I beg to move,
That this House
has no confidence in the Chancellor of the Exchequer's handling of occupational pensions.
That simple motion reflects the following four simple charges. First, that in his first Budget this Chancellor introduced a stealth tax on pension funds that his own civil servants warned him would blow a big hole in those funds' finances. Secondly, that in the decade since that Budget that is precisely what has happened; we have seen what the Labour pensions Minister at the time describes as the "large-scale desolation" of our pension system. Thirdly, that that desolation has left millions with a shortfall in their retirement funds and 125,000 people with little or no pension at all. Finally, that this Chancellor has from the start acted with stealth, blocked all attempts to get at the truth and now blames everyone but himself for the destruction that he has brought to Britain's pensions. In short, the abolition of dividend tax credits was, in the words of the Prime Minister's own economic adviser at the time,
"a mad thing to do" and quite "crackers".
It would do the hon. Gentleman's career a great deal of good if he did not read out the prepared questions of the Economic Secretary to the Treasury. I will come on to what we think we can do to help pensions, and there will be an opportunity tomorrow for the hon. Gentleman to vote for changes that would help those 125,000 people. That raises a question that he will have to answer when we have that debate tomorrow.
Now that the Secretary of State for Environment, Food and Rural Affairs has withdrawn from the Labour leadership race, Labour Members are queuing up to ask the Chancellor's questions in our debates. I will come on to talk about what the hon. Lady and I can do to help those pensioners. Indeed, there is a vote tomorrow in which she can take part.
I was talking about the Chancellor of the Exchequer, and may I say how pleased we are that Macavity has finally been dragged kicking and screaming out of hiding on the very day when homeowners and pensioners are coming to terms with the latest rise in inflation? Not long ago, the Chancellor was telling the Treasury Committee that he expected
"inflation to come down significantly over the course of the next few months."
Today he received a letter from the Governor of the Bank of England explaining why it is rising. Well, the Chancellor never was much of a forecaster.
Whether in terms of rising inflation, the record tax burden, the billions of pounds that we see being wasted on projects such as the NHS computer system, or that con-trick Budget—or, indeed, the pensions raid—this Chancellor's boast of economic competence is unravelling before our eyes. [Interruption.] The first, and worst, of all his mistakes was that raid on pensions. When he stands up to respond, let us find out if he can look Britain's pension holders in the eye and say "sorry". One Browne has already done that this week. [Interruption.] Let us see if another Brown has the courage to do so again today.
The road to the Chancellor's first and worst stealth tax began, strangely enough, in a hotel room, because the pension tax plans were dreamt up —[ Interruption. ]
Order. It is far too noisy in the Chamber. The hon. Gentleman is entitled to be heard —[ Interruption. ] I do not want to have to tell you a second time, Mr. Balls.
The plans for the pension tax raid were, strangely enough, dreamt up in a hotel room. They were dreamt up by the small cabal of the then shadow Chancellor, which included the Economic Secretary, in the penthouse suite of the Grosvenor House hotel, which was taken by Mr. Robinson, who I see has also brought a copy of his book into the Chamber. He is the Chancellor's former paymaster in more ways than one. It is all there in the hon. Gentleman's memoirs, which are titled "The Unconventional Minister". I guess that unconventional meant that he was bankrolling the Chancellor, and providing Tuscan villas to the Prime Minister and mortgages to Peter Mandelson.
It is clear from the memoirs that right from the start the tax on pensions was never about encouraging retained profits or increased investment, or any of the other excuses that the Chancellor still peddles. The paymaster says in his book:
"We needed the money. It had to come from somewhere. We set a target of increasing revenues by £5 billion per annum...There were not many options. If the target was going to be met, then tax credits had to go."
Of course, they were still in opposition while the plans were being drawn up—
It is clear from what the hon. Gentleman has said so far that basic GCSE economics was not on the curriculum of the minor public school that he attended. Would he acknowledge the force of the argument by many independent economic observers that the pension fund deficits and the closures of schemes have much more to do with the extended and unjustified holidays from employer contributions and extended life spans than with any of the actions to which he refers?
We will wait for the right hon. Gentleman's speech, when he can tell us about the second blow to pensions. I did read his article in which he talked about the changes that Lord Lawson made and the tax on the pension surpluses, but as the right hon. Gentleman says, by 1997, the pension system was in extremely good shape. He has said that on several occasions. While of course he makes the point about Lord Lawson's tax, the fact was that when this Government came in, the occupational pension system was strong and the right hon. Gentleman, as the Minister for Pensions at the time, did not know—as the electorate did not know—that the Government were planning to abolish dividend tax credit.
There are two points. One is whether the assets looked strong. The second is the crucial factor of the running down of pension surpluses. If the hon. Gentleman were more honest—[Hon. Members: "Oh!"] I am sorry, if he were more accurate, he would admit that his party fatally weakened pensions. That makes the charge that he is trying to make more serious, not less serious.
The right hon. Gentleman has said on several occasions that when Labour came to office, we had one of the strongest pension provisions in Europe. Now we have probably some of the weakest. That was the situation in 1997. The right hon. Member for Birkenhead did not know about the dividend tax changes because, presumably, they were kept secret from him. They have done enormous damage, as I think he understands—[ Interruption.] It is no good the Chancellor joining in the cheering, as he has not spoken to the right hon. Gentleman for 10 years.
Order. The hon. Gentleman has indicated that he is not giving way. Also, I appeal to hon. Members not to shout across the Chamber. If they do, they run the risk of being expelled from the Chamber. That is what will happen.
The Government kept their stealth plans secret—from the public, from the rest of the Labour party, and even from the then Leader of the Opposition. Clearly, the Chancellor was starting as he meant to continue. According to the memoirs, the tax plans were locked in a safe in that hotel room throughout the election, while the rest of the Labour party went around the country campaigning on a promise not to increase taxes at all.
Does the hon. Gentleman remember that Norman Lamont, who was Chancellor in 1993, said that dividend tax credits had to go because they distorted the market? On five separate occasions over their 18 years in office, the Conservative Government reduced the level of dividend tax credit. Is he contradicting the policies adopted by that Conservative Government?
I can tell the right hon. Gentleman that Norman Lamont—Lord Lamont—did not abolish dividend tax credits. That is why they were there for the present Chancellor to abolish them in 1997. When Treasury civil servants proposed to my right hon. and learned Friend Mr. Clarke that he should abolish them, he absolutely rejected the idea, because he knew the damage that would be done to pensions.
No. I shall get on with my speech and take some interventions later.
The Chancellor and the man who is now Economic Secretary dropped their tax bombshell on to the laps of Treasury civil servants the day after the 1997 general election. Their advice was clear, and we know the truth thanks to the two-year campaign undertaken by The Times. I congratulate that newspaper on its efforts, which it maintained despite the costs incurred.
The Chancellor should be condemned for his efforts to stop that campaign. Indeed, I hope that he will be able to confirm something that a member of the Government told me privately yesterday—[ Interruption.] I can tell the House that someone in my job gets quite a lot of advice about the Chancellor from members of the Government.
Yesterday, I was told that the documents were finally released only because the Permanent Secretary to the Treasury refused to go on funding the legal costs involved in blocking their release.[ Hon. Members: "Oh!"] As I said, I hear many stories from Labour Members about the Chancellor. When the right hon. Gentleman responds to the debate, perhaps he will confirm the truth of that story.
In the end, the Chancellor was forced to release the documents. However, he did so very late on the Friday afternoon after the House had begun its Easter recess. The Government have made a habit of burying bad news, but that was one of their shabbiest attempts, and I am pleased to say that it failed spectacularly.
We can now see the Treasury advice, and understand why the Chancellor was so desperate to conceal it from the public. In its submissions to the Chancellor in May and June 1997, the Inland Revenue warned that
"abolishing tax credits would make a big hole in pension scheme finances" and that
"the change would lead to a reduction in pension benefits for the lower paid"— the same people whom he had just hit with his Budget. The Revenue also told the Chancellor that
"any loss of pension could be difficult for someone on a small income to cope with", and it advised him that
"everyone in a money purchase scheme is a potential loser."
Officials at the Inland Revenue ended up by saying that they did not imagine that the Chancellor would want them
On that note, may I welcome the Secretary of State for Work and Pensions, whose private views about the Chancellor are now so public?
Of course, when Labour Members listened to the Chancellor make his 1997 Budget speech at the Dispatch Box, none of them could have guessed that when he promised to undertake a long-needed reform of company taxation to encourage investment, he meant that he was about to clobber their pensions with a stealth tax worth £5 billion a year.
That first Budget speech established the reputation for stealth and dishonesty that all the right hon. Gentleman's subsequent 10 Budget speeches have lived up to, and none more so than the con trick that he delivered a month ago.
This, Mr. Speaker, is what I said in that Budget:
"The second is a structural reform that will also encourage investment.
The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits. This cannot be the best way of encouraging investment for the long term, as was acknowledged by the previous Government. Many pension funds are in substantial surplus and at present many companies are enjoying pension holidays, so this is the right time to undertake a long-needed reform. ... so with immediate effect, I proposed to abolish tax credits paid to pension funds".
Now, will the hon. Gentleman withdraw the accusation that the House of Commons was not told in 1997? The House of Commons was told not only what we were doing but why we were doing it and why, incidentally, the previous Government had cut the tax credit five times.
"pensions will be smaller and pensioners will be worse off."—[ Hansard, 2 July 1997; Vol. 297, c. 306-321.]
That is of course exactly what has happened. The figures speak for themselves; 60,000 occupational pension schemes have been wound up or, as the right hon. Member for Birkenhead said in the article:
"five sixths of the final salary schemes that have closed have done so since 2000; in other words, they have closed on our watch".
Only a third of the remaining final salary schemes are open to new members, and 125,000 people have lost all or most of their pension altogether. I give way to anyone who will vote for that amendment tomorrow.
When my hon. Friend referred to the 125,000 people who have lost their occupational pensions, is he aware of the extraordinary and disgraceful rumour that, when confronted with the victims of the pension raid, the Chancellor said, "These are not our people." Will my hon. Friend comment on that extraordinary remark?
I am grateful to my hon. Friend the shadow Chancellor for giving way. Is he aware that I represent a large number of former Albert Fisher employees, who have lost the vast majority of their occupational pensions? The compensation currently on offer under the financial assistance scheme is inadequate. Does my hon. Friend understand their resentment and anger about what is going on?
If the hon. Gentleman is referring to the Turner and Newall case, it has absolutely nothing to do with this issue; it is to do with the administration of the American parent company, nothing else. The hon. Gentleman has been speaking for 20 minutes and has not yet mentioned changes in interest rates, changes in the stock market, the pension contribution holidays that were taken or increased life expectancy. Is he seriously implying that none of those issues has had any effect on pensions and that it is all down to dividend tax credits? No one believes that.
Let me make a little progress in my speech. I shall be happy to take lots of interventions because I want the Chancellor to take lots when he speaks, which is not his habit.
The Chancellor has denied all the damage that has been done. The day after that Budget he said:
"Pensioners...will not lose out over this."
Ten years on, he is still peddling that ridiculous line. Tell it to the single parent, working part-time, contributing about £100 a month, who has to increase her annual contributions by £850 to make up the damage caused by the Chancellor's decision, or the young professional— [ Interruption. ] I know Labour Members do not like to hear about those people. Perhaps they are not Labour people any more. A young professional who started her pension plan four years ago and contributes £400 a month will have to work 21 months longer, or increase her contributions by almost £1,000 a year, thanks to the Chancellor.
Rather than acknowledging responsibility, all we have heard from the Chancellor and his cronies is an increasingly desperate string of excuses. They were trotted out by the Economic Secretary on the "Today" programme a fortnight ago. It was a vintage performance. I know that the Chancellor is thinking about who might take his job when he moves next door, as he hopes. The Leader of the House of Commons has his hopes, as does the Secretary of State for Trade and Industry, but I think I speak on behalf of the whole Conservative party when I ask: please may we have the Economic Secretary? We think he is a real vote winner.
In the "Today" programme interview—the hon. Gentleman's first big test as a Minister—he made a number of extraordinary claims. The first was that the pension funds had been long-term gainers from the new pensions tax.
The hon. Gentleman nods to repeat that claim. Indeed, the Chancellor repeated the claim a week later. Taking £100 billion from pension funds and telling them they were gainers has to take the prize for the most unbelievable political statement of the year. Richard Lambert does not believe it; the Economic Secretary should listen to him because he gave the hon. Gentleman his first job. Richard Lambert said that the tax raid made
"a significant contribution to the weakening of the country's occupational pensions platform."
The hon. Gentleman should listen to the Prime Minister's former pension adviser. She said:
"The Chancellor will go down in history as the one who destroyed our pensions system."
The president of the National Association of Pension Funds said:
"This was the biggest attack on pensions in living memory. Even Robert Maxwell only took £450 million."
What is it with Labour MPs and pensions?
I agree with my hon. Friend. When the Chancellor speaks, he would do well to tell us what the Treasury's estimate is of the damage done to British pensions by the money taken out of pension funds, but perhaps we shall have to wait a couple of years for the next freedom of information request.
It is no good the hon. Gentleman shaking his head—that is what he said. How did the CBI respond to his claim? The then director general, Adair Turner, went on the radio to say that it was "completely untrue" and that
"at no time whatsoever did the CBI support the policy...when the change was introduced...I wrote to the Chancellor expressing our disagreement."
If the hon. Gentleman disagrees with that comment, perhaps he would like to intervene. [Hon. Members: "Come on."] It is the hon. Gentleman's big moment in front of the Chancellor—he might get the job he is looking for.
Of course, it is not just the Economic Secretary who has made that claim. The Chancellor himself made it at the CBI conference in 2004. In answer to a question from the audience, he said that the case for abolishing dividend tax credits
"was made originally by the CBI"— a claim that we now know from Lord Turner is completely untrue. Since the Chancellor has discovered the art of the intervention, perhaps he will intervene now to disagree with me. No, he does not want to.
The third claim of the Chancellor is that the tax change was done to encourage long-term investment in the economy. He may well say that in his speech today, but the fact is that documents released by the Treasury show that the Chancellor had known all along that that was not the case. The advice he received from the Inland Revenue on
"the view of the economists is that overall the reform will be broadly neutral in terms of the amount of investment."
Today we learn for the first time that one of the Chancellor's own Ministers was warning at the time of the damage that would be done by his tax.
Will the hon. Gentleman explain why, if the abolition of the tax credit was so devastating to pension funds, those funds' assets rose by more than £150 billion in the three years after that?
I have just read quotes from the CBI and the National Association of Pension Funds that show that there has been a devastating blow to pension funds and that more than £100 billion has been taken out of pensions. That is the case and people's retirements have been raided. That was, indeed, predicted.
I want to make some progress.
"reduce funds available for reinvestment" and
"significantly jaundice... the attitudes of investors in UK projects".
If officials were saying that there would be no overall effect on investment and Ministers were warning of a negative impact, why were the public told that investment would go up? Why? [Interruption.] The Economic Secretary is peddling another claim that is simply not the case. Business investment as a proportion of GDP has been at a record low.
Now, Mr. Speaker, we hear a lot of excuses from the Chancellor about his pensions tax. What we never hear is any expression of sympathy for the millions who have had their retirement funds raided. [Interruption.] Off go the boot boys. As I say, we never hear any expression of sympathy. In Budget after Budget, we hear nothing from the Chancellor about what we can do to restore confidence in pensions and nothing about how to help those who do the right thing.
Unlike the Chancellor, we are listening to the pensions industry and we are working with British businesses on the tax and regulatory changes that are needed. However, there is something that we can do right now for the 125,000 people who have lost some or all of their pensions because their company went bust. I imagine that every MP has met some of those people in their constituency surgeries: their stories are heartbreaking, their dreams shattered with a lifetime of hard work and saving lost—and all through no fault of their own.
We know that some of the fault lies with the Government. The parliamentary ombudsman made that clear in talking about "maladministration". The Labour chair of the Public Administration Committee agrees with that verdict. He says that the Government should stop quibbling over this and act to find an acceptable solution for the thousands affected. That is the opinion of the chair of the Public Administration Committee and I agree with him. I believe that all of us, Government and Opposition alike, have a duty to help those people.
