him know just how grateful he is to the Governor and his colleagues on the Monetary Policy Committee for raising interest rates to counteract the effects of fiscal laxity in the pre-election spending spree that the Government are wrongly engaging in. I imagine that the Chancellor is also thanking him for warning him in advance that interest rates might also need to rise further as a result of that.
But it is perfectly clear that the Governor and the Monetary Policy Committee as a whole are, in a serious-minded way, trying to live up to the inflation target. It is not that they are trying to counteract Government policy; they are trying to counteract the effect of that policy on inflation—not only on asset price inflation but on general inflation. Indeed, it is general inflation that they are required by law to target, and they are doing so. However, asset price inflation has an effect on general inflation. Household indebtedness, when it consists of a large amount of mortgage equity withdrawal and a large increase in mortgage lending, has an effect on house prices. The Governor is quite rightly taking all those factors into consideration.
A short-term problem for the economy is being generated by a traditional, classical pre-election spending spree, which is being financed by traditional, classical deficit financing. That is not what we were told this Government were about, or what this Chancellor was about. We must thank the Lord that we have a central bank that is able to counteract the effect of that activity. We shall not see it come through in inflation, but we are seeing it come through in higher mortgage payments. To address the point raised by the hon. Members for Luton, North (Mr. Hopkins) and for Chorley (Mr. Hoyle), I would suggest that that might become a problem for the fairly large section of the population whose mortgages represent a substantial multiple of their income and which were, and probably still are, quite affordable because of low interest rates, but which will become progressively less affordable as interest rates rise.
I am not making a partisan point here; I am reflecting the point made by the Governor of the Bank of England. He has pointed out that house prices—and hence mortgages—are at multiples of income levels that could cause difficulties to some people if they do not watch out.
Under the Conservative Government, we had relatively low levels of public spending and historically high interest rates. Now we have very high levels of public spending and historically low interest rates. Is the right hon. Gentleman saying that he prefers the former option?
Of course I am going to answer the hon. Gentleman's question. I would not have given way unless I intended to do so. I always answer questions; it has been my downfall on many occasions. I shall certainly do so now that I have the right answer.
The cause of higher interest rates is not purely due to the expenditure, but to the fact that it is being deficit-financed. The Government have gone on a spending spree through deficit financing, and there is every prospect of those deficits remaining large for some time. Indeed, there is some question as to whether the Chancellor is going to be able to obey his own fiscal rules. The Government are therefore pushing interest rates up by engaging in fiscal laxity, which is called a pre-election spending spree. There is no way Mr. Harris can get around that by saying that some other Government at some other time did something else. The fact is that the Government are doing something to the country: they are pushing up mortgage payments.
I thank the right hon. Gentleman for giving way yet again; he is very generous in taking interventions. Is not the basic reason why our Government have had such success with the economy that they have kept sustained demand by having a reasonable fiscal policy and relatively relaxed monetary policy as well? Is he suggesting that we should do something different?
Oh dear. I will have to provide the hon. Gentleman with even more protection from the Chancellor, because the Chancellor has long claimed that his fiscal policy is intended not to be a demand management system, but to stick within very strict fiscal rules to ensure the long-term and medium-term sustainability of the public finances across the cycle. As a matter of fact, I agree with the Chancellor and not with the hon. Gentleman.
The problem with the Chancellor is not that he does not have the right idea, but that at present he is not following it very well. Thank goodness, the Governor and his colleagues are taking appropriate action, but the corollary of that is that there are people for whom there is an increasing instability—an increasing problem of the relationship between their mortgage payments now and their likely mortgage payments in the near future and their income. This is not a crisis, but it is a problem. If it becomes much bigger, it could turn into a serious problem.
I would agree with the right hon. Gentleman's argument except that, under the last Conservative Government, people in my constituency who did feel the rub felt it because there were high interest rates, a crash in property prices and high unemployment. There is absolutely no sign of those last factors being remotely on show now, and interest rates are increasing only slightly.
For the sake of the country, I profoundly hope that the hon. Lady is right and that there will not be any horrible sequel. I hope that as a householder, as a parent and as one who is concerned about the welfare of this nation. That, I am sure, is common ground across the House—but let us not be complacent.
Let us be clear about the fact that when there are very high multiples at work, when there are increases—which, although from a low base to a low number, are nevertheless in proportionate terms quite large—in people's mortgage payments of 10 or 20 per cent. in many cases, and when those may go up overall by 30 or 40 per cent., again admittedly from a low base, problems can be engendered. We should not consider that lightly. We should not ignore it; we should not be complacent about it. That is my first point.
My second point is that, for some people—I absolutely accept that this is only a restricted group who are on low incomes—there is, unfortunately, accumulating evidence of the problem of the debt spiral. For such people, this is not a minor matter and it is far from a laughing matter. It can cripple lives. It is very small so far, thank goodness. Let us hope it remains so, but around us are signs of more people who are closer to it than we can be comfortable about.
I believe that 42 per cent. of those with new babies are in arrears, as are 48 per cent. of lone parents and 52 per cent. of those who are recently separated. Those are all life circumstances that tend to give rise to considerable indebtedness, and I do not say that this is a sudden crisis, but I do say that if we asked the citizens advice bureaux and the various debt advisory bodies we would receive the same response from them all.
The problem is not currently widespread and it has not reached crisis proportions, but there is a worrying increase in the number of low-income individuals who are caught in debt spirals. That, I think, will worry everyone on both sides of the House. I hope that there will be a considerable consensus also on how to deal with it.
In a moment. My hon. Friends and I have promoted—I think for the first time in Britain—a wide-ranging seminar among the lenders and those concerned with debt advice. No doubt the Treasury has seen both groups individually; we tried to put them together. Also, we have asked Lord Griffiths of Fforestfach—who, incidentally, has the distinction not merely of advising us, but of having advised the Chancellor on international debt issues, and who happens to be someone with real understanding of these issues—to look in fine detail, by going out and asking, at what really are the circumstances that give rise to debt spirals and to make recommendations, which of course we will share with the Government and with other parties, on how we can cure that problem.
Those are the short-term problems, as I see it, and I want to move on to a great big problem of a very long-term and deep kind, which is what has happened to savings in this country.
I thank the right hon. Gentleman for giving way yet again. He seems to be suggesting that we ought to tighten monetary policy. The effect of that would be not only to moderate house prices, but to push them down. If house prices fall, people could fall into negative equity and perhaps even have problems with sustaining their mortgage at all. Would that not make debt far worse and bring people to the situation that pertained 10 years ago in my constituency, which was the No. 1 for negative equity and repossessions?
Let me be clear with the hon. Gentleman: I am not making a recommendation about monetary policy, because I believe in what he clearly does not. I believe in the structure that the Chancellor himself established; I believe in the independence of the Bank of England; and I believe it is right that decisions on monetary policy should be taken by a group of people removed from politics.
My argument is very clear: the Chancellor has created circumstances with his pre-election spree that are leading the Bank of England to a certain set of responses, which it is trying to engage in very delicately, subtly and carefully precisely to avoid circumstances of the kind to which the hon. Gentleman refers. There is no question at all but that members of the MPC are acutely aware of the dangers to which he refers and seek to avoid them, but the fact is that it would be better if the Chancellor had not put them in the position of having to respond as a result of the spending spree and the deficit financing in which he is engaging.
Given the crucial nature of house prices in this country—they are central to economic well-being—is my right hon. Friend as disturbed as I am about the row that is clearly under way between the Governor of the Bank of England on the one hand, warning that house prices might fall, and, on the other, the Treasury, spinning like mad through the press, for obvious reasons, that they definitely will not, or at least certainly not before an election?
Would not it be better if the debate were held in the open and the Chancellor made both a statement on the subject and adjustments to the remit of the Bank of England, if he is as unhappy with what it is doing as he seems to be, because he is right in thinking that house prices are central to the future economic well-being of our country?
As usual, my right hon. Friend is right, as well as being honourable. He accurately diagnoses a real problem. The Chancellor has set up the independence of the Bank of England, and presumably believes in it, but he does not like it when the Bank of England acts in the way that his remit asks it to. Of course, he does not want to say that, because it would be a mite embarrassing to set something up and then, when it does the thing it has been asked to do, get explicitly cross about it.
So, the Chancellor sends his henchmen out to say, inexplicitly, that he is absolutely furious about it, in the hope that, somehow or other, this message will, by osmosis, reach the Governor and that the Governor will desist from saying and doing what in fact the Chancellor has asked him to say and do. Of course, my right hon. Friend is absolutely right that it would be much more open if the Chancellor were to make a clear statement on his views about the Governor. I think that the chances of that occurring are exactly as high as those of pigs flying.
Now, savings. This is very serious stuff, because savings matter enormously to our economy and to our society. We cannot have a strong economy across the decades unless the domestic savings ratio is relatively high. Ultimately, the productive capacities of our economy across a long period are heavily determined by the degree to which we save and invest as a nation.
No Government in British history since the war have managed to achieve as high a savings ratio as many of us would like. I recall, as my right hon. Friend Mr. Redwood will also recall, times under the previous Administration when we worried—I think we were right to do so—about whether the savings ratio was high enough. Little did we know.
At that time, the savings ratio averaged just over 9 per cent. That was the proportion of our national income that we saved on average between 1979 and 1997. We thought that that was not good enough, but since 1998, persistently, that ratio has been significantly lower. Between one point at the end of the previous regime and one point now, it almost halved. On average, it has gone down by a third. This is very worrying. It does not matter for six months; it matters an awful lot across a long period.
Why has it happened? There are all sorts of reasons, and it is important to disentangle the most important from the less important, and to try to get a clear picture of what Governments can and cannot do about it. There is a major accusation to be levelled against the current Government, and a major step that this country needs to take to resolve the problems caused by the Government in this area.
Before I describe those two points in more detail, let me say that it is very misguided, should Ministers or others wish to do so, to blame the savings industry primarily. The savings industry is not perfect—no industry is perfect, and nobody is perfect—but it tries on the whole to do its best. Most of the problems that afflicted the savings industry are on the way to being, to a considerable degree, cured. There is a vast expansion of a much more transparent form of saving through unit linking. There is no doubt at all that prices for savings products have been coming down. There is no doubt at all that the savings industry is now engaged in much more realistic risk assessment than previously, and although I am in some respects a critic of the Financial Services Authority, some of the credit for that goes to the FSA. We cannot stand here blaming the savings industry for the reduction in the savings ratio in recent years. Certainly, it is not the principal culprit.
When we turn to the Government, however, I fear that the position is different. First, there is the £5 billion a year raid on the savings industry. Recently, we have begun to see just how serious that was. Recent figures, which have come to light in the past few days, indicate that the extent to which that bit into what were otherwise tax advantages for saving was greater even than imagined at the time, when many Conservative Members complained vigorously and bitterly about the £5 billion raid. Evidently, when the Prime Minister claimed that the £5 billion raid was to be justified because equity prices were high, he was not to know, but he might have guessed, that there would come a time when equity prices were not so high. The £5 billion a year raid has a bizarre effect: as well as causing more trouble now that equity prices are not as high as they once were, it has undoubtedly contributed to the underperformance of the UK stock market, which has underperformed every other major stock market except Japan's in recent years.
Alas, the £5 billion a year raid is not the only item to discuss in terms of diminishing the attractiveness of savings in this country.