So far, frankly, the help has been inadequate. The Government's financial assistance scheme has cost £9 million to administer, but has paid out just £3 million to date. Even by this Chancellor's standards, that is pretty poor value for money. We need a new approach, an approach that meets our moral obligations to those victims— [Interruption.] Yes, the moral obligation that we all owe to those people. It is an approach that we need to adopt without placing a long-term additional burden on the public exchequer.
My hon. Friend the shadow pensions Minister has, along with Government Members, tabled amendments to the Pensions Bill, which reports to the House tomorrow. The effect of those amendments would be to create a lifeboat fund for the 125,000 people under the management of the Pension Protection Fund. The lifeboat fund would start making payments immediately to top up pensions to PPF levels—90 per cent. of the total expected pension package. It would include the 6,000 people whose employers remain solvent, but whose pension scheme has gone bust. I agree with Julie Morgan, who may be in the Chamber, although I cannot see her, that it is unjust to leave those unfortunate people facing financial ruin.
How much would all this cost? According to the e-mail that the Secretary of State for Work and Pensions sent to the parliamentary Labour party and which we have a copy of, the net present value cost is £600 million. The annual cash requirement begins at around £30 million, rises to a peak of perhaps three times that in 20 years' time and then falls to zero. To get the money flowing now, the Treasury should make a loan to the lifeboat fund. That is the precedent of what the Government did with Robert Maxwell. The Treasury should then recover the money, on behalf of the fund, from the hundreds of millions of pounds of unclaimed pension assets that the industry itself confirms exist.
The amendments tomorrow command cross-party support and we will discover today whether they have the support of the Chancellor of the Exchequer. Perhaps he can tell us now. It is time for him to start making amends for the damage that he has done. The Chancellor has made many mistakes in his long time at the Treasury—mistakes that are now coming home to roost. But surely the Chancellor's biggest mistake was his first: his £100 billion raid on the nation's pensions. Why did he do it? As one of my hon. Friends says, we are told that the millions who work hard and save hard for their pension are not his kind of people. In his eyes, their greatest sin is that they want to be independent of the state. In our eyes, that is one of their greatest virtues. For 10 years, the Chancellor has twisted and turned and done everything possible to duck his responsibility and conceal the truth, but the great British pension theft was his crime. The Chancellor has raided the retirement hopes of millions and wrought desolation on the British pension system. We have no confidence in his management of pensions. We have no confidence that he has the answers for the future. Now it is time for him to stand up, face the music, and tell us all that he is sorry.
I beg to move, to leave out from 'House' to the end of the Question, and to add instead thereof:
'notes and welcomes the acts of this Chancellor and Government to tackle the legacy of pensions mis-selling, support occupational pensions through a Pension Protection Fund set up for the first time and anew Pensions Regulator, further support 125,000 people through the Financial Assistance Scheme whose occupational pensions were affected by employer insolvency, set out the long-term framework for pensions through the new Pensions Bill, including re-linking the uprating of the basic State Pension to average earnings, introduce a new scheme of low cost personal accounts and stakeholder pensions of which over three million have been created, remove the dividend tax credit, make reductions in corporation tax which have contributed to the 50 per cent. rise in business investment and helped the UK economy to grow in each of the last 39 quarters and introduce the winter fuel allowance, free television licences and the Pension Credit to provide an additional framework of support for today's pensioners.'.
I relish this debate. I will answer every question put to me. But as this is a debate about occupational pensions, why did the shadow Chancellor not mention first of all that we are the first Government in history to ensure protection for pensioners when their company goes bust? That was not done by the Conservatives; it was done by Labour—not sympathy, but action. Why did not the shadow Chancellor start by also recognising that, retrospectively, we are helping those employees whose companies have gone bust? That is the means by which we are helping the 125,000 who suffered not because of a dividend tax credit, but because their company went bust. We are also—the shadow Chancellor does not recognise this—the first Government to address seriously the mis-selling of pensions that we inherited from the Conservatives. When we took office in 1997, 2 per cent. of the mis-selling had been dealt with. Within two years, the figure was 98 per cent. That was not done by the Conservatives; it was action by a Labour Government.
Will the shadow Chancellor not also acknowledge that we are the first Government to create an auto-enrolment pension scheme that will mean that all— [ Interruption. ] I will give way to all the hon. Members who want to intervene once I have set out my argument and shown that the shadow Chancellor has made a series of mistakes.
We are the first Government to create an auto-enrolment pension scheme that will mean that all taxpayers have a pension from work. That was never done by the Conservatives; it has been implemented by Labour. We are the first Government to make it a priority to tackle pensioner poverty. That is why we have introduced the pension credit, the winter allowance, and the free TV licence for the over-75s—opposed by the Conservative party in the 2001 election. We will be the first Government in 30 years to restore the link between pensions and earnings when we introduce our long-term changes as a result of the Pensions Bill.
Despite what the shadow Chancellor has been saying throughout the debate, what actually happened to the pension assets from 1996 to the present day is that the assets of pension funds in 1996 were—
In 1996, the assets of pension funds were £549 billion. By 1999, they were £820 billion. By 2006, even after the stock market crash, the assets of pension funds were more than a trillion pounds. In other words, the assets of pension funds have doubled during the period of this Labour Government.
I will give way in a minute.
If anyone expects the Conservative party to be more helpful to pensioners than we have been, let me read what the shadow Chancellor said at a meeting organised by The Independent at the Conservative party conference:
"There are lots of Conservatives who come up to me and say we've really got to put more money into the pensions ... the test of whether we are ready for government is whether we can resist those additional" calls for public expenditure.
I will give way in one second.
The strength of our argument is not just the points that I have made. It is based on the rock of the economy and making the right long-term decisions for the country. It is on the rock of the economy that occupational pensions and any other services in our country depend. I tell the House that I do not apologise for the three long-term decisions that I took in 1997 in the interest of stability and growth in this country: first, to make the Bank of England independent, which was opposed by the Conservatives; secondly, to build a fiscal framework for this country that allowed us to double public investment, which was opposed by the Conservatives; and, thirdly, to remove the bias against long-term investment in our economy. That bias was recognised by the previous Chancellor, and, to achieve that, we cut corporation tax by 2p in the pound.
If the shadow Chancellor wants to cut corporation tax by 2p in the pound, as we did in 1997, why cannot he tell us how he could fund that other than by withdrawing the dividend tax credit? Why does he continue to tell us that he wants more investment in the economy while refusing to back the measures that increased investment in the economy? Why does he tell us that he opposes in principle the withdrawal of the dividend tax credit when his own Government said that it was a bias against investment in 1992 and when he cannot tell us that he would restore it if ever he came to power? Why does he not admit that the Leader of the Opposition was the adviser to Lord Lamont on the fifth occasion on which the dividend tax credit was cut?
I am just about to give way.
The shadow Chancellor says that he wants long-term answers to the problems of the economy, but every position that he takes—refusing to replace the dividend tax credit with something else and refusing to tell us how he would fund corporation tax cuts—shows that he has learned nothing from two years as shadow Chancellor. His approach is short-termist, opportunistic and insubstantial. We take the long-term decisions for the economy; he has a short-termist approach.
When the hon. Gentleman became shadow Chancellor, he said that far too often the Conservative party had been perceived as opportunist. He said:
"we have sacrificed long term credibility for the prospect of winning the support of an aggrieved section of the population or ... winning a vote" in Parliament. He continued:
"Short termism has hampered attempts to develop a long term ... policy."
That is exactly where the Conservative party is today.
I am extremely grateful to the Chancellor for giving way. As ever, he prefers to talk about the policies of the Opposition, rather than the results of his own policies. Will he give an answer today, and say what estimate he and the Treasury make of the impact on pension funds of the pension tax raid that he authorised in his first Budget in 1997? Give us a straight answer!
The hon. Gentleman clearly has not read the papers in any depth. What the Treasury said was that actuaries would assume that there would be a 7 to 20 per cent. fall in the share price immediately after the announcement, but in fact the share price rose. It rose by 0.5 per cent., then it rose by 12 per cent. over the quarter, and then it rose by 27 per cent. over the year. That is why the assets of pension funds, which is the big issue, rose from £549 billion in 1996 to £820 billion by 1999.
Is he not? [Interruption.] Oh, he is. Is he apologising? The Cornerstone group proposes £40 billion of tax cuts, but not one of them is to restore the dividend tax credit.
I used at least to have some respect for the right hon. Gentleman's grasp of basic economics, but what actually happened was this: in 1993, the current Leader of the Opposition advised Lord Lamont to remove part of the dividend tax credit, but the Conservatives did not replace it with a cut in corporation tax. There was no cut in corporation tax. When we made our change, we cut corporation tax by 2p. What happens when corporation tax is cut by 2p? First of all, companies are more profitable. Secondly, they can pay more in employer contributions to pension funds. Their dividends rise and they are able to pay more dividends to pension funds. I have to tell Mr. Redwood that all his assumptions are wrong, because what actually happened after the corporation tax changes was that companies paid more in employer contributions, dividends rose, payments to pension funds rose from £34 billion to £39 billion, and the assets rose from £549 billion to £820 billion.
The Leader of the Opposition puts forward all his proposals for tax cuts, but is it his priority to restore the dividend tax credit or not? It does not seem to be his priority, it is not the shadow Chancellor's priority, and it does not seem to be the priority of anybody on the Conservative Benches.
The Chancellor is carefully eliding and shuffling a few dates and events, so may I help him with his recollections? When he was shadowing me as Chancellor, neither of us realised that both of us were looking at the same proposition of a reduction on the tax dividend credit on pensions. In the Treasury, I discussed that proposition with my right hon. Friend Mr. Dorrell, who was then the Chief Secretary to the Treasury, and in the Grosvenor House hotel, the Chancellor discussed it with the current Economic Secretary to the Treasury and Mr. Robinson. We rejected the idea because we were satisfied that it would do damage to occupational pension funds. The Chancellor decided that it would not damage them, and he is still using the preposterous argument that it was responsible for the stock market boom that followed, but I seem to recall that the boom had something to do with the dot.com bubble in the United States. Is he still saying that the Grosvenor House mob came to the right conclusion, and that we came to the wrong one?
First of all, the ex-Chancellor supported, during the period in which his party was in government, the reduction of the dividend tax credit from 33p to 30p, then from 30p to 27p, then from 27p to 25p, and then from 25p to 20p. It was virtually halved in the period in which the Conservatives were in government, and it was halved on the advice of the Leader of the Opposition; he advised Lord Lamont to go ahead with the move. As far as the ex-Chancellor is concerned, the problem is that in 1997 and 1998, he thought that there would be a recession in Britain, so it was not the right time to deprive companies of those resources, but I took the view that the economy would continue to grow. I was proven right: instead of a 7 or 20 per cent. cut in share prices, shares continued to rise, profits continued to rise and investment continued to rise. The ex-Chancellor said:
"I've been forecasting a hard bump and not a soft landing for the British economy since Brown handed the job of setting rates to a committee of bankers...He is going to bust our economy" without any risk of growth. That is what he said, but he was absolutely wrong.
I am grateful to the Chancellor, but I was actually the Financial Secretary. Can we be clear about one thing? Since the Chancellor came to power in 1997, the number of private sector final salary pension schemes accepting new members has been cut by two thirds. Is that a successful policy, an unsuccessful policy or nothing to do with him?
It is absolutely right that there has been a cut in those schemes in every major country in the world, but I have to tell the right hon. Gentleman that I have the figures with me, and the cut in defined benefit schemes between 1995 and 2000 was 2 per cent. Between 1990 and 1995, there was a cut of 5 per cent. under his Government. I remind him that when he spoke in 1993 on the Finance Bill, he supported the withdrawal of the divided tax credit to 20 per cent. He said the Tories were doing it
"in a way that does minimum economic damage, recognising the substantial tax benefits available to pension funds as collective savings vehicles."—[ Official Report, Standing Committee A,
He makes my case.
I am grateful to the Chancellor for giving way, but is it not the case —[ Interruption. ]
Thank you, Mr. Speaker. Is it not the case that the pension fund raid will cost the average Scottish family £3,750 at a time when one in five Scottish pensioners live in poverty? When the Chancellor came to Scotland, he said that he regretted nothing and that he would do it all again. Should he not apologise to the Scottish people, and does he not understand that this is the final nail in Labour's coffin in Scotland?
I have just explained to the House that we put £11.5 billion into pensions from 1997 until now in real terms. We have done more to abolish pensioner poverty than was ever done by the Opposition. We introduced a winter fuel allowance and free television licences, which were opposed by the Opposition. We introduced the pension credit, and the only plans that do not add up are those of the Scottish National party, which assumes billions in oil revenues that do not exist, which promised to spend money that it does not have, and none of whose figures add up. The hon. Gentleman should go back to Scotland and explain why his policies and plans are economically illiterate and cannot make a difference to the people of Scotland.
I am very grateful to the Chancellor. In my constituency and throughout Leicestershire, there are thousands of former British United Shoe Machinery pensioners who, instead of living in retirement on their occupational pensions, have a vastly reduced income and just about survive on benefits. Does the Chancellor claim that as one of his great policy successes?
First, we have just announced—and we are the first Government ever to do so—a financial assistance scheme worth £8 billion to the 125,000 pensioners who are in difficulty. I hope that the hon. and learned Gentleman supports that. My right hon. Friend the Secretary of State for Work and Pensions will be able to say later in the debate that, as part of the £8 billion announcement, we are reviewing the assets of all the funds—we announced that weeks ago—to see if more money can be found. Far from the shadow Chancellor announcing anything new today, he is reheating an announcement made by the Pensions Secretary weeks ago. If the hon. and learned Gentleman is worried about the condition of his pensioners in the meantime, perhaps he should now support the pension credit, the winter allowance, free television licences and the minimum pension guarantee, because I have not heard many Conservative party members or Conservative MPs who are anxious to come out and support those things.
We have just raised the figure from £2 billion to £8 billion. We have made it possible for every one of the 125,000 people who have lost out to benefit. Is the hon. Gentleman repeating what the shadow Chancellor has said, that there will be no extra funds for pensions, or is he demanding that the shadow Chancellor produce extra funds for pensions? Perhaps Opposition Front Benchers—in particular, the shadow pensions spokesman—will clarify in the course of this afternoon whether they are offering new money or whether they are sticking to the shadow Chancellor's pledge that there will be no new money at all.
Will the Chancellor confirm that his raid has been not only on pension funds, but on Britain's charities? And will he confirm that Britain's charities have lost £1.3 billion to date as a result of that policy?
That is not true. [ Interruption. ] The shadow Chancellor thinks that the matter is so important that he did not even mention it in his speech. [ Interruption. ] The dividend tax credit was indeed paid to charities, but we gave them compensation for five years afterwards, and at the same time we introduced a major reform of charities. Gift aid was worth £135 million when we came in; it is now worth £750 million. I have not seen the Conservatives supporting what we have done in that area, either.
The right hon. Gentleman had better be careful in joining this debate. He was the author of plans on pensions that virtually lost his party the 1997 election. I have just explained to him that companies paying into pension funds are paying employers' contributions, which rose by £2 billion between 1996 and 1999. It was wrong that so many companies were taking employer holidays, and it was also wrong that the share of wages paid in pension contributions was only between 1 and 2 per cent. Those companies had unfortunately been encouraged to take those holidays by the taxation regime operated by Lord Lawson, which was why those pension funds were not receiving employer contributions as they should have done. Once we made the change, employer contributions started to rise. They have now risen to £33 billion a year, and I hope that the right hon. Gentleman will acknowledge that employers are now paying a fairer contribution to the pensions of their workers. In my 1997 Budget—this is why the shadow Chancellor was completely wrong when he tried to suggest that this was not in the 1999 Budget—I said that employers had been taking holidays for too long and that it was time for them to restore contributions.