My right hon. Friend makes an extremely powerful point. The main raider that has damaged the savings industry is the Government. Will he remind the House that the Opposition not only warned at the time that it would do damage but quantified it? We said that because the market then valued a stream of income from a company at 20 times the income, if the Government took £5 billion a year out of the stock market, £100 billion would be knocked off the value of shares earned by all those pensioners and savers in the country. It was a smash-and-grab raid, it took £100 billion off, and the Government should apologise and give it back.
There is no doubt that that is accurate—it constituted a smash and grab raid. The Government grabbed a large amount of money, and smashed a large amount—clearly, my right hon. Friend's approximate figure of £100 billion is of the right order of magnitude—off the value of savings in this country.
We must keep our feet on the ground about this alleged smash and grab. The Tory Chancellor Norman Lamont twice cut the rate of the advance corporation tax concession, of which the right hon. Gentleman now makes such major complaint, and clearly saw it as an anomaly even then. I have not heard about any Tory cuts to restore it.
I shall come on to what we intend to do to remedy those bad effects. The problem with the hon. and learned Lady's argument, which is exactly what I was about to discuss, is that the £5 billion raid was not in the context of a large number of other measures of the kind that my right hon. and noble Friend Lord Lamont was then taking to try to encourage savings. Alas, it was in the context of a set of other raids on savings, decreasing their tax advantages.
This Government have reduced significantly the attractiveness of individual saving accounts, for example. ISAs are now significantly less attractive in many respects than their tax-exempt special savings account and personal equity plan predecessors, which were the brainchild of none other than Lord Lamont and his colleagues. In various and important respects, the Government have made savings less tax advantageous in this country. There is no getting away from the fact that that can only have one effect directionally: it cannot increase the savings ratio; it must tend to reduce it. As we know, as an empirical fact, that the savings ratio has on average gone down by a third, and point to point, by a half, some of that is undoubtedly caused by the Government's actions. They are not the main ones, however, as I will come on to the real disaster story in a moment.
Let me come back to the advance corporation tax. The right hon. Gentleman is wrong that it was not accompanied by other measures. The corporation tax rate was cut at the same time. I asked him once, and I ask him again, whether there are any plans to restore this alleged concession, which was the source of such a smash and grab.
I shall come on to something that we will do to cure the biggest of the problems that are attached to, and are the cause of, the reduction in savings. That is the first place to put the money. We would like to do many things, but there is one that we must do. I shall deal with that now, because without it, as far as the long-term picture for savings in this country is concerned, we are sunk.
One of the saddest things about the Government is that they started with the possibility of a real improvement in the character of our country through the achievement of a real consensus. Mr. Field came into government at the beginning of this Government's tenure with great hopes invested in him not merely by Labour Members—I suspect that many Labour Members did not invest great hopes, including the Chancellor, who hoped that he would soon disappear and achieved that ambition—but by Conservative Members and by the country more widely, and rightly so. For many years, he had with passion, vigour and intelligence identified a critical feature of the problems facing this country—means-tested benefit dependency was causing an erosion of the savings culture. He set to work to try to deal with that, and he received the backing of my hon. Friends. I remember walking into the Lobby with him and his friends on the Labour Benches, to the discomfiture of some Labour Members, on a famous occasion, as we were so determined to support actions that could rescue us from an over-dependence on means-tested benefits in this country. Alas, as we all know, it did not take terribly long for the Chancellor to destroy not only the ambitions but the policies of the right hon. Gentleman and to move in precisely the opposite direction.
The Prime Minister, when he was Leader of the Opposition, said that he wished to see the right hon. Member for Birkenhead think the unthinkable. Little did he know that the Chancellor of the Exchequer was going to think the unthinkable—that means-tested benefits should be widely expanded in Britain by a Labour Government. That was a most astonishing, and much more importantly, catastrophic turn of events. Fifty-four per cent. of our pensioners are now on means-tested benefits of one kind or another, and the number is growing apace. Most people believe that, on present policies, it will not be long before three quarters or so of our pensioners are on means-tested benefits of one kind or another.
The right hon. Member for Birkenhead has rightly made it clear what he thinks the effect of this is and will be. He said that the message is going from grandmothers to grandchildren, "Don't bother to save dear, it didn't do me any good." What does he mean? He means something clear: if a person has saved throughout their working life less than £180,000, there is a strong chance, and a great likelihood, that they will find at some point, at the end of their working life, that they are losing between 40p and 85p in the pound for each pound of income from saving. It is not worth it.
Of course, the savings industry recognises that. It is terrified of mis-selling, appropriately, and is therefore increasingly not aiming to sell savings policies to a group of people whom it knows will typically lose a large part of income from savings later in life. It knows that that could be regarded, ex post facto, as a terrible example of mis-selling.
Alas, much of our nation's saving has always been through inertia. Much of it occurs only if the savings industry makes us save by coming to us with the product. When the industry desists from that for fear of mis-selling because of means-testing of benefit for those in retirement, the savings ratio drops. That is the single biggest cause of the present problem—the present disaster—of the reduction of a savings ratio that was already too low by a third—or by half, depending how it is measured. Until the increase in means-tested dependency is dealt with, this terrible problem will continue.
There has also been a catastrophic social effect. I do not know what single thing could do more to harm the social fabric of the country than a message sent to hard-working people who save that saving is not worth it, and that those who have saved will be clobbered. That strikes me as profoundly wrong—and it is another of the points made so powerfully and passionately by the right hon. Member for Birkenhead over so many years.
The right hon. Gentleman has made great play of his belief that means-tested benefits are the main problem in terms of poverty. What would he tell the individual in my constituency who found that she did not qualify for the minimum income guarantee because she had £26,000 in the bank, and now finds herself—with that £26,000 in the bank—gaining by £46 a week from pension tax credit?
I would tell that lady that when we have done what we need to do, and what the country needs us to do, and what the hon. Gentleman's party will eventually agree with us must be done, she will be as well off as under the present scheme, but people will not have the same disincentives. What we need to do as a country is take our courage in both hands, and raise the basic state pension to the point at which it will cross over with pension credit.
I will in a moment, but I want to make this point because it is absolutely critical. Opposition Members can then debate it at length. I do not think that anyone could accuse me of having been ungenerous in giving way.
Unless we take our courage in both hands, we will not solve the problem. The difference between the basic state pension and pension credit is that, unlike the basic state pension, pension credit is means-tested. In our first Parliament, we can lift a million pensioners out of means-tested dependency by raising the basic state pension in line with earnings, and we need to do so. We need to meet the associated costs, and my spending plans provide for that. Half will be met by erosion of the entitlements of those whose basic state pensions are rising to means-tested benefits that they will not need because their incomes from the basic state pension will be rising. The other half, in those first four years, will be met by removal of almost all the new deal, which has been an expensive failure.
At the beginning of the present Administration, a million young people were not in work, not in training and not in education. Now, £310 million a year later, with a new deal for the young unemployed, what do we find? A million young people are not in work, not in training and not in education. What a way to spend money that we could be spending on raising the basic state pension and restoring the incentive to save.
May I return my right hon. Friend to his point about the effect on the nature of society? It is a crucial issue. If a large number of ordinary people have nothing at stake in society, their attitude to society must be fundamentally changed. The one common factor in the history of recent years is that societies that get into that state very soon break down, as social cohesion itself breaks down.
I agree profoundly with my right hon. Friend. When all has been said about the economic effects of the diminution of the savings ratio, the short-term effects of the encouragement of too much household indebtedness and the precariousness of our housing, that abiding social question is the most important.
The fact is that we cannot expect to go on having the kind of society in which we want to live if it is a society in which a large number of people approaching retirement look to those of working age to sustain them, thus creating a persistent tension between the two groups. We must have a society in which all of us, in our working lives, believe we have a reason to build for our retirement in due course, if we have the financial capacity. That is the way in which we can create social cohesion, and the way in which we can reward fairly those who make an effort to do the right thing. If there is one important thing about society, it is that it rewards those who try to do the right thing.
That is what we need to do, and the fact that the Government are doing the opposite will be their undying shame. I hope it is not too late for them to recognise that, and come round to our view on this critical matter. If that does not happen, we shall see persistently low savings, the corrosion of our society and long-term economic damage.
I beg to move, To leave out from "House" to the end of the Question, and to add instead thereof:
"believes that a strong and stable economy is the foundation of families' confidence in their own finances;
notes that economic stability has delivered low and stable inflation, interest rates have been at their lowest since the 1950s, employment is at a record high and unemployment at its lowest since the 1970s;
further notes that as a result households are better able to judge their long-term commitments as macroeconomic stability has reduced the risks to household finances of sudden and sharp rises in interest rates as seen in the past;
believes that the Government has tackled the scandals it inherited and created a world leading system of financial regulation allowing people to save with confidence, simplified savings markets allowing people to make informed choices about what and how to save and taken action to tackle financial exclusion;
recognises that most household debt remains affordable and that total interest payments are now 7.6 per cent. of disposal income compared with 15 per cent. in 1990; believes the biggest risk to household finances and consumer confidence would be a return to economic instability;
and rejects the short-term boom and bust economic policies of the past that saw interest rates hit 15 per cent. and inflation hit 10 per cent. in which circumstances households had to save more to make up for the loss of value of their savings due to inflation and prepare in the event of becoming unemployed."
This Government have delivered an unprecedented period of stability and growth. Notwithstanding the doom and gloom that is the stock-in-trade of some—although, in fairness, not all—Conservative Members, this Government are confronting the demographic challenges surrounding provision for financial security in old age with vigour and determination. I hope that we shall be able to demonstrate that this evening to the satisfaction of the House. Indeed, I think my hon. Friends' interventions on the speech of Mr. Letwin demonstrate Labour's commitment to savings, to pensions and to the importance we ascribe to sustainability, in terms of not just public but personal finances.
I shall be only too happy to give way to my hon. Friend shortly. I saw him in action during the right hon. Gentleman's speech. However, I should like to have my little say first, if I may.
Those are real demographic challenges, and we are confronting them. We are creating the right incentives for saving, and extending the opportunities created by savings to those previously denied them. Nevertheless, there is no room for complacency. For most households, debt remains affordable. Interest payments currently amount to 7.6 per cent. of disposable income, compared with highs of over 15 per cent. in 1990, when the economy was under the stewardship of the Conservatives. Consumer confidence remains above its long-run average, reflecting sound fundamentals. Low inflation, and expectations of low inflation, mean that households are better able to make judgments about what debts to take on. As I have said, however, there is no room for complacency.
We have that in common with the right hon. Gentleman and, I hope, with all Members on both sides of the House. We accept that there are those who are not saving adequately for their retirement. Some 3 million are seriously under-saving, and between 5 million and 10 million should be saving more. The Government are addressing that, aiming not to tell people how much they should save but to enable them to make informed choices about retirement. Such informed choices are the bedrock of our policy.
Now I give way to my hon. Friend.
I merely wanted to reinforce my right hon. Friend's point about sustainability. Does he agree that a crucial component of sustainability is ensuring that consumer demand is kept at a sensible level so that the economy can continue to prosper?
That component undoubtedly plays its part.
The contribution of the right hon. Member for West Dorset was a serious and informed one, although I disagreed with a number of aspects of it. It was interesting to hear the praise that he now affords to the monetary policy framework that my right hon. Friend the Chancellor put in place, and which has indeed delivered this long and sustained period of economic stability. In the Mansion House speech to which the right hon. Gentleman referred, that economic stability drew congratulations from the Governor of the Bank of England. Indeed, the Governor offered congratulations not just on the Chancellor's longevity, but on the
"successful pursuit of economic stability—not even Gladstone achieved such stability."