Most sensible people who look at what happened will find that because we cut corporation tax, employers were able to pay more contributions, which rose by £2 billion in that period. At the same time, of course, there were higher dividends, so the effect of the dividend tax credit was wiped out. The whole argument put by the shadow Chancellor this afternoon was dependent on a 7 to 20 per cent. fall in the stock exchange, which was the worst scenario drawn up by Treasury officials. We decided that that would not happen and took the view that the economy would not experience that share cut. We were right and share prices rose by 12 per cent. in the quarter and by 27 per cent. It is about time the Opposition, who pride themselves on having some knowledge of economics, understood that because we acted on corporation tax, which they failed to do, we were able to recycle revenues to both pension funds and higher dividends, which meant that the assets and incomes of pension funds rose between 1996 and 1999.
As I just said, the bigger fall in defined benefit schemes was between 1990 and 1995, when there was a 5 per cent. fall; there was only a 2 per cent. fall between 1995 and 2000. I have to accept that around the world, particularly in America, defined benefit schemes were running into trouble— [ Interruption. ]
Mr. Fallon, who sits on the Treasury Committee—I am very grateful to him for praising my economic record a few weeks ago, which would not have gone down well with the shadow Chancellor—is a member of the No Turning Back group, which is recommending— [ Interruption. ] This is absolutely relevant to the debate. Members of the No Turning Back group want tax cuts. Unfortunately, they have made all these representations for tax cuts, yet not one of them is about restoring the dividend tax credit—that is how strongly they feel about it.
It has been estimated that council tax payers are paying an extra £175 a year in council tax because local authority pension funds have had so significantly to increase their contributions because of the pension tax raid. What does the Chancellor say about that? [ Interruption. ]
Order. Before the Chancellor answers, let me say this to Mr. Bryant: it is the last time I will hear you shouting in this Chamber.
But the shadow Chancellor has said that he is not going to restore the dividend tax credit—he is not denying that. The hon. Gentleman cannot talk about what we are doing tomorrow night, when voting on those people who lost their pensions because their employers went bust, which has nothing to do with the dividend tax credit but which is an important issue that we must deal with. He wants to deal with council workers and council tax. Unfortunately his shadow Chancellor will not support him, but says that he is not going to restore the dividend tax credit. The Leader of the Opposition started it in 1992 by cutting the dividend tax credit, and the shadow Chancellor is not going to rescind its abolition. Why are the Conservatives promising tax cuts in every single area, or trying to do so, yet not one of them seems to want to restore the dividend tax credit? Is not that an example of short-termism, opportunism and completely unsubstantial policy? Mr. Osborne has learned nothing in two years as shadow Chancellor.
First, we introduced the Freedom of Information Act 2000. Secondly, I support it. Thirdly, I support the release of the papers. The debate has shown how the Act can give information, which people can dissect and then find Opposition policy completely wanting. Perhaps it is time to release the papers relating to the 1993 decisions. Doubtless, the shadow Chancellor has applied for that to happen.
Earlier, the Chancellor mentioned pension credit. Is he proud of the fact that it is so confusing and complicated that the latest estimate suggests that 1.5 million pensioners throughout the country do not claim it, despite its being due to them? Half of them live in poverty. Is that a record of which to be proud? If not, what will he do to put it right?
Nearly 3 million pensioners who receive pension credit never received anything from a Conservative Government. If the hon. Gentleman wishes to support pension credit and get it to pensioners in his constituency who do not have it, we will help him to do so. However, it is about time Conservative Members stood up and said that they supported the winter fuel allowance, the free television licences, the pension credit and what we have done on pensions—the £11.5 billion.
In 1997, we made three major changes in the economy. The third was to remove the bias against investment—exactly the proposal that underlined the change that Lord Lamont made in 1992, and the five other changes in dividend tax credit that have taken place. The result of our change was not that the share price fell—it rose. All the figures that the shadow Chancellor gave today are wrong. Investment in the economy rose as a result of the measure. The shadow Chancellor asked about investment earlier: it rose by 10 per cent. in 1997, 20 per cent. in 1998 and is now £40 billion more than it was in 1997—a sign that the economy is working well. Corporate profits also rose as a result of all the changes that we made. We have had—uniquely under any Government— 39 quarters of economic growth unbroken by recession.
Pension assets rose from 1996 to 1999—they did not fall. Pension income rose, not fell, from 1996 to 1999. Pension dividends rose between 1996 and 1999—they did not fall. We made the right decision for the British economy—the right decision for investment, the long-term stability and growth of the British economy and British industry. It is clear today that the Opposition have no alternative to our policy. They would not rescind the dividend tax credit. All they talk about is short-term opportunism—it is insubstantial. Their policies do not add up and they have been exposed in every part of the debate.
My colleagues and I intend to vote in favour of the motion. We opposed the abolition of dividend tax credits 10 years ago—I personally spoke against it. We believe that the Government made a mistake and that they should acknowledge it. However, Mr. Osborne helped neither his case nor his credibility by turning the debate into a Punch and Judy show, for two main reasons.
First, undoubtedly damage was done to money purchase schemes and final salary schemes. However, most of the serious analysis that has been conducted in the City suggests that, though it was a factor, it was not one of the three leading factors that contributed to the demise of final salary schemes, according to Stephen Yeo of Watson Wyatt, who was one of the leading analysts. Abolition was, therefore, a factor, but there is no point in exaggerating it.
Secondly, as the debate has already shown, the record of the Conservatives in office was not terribly credible. There were acts of omission—the failure to take action on pensions mis-selling—and acts of commission, notably taking action against the so-called over-funding of schemes in the mid-1980s, which Mr. Field highlighted, and nibbling away at, if not outrightly abolishing, the dividend tax credit through a succession of measures.
Does the hon. Gentleman accept that, under the last Conservative Government, occupational pensions were transformed in their scope through an almost tenfold increase in their funds? That was an outstanding achievement. Is it really necessary for the hon. Gentleman, only about 10 seconds into his speech, to show that the Liberal Democrats are heading for a coalition with Brown, if they can get away with it, and that they are here to support him? Anyone who votes Liberal is going to get Brown, and get Labour.
That last comment was really quite pathetic. I started by saying that we intended to vote in support of the Conservative motion tonight, but I am trying to present my argument in a reasonably balanced way—something that I do not think that the hon. Gentleman could begin to understand.
I will make no further reference to the speech by the hon. Member for Tatton. He was not here in 1997, and I think that he has become a bit preoccupied by a cult of secrecy and the exposure of information. I remember the debate at the time; it was very open. All these arguments were put forward, and criticism of the removal of dividend tax credit was made by the Conservatives and by us. There was no great secrecy about it. The arguments were fully debated at the time.
I took the view then—as I do now—that the move was a mistake, for several reasons. The first was a political reason, and not the reason that the hon. Gentleman gave. The Government judged that they needed to raise taxes in 1997 because of what they believed was an excessive level of public debt in relation to gross domestic product. Our view was that if they needed to raise taxes in 1997, they should have done so openly. We argued for direct taxation as an open and transparent way of achieving that, but the Chancellor decided to do it in a more roundabout way, and it has come back to haunt him. That was a political mistake. I am not quite sure what the hon. Member for Tatton was arguing should have happened. Was he suggesting that there should have been an increase in taxation, but of a different kind? Or was he arguing that the severe constraints on public spending that were built in by Mr. Clarke should have been made even more severe? What was the counter-factual case that he was advocating?
The hon. Gentleman is talking about political mistakes, but the political mistake was not made by my right hon. Friend the Chancellor. The hon. Gentleman has agreed that taxes had to rise, and my right hon. Friend made the decision that we are now debating. The political mistake was the 1p rise in income tax that the hon. Gentleman's party proposed in 1997 and 2001, but has now dropped.
Actually, the Government have done what we asked—they did it in a roundabout way, but they got there eventually—so I am not sure that that was a very telling intervention.
The first mistake was the political one of not being open and not accepting that taxes had to rise and doing that in a direct and transparent way. The second mistake involved the damage that was undoubtedly done to pension schemes. We can now quantify that damage in retrospect. Estimates have been made, for example, of the impact in a money purchase arrangement on someone who was aged 25 in 1997. That person will probably have lost about 17 per cent. of their pension benefit. However, there were not many people in that category.
If we take a more relevant group, namely, people who were 55 in 1997 and who are now retiring, their loss is estimated by the actuaries to be about 5 per cent. of their pension benefit. That is a substantial sum, and those people are angry about that. However, it is 5 per cent., not 50 per cent. We must look at this in some sort of context.
Estimates have been made by people who are far more authoritative than us. Perhaps I can refer the hon. Gentleman to a careful study carried out by Watson Wyatt of the overall impact of the measures. It took the view that there is currently the equivalent of a deficit of about £540 billion in occupational pension schemes. It arrived at that figure by calculating that that is the sum that would be required to be made up if pensions were self-financing through an insurance arrangement. It also calculated that the damage done by the Chancellor's changes was about 10 per cent. of that total. So we are talking about damage, but it is one factor among several.
The hon. Gentleman is at least trying to put a coherent argument. Does he accept that part of the reason for that act was to rationalise investment decisions to improve the level of investment in companies, which in itself helped pension fund assets? Does he agree that his figures have to be discounted, at least because of the increase in the investment in companies—their asset value—that has also been reflected in the asset value of pension funds?
That is a good point logically, but it is factually wrong. I noticed that the Chancellor made the same point. Research after the 1997 Budget by City university business school tried to analyse the impact on investment—whether the abolition of the dividend tax relief did what it was designed to accomplish. It came to the conclusion—it had no political axe to grind—that the impact was zero. The claim that it would change investment behaviour was simply wrong as a matter of fact.
I believe that the figure that the hon. Gentleman quoted was for 1997. Was that not a little early to make an accurate assessment? Does he agree that, looking at the stock market, the FTSE has gone up from 4,500 in 1997 to 6,500 now, and that the all-company index has gone up from, I think, 2,800 to 3,500? There has been a significant increase in investment and the asset values of companies.
I am touched that Labour Back Benchers have such faith in the stock exchange as a measure of business behaviour. The study was done several years after the 1997 Budget and established my point that despite the Government's expectations, which may have been reasonable, they did not achieve their aim. There was no change in investment behaviour.
I tried to raise my fourth criticism in an amendment at the time, as did other hon. Members, and the intervention from Andrew Selous was on this point. One of the unforeseen negative consequences was the impact on public sector schemes, in particular local authority schemes, which accounted for about 10 per cent. of pension fund assets. The effect of the change was to increase the Bill for local authorities by about £300 million. That was a substantial increase in council tax which was regressive and had a significant effect on local authority funding. It was clearly something that had not been thought through.
Does the hon. Gentleman accept that the £540 billion combined deficit figure from the actuaries is predicated on wind-up and transfer into bonds, and we happen to be living through a gilt bubble, where prices are very high because of the pension crisis and regulatory pressure to go into bonds? Is not the more accurate deficit for ongoing pension schemes the FRS 17 deficit? Is not the current cumulative FRS 17 deficit about the same as the actuaries' figure for the losses as a result of the tax switch?
The right hon. Gentleman makes a good point. Others take the view that the FRS criterion is very demanding, but he makes the valid point that we are dealing with a set of assumptions and could come up with different numbers. However, the work in the City suggests that damage was done as a result of the measures but that it was not one of the most important factors. As we are going over the historical record, it is helpful to review what those factors were.
The first factor was the impact of the tax holidays, which has been discussed. The second was changes in the stock market, to which several hon. Members have referred in different ways. The third was demography. In 1997, the life expectancy of a man coming up to the pension age of 65 was another 19 years. It is now 20.5 years. That is an 8 per cent. increase. Consequently, if there were no adjustments to contributions, the pension benefit would fall by 8 per cent., so demography has played an important part. Low interest rates contributed to the problem of annuities, which we have discussed often. One of the other contributory factors was the behaviour of many of the private companies.
Does the hon. Gentleman agree that one problem was that the actuarial advice to pension funds did not warn them of longevity increases? Those did not suddenly come about, but happened over a period and should have been catered for several years before the adjustments were made.
The hon. Lady is right. There was a substantial time lag, and when the adjustment was made after the profession insisted on the provisions of the minimum funding requirement, that was arguably a particularly demanding factor operating on the funds.
My hon. Friend Lynne Jones has made an important point. Does the hon. Gentleman also agree that companies that used their pension fund surpluses to make people redundant in the guise of early retirement did no more than compound the problem?
I am coming to that. In many instances, private companies behaved appallingly to their employees. Tomorrow we will discuss the way in which compensation can be given to employees who, through bad luck, found themselves in insolvent schemes, but in many other instances solvent schemes were closed in a very cynical and manipulative way.
A substantial number of my constituents belonged to the pension funds of two American companies, EMC and Parsons, both of which do large amounts of business with the Government. They are flourishing and highly profitable multinationals, whose offices can be seen by those driving out to Heathrow airport. A few years ago they took advantage of the existing arrangements to close their occupational pension funds to new entrants, and effectively to wipe out their obligations to existing pensioners. They did that within the law, but quite cynically. They shipped into the United Kingdom trustees who had been appointed at head office in the United States, and used the maximum scope that they had within the legislation to—"defraud" would be putting it too heavily—reduce the benefits of their employees substantially in a very cynical way, for which they had absolutely no justification in terms of their position. Employers of that sort have contributed to the lack of confidence in occupational pension schemes.
The hon. Gentleman is producing a thoughtful analysis of the problem, but he has omitted one factor. I think that companies' perception of risk, particularly when deficits were exposed more vividly in accounting terms, altered during the period that we are discussing. Companies also became aware of the relatively low weight that a good-quality pension scheme carried as part of a retention and recruitment package. That was certainly my perception. My company's pension scheme closed to new entrants while I was there, before I became a Member of Parliament in 1997, partly because the company did not consider it a valuable enough tool for retaining and recruiting quality staff.
Those are very good points, which add to my basic argument about the complexity of the decline of the occupational pension scheme. Some of it was caused by factors outside Government control, some was due to regulatory change and some was attributable to tax measures, although not necessarily the most important part.
Much of the debate has been retrospective. It has asked who was to blame, and why this happened 10 years ago. We should spend a bit of time looking forward. The hon. Member for Tatton was right to emphasise the need to do something about the 120,000 people who have been dispossessed as a result of the collapse of their occupational pension schemes. He also mentioned the proposal that we are to debate tomorrow, which the Liberal Democrats will support. It is a practical proposal designed to address the issue of compensation, and we hope that the Government will be sympathetic to it.
Another issue that is coming down the track and will have to be faced fairly soon is the Equitable Life inquiry by the ombudsman, which is close to completion. It relates to a serious case of mis-selling to highly sophisticated pensioners, which may well have involved a serious regulatory failing. The Government's response to that, and to the ombudsman's report, will be an indication of how seriously they take the issue of confidence in private funds.
I am surprised by the hon. Gentleman's curious defence of the Chancellor and his policy. It almost seems likely that the Liberal Democrats will tell us next that Bob Maxwell was quite a reasonable guy. Given the hon. Gentleman's response to the Chancellor's speech, can he tell us how he will advise his colleagues to vote this evening?
I do not know whether the hon. Gentleman was having a private chat when I began my speech, but I think I said three times that we would support the Opposition motion. I presume from his intervention that he will be doing the same.
The other key future development in terms of the basic pension architecture that the Government need to get right is to do with personal accounts. We have supported the principle of creating a new mechanism for saving by the low paid and the principle of auto-enrolment, but we are worried that the new scheme could give rise to large-scale mis-selling, intentionally or otherwise. The reason for that is that the new plan is targeted at low-paid workers who might potentially be in receipt of benefit; I understand that about 50 per cent. of the target audience for the new personal accounts are potential recipients of benefit, and particularly pension credit.
What will happen? There will be a negative interaction between means-tested benefits and the new pension payments. We will have a situation in which some people will face the equivalent of an 85 per cent. marginal rate of tax on their new pension, and many will face a marginal rate of tax of 50 per cent. Many such people would be strongly advised not to take out such personal accounts. Yet one has a sense that the Government are so committed to this scheme that that advice will not be given and that many people will be lured into a scheme that is clearly not in their interests.
Underlying all of this is the most fundamental point of all: the reason so many people are on means-tested benefits is that the Government—particularly the Chancellor—have chosen to concentrate all their efforts on improving the pension credit scheme rather than the basic state pension.
No, I am about to finish. Until there is a decent basic state pension without means-tested benefits there will be no platform on which people on low and middle incomes can make sensible decisions about their own supplementary saving and pensions.
I am pleased to have been invited to contribute to the debate. Two words are particularly appropriate for it: "hullabaloo" and "hypocrisy". "Hullabaloo" is appropriate because we are debating a decision that was taken 10 years ago and on which there was complex and competing counsel. The following question must be asked: what will this debate do for good government and good public policy in the future? Instead of opening up the workings of government as a result of freedom of information legislation, might it encourage Ministers to seek only advice that supports the decision that they want to take? If all civil service advice is prepared with an eye to publication, objections to official policies will not be put in writing and will soon be completely suppressed. I believe that I have support on that point from Mr. Clarke. It is an important point, which has not yet been raised in today's debate.
"Hypocrisy" is also a relevant word. If we look at the past record, we find that the previous Conservative Government were making progressive steps towards reducing, if not abolishing, dividend tax credit. I will mention a few of them later. I have also looked at the general press commentary on this issue. John Ralfe is a pension expert and former finance head of Boots. He has said:
"Anyone who thinks we were living in a pensions nirvana before 1997 needs his head examined."
He also said:
"I am not someone who habitually jumps to Brown's defence, but the idea that everything is his fault is baloney."
Yes, that idea is absolute baloney.
Stephen Yeo is a senior consultant at Watson Wyatt. He advises the Conservative party, and he said that
"the cost of pensions has risen due to lower investment returns, the increased cost of security and greater longevity."
The decision that we are discussing is not among his top three reasons for that rise in cost. The top three reasons are the rise of guaranteed benefits, poor investment returns and greater longevity. For example, today a 65-year-old man is on average expected to live for 20 years, as against 12 years in 1950. As a result there has been a revaluation of pension scheme liabilities, which has contributed to the current situation.
Does the right hon. Gentleman accept that one of the big impacts on investment returns was the dividend tax? If one takes away money that would have been received in income, the assets are worth less and the total return falls.
The former Chancellor of the Exchequer, Norman Lamont, and John Moore and others in the Conservative party said that the tax relief was a subsidy. Pension funds do not pay tax and why should they get a subsidy? Steelworkers, miners and others do not get such subsidies. I would have thought that in true Conservative No Turning Back fashion, the right hon. Gentleman would agree with his ideologically firm colleagues on that issue.
The issue is the relationship between labour and those who have retired. A hundred years ago, there were 14 people working for every one retired. Nowadays, the figure is four to one, and in 2050 it will be two to one. That will lead to big problems. I regret the Opposition's motion today, because I had thought that we had a consensual approach to the issue of pensions. A long-term solution is needed, but the Opposition are going for the short-term fix.
Does my right hon. Friend recall that in 2000 some £250 billion was wiped off the stock market, which had a monumental effect on pensions? Most neutral commentators agree with that assessment.
That is certainly one of the issues of concern. The basic issue is that not enough people are saving. Confidence in savings is declining. Indeed, the Treasury Committee has undertaken several inquiries into that issue, to which I shall refer. Two of the big questions are how we can restore confidence and how do we get people on between £10,000 and £25,000 a year to save. It is those people who are not saving, and they constitute some 8 to 10 million people.
David Robbins, a pension partner at Deloitte, has said:
"Around 90 per cent. of the British population aren't saving enough to ensure a reasonable standard of living when they retire."
The problem has come to a head because people are living longer. Pensions provision has become so expensive that large numbers of companies have scrapped final salary schemes or closed them to new members amid fears that they could be crushed by the weight of future liabilities. It is incumbent on us as responsible politicians to recognise that issue.
Stock market volatility is another issue. In 2000, some £250 billion was taken off the value of the stock market. Other hon. Members have mentioned the issue of accounting standards and FRS17, which exposed the potential liabilities of companies. That also reduced confidence. The Secretary of State for Work and Pensions is in his place on the Front Bench and the Treasury Committee has worked with him on the pension issue. I make the point to him that the Cabinet needs to discuss today's accounting environment. Many companies have told me that despite the good efforts of the Financial Reporting Council and others, one good measure is being built on another, so that the system becomes complex and difficult to apply, understand and compare. One company wrote to me this morning with an example in which the same transaction can be correctly accounted for in three different ways with quite different impacts. There is something wrong with such a system. That cannot be laid at the Government's door, but it is a responsibility for them. We urgently need to simplify accounting and make it more transparent, and that should also be part of the debate.
The right hon. Gentleman makes some good points about the collateral harm to pensions and the lack of confidence caused by FRS17 and other regulations. The problem today is whether the Chancellor, in making the decision in 1997, realised the size of the impact it would have. The previous Conservative Government considered the move, but rejected it because of the impact it would have. The question today is whether the Chancellor fully understood, even on the Treasury advice he received, the damage it would do to pension schemes.
That is a very good question, but Conservative Governments reduced the relief five times, from 35 per cent., so some in the hon. Gentleman's party took a different view.
I said at the start of my speech that these are complex issues and that people have different opinions about them. I was in the City yesterday, and I asked one of the practitioners there about the decision taken 10 years ago. I was told that the market goes up and down on a daily basis, and that decisions must be judged according to whether they achieve their objectives. No one can see 10 years into the future, as the correspondence published in the Financial Times over the past few weeks demonstrates.
In a letter dated
"Pension funds are rarely invested 100 per cent. in equities, so the tax charge affected only a portion of pension investments: let us suppose a 50:50 split between shares and equities. What is the average dividend in shares? Let us pretend it is...5 per cent. a year".
That is ambitious in today's environment, but Mr. Cave went on:
"Then, by stopping the (current) 10 per cent. tax refund, Mr. Brown is stopping 10 per cent. of the 5 per cent., namely 0.5 per cent. So the current annual loss to a pension fund, through Mr. Brown's tax change, is 0.5 per cent. on half of the pension fund—namely 0.25 per cent."
So we are talking about 0.25 per cent. of £1,000 billion, but I can tell the House that, behind closed doors, fund managers can put up their fees just like clicking their fingers and we will know nothing about it. That is how complex the matter is.
As Chairman of the Treasury Committee, I have been lobbied a lot by industry representatives over the years. They have been concerned about two things: how to restore confidence in the industry so that people on lower incomes get saving again for their pensions, and how we can get people on average salaries of £10,000 to £25,000 to enrol in pension schemes—something that the Government have done a lot to facilitate with their establishment of the national pension saving scheme.
The Treasury Committee has made its view clear, saying:
"The long-term savings market is worth £1,900 billion-plus, and its efficient working is vital for the prosperity of both savers and the wider economy. It is widely accepted that there is now a damaging lack of consumer confidence in long-term savings."
The Committee added that savers need to be given "clear, succinct information" that would reduce the risk of mis-selling.
The Treasury Committee has also been responsible for establishing a committee comprising industry and consumer group representatives to look forward and plan the pension industry. Richard Lambert, the director of the Confederation of British Industry, was kind enough to be the original chair of the committee. The Treasury Committee's aim was to reach cross-party consensus about the pensions problem, and we made recommendations to the Chancellor about tax and benefits. We said that the present complex tax arrangements needed to be made more coherent to encourage people to save.
"many do not trust the financial services industry to sell good-value products".
It said that the combined result had been a dramatic growth in the numbers in the private sector work force who do not contribute to a non-state pension from just over 8 million in 1996-97 to nearly 12 million in 2004-05. Lord Turner concluded that
"the private pension system, far from growing to fill the gap left by the State...is actually doing less."
As responsible politicians, we must focus on that, on a consensual basis, as otherwise we will not succeed in making improvements. Lord Turner has performed a good service, especially in respect of the auto-enrolment that has been mentioned already, and of the annual management charge.
Stakeholder pensions were introduced with an annual management charge of 1.3 per cent. They failed because the industry was not attracted by that, and Turner asked for a management fee of 0.3 per cent. If, during the lifetime of a pension the management fee is 1 per cent. more—1.3 per cent. rather than 0.3 per cent., which is a low figure for the industry today—the end result for a worker is that they have 20 per cent. less in their pension. That is one fifth less. So it is important for us to engage in the setting of annual management fees and ensure that the industry brings its costs down. The Secretary of State for Work and Pensions knows that I have been on his back and I will keep on his and other backs on this matter because until we get low fees and competitive charges we shall be doing a disservice to those who save their money on a weekly basis. That is the issue that we should focus on.
I mentioned the issue of hypocrisy. The dividend tax credit was cut five times in 18 years by the previous Government. Norman Lamont in his 1993 Budget clearly said that it could have damaging economic effects and it distorted the market. He said:
"It cannot be right to distort the commercial decisions of British companies in this way".—[ Hansard, 16 March 1993; Vol. 221, c. 186.]
So hon. Members who have addressed the House this afternoon agreed with that Budget, but it seems that they have now turned turtle and they do not agree with the policy. This is where the charge of hypocrisy sticks. If it was okay during 18 years of Conservative rule to reduce dividend tax credits, why are Conservative Members bleating now—particularly those who have a firm ideological viewpoint? The tax credit should be seen as a subsidy, and why should people get a subsidy when other people do not get it?
"indeed not only did contributions fall but they were required to fall by deliberate government policy... the Finance Act of 1986...required pension funds to identify whether...they had a surplus of 5 per cent. or more, and to take action to remove the surplus within five years, or else lose some part of their tax exempt status. The deep dip in contributions seen in the period 1988-91...almost certainly reflects the impact of this policy."
So we had a perverse situation in which companies paid more tax if they invested in their pension fund, but paid less tax if they paid out a dividend. Surely that was a market-distorting policy. Surely it was for the benefit of the long-term economic future of the United Kingdom to get rid of that policy.
My right hon. Friend Mr. MacShane has written a letter to me. He says that he tried to get it published in The Economist, but it was refused. It regards the comments of John Moore, who was a Conservative Treasury Minister and has endorsed the release of this information. The letter says that John Moore said to my right hon. Friend that
"the first thing an incoming Labour government should do would be to switch the tax relief for private pension funds to more worthwhile ends."
He was a Treasury Minister, a professional accountant, someone who had experience in this House. So I hope that the charge of hypocrisy sticks perhaps only for today and that we get back to the consensual approach to pensions provision.
So what should we do? First, we need to get back to a consensual approach. We should accept that dividend tax credits distort the market. We should work together to reverse the historic under-investment and short-termism in the British economy. We should also continue on the path of reducing corporation tax. We should provide incentives for investment. I am particularly keen that the Government should provide incentives for those in low-paid work to save for their retirement. We should also recognise the long-term nature of the problems with pensions and get back together, working on a consensual basis to find a solution to a long-term problem.
I agree with John McFall that we are making a great hullabaloo about the events of 10 years ago, but there are perfectly good reasons for doing so and for holding this debate. There is an obvious public interest because the Chancellor has delivered his last Budget and is about to become Prime Minister, so the release of the information excited legitimate public questions about his judgment, his style of taking decisions and the consequences of some of the judgments he has made, which may give some clues to how he might act in future.
The questions were provoked by the release of information on the decision of the Information Commissioner. The Chancellor says he welcomes the release of such information, although—like the right hon. Member for West Dunbartonshire—I am not sure that I do; I am not sure that we want the form of government in this country to be altered in quite that way. However, it is inevitable that we should have a debate.
The debate is particularly relevant because the subject is even more important now than it was 10 years ago. We all accept that there is something of a pensions and savings crisis and we are all trying to produce long-term consensus on how to resolve it—not for the first time. I was involved in trying to reach consensus with Barbara Castle when she produced proposals that would have practically wiped out private occupational pensions if she had gone ahead.
The undoubted fact is that if people carry on contributing as little to their savings and their future retirement as they do at present we shall face great problems. We have to form a judgment about recent events, which will include coming to the conclusion that more should be done to encourage people to make their own savings and their own provision and that more should be done to encourage employers to help by trying to rebuild the system and reverse the decline of the occupational pensions industry. That will require continued tax relief—perhaps additional tax relief when it is affordable and even forms of subsidy—so it is important that we consider what the culture should be now. Never again should pensions be regarded as the easy source of revenue that they were in 1997 by the incoming Chancellor. If we can get that point across, the future consensus will be improved.
I turn to what is still relevant about what happened 10 years ago and will deal briefly with how the announcement was made. The decision was arrived at in great secrecy in opposition and there was no mention of it in the election campaign. It was produced in the Chancellor's first Budget and he read it out in delphic terms; four sentences dismissed the heftiest part of a great increase in the burden of taxation in the 1997 Budget. We had been warned about the windfall tax—another disgraceful tax—but it did not raise enough for the Government, so out of the blue came those remarkable four sentences, ending with:
"The previous Government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies."—[ Hansard, 2 July 1997; Vol. 297, c. 306.]
It is clear when we read it, but we all know how the Chancellor delivers such things, particularly the difficult bits of Budget speeches. That was the first time.
The Chancellor's announcement was misunderstood by less sophisticated members of his party. I do not say that critically; things such as tax credits on pension funds are subjects that usually hold the complete attention of only about 20 Members on either side of the House. The Chancellor's statement produced cheers because some Labour Members thought he was announcing a tax reduction and he thought he had got away with it—or so he thought. However, by the next day—
In 1997, the Chancellor announced the original stealth tax. He chose it as a source of revenue partially because he believed that 999 in 1,000 people would not understand the statement he was making, so the money would not appear to come from their pockets. However, by the next day, as Dr. Cable said, people were beginning to criticise it. I looked up what I said at the time. Even then, we were talking about the fact that we had been considering but rejecting the same proposal and I said that there would be a profound effect on pension funds, pensioners and employers as a result of that dramatic and unexpected change, for which we were unprepared and which had never been mentioned in the general election eight weeks before.
Does my right hon. and learned Friend accept that there were some rumours that that might happen? Indeed, the first question put to the Prime Minister at Prime Minister's Question Time in May was from me, and I asked him whether he would compensate pensioners for any of the proposed changes in advance corporation tax.
There were rumours and I shall refer in a few moments to a book on the subject. There was considerable worry at the time about the matter leaking out before the election. The decision was taken in great secrecy by the group of four people to which the shadow Chancellor has already referred—the three hon. Members and our old friend, Charlie Whelan—in the Grosvenor House hotel and with the assistance of Arthur Andersen, the then well known consultancy and accountancy firm. That is how these proposals were devised and put together. It had nothing to do with Treasury advice and I have no doubt that this group discovered, as we had discovered, that the Treasury, as usual in these matters, had a range of opinions among officials, with some in favour and some against. It had all been tied up and decided before the Government came to office.
There are probably even more victims to be added to the list, but I believe that it is indeed internationally the same firm, but no doubt some very good people worked for that accountancy and consultancy firm. It was Enron rather than working for new Labour that brought it to grief, but the firm did indeed work for both and helped to produce this particular proposal.
Why was the decision taken? They looked at the argument, familiar to anyone at the time, that if companies were stopped from paying dividends as demanded by pension funds and were encouraged to retain profits, it would boost investment. That was repeated and has been repeated again over the last few days. It was a convenient argument to use whenever people were looking in that direction to raise revenue. However, as the hon. Member for Twickenham said, subsequent events proved that that was quite untrue. In any event, I do not accept it because the idea that if a company has produced a surplus, the best form of investment for it is to plough it back into the same company—or that if it distributed that surplus to the markets, they could not find better ways of investing the money in other ventures and other businesses—is a somewhat preposterous one.
If anyone returns to that argument, as new Labour Ministers do, I hope that we will not go back to the absurd idea that successful companies should hoard all their profits and not return any of the money to the owners as if that were the best way of making use of the surplus generated. In today's modern markets, which work very well, I believe that quite the reverse is true. All the pressures under the present Government are for share buy-backs and distribution of dividends because most people accept that that former argument was wrong and that the best way to proceed is to encourage the distribution of dividends so that the market can make use of them in new ways.