The cornerstone of that stability has been the monetary policy framework, which has delivered low and stable inflation. Central to that have been the role of the Monetary Policy Committee and the independence of the Bank of England. But the right hon. Member for West Dorset, who has shared his views with us this evening, voted against the creation of the MPC, and was opposed to giving independence to the Bank of England. As with a question of pronunciation—"Cecil" or "Cicil"—a vote of opposition remains a vote of opposition, and that is what we got from the right hon. Gentleman. I am glad that he has come round to our way of thinking, and I hope to persuade him this evening to come round just that little bit more, and to recognise what we are trying to do.
Let us consider the reality of higher savings in the early 1990s. The right hon. Gentleman referred to the period in which the Conservatives were responsible for the stewardship of the economy, and to the track record of Lord Lamont. To do so in the way that he did was a little surprising. It would not be uncharitable to say that Lord Lamont scared many people into saving, because they were aware of the consequences of the boom and bust period that I fear characterised the Conservatives' stewardship of the economy.
I am not privy to what occurred in Lord Lamont's bathroom, save to say that it is undoubtedly true that while he was Chancellor, all sorts of ills and misfortunes were visited on our nation's economy. If my memory serves me well, the right hon. Member for West Dorset was then a young, up-and-coming tyro in Conservative central office; indeed, he may even have been at the Treasury at the time. He will correct me if I am wrong, but he certainly had a hand in matters and would want to have a hand in them again.
The reality was that in the 1990s, households—
Just to correct the right hon. Gentleman, I am flattered that he thinks me so young, but actually I left the employment of Her Majesty's Government some six years before Lord Lamont entered the Treasury. At that time, I pursued my business in the private sector, so I am very well aware of the problems to which the right hon. Gentleman refers. Is he seriously arguing that the savings ratio was as high as it was between 1979 and 1997 only because people were continuously scared into saving, and is he suggesting that he wishes now again to scare them into saving?
I make no such point, but I do say that households had to save more to make up for the loss in value of their savings due to inflation, and to provide a cushion in the event of being unemployed. The right hon. Gentleman ignores the fact that the asset side of the household balance sheet today remains strong. Household net wealth, taking account of the recent fall in equity prices, is more than 50 per cent. higher than at the beginning of 1997. So this debate has to be placed in the framework of a thriving economy.
Britain's economy, alone among the major industrialised economies, has not only averted recession and continued to grow in every quarter for the past seven years; it has also had the longest period of continuous sustained growth for some 200 years. We have the lowest inflation levels for 40 years, interest rates have been at their lowest since the 1950s and we have the highest employment levels in our history. Again, there is no room for complacency, but economic stability, continuing economic growth and sound public finances do provide the best environment for savings, and for ensuring that existing levels of household debt are sustainable.
I am doubly grateful to the right hon. Gentleman for giving way again. I am glad that he thinks there is no room for complacency. Does he agree that there ought not to be, given that our growth rate is the lowest of the Anglo-Saxon economies, our productivity growth rate has gone down by a third, our savings ratio has halved, we have dropped from fourth to 15th in the international competitiveness league, Ireland now has a higher per capita income than ours, we have the largest trade deficit since the 17th century, and we are facing the very serious problem of over-inflated house prices?
I really am sorry that the right hon. Gentleman adopts that approach. The reality, as he will recognise, is that the economic fundamentals of this country, in comparison with those of our partners and competitors, shine out as an example of what stability can bring and of what needs to be done to create jobs. Some 2 million jobs have been created since 1997, and Members from all parts of the House ought not to forget that it was the Opposition who told us that we would lose 1 million jobs as a result of introducing the minimum wage. That is the reality.
In 1997, we inherited the historical legacies of poor and ineffectual financial regulations, the pension mis-selling scandals of the 1980s and a lack of initiatives to educate and support consumers effectively. The right hon. Gentleman will understand, therefore, why we decline to take from the Opposition lessons on the virtues of saving and on our own supposed failures in that respect. In tackling that inheritance, we have created a world-leading system of financial regulation. That is not just our doing; it is the result of a partnership with the industry and with those who make, and who are responsible for the creation of, the wealth in the City of London and throughout the United Kingdom. The right hon. Gentleman really ought to pay tribute to that partnership.
We have overhauled the regulation of financial services, which led to the Financial Services and Markets Act 2000. We have set up a single regulator, in the form of the Financial Services Authority, to ensure that the market is properly regulated through a risk-based approach. Many other countries have now copied our successful, world-leading approach by establishing their own unified regulators, and we have created a single ombudsman and a single compensation scheme for consumers, ensuring that they have free access to redress and compensation. All of that was necessary to give people a sense of confidence in saving, and to create the context in which our strategy for promoting saving and asset accumulation can succeed. It is founded on some important principles. Those principles address opportunity, security and responsibility, and I see no reason why they should divide us across the Floor of the House. We embrace those principles because they underpin the very notion of the welfare state. On the principle of opportunity, assets enable individuals to take advantage of opportunities throughout life and widen choice. On the principle of responsibility, the development of the savings habit promotes independence. On the principle of security, individuals can be assisted to accumulate a stock of financial assets for times of adversity. Those principles should unite us in agreement that they should form the basis of effective policy.
Mr. Letwin listed the apparent problems of the British economy. He seemed to suggest that we should tighten monetary policy and raise interest rates, but would that not strengthen the pound, depress investment and make our balance of trade position worse, thus damaging the economy? Does my right hon. Friend agree that our policy of lower interest rates is more sensible?
I certainly endorse our policy. Indeed, it would be rather alarming if I did not! I also cast doubt on the remedies proposed by the right hon. Member for West Dorset and some of his right hon. and hon. Friends. We would like to know a little more about those policies, how much they would cost and how they would be paid for. The right hon. Gentleman was remarkably reticent about that. I hope that he has had discussions with Mr. Willetts, who has come up with a range of products that apparently are the answer to the problems that the right hon. Gentleman outlined. We look forward in the coming days, weeks and months to seeing the bill for some of the hon. Gentleman's proposals. I hope that the right hon. Gentleman can assure us tonight that those proposals have been costed and that he has approved them. He says, "Of course." In that case, he will no doubt tell us how much they will cost in due course, although the hon. Gentleman was remarkably reticent on the issue in his press release before tonight's debate. We will tease the details out in due course.
We are charged with the responsibility of encouraging people to save for their futures and of working with the industry so that it provides products that people can understand and trust.
The Government should be praised for their economic record over the past seven years. However, one of the issues that we should address is the practice of the banks in sending offers of loans to individuals that make it very easy—especially for young people—to fall into debt. Do the Government intend to deal with that problem, which discourages saving and increases indebtedness?
I know that my hon. Friend has taken an especial interest in that issue and I shall describe shortly several measures that my right hon. Friend the Secretary of State for Trade and Industry is taking and that he will find of interest.
We have developed a stakeholder product suite to ensure that consumers have access to simple, good value investment products, with increased incentives to save. The right hon. Member for West Dorset mentioned ISAs, which were introduced in 1999. More than 15 million people now have an ISA, with more than £130 billion subscribed. He should remember in his strictures to us that ISAs are supported by some £1.6 billion of tax relief for saving. The suggestion that we do not back ISAs with tax relief is not fair. ISAs have increased take-up of savings products compared with TESSAs and PEPs, for both low-income earners and the young.
On top of tax-free savings products such as ISAs, a 10p starting rate of income tax has applied to income from savings since April 1999, with a lower rate of 20 per cent.—rather than 22 per cent.—applying up to the basic rate limit. We are also looking at new ways of supporting savings, such as the saving gateway, through which the Government match the savings of low-income families up to a limit of £375. Initial indicators from an interim evaluation are positive.
In last year's Budget, the Government also introduced the child trust fund, which the Conservatives have criticised and the Liberal Democrats would axe. It is a ground-breaking initiative that will strengthen financial education, promote positive attitudes to savings and ensure assets for all children, regardless of family background. All children will receive £250 and children from poorer families will receive £500. The Government will also make further payments when the children reach the age of seven.
We are also taking specific steps to raise the level of consumer financial literacy so that consumers are empowered to make informed choices and manage their finances better. With the support and active involvement of the Financial Services Authority, we seek to ensure that, year on year, the scale, range and topicality of its public awareness work adds to that financial literacy.
We are aware of the need to tackle financial exclusion and we are taking steps to do so. In the Budget this year, we committed to continuing our efforts, working in partnership with the sector and with voluntary and community bodies to achieve dramatic reductions in the number of households without bank accounts and a significant increase in the availability of affordable credit for those on the lowest incomes. The right hon. Member for West Dorset is right to draw attention to the particular dangers of debt for those on low incomes. We all know from constituency experience of the ravages of loan sharks on some of our more deprived housing estates. It remains our ambition to achieve a step change in the availability of free debt advice.
I can tell my hon. Friend Mr. Tynan in response to his question that my right hon. Friend the Secretary of State for Trade and Industry introduced a consumer credit White Paper in December last year, in which she set out a policy on tackling over-indebtedness, unfair lending practices and loan sharks. The next phase of that work will come later this month, with the publication of the DTI's strategy for low-income, indebted households. Real issues are being addressed with practical policies.
The issue of pensions is a legitimate one for concern. The issues include longer lifespans, the level of pension saving, the complexity of products, and the number of people leaving employment too early and too suddenly. We are taking action to address those issues. We have introduced a Pensions Bill that sets out our proposals to renew the pensions partnership between the Government, individuals, employers and the financial services industry; introduces the pension protection fund; radically simplifies the taxation of pensions; replaces the eight current regimes with a single lifetime allowance on the amount of pension savings that can benefit from tax relief; and empowers individuals to make informed choices about working and saving for retirement, so that future pensioners receive the income in retirement that they are entitled to expect.
The Pensions Bill is being backed up by practical measures to bring home to people the reality of the situation that they may face. We will issue 1.6 million state pension forecasts to the self-employed by the end of 2003–04. We will be sending out 8 million automated state pension forecasts in 2005–06. By the end of that year, we shall ensure that more than 6 million people receive combined pension forecasts that give details of current private pension arrangements as well as state pension income. All that will contribute to greater awareness and understanding so that people can make informed choices. We believe that confidence in our occupational pension system must be restored and we have taken the necessary steps to restore it.
The right hon. Member for West Dorset made much in his remarks—as he often does—of changes to advance corporation tax. My hon. and learned Friend Vera Baird highlighted the issue, but unfortunately even after the right hon. Gentleman's responses to her questions we are no clearer as to whether he has any intention of reversing our actions on ACT. He had the opportunity at least to tell us that it features among his priorities, but there was not a word.
That is hardly surprising, however, because the hon. Member for Havant has already told us that the Conservatives have no intention of reversing the change. He made that clear in an interview in the Western Daily Press, in which he said, "I can't promise it". When he was asked about it by The Observer, he apparently said:
"Ah, er, erm, it's a good question."—
My hon. Friends may laugh, but we have made some progress: we have gone from "I can't promise it" to "Ah, erm, it's a good question" to absolute silence. The right hon. Member for West Dorset is completely stumm—not a word, not a sound emanates from his lips.
We are entitled to know, however. What are the Conservatives' plans to help pension funds and to increase savings? First, apparently, they would let pension credit die—their words—despite the help it gives. Just an inkling that they recognise that it has helped more than 2 million people with modest savings would give some indication that the Conservatives live in the real world, in which practical measures such as the pension credit actually make a real difference to people with modest savings. It helps to create a different culture.
We know that the Conservatives would scrap the state second pension, with the result that millions of carers, disabled people and low earners would lose £43 a week.
Does my right hon. Friend agree that the Conservative proposals represent a shift from purse to wallet? Getting rid of the pension credit and the state second pension and putting the money into an increase in the basic state pension would hit women very hard, because only 14 per cent. of them qualify for the state pension through their national insurance contributions, despite the fact that record numbers of them work. Our policies seek to overcome the problem that their pension prospects are defined by motherhood and widowhood.
My hon. Friend makes a fair point; she has long championed the cause of women in that regard. She knows that if one is serious about tackling poverty the best thing to do is to put money into the pockets of women. That is the way to tackle family and child poverty. Opposition Members must provide an answer for carers, disabled people and low earners and tell them what will actually happen to them in the absence of a second pension.
The Conservatives claim that they would introduce a new savings account, yet the right hon. Member for West Dorset has made it clear that he is committed to cuts of about £18 billion across the board. They tell us they will earnings-link the basic state pension, but we have heard nothing about how they would pay for it, and what we have heard is far from convincing.
We know that the Conservatives want to axe the new deal, but even the right hon. Gentleman has admitted elsewhere that after four years he would have to make some painful decisions in order to fund his commitment. We need some indication about just how painful those decisions will be and where the axe will fall. Who will actually have to pay for that policy? Or does the right hon. Gentleman agree with the pensions commentator who said that returning to the earnings link
"is not affordable and would not be well targeted"?
That particular commentator said those words on "On the Record", and now we have them on the record; he is the hon. Member for Havant. To pretend that their policy will not have a cost is disingenuous.
I have tried to outline a range of measures that we seek to take to deal with the problem. We recognise that that package of measures—about which we have talked during the debate and which includes financial education and access to secure, quality savings vehicles—has to be seen in the context of the overriding imperative of helping people off benefit and into work; to help make work pay and to provide affordable housing. All that would be put at risk if the Conservatives had their way, because they would axe the new deal and scrap the tax credits. They would scrap the very things that make work pay—that move people off benefits and into the world of work.
Will my right hon. Friend comment again on the fact that the Conservative programmes would particularly disadvantage women? The child care tax credit has revolutionised things for women; it pays their child care costs so that they can actually have choices about going out to work.
My hon. Friend is right. [Interruption.] Ah, that is very interesting. Of course, I give way to the right hon. Gentleman.
The hon. Lady made a very serious intervention about wallets, purses and pensions, and it is something with which we are wrestling, but, on her last point about the child care tax credit, I am afraid that she is completely up the spout. We have made it perfectly clear that we have no intention whatsoever of doing any damage to the child tax credit. [Interruption.]
I hope that the right hon. Gentleman will clarify his point about children's tax credit, child tax credit and the child care tax credit because, as my right hon. Friend knows, it is the child care tax credit, which pays about £105 a week for child care costs, not the children's tax credit, that has been so important. If the Opposition are prepared to give that assurance, that is great, and we will hold them to it as we approach the election.
I am grateful to the right hon. Gentleman for giving way, as it is rare for these debates to constitute a useful purpose, but this is one. What my hon. Friend Mr. Willetts and I have made abundantly clear is that, although we believe that we need to raise the basic state pension and lift people off pension credit, as for the working life tax credits, including all those the hon. Lady describes, we have no plans to remove or diminish them whatsoever. My spending plans specifically provide for them to continue and for current and expected expenditure on them to continue.
That has been a very interesting and informative exchange, and I am grateful to my hon. Friend and the right hon. Gentleman for that clarification. It is interesting how the hon. Member for Havant so often lets the cat out of the bag. We look forward to hearing what was said in tonight's much vaunted speech. I am interested in the fact that the Conservatives have gone back on what he said not so long ago:
"But most of all I want to end the ludicrous tax credit system Gordon Brown has introduced, which was a failed idea from the 1970s."
The Conservatives have now apparently changed, but I am not the slightest discomfited by that. The right hon. Gentleman said earlier that we might be discomfited by his support. I am not discomfited in any way, but I am very interested in it because it demonstrates the journey that Opposition Members have apparently travelled. We remain unconvinced because we know what their record was. We know that their sums do not add up, and we are determined never again to return to the boom and bust that characterised their stewardship of the economy.
We have strong fundamentals. We are making great strides towards improving the consumer credit and financial product markets. There is no room for complacency, but we are increasing incentives to save and improving financial literacy, and we have put in place a secure and stable environment to encourage savings. With that record and that assurance, I urge my right hon. and hon. Friends to follow me and my hon. Friend the Financial Secretary into the Lobby tonight, against Opposition Members.
I broadly agree with the motion moved by Mr. Letwin and am happy to support it. I am pleased that there has been some recognition of the scale and seriousness of personal debt. I have been banging on about it now for two years and was initially dismissed with some ridicule, so I am glad that it is now being taken further. I take the view that imitation is the best form of flattery. I therefore feel flattered that the right hon. Gentleman has taken up the issue and even more flattered that the Governor of the Bank of England now takes it seriously, too.
I wish to say a few words about pensions, because the right hon. Gentleman's comments raise many questions about his own proposals, which, frankly, rather worried me. Clearly, his basic point is right: there is a serious, fundamental crisis in the pension system. The data that have emerged in the past week reinforced that view. Statistical evidence shows that average pensioner incomes fell in the last financial year for which data are available—2002–03—because of falling annuity income and falling income from private pension schemes. The average pensioner income is currently falling in nominal terms before taking account of inflation.
The Office for National Statistics has also produced alarming figures on the collapse in contributions. The initial estimate was £76 billion a year. It is now down to £27 billion. That is the second revision. These are tricky numbers—they are difficult to get hold of—and they may be revised again, but it is clear that, because of the difficulties of occupational pension schemes, there is a collapse in contributions going into the system. All those things are building up difficulties for the future, and many of the explanations that the right hon. Gentleman gave were right, not least the massive disincentives in the benefit and tax system. I accept that the pension credit is a considerable improvement on its predecessor, but the effective marginal rate of tax is still 50 per cent., which creates a massive disincentive to save.
The right hon. Gentleman's basic conceptual approach on providing a solution to the problem is right, which is getting people out of means testing altogether. However, my mind started to boggle when he came up with what I thought was the proposal that all pensioners should be removed from means testing— lifted above the means-tested level—and have their pensions earnings-linked simultaneously. That is an attractive idea.
I understand why the hon. Gentleman found his hair starting to rise a little. Our proposal is progressively to lift pensioners out of means testing by progressively raising the basic state pension. If he thought I was saying that we would raise the basic state pension first to a level that would get all pensioners out of means testing, and then link it, he was misinterpreting my remarks. We are suggesting their progressive removal from means testing.
I thank the right hon. Gentleman for that clarification, which makes his proposals a good deal more affordable. Such changes would have to be very progressive and slow to be remotely affordable. I have done the sums myself, and lifting all pensioners out of means testing would cost about £13 billion a year. The proposals that he advanced on removing the new deal—there are arguments for and against that—and means-tested provisions would not come remotely near to meeting that sum, unless we were talking about a long and slow phasing-in process.
As we seem to be following the tradition of having an interesting discussion, it is worth pointing out that we estimate that our proposals would lift the first million pensioners out of the means-tested benefit trap over the first Parliament. The system would be progressive and thus take some time to achieve its full effect.
If that is the case, I think that the right hon. Gentleman's suggestion may be quite similar to our proposals, albeit using a slightly different mechanism. It is possible to move in that direction if we consider a limited group of pensioners. If that is his proposal, it is less sensational than I thought, but more credible. If we want to get all pensioners out of the means-testing system in the long term, we must start to grapple with tricky ideas such as raising the pension age, which the radical pension reformers are talking about. I did not hear the right hon. Gentleman mention that, but such measures must be introduced if we want radical reform. We will have to wait to read the small print tomorrow to find out where this all leads.
The right hon. Gentleman framed the debate by considering whether there is a problem with personal debt—I agree that there is. Thoughtful interventions from Labour Members challenged whether that was the case and echoed several arguments that have been put forward in the academic community, especially, by people such as Professor Steve Nickell, who is on the Monetary Policy Committee. They ask whether there is a debt problem, so it is useful to rehearse some of the arguments, because although it is not altogether clear that there is such a problem, it is true that on a balance of probabilities, a serious problem is building up.
There are two key points to consider. The level of personal household debt as a measure of people's income is about 135 per cent. That figure has never been approached in recorded economic history, so we are considering a new phenomenon. People such as Professor Nickell argue that that is fine and that most people are coping with it in practice, as Vera Baird said. Few people, with the exception of low-income debtors, are defaulting on their debt, so most people are coping. Additionally, people say that the ratio of payments to income is not exceptional. However, that will be true only while interest rates remain close to their current levels, but all the evidence shows that there is now a movement towards significantly higher interest rates—I am not advocating that, but describing what is going on in the world. That is happening in the United States, it will probably happen in the European Union and it is certainly happening here. One need only look at what is happening in the forward markets, which expect interest rates to rise significantly and are factoring that into market expectations. Once interest rates move up by 1.5 or 2 per cent., many of the comfortable assumptions about the ability of debtors to sustain their repayments become very questionable.
There is another key point of the argument, which was put to me by the Chancellor when I first raised the issue in Treasury questions. We may complain about the debt, but on the other side of the household balance sheet there are some pretty juicy assets, so on paper things do not look too bad. The problem is that almost all those assets are in the prices of people's houses. One can take different views about whether houses are overvalued. Most of us are not qualified to pass judgments on that, but bodies that are technically competent to make such judgments, such as the International Monetary Fund, are extremely worried and are arguing that on most plausible measures house prices are probably 20 to 30 per cent. above what we would expect them to be on some economic test. Many others in the City see the problem as a good deal worse.
Were the correction to take place, there would be the problem of large numbers of people finding themselves in negative equity, which, as Mr. Hopkins reminded us, has occurred before. For those reasons, we must regard the problem seriously; there are high risks. The problem will not necessarily prove unsustainable, but the risks are mounting. The fact that the Governor of the Bank of England and his deputy have been so pointedly clear about the dangers should be a warning to us all.
What should be done about that in policy terms? What concerns me most is the vacuum of responsibility. When the Government came to office, they made what many of us felt was a sensible decision to subcontract monetary policy to the Bank of England. They also subcontracted regulation to the Financial Services Authority. Those were wise decisions, and the functions have been generally well executed by the bodies given responsibility. However, some big new problems are looming as a result. There are asset bubbles in housing and—potentially—in other things, and big problems of household debt, but it is not at all clear who is responsible for that.
Are the Government responsible, through the Treasury? Is the FSA or the Bank of England responsible? Indeed, who in Government is responsible for the issue of long-term savings, about which the right hon. Member for West Dorset talked? Is there a Government policy on long-term savings? My hon. Friend Mr. Webb asked the Financial Secretary some time ago about the mandate of the Government agency responsible for national savings. The answer was that it did not include savings. He was told that it has other roles, but savings was not one of them.
What has happened in practice, and has happened over the past few weeks, is that the Governor has exceeded his mandate. There is nothing in his mandate that tells him that he is responsible for house prices and personal debt, but he has taken responsibility for that because no one else is doing so and because he can see the dangers. The problem is that he has only one policy instrument: interest rates. The danger of using interest rates to deal with such a scenario is that the British economy will become even more imbalanced.