Surely what this measure was doing was precisely removing the market distortion of the subsidy so that the company could decide for business reasons what was the best proportion to invest back in the business and what was the best proportion to pay back in dividends. That should not be distorted by the tax subsidy.
That was the argument, but as I have just explained, I do not accept it and I do not think that subsequent history showed that it had that effect. It actually made no significant difference. That argument may have been used even by my predecessors in office, but it has been a convenient excuse to put forward when a Chancellor is looking for revenue.
Let me move on to how and why the decision was taken. Labour apologists for what happened keep going back to former decisions by my noble Friends Lord Lawson and Lord Lamont, which took place in quite different circumstances. It is relevant to look further into the precise time that we are talking about and the state of the economy then. The three Members I have identified were sitting in that hotel suite at the same time—precisely the same time—as my right hon. Friend Mr. Dorrell and I were looking at the same proposition. We rejected the argument about distributing dividends and the argument that the pensions funds could carry this. It is possible to say that we came to a conclusion that, looking back, was preferable to the one that they reached. I do not believe that, in the end, in any event, that issue is what drove the three new Labour pioneers to the conclusion that they came to.
I turn to a book that has been cited once already—I thought that my hon. Friend Mr. Osborne was going to take all my speech when he opened the debate. The book is called "The Unconventional Minister: My Life Inside New Labour" and it is by Mr. Robinson. I commend it. I am grateful to him for giving me an inscribed copy when he produced it. I am using it only for political criticism of the decision and certainly no kind of personal attack on him or either of his colleagues. He is candid and makes it quite clear that they were searching for revenue. On page 88, when discussing looking at whether the calculations made by Andersen's and being checked by the Treasury were right, he says:
"We needed the money. It had to come from somewhere".
That was what actually drove the decision in that first tax-raising Budget in 1997.
Why did the Government need the money? The main problem was that they had promised not to raise personal taxation. That was a successful electoral ploy and totally robbed me of the best argument that I was hoping to use against them. They were raising the money to fund their youth employment schemes and other measures. That is what it was for. The hon. Gentleman's book reminded me that the windfall tax had been announced to pay for that, but it was not enough.
The hon. Gentleman is agreeing. Well, it is his own book: it is a good source. The Government had to find some tax that they had not told anybody about in order to fill the shortfall. They may also have suspected that there was a kind of structural deficit and they had to do something about it. He refers to that as well, I think. But the key thing was that the Government believed that they had to raise some money without raising any personal taxation. It had to be corporate taxation and this move was the easiest way because it would raise an astonishing £5 billion per annum—and nobody would understand it apart from a few anoraks in the House and a few people in the pensions and accountancy industry. It was the original, and most profitable, stealth tax. That is how it all emerged.
A sadness is that the Government turned out not to need the money. It was the beginning of some extremely bad forecasting that they made in subsequent years. They were not able to anticipate where the dotcom bubble in America was going to take us. Nobody did; I did not when I made my remarks about recession. They began to run massive unsolicited and unexpected surpluses. It was years before they needed the money. Sadly, nowadays they are still spending about £6 billion a year and no one can find an easy way of getting out of this continued drain on pension funds.
They did what they did to raise the money and because it was a stealth tax. It did terrible damage to the pensions industry, pensioners and the legitimate expectations of many of our constituents.
I listened to the Chancellor defending himself and saying what a great decision it was and how he would make it again. He allowed fancy to run away with him. He was plucking things from the air to a quite extraordinary degree. The idea that I had used the argument that we were going to go into recession against him was nonsense. That came when the Governor of the Bank of England was raising interest rates and the Chancellor was raising taxation at precisely the same time, when we were already slowing down the economy. My right hon. Friend Mr. Maude and I were unlucky: all that happened was that the economy went flat. There were two successive quarters of stagnation. We never went into recession. But that was later.
Corporation tax was used in mitigation. In my last Budget, I reduced the small companies rate of corporation tax—quite the reverse of what has just been done by the Chancellor. My recollection is that the Government did not cut corporation tax until 1998—and they did not actually cut it. They took the headline rate down by 2 per cent., but they altered the method of payment to quarterly on advance estimates so that the cash flow into the Treasury was increased by what they did to corporation tax. It is bizarre to use that excuse. Until very recently, the Labour Government had been raising corporate taxation incessantly during all the time in which they had been in office. The Chancellor then went into even wilder fancies by saying that corporate profits had risen as a result of the decision. I cannot for the life of me understand how corporate profits rose.
As has been pointed out, the inescapable fact is that the decision, on international financial reporting standards calculations, has cost at least £100 billion over the years. The cost is now running at £6 billion a year. Compared with the previous arrangements, 20 per cent. of the dividend income of pension funds is being sacrificed to the Treasury. Whereas nine out of 10 members of occupational pension schemes were in defined benefit schemes when we left office, only one in 10 is now in a defined benefit scheme. It is estimated that deficits in the pension industry are running at about £100 billion, which is exactly the figure that has been extracted so far by the tax.
The reaction to this is relevant. The way in which the Chancellor gets carried away by using different time scales to make his points, clutching at figures from the past and making wild assertions about what has happened casts serious doubts on his judgment and where we were going. Yesterday, the Secretary of State for Defence came to the House in almost as big a pickle. He had made a quite appalling error of judgment, but he admitted that he had made a mistake and actually apologised for it. Had he not admitted that he had made a mistake, he would have been roasted alive on the Floor of the House, so he made a sound political judgment. I am afraid that the Chancellor's instincts are totally different. The very fact that he is criticised makes him defend his decision more vigorously by using wild arguments to justify it. He seems oblivious to the fact that although the decision was not the only cause of the problem—there was also longevity, the fall in stock market values and the mad regulation and valuation—he has done great damage to the pensions industry and his judgment was seriously—
I am pleased to follow the former Chancellor, Mr. Clarke. He started his speech in a serious vein, but he seemed to degenerate into using the unfortunate tone of voice and personalised criticism that we have sadly come to associate with the shadow Chancellor. As I tried to say to the shadow Chancellor last time I commented on his remarks, I do not know why he wishes to demean himself in such a way. The more he personalises his attacks on the Chancellor and makes them as unpleasant as he does, the more his behaviour borders on a form of paranoia and suggests that he lacks self-confidence. If I may offer him some advice—although he seems to have found much in my book, I doubt that he will take this from me across the Chamber—he would do well to moderate the personal nature of his attacks . [ Interruption. ] That remark was meant to be constructive; it was made to the hon. Gentleman in perfectly cordial terms.
Let me address a couple of points made by the former Chancellor. He makes a great deal of his four-year period as Chancellor. The Opposition often talk about the golden legacy that we inherited in 1997 —[ Interruption. ] Calm, calm. I am prepared to say that we did not find the usual mess left by Tory Governments. However, two significant aspects of the economic situation were of great concern, so we had to address them immediately. The first was the public debt. I have the figures for the former Chancellor, given that he seems to have forgotten them.
When the right hon. and learned Gentleman took office, we had a massive public sector deficit of £42 billion. The reason the deficit had been allowed to run that high in 1992 was quite clear: the Conservatives wanted to win the election. To some extent, they succeeded in winning the election on the back of an unsustainable public sector boom and investment in the public sector. The deficit rose to 5 per cent. of gross domestic product, which was an exceptional figure by anyone's standards. When the right hon. and learned Gentleman vacated No. 11, he left us with a structural deficit—or a deficit at any rate; he never answered my questions about whether it was structural—of £22 billion. During his four years of stewardship of the Treasury, his forecast for the deficit was wrong every year because he overestimated by 100 per cent. the reduction that he actually achieved.
That was the first matter that we had to tackle in one way or another, and through a combination of factors. The other matter—and it relates to why we made the Bank of England independent, and why the first act of the incoming Labour Chancellor was to show that he had the resolve to face the issue of whether it was necessary to raise interest rates—arose because the Conservative Chancellor, no doubt from sound party political electoral considerations, had refused Bank and Treasury advice to raise interest rates time after time, and month in, month out. Those were the twin matters that we had to address. The incoming Chancellor addressed one of them by taking the courageous political decision and brave economic decision to make the Bank independent. We all know that the present shadow Chancellor said that that move was a mistake, and he even voted against it, I think.
He indicates that he did not vote against it, and I am prepared to accept that, but he certainly was not very vocal in his support for the measure. As for the right hon. and learned Member for Rushcliffe, the former Chancellor, in the weeks after we took the decision, he said that it was a mistake. Those were the two fundamental decisions that we had to take. Part of the issue, and I see that we must confront it as honestly as I did then, was that we had to raise money, via the windfall tax, for our welfare to work programme, which was £5 billion. We raised a bit more than that in the end. The programme was successful, and people were successfully employed. Another issue was a general closing of the gap, which we successfully achieved, perhaps even to a greater extent that we dreamed that we could. We then went into budget surplus, but we did not do that by dodging the difficult decisions, by finding some local bandwagon that we could jump on, or by flirting with a superficially attractive idea that makes a brief apparition on the political stage. We did it by facing up to the fundamentals and taking difficult decisions.
The shadow Chancellor, who is a recent convert to the idea of facing up to the issues, has the courage to say to his party's Back Benchers, whatever groups they are in—there seem to be so many of them; I cannot keep up with them these days—
Yes, and there is the No Turning Back group. They want £40 billion of tax cuts, but the shadow Chancellor will not say where they are to come from, and of course he will not say that his party will reinstate the tax credit system. Of course he knows that it would be wrong to do so. I hope that later we will hear from the Secretary of State for Work and Pensions on the steps that we are taking to deal with the real problems that we face.
We heard very good contributions from Dr. Cable, who led for the Liberal Democrats in this debate, and my right hon. Friend John McFall, who is the Chair of the Treasury Committee. He made a serious contribution on a serious problem. We face a savings problem and a long-term pensions problem, and we have to find consensus to deal with that. Those who have chosen to make a personal attack on the Chancellor and to turn the issue to temporary party political advantage have done nothing to advance the debate, which is one in which the whole House and all the parties have to engage. That has been made clear— [Interruption ]—not by Mr. Stuart, who makes an interjection from a sedentary position, but by many others in the House. The shadow Chancellor does nothing to contribute to the debate, given the tone of voice that he used and the party political way in which he deliberately sought to exploit an issue that is of public interest, but not for the reasons that have been given.
Was my hon. Friend as disappointed as I was to hear Mr. Clarke, the last Conservative Chancellor, misrepresent the position in relation to advance corporation tax? The former Chancellor said that the changes were made to increase cash flow, and it is certainly true that there would be increased cash flow at the start, but would that not simply re-profile the amount of corporation tax that would fall due? It would not alter the total. To misrepresent matters in that way does not improve the case one iota.
My hon. Friend is correct, and I fear that the right hon. and learned Member for Rushcliffe, who did not have much interest in the detail of policy while he was in the Treasury, may not have understood that point. One thing that we did when we corrected the whole matter, when we abolished dividend tax credit, was to introduce a new instalment payment system for corporation tax. Of course, inevitably linked to that was the removal of advance corporation tax; in fact, there was a cash flow advantage to the Exchequer, of which the Confederation of British Industry was very aware. I will come back to that point in a moment.
I am grateful for the hon. Gentleman's advice that I should be gentler with the Chancellor in future. Will he explain something, because he is in an almost unique position to do so? He explained why the decision was made to raise taxation, and he made the point that the then shadow Chancellor thought that he had to tackle the budget deficit. Why was that decision kept secret? Why were those tax plans developed in such detail in opposition, kept, so he claims, in a safe in his hotel room, and never revealed to the public or perhaps even, as I understand it, to the leader of the Labour party at the time? If that difficult decision, as the hon. Gentleman says, needed to be made, why was he not honest about that to the public before the general election?
The hon. Gentleman is absolutely incapable of distinguishing between a fundamental point and a personal point. He is at it again, trying to imply that there is something wrong about trying to work out policies in opposition. I commend my book to him, as it will teach him how to behave in opposition, which he has not learned yet, as well as preparing him for government. Every party that makes a serious attempt to become the Government of this country does serious work in opposition with serious players, which is one reason the Opposition have been distinctly unsuccessful on three occasions in gaining the country's trust. People saw through all that they said on immigration at the last election, as they saw through what they tried to do on tax in previous elections. They jumped on an apparently attractive bandwagon, but the wheels came off when they were under scrutiny. With that mind, let us deal with the central issue —[ Interruption. ] If Opposition Members would like to intervene, I am happy to give way.
I will give way to the hon. Gentleman in a moment. He was very patient in waiting for the Chancellor to give way, and made a terribly telling intervention. I look forward to another one, but may I first deal with the point about the official advice that we received?
There were, as the right hon. and learned Member for Rushcliffe correctly said, a range of views in the Treasury and in the Inland Revenue, which were the two principal Departments giving advice. Initially, the Inland Revenue was dubious about the figures that we had worked out in opposition—only the Treasury computer held all the information needed to achieve an up-to-date and accurate estimate—because it had looked at the problem before, and the numbers were nowhere near as favourable to the overall proposition of the three interlinked changes as was later the case. We had to wait about two weeks until the Inland Revenue came back, thoroughly in agreement with the proposals that we had evolved. Indeed, the person who led for the Inland Revenue said that it was something that he had wanted to do for many years.
May I just finish this point, because it fits the whole and may be of some interest to the House? As the right hon. and learned Member for Rushcliffe said, the proposal had been considered before, but it was rejected, principally because of the fear of political repercussions. He could not face up to making tough decisions, just as he could not face up to increasing interest rates or to making the necessary cuts that have since brought the public accounts back into balance. That is why the Opposition failed to do it—and it is that lack of political courage that dogs them to this day. They seek to exploit easy opportunities, and that hollowness means that they will be found wanting at the next election.
The figures were printed very fully, and the hon. Gentleman will find the £5 billion figure in every relevant part of the documents relating to that time. I cannot see why there is any surprise about that. Everyone knew it then, and everyone knows it now. The figure was in the public domain. To my knowledge, nothing has been revealed, apart from the fact that the Opposition, with the help of some parts of the press, are trying to impose a construction that suggests that in some way the Chancellor personally rejected official advice from the Treasury. Nothing could be further from the truth. As I said a moment ago, and as the previous Chancellor said, a range of advice was available. Of course, officials gave us caveats and warned us of the dangers. They told us the same about the Bank of England, which is no doubt why the right hon. and learned Gentleman refused to make it independent, because he was fearful of what would happen if he did so. Just as we made the hard but correct decision on the Bank of England, so we took the hard but correct decision about the overall reform of corporation tax, which involved the abolition of tax credits. Any notion that the Treasury team or the Chancellor personally went against official advice is plain wrong. I hope that the House clearly understands that.
None of the excerpts that the Opposition have read out from the official papers delivers the formal burden of official advice that we received, which was that we should proceed with the overall reorganisation of the corporate tax system. The CBI itself—and I spoke personally to Adair Turner—was in favour of the overall reorganisation. In particular, the industry as a whole wanted to get shot of advance corporation tax. If ACT were abolished, tax credits had to go, and if that happened, there was every reason to provide a more balanced and even pattern—a level playing field—of corporate taxation that would not favour dividends, capital investment and retention, still less companies that wanted to reinvest funds that they could not profitably use in their own business. That would be left to the market and not to an invented and distorted tax mechanism that no one ever had in mind when ACT was introduced.
I come back to the two central points on which I am pleased to base my personal contribution. This is a serious debate, and it should be about a serious problem that the country as a whole faces. I hope that, after this unwanted and unnecessary political intrusion instigated by the Opposition, we can return to the consensual approach adopted by the main parties in the House. The reasons we made that decision were quite clear, and it was based on the burden of advice from the Inland Revenue and from the Treasury that we should proceed with the changes that we were making. It was necessary, as were the other decisions that we made about the independence of the Bank of England, about raising interest rates and about closing the gap in the disastrous public expenditure levels that we inherited from the Tories. I do not want to rehearse again the specious and fallacious arguments made by the Opposition, which were comprehensively demolished by the Chancellor in his major contribution. I hope that the shadow Chancellor will take on board what I said earlier, because in such head-on confrontations, the message that reverberated around the House is that he has some way to go before he reaches the measure expected of a shadow Chancellor. As for us, we stand by those decisions: they were right then, and they are right now. We have problems—let us face them responsibly.
It is a great pleasure to follow Mr. Robinson, whose amiable lack of self-regard enables him openly to admit that Labour deceived the British electorate at the last election. He sees nothing wrong in developing policies in secret, which it refused to admit. As an aside, I got wind of those policies before the election. I held a press conference during the election campaign alleging that it was the Labour party's intention to abolish advance corporation tax. Only the Financial Times took me at all seriously, publishing a comparatively modest article saying that that was allegedly being considered by the Labour party. No one else paid any regard to the matter, and even I scarcely believed that it really intended to do it. None the less, I shall put in some context the decision that subsequently followed.
When I became Secretary of State for Social Security, the first crisis with which I had to deal was the Maxwell pensions crisis. The former Labour Member for the Milton Keynes area had left his companies' pension funds bereft of hundreds of millions of pounds, so tens of thousands of pensioners' livelihoods and future were at risk. We had to deal with that—we did not do so, but that is not the issue today. It meant, however, that I had enormous sympathy for my successors when they faced a Chancellor of the Exchequer who introduced a tax that took billions of pounds from the pension system, which affected every pensioner and future pensioner in the country. Indeed, on the night that he introduced that tax, I described it as the Robert Maxwell memorial tax, because no one before the Chancellor had thought that they could get away with removing money from pension funds without anyone noticing until it was too late. That is what our Chancellor did, but he has not got away with it indefinitely—only for too long.
I want to look very simply at the Chancellor's record on pensions and his reasons for introducing this change. He inherited a system that, in the words of Mr. Field, was the "envy of the world". He inherited an occupational pension scheme that was accepted as the jewel in the crown of pensions systems worldwide. As a result, we were enabled to build up funding, savings and investments for future pension liabilities in this country to a level that was not only more than that built up by any other country in Europe, but more than all the other countries in Europe put together had saved and invested to meet their future pension liabilities. We faced less of a potential burden of tax to fund our future pension liabilities than those countries, and we were generating a huge annual flow of savings, which were available for investment in this country or to acquire assets abroad to meet the burden of future pensions.
In 1997, when the Chancellor took over, occupational schemes were generally well funded: they were secure, they were growing, they were giving earnings-related pensions to an increasing number of people and they were fairly taxed without disincentives to save. Let us take each of those points in turn and see what has happened under the tenure of this Chancellor.
May I make a little more progress? I will happily give way when the hon. Gentleman has something about which to ask a question.
Pensions were well funded in 1997. We know that because when the Chancellor introduced the tax, one reason that he gave was that they were over-funded—he thought that they had too much money. Now, the deficits are measured in billions of pounds. I have asked the Library for the figures, and it puts the gross deficit shortfalls of pension funds at some £76 billion, which is a turnaround from surplus to deficit that is commensurate with the net present value of the £5 billion a year taken from pension funds and its impact on the value of those funds' assets.
The Chancellor had the cheek to suggest that my hon. Friend the shadow Chancellor needs a lesson about the value of assets, but it is he who needs the lesson. What is important is whether assets exceed liabilities, which was the case in 1997. Now, the liabilities of pension funds exceed the assets. That is the Chancellor's record, which he must answer for, and the lesson that he needs to be taught.
We were told then, and we knew well, that occupational pension funds were secure. Robert Maxwell had delivered a blow to confidence, but that blow was enormous precisely because up to that point no significant public company had ever gone into bankruptcy while being unable to meet the liabilities of its pension funds. Such pension funds were sufficiently well founded that even if the company did not survive, the pension fund did, or if the funds were underfunded, they were met by the resources of companies. When I faced the Maxwell pension crisis, I asked officials, "What normally happens in such cases?" They said, "This has never happened before", so secure were we. Now it happens all too often, and all too many companies have failed leaving deficits in their pension funds. Hence the amendments that Conservative Front Benchers will introduce tomorrow to the Pensions Bill, when Opposition and Government Members will have an opportunity to try to make good the deficits and help the pensioners who are now caught in an occupational pensions system that is no longer as secure as it was.
The Chancellor has mentioned £8 billion being made available, albeit over 60 years, which is a measure of the crisis that he has created.
On pension fund deficits, surely the right hon. Gentleman should refer, at least in part, to the fact that after a long boar market the FTSE 100 was at about 7,000 on
I am grateful to the hon. Gentleman to doing so for me. I entirely take the point. Markets go up; markets go down; markets go back up again. When they go down, it is like the tide going out—it reveals who was swimming without wearing any swimming trunks. When the market went down, it revealed the shortfalls in the provision that the Chancellor had made available and the problems that he had created.
The system was growing before this Chancellor came into office, but now pension funds are closing. The majority of them are closed to new members, and two thirds of final salary systems have closed on his watch. Lord Turner has forecast the virtual euthanasia of final pension occupational schemes. The crown jewel of the occupational pension system has been successively plundered and sold off to the fences.
The Chancellor inherited a system that was fairly taxed and well incentivised. The system was fairly taxed in the sense that it was designed so that people did not pay twice. Having paid taxes on their incomes and made savings—the companies in which they invest pay tax—people did not pay a further round of tax, which is what the complex system of advance corporation tax credits was all about. The tax credit reflected the value of the tax—when taxes went down, the tax credits went down. The bulk of the reductions reflected that, rather than being a cut in the credits without any corresponding cut in the tax for the most part.
My right hon. Friend has touched on an important point of principle. My right hon. and learned Friend Mr. Clarke referred to the fact that that option was rejected when he was Chancellor, partly because the arguments about rebalancing investment flows were rejected and partly because the tax change implemented by the Chancellor introduced for the first time double taxation on pensioners—taxation on income into the pension fund as well as taxation of the pension paid to the pensioner.
My right hon. Friend is absolutely right. Any fair system taxes money either when it goes in or when it comes out, but not when it goes in, when it is in there and when it comes out again, which is where we are heading under this Government.
There is another change that no one has mentioned so far, which is the double whammy that this Chancellor landed on the pensions system, namely, the resort to extensive and almost universal means testing. That has meant not only that the pensions system bears more taxes, but that the incentive to save is reduced, particularly for those on middling and low incomes. That will have a serious, long-term deleterious effect on savings and provision for pensions in this country, not least because it means that most providers of pensions are now afraid that they will be acting unwisely if they advise someone who is not very rich to save and invest, which is surely a serious indictment of the situation that this Chancellor has created.
The Chancellor justified what he did in his Budget speech and subsequent interviews in three ways. First, he said that the measure would increase investment. Figures from the Library show that when the measure was introduced business investment amounted to 10.4 per cent. of GDP—it subsequently went down before recovering again to 10.4 per cent. of GDP. The measure has not raised the level of investment in this country—I will not pretend that the decrease was due to the tax change—and it has failed in the central thing that it was supposed to do.
The Chancellor said that the measure would discourage dividend payouts. As we all know, dividend payouts follow a cycle, but in the nine years since the measure was introduced, the payout rather than falling has risen compared with the nine years before its introduction. The amount is only small, but the measure has had the opposite effect, if any, to that which the Chancellor proposed and forecast. He imagined that there would be a complex system whereby even though the cash flow of companies would clearly be reduced by this tax measure—there is no way of taking money from companies and pension funds that does not leave them with less—they would none the less invest a higher proportion of a reduced cash flow, which would increase asset values in the long term sufficiently to offset the effect of the money that was taken out. That was an absurd, incredible and complex thesis that I am pleased to say the Chancellor did not resurrect today, although it will be interesting to see whether his devoted colleague and potential successor will do so in the wind-ups.
Finally, the Chancellor said that it could all be paid out of surpluses—that these pension funds were awash with money that served no purpose, and that they could pay it out at a rate of £5 billion a year with no harm done. As we have seen, however, those surpluses were available at that time but subsequently disappeared and have been replaced, by and large, by deficits on a fairly substantial scale.
I will resist the temptation to ask the right hon. Gentleman about pensions mis-selling. I am following his argument very carefully. Is his refutation of the Chancellor's argument based on the fact that dividends—the profits paid out by companies in the UK—have been rising over the past 10 years under this Government?
No, it is not, but never mind. If the hon. Gentleman reads the text in Hansard he will be able to see what I was saying.
The Chancellor said that the percentage of dividends paid out would decline; in fact, it has risen. [ Interruption . ] I am sorry—the percentage of profits paid out as dividends.
I was referring back to the Chancellor's Budget speech, when he said:
"The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits."—[ Hansard, 2 July 1997; Vol. 297, c. 306.]
If he introduced this measure to discourage paying out dividends, he has failed, as companies paid out a higher proportion in dividends in the subsequent nine years than they did before.
Given that the overall level of profits for corporations in the UK is at a record high, if the level of profits paid out in dividends has gone up, that means that dividends going to pension funds and to recipients of those profits have also been rising. The right hon. Gentleman is therefore saying that profits and dividends being paid out have gone up over the past 10 years, which is a fair point.
That series of interventions by the hon. Gentleman was probably worse than his contribution on the "Today" programme. All that he may end up saying is that the Chancellor successfully achieved the opposite of what he intended, but it was not such a bad thing after all.
The Chancellor committed two great sins of commission by imposing a heavy burden of taxes on pension funds and introducing extensive means-testing, but he committed an even greater sin of omission, which was the failure to cope with the growing issue—I would not call it a problem; it is a good thing that people are living longer—of longevity. The Government failed to address that for their first eight years in office. Why is that? I suspect that it is in large measure to do with their misrepresentation of the pension proposals that we published ahead of the 1997 election. Having so grossly and grotesquely misrepresented our proposals for reform, they could not return to the issue until it was all in the past, when they came back with something not entirely different from what I had proposed. It is a case of dishonesty being the root of a failure to act subsequently.
I believe that on this issue the Chancellor has revealed his failures of judgment and unwillingness to accept when he has made mistakes. It is time to drive home to him that he seriously damaged the glories of the pension system that we had in this country by taxing it, means-testing it and failing to adapt to the longer life expectancy that we all now enjoy.
Being a socialist, I am a compassionate sort, and I think that Labour Members have been unduly hard on the Conservatives. My right hon. Friend the Chancellor and my hon. Friend Mr. Robinson, the former Paymaster General, were very mean to the former Chancellor, Mr. Clarke, and to the shadow Chancellor. The Conservatives should be congratulated—not only those on the Front Bench, but those in the serried ranks of their predecessor generations, of whom there have been rather a lot in the past 10 years—on the only successful piece of guerrilla politics in what has otherwise been a sterile, acrid, wasted decade of opposition.
Opposition day debates on spurious subjects and specious axioms are nothing new—indeed, they are the very stuff of these afternoons. It is unbelievable that we are having this debate today, 10 years on, and we can only look forward to the rest of the series of retro-debates. Perhaps next week we could have one on the calamitous independence of the Bank of England and the consequent interest rate crisis, on the disastrous introduction of a national minimum wage and the consequent inflation shock, or on the disgraceful cuts in corporation taxes which accompanied the removal of the pension fund dividend subsidy, thereby causing a sharp, immediately discernible and outrageous rise in investment. Or, with a slightly different flavour, we could debate the consistent reduction of the dividend subsidy by successive Tory chancellors—a gradual phasing out of this market distortion, catastrophically prefiguring its eventual, extremely successful, removal by the Labour Government in 1997.
When the removal of a subsidy becomes a smash-and-grab raid, we really are in the world of doublespeak and upside-down-think. Even "credit" is a misnomer when the institutions in question do not pay tax. This was a subsidy, and one that was widely understood to have serious, long-term, structural, negative effects on the level of investment in the economy. Everybody knew that. We knew it when I worked in the global HQ of a FTSE top 10 company in the early 1990s. The dividend was deleterious, but there was no choice because of the tax regime and because of the expectations that it created in the City. Even the Tories knew that perfectly well. Even Norman Lamont, advised by Mr. Cameron, knew it. That is why he said exactly that when he cut the subsidy for the fifth time in 1993.
It was not advance corporation tax. We are talking about the dividend tax credit, as it was called, which was a subsidy paid in cash to pension funds, which do not pay tax. I am afraid that it is the right hon. Gentleman who does not understand.
This was a subsidy widely understood by the Tories to be deleterious; otherwise, why would they have phased it out gradually on five successive occasions? Their Government were not only pouring cash unnecessarily down the necks of pension funds but incentivising companies to pour their cash down the necks of pension funds instead of reinvesting it into their businesses. Not only did everybody know at the time that something needed to be done, but no serious, impartial, disinterested commentator is in much doubt that, as part of a package including cuts in corporation taxes and increasing capital allowances directly to stimulate investment, it worked.
The hon. Gentleman has been encouraged to perpetuate the myth that the great scheme involved cutting corporation taxes. That was not the aim. I refer him to the book of Mr. Robinson, which makes clear on page 86:
"In the first place, if we were simply to get rid of ACT and leave the other existing arrangements for the payment of corporation tax in place, we would face a net loss to the exchequer in cash-flow terms of over £1 billion per year. This was unthinkable. The road to reform should take us in precisely the opposite direction".
He goes on to describe the way in which they ended up producing a system that resulted in a cash flow to the Treasury of more than £20 billion.
I think that I reviewed my hon. Friend's book when he published it. It is an enjoyable read, but I believe that I said at the time that it was perhaps imperfect. It has misled the right hon. and learned Member for Rushcliffe to overlook the fact that at the same time as the dividend subsidy was removed, the main rate and the small firm rate of corporation tax was cut as part of a package that succeeded in stimulating investment. The investment in the economy, profitability and the size of the pension funds increased significantly between the policy's introduction and the dotcom crash of 2000. Everybody knows that.
No money was taken out of the pension funds. A previous Government's cash subsidy, which was being given to pension funds but was not advancing their interests, was removed for the long-term benefit of the economy. That was immediately perceived to be successful. That is what happened. The notion that any current problems or changes in the pension industry are attributable to the removal of the subsidy in 1997 is not simply wrong but ridiculous. That is why I am so impressed, as a partisan politician, that the Conservative party has got the subject on the Order Paper an unbelievable decade later.
Let us consider Kaletsky's column in The T imes last week. I do not know whether hon. Members have read it—none, strangely, has mentioned it. I commend it to everyone. One of the many comments that he made was that
"the claim that the 1997 'tax raid' was the main cause of pension fund closures, or even an important contributory factor, is simply false."
As he goes on to explain:
"The fact is that the pre-1997 pensions industry was not remotely as healthy as its lobbyists have claimed. The closure of traditional private sector pension funds was already becoming inevitable because of regulatory changes imposed by successive governments over the previous 20 years."
We know what kind of Governments they were in the 20 years leading up to 1997, do we not? I do not recall that they were Labour Governments.
Let us be clear: even it were not for the dotcom crash that wiped £250 billion off the value of the stock market; even if contribution holidays—encouraged by Tory Governments through their capping of surpluses—had not been recklessly overused, and even if life expectancy had not risen so dramatically, there would still be major challenges for the pensions industry because of the serious regulatory changes, which fundamentally altered the landscape of the industry, the implications of which were not properly foreseen or understood when the Tories introduced them.
Having to pay spouses' pensions, protect pensions against inflation and offer equitable treatment to early leavers had, along with life expectancy, already doubled the cost of providing private pensions. To quote again the esteemed and disinterested Kaletsky in The Times:
"The last straw... was the Major Government's panic reaction to the Maxwell pensions scandal."
He finally quotes Stephen Yeo, as several others have done, who advised the Tories on pensions. It is a shame that he did not tell them at the time that the business of getting rid of the subsidy being responsible for a pensions catastrophe was nonsense.
The Tories know it is nonsense, so what on earth is the motion doing on the Order Paper? To any student of economics or public policy, it would be baffling. To the student of politics—of the cynical, deceitful, disreputable way in which it is possible to practise politics—it is instructive. Hon. Members too often have recourse to Josef Goebbels's line in 1933, which they often misquote and misattribute, that
"any lie constantly repeated eventually becomes the truth".
It is not a line that fits our purpose here because it is far too strong. Conservative Members have not been lying about the matter, obviously.