One of the key trends in economic performance over the past seven years under this Government has been the extent to which the growth of the economy has been driven by personal consumption. There has been quite impressive and steady growth, but it has been driven by personal consumption and boosted by personal debt. Of the average 2.8 per cent. growth, 2.3 per cent.—about 80 per cent.—has been driven by personal spending. Trade has deteriorated—net exports have detracted from economic growth—and there has been little contribution from business investment. If interest rates are used to deal with the asset bubble in the housing market, the exchange rate will inevitably be pushed up, as the hon. Member for Luton, North pointed out, making it even more difficult to export and to compete with imports, and making investment even less profitable. As a result, the economy becomes even more imbalanced.
What are some of the other policies that the Government should be considering? I helpfully produced a 10-point plan, and shall make a few suggestions relevant to our debate. First, the Government ought to look at the structure of incentives for savings and investment. It is striking that there is no restraint on borrowing. If I go into a bank, I can see that the walls are covered with advertisements urging me to take out credit cards and additional debts. All the bank employees earn bonuses by pushing out more debt to their customers, but there is little compensating incentive for anyone to invest their capital. Indeed, if someone tries to invest a few thousand pounds they have to go through a complicated process of filling in forms with a financial adviser. Those procedural difficulties have understandably arisen from past mis-selling, but they have resulted in an enormous bias in the incentives system to borrow and not to invest. I hope that the Government, in their review of the Financial Services and Markets Act 2000, will consider and analyse the fundamental issue of incentives. Is there over-regulation of investment and under-regulation of credit provision?
Secondly, I urge Ministers to consider the important but neglected issue of payments insurance. If large numbers of people get into difficulties with their mortgage—they might not, but they might—insuring their payments will be an important safety net. There is a market for payments insurance, but it is unsatisfactory. The margins are enormous, it is provided by a handful of brokers and banks, and it is not taken up by most people. There is a lot of mis-selling— the institutions that promote the mortgages also promote the insurance—and there is little genuine competition. It is a classic example of something that calls for Government intervention—the Office of Fair Trading needs to look at the market and make sure that it works better—so I hope that they are persuaded to take an interest in it.
Thirdly, Dr. Reid has touched on the issue of debt distress and people who are affected by loan sharking and comparable activities at the bottom end of the market. The paper produced by the Department of Trade and Industry makes some sensible suggestions, but the process of implementing them is slow, so it would be helpful if the Financial Secretary told us when they will come into effect. For example, there are sensible recommendations about stopping the ludicrous practice of penalising people for making early repayments, which would do a great deal to change the culture and encourage people to adopt a more prudential approach to personal finance.
Finally, to expand a debate that I had with the Financial Secretary about 18 months ago, the Government should develop their initiatives on financial advice—a subject in which she takes a personal interest. It should not be impossible to get the industry—the banks, insurance companies and so on—to set up, through a small levy, a national system of genuinely impartial personal advice. At the moment, it is difficult to get independent financial advice, because most advisers are tied to the industry, and the polarisation changes do not make their position any easier. A system of genuinely independent financial advice centres dealing with people before they get into difficulties, not afterwards, would go a long way towards easing people's anxieties before they enter into major financial contracts. The Government want to develop such proposals, but I can see little evidence of their doing so. Perhaps the Minister can reassure us that progress has been made on that agenda.
I welcome the opportunity afforded by our debate to discuss personal debt and savings, a crucial quality-of-life issue that affects all of our constituents and probably every Member of Parliament. When things are going well and we have plenty of money—we have more savings than debt—everything in the garden is rosy. When, however, we cannot cope with personal debt, lives and marriages start to fall apart, which has a huge negative impact on wider society. It is therefore entirely appropriate to debate the matter this evening.
The Government have created a climate in which people feel secure about their finances. When interest rates are at an historic low, inflation is low and unemployment is low, it is inevitable that people feel a little more secure about taking out personal loans and credit cards. That is even more the case when they realise that the value of their house has increased substantially since they bought it, perhaps only a short time ago. In those circumstances, people will inevitably get into personal debt that they can manage.
That is a fact of life and we should not necessarily be afraid of it, but the corollary is that when unemployment is high, interest rates are high and inflation is high, as happened under the previous Conservative Government, absolute personal debt may be lower, but the ratio of personal debt to personal income is much higher. As my right hon. Friend the Chief Secretary to the Treasury said, that ratio is about half of what it was eight or nine years ago. It is now about 7.5 per cent. Although personal debt in this country has gone up, I believe, to more than £1 trillion, the crucial point, which we should welcome, is that that is largely manageable debt, compared with what it was in times of recession.
I accept that the ratio of repayments to income is significantly different from what it was in the early 1990s, but does the hon. Gentleman agree that the trend is very much upwards? Many people predict that we will return to ratios similar to those in the early 1990s.
There is no denying that recently the trend has been upwards, but I am not convinced that it will become as unmanageable as it was in the middle to late 1980s, when the country was in an interest rate crisis. Thanks to the Government's economic management, interest rates are historically low. Mr. Goodman on the Conservative Front Bench smirks at such a statement. It is bizarre that Conservative Members cannot admit that interest rates are now a fraction of what they were in the 1980s and 1990s.
I appreciate that the amount of debt to which people are exposed is much larger, as the hon. Gentleman says. Interest rate sensitivity is therefore much greater. A relatively small movement in interest rates—much smaller than in the period he refers to in the late 1980s and early 1990s—will have a disproportionate effect on disposable incomes. For example, a 2 per cent. increase in interest rates could leave people paying a quarter of their disposable income in interest payments.
The hon. Gentleman is right. A 2 per cent. increase in interest rates would effectively be a 25 per cent. increase in payments. Interest rates are low, so it is inevitable that a small increase has a proportionately bigger effect than in 1989, for example, when interest rates went up from 11 to 12 per cent., which was an increase of only one eleventh.
I apologise to the hon. Gentleman for smirking, as he put it. I was merely recalling that in the early 1990s, our membership of the exchange rate mechanism was supported by the then Government, the Labour party, the Liberal Democrats, the CBI, the TUC and the Church of England bishops, as far as I know—indeed, by everyone.
That was before my time. All I remember is that I was encouraged at the time by the reassurances of the then Prime Minister, John Major, to take out a five-year fixed-term mortgage on my new house at 9.9 per cent. one month before September 1992, and for the next five years was paying substantially more than I would have been paying had I ignored the advice of the then Prime Minister.
The point I want to make is not partisan and has not been referred to in the debate so far. On a number of occasions in the Chamber I have fulminated against the instant gratification society and blamed it for all sorts of things. It is informative to bring up the subject in this debate. We are all bombarded day in, day out with images of stuff—possessions, designer labels, new cars and houses—in advertising, on television, the internet and radio and in newspapers. Some people who see pictures of David and Victoria Beckham in the newspapers may want to buy clothes of whatever designer label the couple is wearing, from shoes to sunglasses. On some of the cable channels, such as E4 or Granada Plus, almost every single advert is for a personal loan. If it is not for a personal loan, it is for insurance.
It is hardly surprising that when children, who are subjected to such images of the fantasy lifestyle that we are told we can pick up off the shelf, find on leaving school that they do not have the income to buy into the lifestyle that they have been told by the media for many years that they can achieve, they take out loans and get credit cards or store cards. If they want to buy something, the idea of saving for it is anathema; it is an unknown idea. If somebody wants something, they get it. How do they get it immediately? They take out a loan. That is the culture in today's Britain. That is how we are being told to live our lives. There is no suggestion that we should ever save up to buy anything. We are always told, "Buy it now, as you can have it now; simply take out a loan." That is not a healthy attitude for us to adopt.
At the end of last year, the Government produced a White Paper, "Fair, Clear and Competitive", looking at reform of certain aspects of the consumer industry. I want briefly to refer to four suggestions in the White Paper, one of which has been mentioned by Dr. Cable, who referred to the ending of punitive penalties levied in the event of a borrower wishing to pay off a loan early. Sadly, the practice continues whereby banks and lenders put all the interest for a loan up front, even if it is a three or four-year loan, so that in the first six months or so when one is paying it off, one makes no impact on the capital. If somebody feels after six months that they can pay off the next two and a half years of the loan, they will find that they have to pay off all the debt, and that all that they have done so far is pay interest. That appalling practice takes a number of people by surprise who find themselves in the lucky position of being able to pay off a debt early.
The White Paper proposes that the rules on advertising should be changed to ensure, for example, that the annual percentage rate offered by a particular company has more prominence than other information about that company. That will be welcomed by anybody who wants to make a genuine comparison between the different products on offer. Another proposal is to introduce a standardised way to calculate the APR. Thank goodness for that. If a gun were put to my head and I was told to explain how an APR was calculated, I could not do so. When the White Paper was published, I was astonished to find that there is more than one way of calculating the APR. I cannot understand how the industry has managed to survive to date without a standardised form of APR, and I am delighted that the Government are now looking at ways of standardising it.
All those proposals will be especially welcomed in my constituency. In Castlemilk, for example, there is a shop that has, for many years, put on sale products and advertised hire purchase agreements with extortionate interest rates that are well beyond what anybody would expect even from the most notorious store card. It advertises those rates of interest not because its target audience and clientele can afford to pay them, but because it knows that they cannot afford them and that there is money to be made from getting people into debt to the point at which they cannot afford the repayments. For the sellers, that can often be a win-win situation, but for the ordinary people who are trying to make the payments, it is almost always a lose-lose situation. Another example, which a constituent brought to my attention, recently appeared in a local paper in Glasgow. It concerned a company that sold second-hand personal computers, and the repayments on its loans were structured to attract people who would not normally obtain credit from outlets such as PC World to buy a brand new computer. Such people prey on the most vulnerable and poorest people in our society, and I am glad that the White Paper will combat that practice.
My hon. Friend's reflective speech makes me think what a bind such companies get ordinary people into. He made the strong point that the charges for paying off a debt early are onerous, but one also incurs onerous charges if one makes a late payment. If one does not toe the consumer credit companies' line, one gets oneself into deeper and deeper debt.
My hon. and learned Friend is right. We could have a full day's debate on the various sharp practices used by banks and lenders, and perhaps we will have such an opportunity. Banks are not slow to penalise people for making late payments, but they are not particularly quick to come forward when they make a mistake—but that is a separate debate, Madam Deputy Speaker.
Many people do not save enough, and far too many people save nothing at all—I suspect that it has always been thus, and it has certainly been thus in recent history. The Opposition blame the Government for those ills.
The hon. Gentleman is a partisan fellow, and he has his opinions. It is difficult for the Conservative party to blame the Government unless, of course, it turns a blind eye to some salient facts: it is difficult to cope with a large debt if interest rates are 10 or 11 per cent., as they were under the Conservative party; it is difficult to cope with a large debt if unemployment is more than 3 million, as it was under the Conservative party; and it is almost impossible to manage a large debt if inflation is in double digits, as it was on a number of occasions under the Conservative party. This Government have done more than any previous Government to encourage people on middle and low incomes to save, and they have done more than any previous Labour or Conservative Government to provide economic circumstances in which saving is not only a financial necessity, but a bonus that allows people to prepare for the rest of their lives.
The debate is important, and I support much of the analysis outlined by Mr. Harris.
It is easy to be puritanical about increased consumer debt, which is approaching £1 trillion. It is also easy to criticise people who take out store cards, credit cards and personal loans, but who can blame those people when some of today's circumstances encourage them to do so? Factors such as low interest rates on savings and rising house prices lead people to ask, "I have got more money and more wealth; how can I best use that wealth?" However, the seeds of economic uncertainty for not only individual households, but the economy as a whole lie in the sense of increasing affluence and the ability to service higher debt, which is the point that I want to discuss this evening.