However, the variation on Goebbels's theme that dear old Willie Whitelaw played to the Conservative party conference in 1985, when he said that
"we must never forget the value of constant repetition to get our message across" is not strong enough because it does not include the implication that it does not matter how misleading or lacking in truthful content the message that the party in question is conveying is—all that matters is how often one says it.
Any young proto-politicians who seek instruction in the worst excesses of the dark arts should note the sheer, dogged, determination, during a period of utter barrenness, despondency and failure, to keep the non-story alive. Looking back through the records, there is quite a roll of honour from the Conservative point of view, though a complete rogues' gallery from the point of view of serious debate about the pensions on which people are obliged to rely often at the most vulnerable time in their lives.
Mr. Lilley, whom I greatly esteem in many other contexts, opened the Budget debate about which we have heard so much in 1997, and claimed that the change in the dividend subsidy, combined with the windfall tax—perhaps another potential Opposition day debate; "the windfall tax on the private utilities" might be a good topic for next week or the week after—was
In the same year, Mr. Hague stated that the Budget was
"a double whammy against pensions... It is a smash and grab raid on pension funds in this country".—[ Hansard; 2 July 1997; Vol. 297, c. 321.]
There is the double whammy theme. In 1998, Mr. Maude wittily reminded us:
"Last year we had the Robert Maxwell memorial Budget, with its vicious raid on pension funds."—[ Hansard, 14 July 1998; Vol. 316, c. 198.]
Vicious? The Chancellor removed a subsidy to stimulate investment—and a year later it is "vicious".
"In the Government's first Budget, there was a £5 billion a year raid on pension funds as a result of the withdrawal of dividend tax credits."—[ Hansard, 28 April 1999, Vol. 330, c. 351.]
In 2000, Mr. Michael Portillo, typically lyrical, stated that
"the Chancellor is still taking £5 billion a year from the pension funds of people who are now saving for their retirement. He is attacking the people who are trying to do the right thing and want to be independent. He is impoverishing future generations of pensioners, driving more and more of them to be dependent on the state."—[ Hansard, 13 December 2000; Vol. 359, c. 662.]
The student should pause at this point and remember that that is not only not true, but ridiculous. Everybody knows that it is ridiculous. The Conservatives know that it is ridiculous. When they were in office, they did exactly the opposite from what they say. However, now they simply keep saying it—year after year and over and over again.
"I cannot think of any tax rise"— it is now a "tax rise"—
"more retrograde than his massive tax raid on pensions savings... How can this assault and battery of prudence be defended?... 'it is like Gordon Brown leading a £25 million Brinks Matt robbery every day of the working year.'"—[ Hansard, House of Lords, 14 March 2001; Vol. 623, c. 853.]
That goes on and on, right up to three weeks ago, when Mrs. Villiers told us about the famous time when the Chancellor "dealt a body blow" to savings with what has now become "his £100 billion raid" on pension funds.
The Chancellor removes a £3.5 billion to £4 billion subsidy to stimulate investment and it becomes a vicious, £100 billion raid on pension funds. For cynical, self-serving, misleading party politics, I take my hat off to the Conservatives. It is remarkable that they managed to get the motion on the Order Paper without the Clerks rolling about laughing and the printers becoming so hysterical that they could not get the document out.
However, for serious debate about people's economic security, it is not funny. To call the ending of a damaging £4 billion subsidy, which the Tories were in the process of phasing out five or six times, a £100 billion smash-and-grab tax is not only ridiculous but disreputable. To be so baldly at odds with the facts is not clever, but to scare people about something that can make them feel so vulnerable is not kind. It is for that serious reason that Labour Members will be glad to vote against the silly motion tonight.
I begin by declaring an interest as a trustee of an occupational pension fund, and as a director of the associated principal employer.
I want to congratulate my Front-Bench colleagues, for an eerily similar reason to that being used by Mr. Simon to attack them. Over the past 10 years, the Chancellor of the Exchequer must frequently have quietly congratulated himself on the relatively low amount of political pain that he has had to suffer for the huge amount of money that he has taken out of the occupational pension schemes in this country, and for the damage to which that has contributed during that period. I welcome the fact that a combination of the Freedom of Information Act 2000 and the activities of The Times and of my right hon. and hon. Friends on the Front Bench has now brought the issue into sharp relief in the political debate. Those on the Conservative Front Bench should be warmly congratulated on that.
It is worth reminding ourselves why it has taken so long for this issue to take off as a subject of political debate. As my hon. Friend Mr. Hammond knows better than most, and my right hon. Friend Mr. Lilley probably knows even better, anyone who tries to explain pensions issues in a political context fights an uphill battle. It is too easy for the issues surrounding pensions to degenerate into impenetrable jargon. That is precisely why the Chancellor chose this target in the privacy of the top-floor suite of the Grosvenor House hotel before the 1997 election. It also explains why he chose to present the reality of this tax increase on the pension funds in very delphic language during the 1997 Budget.
If people make an issue sound complex, there are usually two explanations. One is that the speaker does not understand the subject; the other is that they have something to hide. The Chancellor has consistently made this subject sound complex, but not because he does not understand it. He is a very bright man; he understands it with absolute clarity. He has made it sound complex because he has had something to hide, and my Front-Bench colleagues are to be congratulated on at last revealing what he has spent 10 years hiding.
The right hon. Gentleman has, like me, been listening to the debate. Unless I have missed something, no two people have given the same figure for this alleged pension raid, either on his Front Bench or in any other part of the House. Why is that? Is it because no such figure exists, or because nobody understands the issue, as he has just been describing?
I propose to stick with what I understand and, more importantly, with what my pensioner and employer constituents understand, namely, that it was a key factor of the Chancellor's policy in 1997, as was made clear by Mr. Robinson, to levy a significant additional tax revenue out of the pension funds. We can argue about the number; the figure that most of us will stick with is £5 billion. The Paymaster General clearly thinks that it is more, because he has drawn the attention of the House to the fact that dividends have risen over the past 10 years, so £5 billion might be an underestimate. The key fact is that that money was previously flowing into the pension schemes, and now it no longer does so. The key questions when additional tax is being levied are: who pays the tax and what is the consequence of levying it? I shall go on to discuss that question in a moment, but I shall give way to the Paymaster General first.
I am the Economic Secretary. I am grateful to the right hon. Gentleman for giving way. I know that he has a great deal of expertise in these matters, partly because of the time that he spent at the Treasury, where he conducted a review into barriers to long-term investment, which was known as the Dorrell review. If a freedom of information request were to reveal the contents and background papers of that review, what would that tell us about the review's attitude to the dividend tax credit as a barrier to long-term investment?
We do not need a freedom of information request, because we had the details in glorious technicolour from my right hon. and learned Friend Mr. Clarke, who was Chancellor at the time. It was revealed that we had assessed the options for this measure as a tax-change proposal, and that we rejected it on three principal grounds. The first was a purely practical one, namely, that we feared the effect that it would have on pension funds. The other two were issues of principle, both of which are important to the debate.
The first, to which my right hon. and learned Friend referred in his speech, is that the argument for the change was that it would reduce a distortion in the tax system by reducing an encouragement to dividends and encouraging companies to reinvest in their own activities. That was also an argument put forward by the hon. Member for Birmingham, Erdington, and it was implicitly accepted by the Economic Secretary—I apologise to him for referring to him as the Paymaster General earlier. My right hon. and learned Friend, as Chancellor, made it clear at the time that he disagreed with that approach to policy on precisely the grounds that he set out to the House this afternoon, namely, that capital markets become progressively more efficient, and that, if we want efficient allocation of capital in the economy—as we should, as an issue of public policy—we will achieve that aim better through capital markets rather than through trapping investment flows within individual companies.
That brings me to the third reason why we rejected the option, which, in view of what has happened since, will be of some interest. We did not agree with the analysis, also put forward by the hon. Member for Birmingham, Erdington, that saw the dividend tax credit as a subsidy to pension funds. It is important to understand why we did not accept that logic. Until the present Chancellor did what he did in 1997, the taxation of pension funds in Britain had always been based on the principle that the revenues going into the funds went in tax free, with the result that we were then able to tax the pensions paid by the funds in the hands of the pensioners. That meant that the capital build-up during the life of the pension took place on a pre-tax basis.
That policy had been pursued for many years, and that was what led us to reject the option that the present Chancellor subsequently adopted. He has created a situation in which the revenues that come into the pension funds via a dividend come in tax paid. For the first time in the history of occupational pensions in Britain, the portion of the financing of the pensions that comes from dividends is now subject to double taxation. It is taxed when the income comes into the pension fund, and again when it is paid out as pension in the hands of the pensioner. That is why I hold the Chancellor responsible for having contributed in a major way to the practical decline of occupational pension schemes over the past 10 years. And that was precisely the practical reason that led my right hon. and learned Friend—ever a practical man—to reject the abolition as a policy option.
I am grateful to the right hon. Gentleman for giving way again. I am not making an accusation here, because, given the conventions that exist, I have seen none of the pre-1997 papers. I also do not doubt his word that the Chancellor of the Exchequer at that time rejected the case for this abolition. The case had previously been made for a reduction by his predecessor, advised by Mr. Cameron. Did the papers prepared for and submitted to the then Chancellor—the Dorrell review—contain a proposal that the dividend tax credit should be abolished, which was rejected by the Chancellor? Or did the right hon. Gentleman himself reject the idea and the background papers? I ask only because those papers have not yet been made public.
If the hon. Gentleman wishes to make a freedom of information request, he is no doubt as free as any other citizen of the United Kingdom to do so. What I think he will find is that the way in which I tended to work as a Minister—I suggest to him that it is a sensible way for any Minister, particularly a junior Minister, to work—was to follow the principle that there is not much point in committing a huge amount of effort to preparing a policy option without having first established whether the Minister in charge of the Department is a receptive audience to the proposal. I took the precaution of establishing that my right hon. and learned Friend was not a receptive audience.
With respect, I began by pointing out the right hon. Gentleman's personal expertise in these matters. I know that his work at the time created a lot of interest, and it was called the Dorrell review, not the Clarke review. I entirely accept that the then Chancellor of the Exchequer made his decisions, but will the papers prepared for right hon. Gentleman for the Dorrell review and the background papers reveal his support for, or opposition to, the measure?
They will reveal that the options were examined and did not take the form of a final recommendation because we had had discussions that led to a conclusion.
In the case of a final salary pension scheme, the bill for the Chancellor's policy is met by the employer. In the case of a defined contribution scheme, it is met by the individual's pension pot and, ultimately, out of the pension paid to the individual employee. It is therefore completely absurd for Ministers to claim, as they do, that the changes have helped employers, who have ended up paying the additional costs into their pension funds, or individual pensioners who are members of defined contribution schemes, who will end up receiving reduced pensions as a result of the increased burden on their pension fund. That is why it is correct to say that the primary effect of the changes has been to contribute, in a significant way, to the reduction in the availability of final salary schemes outside the public sector by roughly two thirds since this Government came to office.
It is significant that in the Chancellor's responses to interventions all the statistics that he quoted in relation to the availability of final salary schemes ran out in 2000 or 2001. We are now in 2007 and anybody who has been engaged in private sector activity over the past decade must surely understand that private sector pension provision on a final salary basis has been in sharp retreat throughout that period and in particular in recent years. To an important extent, that is a result of the policies that the Government have pursued. It is also true that the primary effect of the changes has been to reduce pensions paid out by defined contribution schemes.
My final comments focus on the secondary effects of the changes. Increased tax burdens have resulted in reduced availability of final salary schemes and in less generous payments by defined contribution schemes. However, there have been two important secondary effects, and it is important that the Government not only accept responsibility for them, but are seen to do so in public debate.
The first secondary effect is that if additional costs to providing final salary schemes are imposed on employers, it has the effect of tipping some employers—marginal employers—into administration and receivership. It is those employers whose employees have been among the primary victims of the changes. Constituents of mine who were employed by the British United Shoe Machinery Company and who saw their savings evaporated, rightly hold the Chancellor not exclusively responsible—Dr. Cable was right to say that there were other important contributors—but responsible for public policy. The Chancellor took a position that was poor for those people at the margin and then made it worse. Their pension savings evaporated and they rightly hold him responsible for that effect.
The other secondary effect is much more broadly based across the economy and in the long run, particularly if we can agree to lifeboat proposals for the people who have been badly damaged by companies that have gone into administration, much more concerning for the social structure of this country. If we take a pension world that is moving more and more towards defined contributions schemes, and where those schemes are, as a result of this tax policy, becoming less generous in terms of the pensions that they pay out, and combine that with the tax credit policies that the Chancellor has also been pursuing, and therefore the increased reliance of pensioners on means-tested benefits, we can see that we have hugely undermined the incentives on people to provide for their old age. The end result of his policy has been reduced individual responsibility because, as my right hon. Friend the Member for Hitchin and Harpenden rightly said, pensions advisers are, entirely rationally, telling people who are on relatively modest incomes that against the background of the high level of means-tested benefits and relatively low levels of pay-out from defined contribution schemes, they do not have much interest in saving for their old age through a pension fund.
We have seen the result of the Government's policy at the margin reducing, to an important extent, the incentive on the citizen to accept their individual responsibility for providing for their old age—what the Chancellor in an earlier age might have referred to as prudence. The effect of that has been the renationalisation of pension provision and a sharp move back towards seeing the state—the taxpayer—as the primary provider of income in old age, rather than encouraging individual responsibility during our working lives.
The key objectives of policy going forward must be to reverse the drift back into state dependency, to encourage independence and to encourage people to provide for their pension in their old age, and to protect to a better degree than the Government have yet shown themselves willing to do—my hon. Friends on the Front Bench have demonstrated that we are willing to do this—those whose interests have been sold down the river by the Brown mugging of the occupational pension scheme.
It is important to remember the context of the debate. It is undeniably true, and it is certainly constantly repeated by my constituents, that senior citizens are far better off than ever before. Support for them has been systematically increased by the Government. As we all know, the basic state pension has risen by more than the rate of inflation and a raft of new benefits has been introduced since 1997. Hon. Members will be aware of them. As well as measures on the basic state pension, there is the winter fuel payment of £200 for households with someone over 60 and £300 for households with someone over 80. Free prescriptions and free eyesight tests have been introduced for the over-60s, and the over-75s receive free television licences. As we know, the Pension Protection Fund has been introduced. It is an innovative scheme, the first of its kind in this country. We also have the financial assistance scheme and related measures announced in the Budget. There have been many other measures as well. All those important measures and others have created a favourable situation for elderly people in this country.
Reference has been made to the dividend tax credit changes that were made in 1997. As has been pointed out time and again today, there was an emerging consensus that that was the way forward. In 1993, when Norman Lamont was Chancellor, he cut the credit from 25 per cent. to 20 per cent. He made numerous statements at the time, but I shall quote just one. In March 1993, he said that the dividend tax credit distorted the commercial decisions of British companies. I believe that that was true then, and remained true until the abolition of the credit.
A range of economic commentators and professional economists also said that the whole system needed to be modernised, and that the tax credit was outdated and an impediment to investment. I shall quote just one of those commentators. In his widely read and acclaimed book "The State We're In", Will Hutton said:
"If the tax treatment of dividends...was changed...then the incentives in the system would be redirected towards tomorrow's profits rather than extracting as much as possible today".
It was no surprise when, in 1997, the Chancellor of the Exchequer in a new Labour Government announced that the tax credit would be removed. Not only was the action generally anticipated and not only did it represent the summation of a developing consensus that transcended political lines, but it was widely expected in the stock markets. The day after the 1997 Budget share prices increased by 0.45 per cent., and that was not a one-off: the markets continued to respond favourably for some time afterwards.
We should consider not just the position of senior citizens from 1997 until the present day, but the particular circumstances inherited by the Labour Government in 1997. They may be difficult for us to imagine now. At that time there was still high unemployment, along with relatively high inflation, high interest rates and a large budget deficit. The need to achieve stability and do everything possible to encourage investment was widely accepted in the financial community, and that, I believe, was the rationale behind this and other measures introduced in 1997 and thereafter. Those other measures are also important. It is impossible and wrong to see this measure, which has attracted so much attention in this and earlier debates, in isolation from others introduced at the same time and subsequently. For instance, the Government introduced measures that reduced corporation tax, thus also reducing the burden on companies significantly. That was warmly welcomed at the time, and rightly so.