Hon. Members from both sides commented that lower interest rates allow people to service greater debts, and households are gearing their debt to reflect the lower cost of servicing it. The debt-to-household-income ratio is 140 per cent., which is one of the highest levels ever. People can service that debt at the moment. They are gearing up—borrowing more—because of the low interest rates.
People are optimistic about their future; they are prepared to continue to take on extra debt if they believe that the economy is stable, that they will stay in employment for the foreseeable future and that interest rates will be low. Moreover, if they sense that their personal wealth is increasing, they will start to borrow more. Equity in a house was previously viewed as an intangible asset that was difficult to realise without selling the house and downsizing; nowadays, it is realised in many different ways. My right hon. Friend Mr. Letwin cited the increased use of retirement income schemes, which take out equity from a house to provide income for retirement. That was also mentioned by my hon. Friend Mr. Swayne.
Another factor in the rise of the borrowing culture is the decline of the savings culture. Returns on savings are low. The FTSE 100 has barely moved during the past seven years, whereas stock market indices in other leading economies have gone up. We have already heard about the £5 billion raid on pension funds. We must also consider the rigidity of certain savings products: for example, it is very difficult to access one's pension fund before retirement; and if one takes money out of an individual savings account to meet a short-term financial crisis, one loses the tax relief on one's savings.
Some people are having to shoulder higher levels of debt at the start of their career. I do not wish to make partisan points about the level of student debt, but it is clear that top-up fees will saddle students with more debt that they have to pay off over a longer period, so they will not have the free cash available to put money aside for a pension or to save for the deposit on a house. The pension credit has a particular effect on tomorrow's pensioners' incentive to save.
On current returns, the structure of the savings market encourages people to borrow money instead of saving for the future. That sows the seeds of several economic problems. First, strong borrowing for personal expenditure adds to the volatility of the economy. If people perceive the economy as continuing to grow, they will continue to borrow on the assumption that their income will increase in future and they will be able to service the debt from it. One of the Bank of England's most recent inflation reports included a very good chart that showed the strong correlation between the increasing level of equity withdrawal from houses and household consumption: as people took more equity out of their houses, they spent it on a new car, a holiday, or a new kitchen or bathroom. People have started to borrow out of their principal asset—their house—to fund future consumption. Once they start to lose confidence in the future of the economy, they will borrow less, and consumer expenditure, which has been one of the main drivers of the economy over the past few years, will start to come under pressure.
Secondly, people have re-geared their debt to reflect low interest rates, which mean that they can afford to borrow more. Because of the significant increases in house prices, people borrow ever-higher multiples of their income in order to be able to afford to buy a new house. When I first bought a house, the maximum multiple was three times one's salary; now it goes up to four or five times one's salary. Such a high level of borrowing increases the volatility exposure of households to high amounts of debt. My hon. Friend the Member for New Forest, West expressed that eloquently in an earlier intervention. If interest rates are 5 per cent., a rise of 1 per cent. would increase the interest cost by 20 per cent. If interest rates are 10 per cent., a 1 per cent. rise would increase the debt service cost by only 10 per cent.
Perhaps I did not address that point fully when Mr. Swayne raised it with me. Although an increase of 1 per cent. is a large proportional increase, does the hon. Gentleman accept that the actual net increase in pounds per month would be exactly the same as the increase if interest rates were even higher?
The hon. Gentleman needs to be careful because although there is an interest rate, we should not forget that people are also borrowing more. A repayment element therefore needs to be taken into account. Borrowing more means repaying more as well as paying slightly less in interest.
If one borrows when interest rates are low and house prices are high, without considering that house prices might not continue to rise but that interest rates could, one finds oneself absolutely out of kilter. That does not happen if house prices have ceased to increase so quickly or interest rates have been reasonably high for some time and one has made a decision in the context of high interest rates. It is a question of when one makes a decision and in what context.
My right hon. Friend makes a powerful point. People who borrow when interest rates are high benefit significantly when they fall. Much of the increase in disposable income is a consequence of that. When the reverse happens, and one borrows on the assumption that low interest rates will continue for some time, but they rise significantly, disposable income, after taking account of interest payments, begins to diminish. Such matters lead to volatility starting to creep into the economy. People gearing up debt present a risk to both their personal finances and the economy. As people increase the amount of interest that they pay on their debt, they will be forced to reduce their personal consumption to keep their books balanced, and that will have an impact on the wider economy.
The deputy governor of the Bank of England summed up the matter neatly when he said in March:
"Since there are, at present, relatively high levels of debt and these are rising faster than income, it is likely that potential vulnerabilities from increased gearing are rising . . . And we know from experience that unexpected shocks from one source or another can upset individuals' predictions and behaviour."
My right hon. Friend Mr. Gummer referred to those shocks when he mentioned the changes in the economy that force up interest rates. We should be mindful that we are considering not only straight economics but people's lives and that personal debt has a huge impact on all our constituents.
In my constituency, the citizens advice bureau said that, according to its referrals, in 2002–03 the average debt was approximately £11,500, whereas in 2003–04 it was £17,000. That shows some of the vast personal debt that people are incurring. We are therefore presented with a difficult position and Mr. Hopkins picked up on that when he probed Government and Opposition Front Benchers about interest rates.
The Monetary Policy Committee of the Bank of England is in a difficult position. Interest rate increases are significant and could lead to a hard landing for the economy as people cut their spending to meet high borrowing costs. Small increases in interest rates, however, might not send the right signals to consumers, and the house price increases might continue, forcing people to borrow more money so as to be able to afford a house. A difficult dilemma faces the Monetary Policy Committee; it has to get the interest rate right both in terms of controlling inflation in the short term and in regard to the longer-term implications for house prices, consumer debt and the long-term structural stability of the economy.
One might ask what the Government are doing in this regard. In an interesting article published last month, Ros Altmann, a Government adviser on pensions, wrote:
"The UK economy's remarkable recent performance has been supported by a housing boom and government spending on job creation in the public sector. Is this all part of the Treasury's plan? Rising house prices have a positive wealth effect, increase consumer spending on housing-related items and fuel sharp rises in borrowing, all adding to short-term economic strength."
That is the view of someone who advises the Government.
This is how we come to understand the nature of the economy. If we continue to fuel short-term growth—and as long as the economy continues to grow, and interest rates and unemployment remain relatively low—borrowing may well be sustainable. However, we cannot rely on a positive view of the economic outlook by the Government. Steps have to be taken to introduce stability into the economy. That is why we need stronger incentives for saving, not only for retirement but for the pre-retirement period. We also need less rigidity in the savings products that are available and encouraged by the Government, if we are to encourage more people to save. If we do not have the counterbalance of savings in the economy, the threat that borrowing poses to the stability of the economy in the medium to long term is significant. That is a challenge that the Government have yet to grasp, but my right hon. Friend the Member for West Dorset demonstrated in his opening speech that the Conservatives certainly have grasped it.
A generation ago, Britain was a country in which debt carried a stigma and borrowing was known as living beyond one's means. Now, however, personal borrowing has risen to £1 trillion. There has been a profound cultural change, and the key to that is our affection for home ownership. As many hon. Members have said, 80 per cent. of the £1 trillion consists of mortgage borrowing, but the impact of the housing market boom goes much wider than the headline figure. Many people have seen the value of their home double in the last five years. People who were never asset-rich before have become so, probably faster than at any time in history. At the same time, with low interest rates, low inflation and low levels of unemployment nationwide—although not throughout all the regions—it is cheap to borrow.
Low interest rates also fuel the notion that it is not profitable to save. I have never been entirely sure whether that is right, because inflation—which fuels higher interest rates—makes savings look attractive, but if they are fuelled by inflation, their benefits are wiped out. However, it looks as though it is not worth saving at the moment, and that illusion is widespread. Lenders, too, have obviously become—let us put it generously—flexible, but as long as everyone agrees that credit is being used as a tool for financial flexibility in a manageable way, it is part of economic growth. It creates employment in the service sector and contributes to gross domestic product, and our economic performance has outshone that of France and Germany recently.
I listened to a commentator from Ernst and Young on the BBC recently. I was impressed that Dr. Cable gets his views from professors; I listen to the BBC. That is the best I can do. The spokesperson from Ernst and Young made it clear that, without the explosion in borrowing, UK growth rates would have been much lower, the UK economy would have been much smaller, and the corporate sector would have been less profitable. There would also have been fewer jobs without the impetus of personal borrowing. There seems to be consensus among financial commentators at the moment that people are in the main still servicing their debt reasonably comfortably because of low interest rates, but I accept that, as hon. Members on both sides have pointed out, it does not take much of an interest rate change for that to become a problem.
However, there is an historical point. Capital Economics, quoted in a Money Observer article that I read recently, cited the fact that from the late '80s, long before economic gearing started to peak—we have talked about the levels of economic gearing tonight—people in households took action to cut their debt. It has been shown that the recent increases by the Monetary Policy Committee are having an effect on mortgages. Secured lending rose by only £8.5 billion in May, which is the lowest increase for nine months and down from an increase of £9.2 billion in April. So, one hopes that people are reading the signs as they come and that there will not be any real developing crisis.
A MORI Market Dynamics poll recently referred to the fact that thousands of pounds of credit card debt are in the hands of people it calls convenient controllers—that is, by and large, people who cope with paying off their balance every month. Only about 5 per cent. of card holders are classified as spiralling debtors with large debts relating to their income. It is right to point out, however, that the Consumer Credit Counselling Service says that 5 per cent. represents an enormous number of people. With 61 million credit cards, that is likely to be true.
I want to point out some oddities that presented themselves to me in recent days as I reflected on this debate and which have perhaps pushed people towards borrowing rather than saving.
My hon. and learned Friend's analysis is absolutely correct. One wonders whether Opposition Members are amazed, and even perplexed, by the fact that the figures she has given on inflation, interest rates and the rest have all been achieved under a Labour Government. Perhaps it is difficult for them to come to terms with that.
On the specific issue of credit cards, does my hon. and learned Friend agree, on the basis of constituency experience, that many people are deeply worried about the increase in credit card fraud? Therefore, should we not quite properly be addressing it?
My right hon. Friend is correct. People are very concerned about credit card fraud and about identity theft, which can go beyond credit card fraud. It is a most serious issue indeed. There are, of course, steps that the Home Office is countenancing now to try to make clearer what people's identities are in the hope of at least partly combating that issue.
May I return to credit cards specifically and some oddities between pressures that push people towards saving or push them towards taking credit? A number of people have said to me in the last few days that having a savings account in a bank for several years does not help a person to get a credit rating—particularly not a young person, apparently. Getting a credit card does help a young person to get a credit rating.
In addition, people who go to buy a car in cash are told that they should borrow the money if they want a discount, because cash purchases are no use to the salesperson. Discounts are available only for credit. I recall that there used to be discount for cash, but it seems that the clear message now is that there is no point in saving up for a car because people who do so will not get as good a ticket price as they would if they borrowed the money.
Whether those factors play a role it is hard to know, but it is hard to suspect that they do not. Of course, inequity has come into play. The pattern is that the lower the person's income, the higher the interest charged, together with, as my hon. Friend Mr. Harris said, penalty charges for being late by a day and penalty charges for paying debt back a few days early.
Over-indebtedness is a real problem for people on low incomes and it can result in significant costs—health problems, depression and deterrence from moving into better employment leading to homelessness. There are 3 million households in arrears with credit repayments on household bills and problem debt is primarily concentrated in low-income and other socially excluded groups. For example, 57 per cent. of over-indebted households have an annual income of less than £7,500.
Of course, low-income groups also experience the most directly serious debt—priority debts—such as utility and council tax bills, which are likely to result in eviction, imprisonment, disconnection or repossession. High repayments also leave people with little disposable income. According to the Office of Fair Trading family expenditure survey, in this day and age, 5 per cent. of the poorest decile spend 90 per cent. of their income servicing debts.
The debt problems of the lowest group are not caused primarily by irresponsible money management. Mostly, people on low incomes have reasonably sophisticated budgeting skills—I suppose that, by necessity, they must have. In most cases, initial triggers for debt are life events: losing a job, moving in and out of work, separating, becoming ill, developing a disability, having children, or being on a long-term low income. One in five households in arrears or financial difficulty attributes it to redundancy, and one in seven people cites living for long periods on a low income as the cause. Those are the kinds of people whom Redcar citizens advice bureau deals with. Last year, 42 per cent. of the 23,500 issues that came before it related to debt, and it has dealt with approximately £2.5 million worth of debt.
In addition, the community legal service partnership in Redcar has found a high need for debt and money advice in the borough. It now has a money advice worker who has dealt with 100 clients over the past financial year and debts totalling about £1 million. Apparently, the average debt is around £10,000, and that partnership too finds that the reasons why people get into debt tend to be life events and not mismanagement. It points, however, to a number of features that exacerbate the situation—for example, the fact that debt is easily accessible. In particular, once into debt, people get another debt to pay off the last one, and again and again.
Problems are apparently encountered with the commercial side of debt advice, in which individuals tend to be recommended to consolidate their debts into a personal loan, which will have "a lower interest rate", but which will go on for very much longer, and therefore, in the end, be very much more costly to service. In particular, people get talked into secured personal loans, which will not only increase the amount that they will have to pay back over the years but put the roof over their heads at risk if they are unable to make the payment. I was shocked to find that there are commercial debt counsellors who charge for debt counselling. I was completely unaware of that. Happily, free services are provided through the CAB and National Debtline, although it is a moot point whether those are sufficient.
A further problem is that 41 per cent. of adults on Teesside have numeracy and literacy problems, which feeds the problem. People do not understand contracts, do not know how to choose the best deal, and do not understand what APR is, although, as my hon. Friend Mr. Harris said, which one of us does? Furthermore, they do not know what the term "interest free" may mean, as, again, many of us do not. Addressing adult numeracy and literacy problems will help people to have greater financial understanding. Redcar CAB does some proactive work in schools and at Sure Start venues, where it tries to teach people how to avoid debt from as early as 15 or 16 years of age, which, I would imagine, is the type of work that the Government would like to encourage even further.
I want to mention only two things that the Redcar CAB and the welfare advice department are concerned about, because their effects are capable of making matters worse. Under changes to income support from January 2005, no amounts will be provided under it for children, and claimants will be moved on to child tax credit to support their children. That means that some people will be lifted off income support, even though they will not get any additional money paid to them. As a result, they will stop being passported through to the social fund, although budgeting loans and community grants are important to enable people to buy large items that wear out, such as washing machines. The question is: if people are no longer able to access the social fund, what will that do to families who are currently struggling and just managing to hold off debt? In addition, the new working tax credit, which of course aims to help low-income workers with children, is perhaps a tad unresponsive to changes in the household, such as someone going sick, or someone leaving the household, as it is based on the last year's income. Many people in the Redcar area who suffered overpayments through no fault of their own are having to repay from this year's award.
I know that the Government, who are very concerned about these issues, will want to consider those two potential problems, and decide whether they are likely to have an impact or whether there is already a solution to them.
I do not believe that the current levels of borrowing constitute a crisis, or are seriously damaging at the moment. I think that we can take it easy in the short term, although we must not be complacent. For a narrowing band of society, however—the poorest—there is a serious debt problem, and where debt has its impact in that sector it is very severe.
Let me say a quick word about pensions. If the basic state pension were increased to pension credit level, that would do no good to the 87 per cent. of women who have no basic state pension. Their pension credit would be wiped out pound for pound. It would benefit only the more affluent pensioners whose savings take them well above pension credit level, most of whom receive occupational pensions. That would clearly be regressive in terms of income distribution, but above all it would be deeply sexist.
What does the hon. and learned Lady make of the 1 million pensioners who are entitled to pension credit and do not take it because of its awesome complexities—including, of course, many hundreds of thousands of women?
As I am sure the right hon. Gentleman knows, the figures show an improvement in take-up of pension credit. He must also know that the application forms have been made much more strikingly similar to others. The Pension Service's telephone responses are being praised by all those in my constituency—I have mentioned them—who help elderly people with means problems. The right hon. Gentleman is barking up the wrong tree.
If some pensioners believe that the forms are too complicated, might that not be at least partly because every time a Conservative MP goes on television to talk about pension credit he or she never misses the opportunity to perpetuate the myth that they are far more complicated than they are?
My hon. Friend makes a powerful point. It is time the Tories stopped saying how hard it is to obtain pension credit, and started to encourage a few more elderly people to claim it.
I hope the right hon. Gentleman takes my point that his proposals to alter the basic state pension are profoundly sexist, and will certainly not appeal to female voters.
The hon. and learned Lady overestimates our influence if she believes that we are responsible for the present non-take-up rate of pension credit, which is 40 per cent.
I would not dream of overestimating the Opposition's influence. I do not believe that they have a great deal of influence, or that they have exercised much of it tonight.
I look to the right hon. Member for West Dorset to explain how it is possible to advocate what he has advocated tonight in regard to basic pension increases without being profoundly sexist, as well as redistributive in a regressive way.
I refer the House to my declaration of interests, and particularly to my independent chairmanship of the Association of Independent Financial Advisers.
I wonder how we have managed to talk about mortgages for a whole evening without mentioning the shortage of homes. There is another issue besides the price of a mortgage—the issue of supply and demand. One of the reasons why house prices have risen so sharply is the Government's failure to ensure that enough homes are built, and enough land released on which they can be built. But we in this House must be careful not to take the doom and gloom view that everything is bound to get worse, nor to adopt the unbelievably self-congratulatory attitude of Mr. Boateng, who introduced the Government's case. There ought to be something in between, and that is what the Opposition are trying to underline.
The simple point is this. It is not surprising that concern exists if the very high level of debt is based on the belief that interest rates will for ever remain low, or if such debt is being forced on people because of a shortage of homes, and they are pushing up the proportion of income that they are prepared to risk in such circumstances, simply to get a roof over their heads. Such concern is indeed what the Opposition are expressing. In doing so, we are not being party political, for this is precisely the concern that the Governor of the Bank of England has expressed, as have many independent and largely left-leaning commentators.
Our concern is increased because of the Government's complacency. Have they read their own alternative motion? It is the most self-congratulatory and complacent statement of the situation that one can possibly have read—a fact that should concern us all. The second worry is that huge disagreement exists within the Government, with the Chancellor on one side and a whole range of people from different elements of the Government on the other. This is, after all, a Chancellor who is at odds with the Governor of the Bank of England. This Chancellor thinks that he can do better at solving the housing problem than the Office of the Deputy Prime Minister. Most people think that, but this is a very curious situation. Two major offices of state have publicly announced different ways of solving the housing problem, and both are pushing forward their ideas in total contradiction of each other. The Chancellor has also fallen out with the Department for Environment, Food and Rural Affairs over how we are to deal with housing and planning issues.
All those issues feed into the considerable concern that we must feel at the fact that the level of debt is based on the Micawber-like principle that everything will be okay because interest rates are not going to rise. Well, they will not rise very fast, but I certainly do not want this nation to be dependent not only on interest rates not rising, but on the value of houses not falling—for that, too, is a major issue. I doubt whether there will be a collapse, but it will be avoided not because of the Government's management of the economy, but because of the shortage of houses. There is now huge pressure on the system in terms of supply and demand. Some 58 per cent. of the new homes needed are needed by those whose marriages have broken up. The deposits that such people can put down are significantly larger than those that first-time buyers can put down. Such factors complicate the situation, but the Government have not properly considered them.
I would not be proud of a record that shows that per capita wealth in Britain is now lower than that of the Irish, much as I like and am enthusiastic about the Irish, and much as I am pleased that the European Union has improved Ireland's economy, as it has done in many other cases. That is a great achievement that Britain never managed, and it is another good reason why we should be extremely pleased to be part of that organisation. But it is important to point out that this Government do not make that comparison, and the reason why is that they have presided over an economic policy that has made it more difficult for business to thrive, thanks to the restrictions that they have placed on it. Nor would I be enthusiastic about defending a savings rate as low as we see today.
It was difficult to follow the Minister's argument, because he essentially said, "We have done this, that and the other, and we have done more and extra, to try to encourage saving, but people have ceased to save." We have done everything for them, and we have a wonderful committee—on which I sit with the Financial Secretary—to educate people, but the savings ratio continues at a very low level. Indeed, it is much lower than it safely should be.
I return to the point made by my right hon. Friend Mr. Letwin. A society that does not have a relatively high savings ratio and in which savings—large and small and across the social structure—are not considerable in proportion to the assets and earnings of individuals is a society that in the end destroys its own cohesion. A safe society is one in which each individual has a real stake in their future and knows that when they save they are contributing to the improvement of that future. A society that makes it better not to save is a society that removes from people that important social asset of a commitment to order, progress and security. Societies that have ignored that have ended up in political disorder, have destroyed their progress and have removed their security. History is a hard teacher on that issue, and this Government have done much to undermine this society.
That was a very fine speech by my right hon. Friend Mr. Gummer. It was a fine contribution to what has been a good, serious and reflective debate. It is worth saying that debt is not always bad, and indeed that point was made by my hon. Friend Mr. Hoban. Firms must often borrow to invest and people must often borrow, for example, to improve themselves, their homes and their lives. None the less, the facts on debt are extremely worrying, and Dr. Cable made a fair attempt at trying to establish just how worrying they are.
Lending to individuals has almost certainly now broken through the £1 trillion barrier, so it has soared. The facts in relation to saving—a point on which my right hon. Friend Mr. Letwin dwelt at some length—are alarming. Between 1998 and 2003, the savings ratio was never higher than 6.7 per cent. In the previous seven years, it was never lower than 9.3 per cent., so saving has fallen sharply. It is around the two polarities of debt and saving that this debate has turned.
According to the family resources survey, 27 per cent. of households have no savings at all and a further 23 per cent. have savings of less than £1,500. The Bank of England's chief economist has noted that the gap between what British households should be saving to ensure a comfortable retirement and what they actually save is £27 billion a year. Unsecured personal debt is now £172 billion, or more than £500 a person. What does all that mean for homeowners and for the vulnerable? The latter group includes some homeowners, but of course not by any means all of them.
According to the Council of Mortgage Lenders, a household with average earnings, average mortgage and average levels of unsecured debt now uses 34 per cent. of its income to service that debt. According to Capital Economics, a 1 per cent. rise in interest rates would take the gearing on that debt to just over 24 per cent.; a 2 per cent. rise would result in households paying just over a quarter of their income in servicing debt; and a 3 per cent. rise would raise that figure from a quarter to 28 per cent. Indeed, as we have heard from the Governor of the Bank of England, house prices are
"well above what most people would regard as sustainable in the longer term".
The trend of rising interest rates has the potential—I put it no more strongly than that—to damage the lives of millions of homeowners who would be hit if the Government won a third term, a prospect that is looking increasingly unlikely given the damaging combination of interest rate rises and Labour's third term tax rises, to which my hon. Friend the Member for Fareham alluded. Of course, there is always the risk of the transfer of debt to the next generation.
None the less, I want to assume, for the sake of argument, that the Council of Mortgage Lenders is right to say that
"current . . . levels of debt are clearly an issue, but they are not as dramatic in the secured sector as in the unsecured sector".
I want to assume that the council is right, because although most home owners may be able to endure the debt culture, there can be no doubt that the poor and the vulnerable—a group that includes some home owners—cannot endure the debt culture. That group of people is losing out, as Mr. Harris reminded us in his interesting speech, so I shall turn to their plight.
The debt to income ratio is highest in the poorest households; it doubled between 1995 and 2000. Forty-two per cent. of families with a new baby are in arrears, as are 48 per cent. of lone parents and 53 per cent. of recently separated couples. Over the last five years, inquiries to citizens advice bureaux rose by 46 per cent.
The Council of Mortgage Lenders said:
"There are some signs of financial pressures building in the unsecured sector. Recent trends in consumer credit appear to suggest that the debt position of a significant minority of households leaves them vulnerable to default."
We believe that the Government's White Paper does nothing substantial to help that group. It does not address the growing failure of people to save. It does not address the growing problem of the debt culture and it contains no significant proposals on education, savings or alternative sources of finance. As my right hon. Friend the Member for West Dorset said earlier, that is why the Conservative party has set up a commission to report on debt and savings. The debt commission will be independent of the party and will report later this year. It will be chaired by the distinguished figure of Lord Griffiths of Fforestfach, who was of course head of the Downing street policy unit when Baroness Thatcher was Prime Minister—[Interruption.] Before Labour Members work themselves into paroxysms of wrath, I remind them that Lord Griffiths is an adviser on third world debt to the Chancellor of the Exchequer, so they should not laugh too loudly, because the Chancellor, who is a very influential man these days, as Mr. Mandelson reminded us recently, might hear them. The members of the commission include the Right Reverend James Jones, the Bishop of Liverpool and Keith Tondeur, the national director of the money education charity, Credit Action.
The commission is charged with finding ways of relieving the debt burden and of reviving the savings culture and will examine ways of improving education and saving. However, we do not believe that the Government have to wait for Lord Griffiths before acting to slow the debt culture and to revive a savings culture, because one fact is clear: there will be no savings culture if three quarters of all pensioners end up on means-tested benefits, and that is exactly where we are heading. Half of all pensioners are already on means-tested benefits. By 2025, three quarters of them are expected to be on means-tested benefits. In short, 4 million pensioners will have to reveal all the details of their personal financial circumstances to a Government official so that he or she can determine the total income they should have.
Means testing not only increases dependency and decreases dignity but also destroys saving. The Government's mania for means testing is throwing their pensions strategy into chaos. Ministers have declared that they want to shift the pensions balance; they want 40 per cent. of pensioners' incomes to be funded by the public sector and 60 per cent. by the private sector. When they came to office, those figures were almost the reverse: 58 per cent. were funded by the public sector and 42 per cent. by the private sector. Since then, the shift has been not from public to private but from private to public.
The percentage of pensioners' incomes funded by the public sector has risen to 61 per cent. while the percentage funded by the private sector has fallen to 39 per cent. The pensions industry cannot plan while the Government say that they want to decrease state dependency yet act to increase it. People will not save if the shift to means-tested benefits penalises them for saving. The Government are unwittingly creating a vicious cycle, in which low saving boosts dependence on means-tested benefits, which in turn boosts low savings.
That cycle must be broken. The way to break it is evident: a lifetime savings account—a flexible way to reward saving—and a pension linked to earnings. That would float 1 million pensioners off means testing in just one Parliament and would allow them to save on top. However, I doubt that the Financial Secretary to the Treasury will announce either proposal tonight. The Opposition certainly would not expect that from a Government whose raid on pension funds has cost a scandalous £5 billion a year.
Slowly but surely—perhaps unwittingly—the Government are destroying our savings culture, which is why I urge the House to vote for our motion.
We have heard some excellent contributions to the debate, particularly from my hon. Friend Mr. Harris and my hon. and learned Friend Vera Baird. I shall respond to some of the detailed points that the Opposition have raised in a few moments; but, first, I should like to put the debate into some sort of context.
The important achievements of this Labour Government—economic stability, continued economic growth and sound public finances—all provide the best possible environment for savings and ensuring that existing levels of household debt are sustainable. Opposition Members have lectured us on the economy—that from a party that, when in government, had inflation running at 10 per cent., interest rates at 15 per cent., and 3 million people unemployed twice. It ran up a huge deficit. Some 1.5 million people were in negative equity, and there were 250,000 home repossessions. The Conservatives had to break every promise that they made on tax.
Britain has grown in every year of this Labour Government, while under the Conservatives this country had two of the worst recessions in its history. Higher savings in the early 1990s, which Opposition Members are so fond of quoting at us, were a symptom of macro-economic instability. Households had to save more to make up for the loss of the value of their savings owing to inflation and to provide a cushion in the event of becoming unemployed.
I cannot resist drawing attention to some of the analysis carried out by the Bank of England, as Opposition Members are so fond of quoting the Governor of the Bank of England, and indeed pointing to the savings ratio performance under this Government. Of course, I treat all these statistics with a measure of caution, as hon. Members will appreciate, but I refer them to an analysis of the savings ratio carried out by the Bank of England, which concluded that, when inflation is taken into account, the savings ratio since 1998 is significantly higher than the average over the previous 40 years.
If hon. Members look at the facts, they will see that, under this Government, inflation has averaged just 2.4 per cent. compared with 6 per cent. under the Tories—the peak was 21 per cent. Interest rates have been averaging 5.2 per cent., whereas they were on average 10.5 per cent. under the Tories. Mortgage rates have averaged just over 6 per cent. under Labour, while they averaged 11 per cent. under the Tories.
Conservative Members opposed each of the decisions that we took to put the economy on a sound and stable footing. The decisions that they would have made had they been in government would have put Britain into recession, instead of which Britain is growing. Indeed, when we introduced tough fiscal rules, the Conservative party opposed them. When we introduced the symmetrical inflation target, the Conservative party opposed it. When we made the Bank of England independent, that was opposed by Mr. Letwin.
I am sorry to intervene on the hon. Lady, and I am grateful to her for giving way. Is she really trying to tell the House that she thinks that the current level of savings is satisfactorily high?
I would not claim that for one moment. My right hon. Friend the Chief Secretary to the Treasury has pointed to the fact that 3 million people seriously under-save and that 5 million to 10 million do not save enough, but I point to the Conservative party's flawed analysis, flawed facts and inability to grasp the reality. Instead of standing up to apologise, as the right hon. Gentleman should have done, he has proposed a policy that Mr. Willetts described a few years earlier as wild, uncosted and opportunistic. I have not got much time tonight. I would love to take hon. Members through each of the right hon. Gentleman's arguments, but let me look at just some of them.
First, let us turn to the housing market. The right hon. Gentleman will know that both the Treasury and the Bank of England have consistently forecast a slow-down in consumer spending and house-price inflation as the UK and global economic recoveries gather pace, and because UK interest rates have risen from last year's historic low levels. The recent speech made by the Governor of the Bank of England in Glasgow pointed out the surveys that show early signs of a slow-down in the housing market. The right hon. Gentleman cannot obscure that fact by citing annualised rates; surely he can see the evidence. As he knows, there are important reasons to believe that household overall balance sheets will remain consistent with macroeconomic stability.
As Mervyn King said in his speech, there are good reasons to think that the long-term level of house prices relative to earnings has risen. For a start, as the Barker review shows, house prices reflect the balance between the rising demand for, and restricted supply of, housing in the UK. Additionally, the success of the new economic policy framework in delivering economic stability with low interest rates and strong labour market outcomes has made people more confident about taking on new risks, which is likely to have contributed to a rise in the equilibrium of the house price to earnings ratio.
Quite unlike during the late 1980s, the low interest rates delivered by greater macroeconomic stability have ensured that household interest payments remain low by historical standards. The ratio of interest payments to household disposable income has remained close to 7 per cent. since 2002, compared with its peak of more than 15 per cent. in 1990, when consumers were hit simultaneously by rises in interest rates that were well into double figures and rapidly rising unemployment. The result of that is that the asset side of the household balance sheet is strong, with household net wealth, despite the recent fall in equity prices, still more than 50 per cent. higher than at the beginning of 1997. The right hon. Gentleman will doubtless appreciate that when developments on both sides of the household balance sheet are taken together, the ratio of household debt to total wealth remains stable around its long-term average.
Instead of looking at the facts, the right hon. Gentleman tried to make a rather tortuous argument about the impact of mortgage equity release on interest rates, arguing somehow that that is fuelling an increase in consumption that will thus hit interest rates. Given that he is so keen on the Bank of England, I shall cite an analysis in a recent inflation report that examined mortgage equity release and argued that that was largely driven by demographic factors and unlikely, therefore, to have had a significant impact on consumption.
I could back up that analysis with figures from the Office for National Statistics, which suggests that most of the mortgage equity release that has been withdrawn over the past few years has been saved, not spent. Three quarters of the increase in mortgage debt since early 2000 has been matched by a build-up of money and deposits, while the savings ratio has remained broadly stable. I urge the right hon. Gentleman to undertake more cautious analysis in the future before making great claims about the effect of mortgage equity release on consumption. I agree that there are real issues to address regarding the impact of debt.
I have cited two sources for our estimates on mortgage equity withdrawal: the Office for National Statistics, which most people would say was at the cutting edge of international statistics; and the Bank of England, which the right hon. Gentleman has cited throughout the debate.
Hon. Members on both sides of the House would agree that we must take the impact of debt on vulnerable consumers extremely seriously. We want to have well-informed consumers who are able to take sensible and appropriate decisions about their long-term finances. I remind the right hon. Gentleman that from
The Government's vision is of a simpler, more transparent market in long-term savings in which trusted and trustworthy providers sell simple, good-value products to informed consumers. We have been working towards that for the past six years with measures—
Question accordingly agreed to.
Mr. Deputy Speaker forthwith declared the main Question, as amended, to be agreed to.
That this House believes that a strong and stable economy is the foundation of families' confidence in their own finances; notes that economic stability has delivered low and stable inflation, interest rates have been at their lowest since the 1950s, employment is at a record high and unemployment at its lowest since the 1970s; further notes that as a result households are better able to judge their long-term commitments as macroeconomic stability has reduced the risks to household finances of sudden and sharp rises in interest rates as seen in the past; believes that the Government has tackled the scandals it inherited and created a world leading system of financial regulation allowing people to save with confidence, simplified savings markets allowing people to make informed choices about what and how to save and taken action to tackle financial exclusion; recognises that most household debt remains affordable and that total interest payments are now 7.6 per cent. of disposal income compared with 15 per cent. in 1990; believes the biggest risk to household finances and consumer confidence would be a return to economic instability; and rejects the short-term boom and bust economic policies of the past that saw interest rates hit 15 per cent. and inflation hit 10 per cent. in which circumstances households had to save more to make up for the loss of value of their savings due to inflation and prepare in the event of becoming unemployed.