The difficulties that arose were not connected, directly or indirectly, with the difficulties that have been attributed to the change in the tax credit. As has been pointed out frequently today, there were other reasons for those difficulties. The fall in the stock market and the dotcom collapse were obviously of tremendous importance, and the reduction of about £250 billion in the market value of occupational pension schemes between 1999 and 2002 was enormously significant. Moreover, as at least some Opposition Members have acknowledged, life expectancy has increased. The 12 years for which a 65-year-old man could expect to live in 1950 have now become 20 years, and it is only common sense to realise that such a profound change in demography will have a profound effect on occupational pensions.
My hon. Friend may recall that certain companies took pension holidays. I know of one major company that took a 15-year pension holiday.
That is also a significant factor. During the 1980s and 1990s, despite rising liabilities, many firms decided to take so-called contribution holidays, which undoubtedly had a huge impact.
Does the hon. Gentleman not concede that a company could take a pension holiday only if the actuary signed a certificate saying that there was enough money in the fund to meet all foreseeable pension requirements?
I do not claim to be an expert, but I suggest that some of the responsibility lies with the actuaries. Certainly we should acknowledge that the fault lies not with the Government's decision in 1997, but with decisions made by individuals on subsequent occasions in complex circumstances. The main point is, however, that if we are looking for reasons for the difficulties that we have experienced, we should look beyond the ending of the dividend tax credit.
That is a valid point. While it is always possible to speak with the benefit of hindsight, it seems that the problems that arose at least partly as a result of increasing life expectancy were not identified by those who were supposed to have their fingers on the pulse, and they should look to themselves when these matters are discussed.
It is not a question of hindsight. I was a personal injury lawyer at the time, and I used life expectancy tables to calculate lifetime loss of earnings. I saw new tables every year showing increased life expectancy, and I took that into account in my professional practice. Actuaries advising those in charge of pension schemes clearly did not.
That is an important point. My hon. Friend is clearly far better versed in such matters than I am. I think we should have another debate, here or elsewhere, where they can be examined in more detail.
Those three factors—the fall in the stock market, increasing life expectancy and firms' decisions to take contribution holidays—all contributed, in their different ways, to our current difficulties. Those difficulties are not due to the Government's decision in 1997, as was argued at least initially by Opposition Members today.
My hon. Friend has identified a moot point. Opposition Members have gone very quiet, perhaps because there is quite a lot in what he has said. It is more than just a rumour or a suggestion; I believe that it may be based on hard fact, and I am sure that my hon. Friend's intervention was based on sound knowledge.
Some commentators, for whatever reason—I suspect that it is more to do with politics than with economics—appear to have changed their position on this issue. The shadow Chancellor, Mr. Osborne, made a passing reference to Dr. Ros Altmann, although he did not mention her by name. The press have described her as being very critical of the 1997 decision, but I was interested to note that historically her view has been somewhat different. In evidence to a Select Committee back in March 2004, she made some very pertinent comments that were quite different from those attributed to her recently. Let me quote from the verbatim reports of that evidence session of March 2004. She clearly stated that the arguments that some had put forward to test the water were wrong because income was reduced by only about 0.9 per cent. She asserted that that was an insignificant amount. She said that the argument that some had put forward was
"simply trying to make a political point but is of negligible size in this debate in practice. Even if they still had the...relief, there would not have been enough in the funds to pay for pensions. I certainly do not want to be associated with any argument that says this problem was caused by the removal of this relief."
The hon. Gentleman might have been listening earlier when John McFall, who chairs the Treasury Committee, argued that the difference between a 0.3 per cent. annual charge and a 1.3 per cent. charge when accumulated over a lifetime would make a huge difference to the pension pot of ordinary working people. Is not the hon. Gentleman undoing that argument?
I am simply relying on expert objective opinion, rather than on political comment. Dr. Altmann's argument certainly seems to hold water with members of that Committee, and she certainly was convinced of it.
The hon. Gentleman knows the answer to that, so he has asked a rhetorical question. I quoted Dr. Ros Altmann simply to highlight that commentators need a degree of consistency and that it is wrong to quote people's comments in isolation both historically and in terms of their wider contributions. In 2004 when some of the difficulties that we are alluding to were already becoming apparent, she was clear what the situation was.
This is an important debate. I am pleased that it is taking place because, sadly, over the past week or so there has been an unprecedented degree of misrepresentation in the newspapers of this country and from many Opposition Members. As we have addressed the details in this debate, the reality has become clear. The Chancellor gave a tour de force in explaining why the situation that we are discussing came about.
I agree with my hon. Friend, and I hope that the newspapers accurately reflect that reality tomorrow morning, but I will not hold my breath.
It is possible to say with honesty and integrity and with hand on heart that the right decision was made in the Budget of 1997. It was the right decision for investment. Investment in the subsequent 10 years has increased dramatically; that objective fact cannot be denied. Therefore, that decision was right for the long-term interests of this country.
Obviously, by praising the Chancellor's speech Mr. David is applying to him late in life for a job, perhaps as his Parliamentary Private Secretary. I wonder whether he would have made that same speech so willingly in 1997, when the decisions we are discussing were being taken: would he have stressed the benefits of this change in advance corporation tax that the Chancellor had sprung on the House? It is my contention that at that time nobody knew what its full effect would be. The Chancellor certainly did not come clean about it in the Chamber. It is good that he is now belatedly being held to account, simply because we happen to have the Treasury evidence, which came out after 10 years. The Chancellor's remark that he welcomed the Freedom of Information Act 2000 was one of the most amusing comments that he has made in the Chamber, and I hope that it will be included in future dictionaries of quotations. He clung on to information that some of us had anticipated must have existed in the first place—he legally tried to hold it back until he went on a trip, to Afghanistan—namely that he overrode the advice that he had been given and that he knew what the effect of his decision would be, although I suspect that he did not realise how bad it would be.
There is a pensions crisis, although I accept it is not caused entirely by the particular tax change that is at the centre of our debate—I shall come back to that point. There is a pensions crisis because people no longer have confidence in putting enough money aside for their retirement. Not only do they not feel that that is a justifiable saving, but they are unconvinced that the benefits of that saving will flow back to them when they have retired.
I ask the hon. Gentleman to look back to 1990s. Because of Maxwell and pension mis-selling under his Government, people did not have confidence in the system then either, so what has changed if what he says is right?
It is clear what has changed. In 1997 the pensions industry was, according to objective observation, in a good state. Of course, the Maxwell affair raised questions about what might happen, but people did not think that that was a generic problem. However, since 1997 60,000-plus occupational pension schemes have closed, final salary schemes are now regarded as too risky, and some people have lost money because of failed schemes or failed companies that fall outside the recently introduced lifeboat—we will return to that when we address the Pensions Bill tomorrow and the excellent proposals that the shadow pensions Secretary and his colleagues will put forward.
The constituents of Stephen Hesford must be raising concerns. It would be very strange if they were not. [Interruption.] Well, the hon. Gentleman must live in an extremely affluent and contented constituency, but in the dark reaches of Surrey the natives are restless.
I am pleased to be able to tell the hon. Gentleman that I do live in a reasonably affluent and contented constituency.
I am delighted that the hon. Gentleman can afford to do so, but some of my constituents have been affected by failed schemes. Arcolectric has a failed scheme. Mayflower is based in Guildford, but its failed scheme also affects constituents of mine. Those people are extremely concerned about their futures, and I hope that the Government will tomorrow adopt the Opposition's amendment on this issue.
However, that is not the only issue that I wish to address. There is a pensions crisis and there is a savings crisis and we must do something about that. How we address those problems is perhaps not a matter for this debate, but I hope that something constructive will come out of it, because I am extremely concerned as the long-term prospect is that the state will not be able to provide sufficient for people in their retirement. People will live longer. Therefore, they will have costs to meet, not least in terms of nursing home care. In those circumstances, we desperately need there to be a thriving private sector pensions industry.
In 1997, it was clearly being rumoured that the Government were thinking of making changes. Mr. Robinson made an open speech in which he was also affable—although he did not perhaps always mean to be so—and in which he revealed the truth: secret work was going on at that time to work out how to get more money from the taxpayer without them necessarily realising it. That is effectively what he said in his book, and it is what he has said in the Chamber today. There is nothing wrong with that in the sense that Governments occasionally have to consider how to raise tax revenues. All Governments have a responsibility to do that. It is always better—in the long term, it is better for the reputation of the Government—if they do so overtly rather than covertly, but the exercise undertaken by the hon. Member for Coventry, North-West was clearly covert. Again, I do not necessarily criticise him for being covert before a general election. Political parties do not always put all their policies in the shop window. What was damaging was that the introduction in the Budget was covert, glossed over and spun so that nobody understood its implications. However, the advice given to the Chancellor from several different quarters suggested what the effect might be.
Does my hon. Friend agree that the biggest problem was that the covert change took the choice away from individuals saving through occupational or private pensions, because they did not realise that they needed to decide whether to increase their contributions? They were left thinking that there had been no change and that therefore they did not need to change their provision. They were wrong.
I welcome that point because it underlines the concerns that I have about how we get people to realise the full extent of their personal liabilities for their own futures. Anything that reduces their awareness of what they need to do is of considerable concern.
When the Chancellor introduced his 1997 Budget, he was aware that some of us were already talking about the implications of what might happen. My right hon. Friend Mr. Dorrell was involved in the previous decisions and I was aware that we had rejected a change of the sort that the Chancellor and the hon. Member for Coventry, North-West were considering. Therefore, the first time that the Prime Minister's came to the Dispatch Box to answer questions, in May 1997, I asked him whether he would compensate pensioners for any loss that might arise from the rumoured changes in tax, including a windfall tax and advance corporation tax. Not surprisingly, I got the brush-off with an evasive reply. The Prime Minister merely commented that a windfall tax would not damage pensioners and did not comment on advance corporation tax. He also took some sideswipes at my right hon. Friend Mr. Lilley and the pension proposals and reforms that we had put forward before the 1997 election. That attack was disingenuous, because at least we had put our proposals forward for public consultation. They were misrepresented by the incoming Labour Government, but I strongly suspect—as my right hon. Friend pointed out in his speech today—that they subsequently regretted having written off those proposals, which meant that they could not grasp the pension problem for some years.
Lord Simon of Highbury, then a Minister, also apparently made it clear that the changes would be damaging. He also said that the proposed tax change was a particular concern, given its impact on investment in the UK and pension provision. The Chancellor claimed that he was given the opposite advice today—that the decision would help investment. Those issues have been addressed by colleagues in previous speeches, so I shall not go over them.
The Chancellor was aware of the implications, but he did not make them clear in his Budget speech. I am not sure that he fully understood what the implications were. Local authorities have been mentioned, and I checked with my local authority, Surrey county council, today. It said that at the 1998 valuation the deficit on the pension fund was £243 million, but at the 2004 valuation—the latest official valuation—the deficit had grown to £517 million, despite the council making additional contributions of £200 million to reduce the deficit over the period. That prudently run county council has been hit, with the result that council tax payers are paying more. The impact of the measure in 1997 was not only felt by pensioners, but caused collateral damage. Did the Government admit that? Did the Chancellor come to the House and say "Well, I think that this is a necessary measure because we need to raise more money. I have been advised by my Minister"—the hon. Member for Coventry, North-West—"that we have to raise £5 billion and this is how we'll do it. It will of course affect pensioners, but in the long term we think that the pension industry will survive, and of course it will have a knock-on effect on council tax payers, but they must play their part." He did not say any of that.
The accusation against the Chancellor is not that he thought through some measures and happened to come up with some that were tax-raising. That is the job of the Chancellor. The accusation is that he did that in a clandestine, covert way and has never apologised to the people who have been affected. Apologies in the Chamber are always highly regarded and respected by colleagues. The House listens sympathetically if a Member comes to the Chamber and says, "Well, I didn't understand the full implications of what I have been doing. There were merits to my decision and I took good advice, but the effect has been worse than I expected." But even today, when the Chancellor's cover has been blown, we did not hear a word of apology. There was lots of talk about other measures that he had introduced to try to protect from flanking cover the problems that he had caused by that decision, some of which have been beneficial to pensioners, but that does not alleviate the damage to confidence in the pensions industry.
We did not get an apology. Instead, we got bluster, fight-back and statistics that did not make comparable sense with the time scales involved. Interestingly, few of the figures came from after 2001. Heaven forfend that I should have to read the Chancellor's speech in Hansard tomorrow, but I think that that is true. That is interesting, because one of the arguments that he has used is that the stock market went up. It is rare that Chancellors claim credit for stock market movements, and he certainly would not wish to claim credit for the fall in the stock market, which logically he should. If he is behind all movements, the fall must also have had something to do with him.
"But when a crime's discovered, then Macavity's not there! "
Well, the crime has been discovered. The Chancellor was there, but he did not come to the House and own up. That is the accusation that we are making.
No crime has been committed. That is a ridiculous way of putting things. The statements and analysis given by the Chancellor and others have made the position clear, and they contested very strongly the points made by the Opposition.
It was unclear from the exchanges between Mr. Dorrell and the Economic Secretary what the advice and recommendations were on the relationship between investment and dividend tax relief, and it will be fascinating to read the papers when they are released. I get the feeling that a range of advice was given by the Treasury and advisers from other Departments. It is like what people say about economists—get three economists in a room and one ends up with four opinions. The debate on the advice reminds me of that saying.
We all know what the debate is actually about. I do not have the polemical flair of my hon. Friend Mr. Simon, who was very up front on this issue, but the debate today—certainly for those who initiated it—has been about trying to denigrate the economic record of the Chancellor, which the Opposition have not previously been able to challenge seriously. He has been able to see off one shadow Chancellor after another because of the excellent performance of the British economy under his stewardship.
We have had the longest sustained period of economic growth, with 2 million more people in work and higher incomes for the British people. The unspoken element of this debate is that the Tories want to denigrate the Government's record because their attack has moved from the Prime Minister to the Chancellor ahead of the leadership election. They are determined to damage the Chancellor, regardless of the seriousness and importance of the issues relating to pensions.
The constituents who came to my surgery this week to raise their concerns about pensions and the Chancellor's smash-and-grab tax raid believe that those are live issues for everyone outside the Chamber. The hon. Lady dismisses their concerns and pretends that we are holding this debate only to pin something on the Chancellor, but that is untrue.
The problem is serious and we need to have a proper discussion about the consensus that we want to build in respect of pensions in the future. However, the way in which the debate has been initiated means that it cannot offer a serious representation of what has happened. All hon. Members know that constituents are worried about their pensions and livelihoods, both now and in the future. No one denies that, but that is not the substance of the debate. Some serious contributions have been made, but there has been little attempt to give a serious representation of what has happened, and why.
The debate is an easy hit for the Opposition. Few people understand the complexities of pensions or the workings of the stock market. Not many are familiar with dividend distribution and the nature of investment, the implications of demographic change resulting from rising life expectancy, or the changes in accountancy laws. The issues are complex, and it is easy to claim that a smash-and-grab raid has been carried out and to say, "The Chancellor stole your pension." That is the soundbite, but it is not an accurate or sensible reflection of what has happened. The truth is very different.
When we look back at the relevant documents, I shall be interested to see what they have to say about the relationship between the abolition of dividend tax credit and investment. It has been claimed that the aim was merely to raise money, and Mr. Clarke said that the money was to be used for the Government's employment programmes. As I understand it—
I have not read the book that everyone is quoting as though it was the new Bible. I shall have to get a copy.
The windfall tax covered the amount needed for the Government's new deal—a programme which, along with other measures, has cut significantly unemployment in my constituency. It has also enabled us to spend less on funding unemployment, and to have more money for investment in public services.
The hon. Lady does not need to read the book. The hon. Member for Coventry, North-West was in the Chamber earlier, and he made it crystal clear that the change to taxation of pension fund dividends was motivated by a need to raise revenue.
I am sure that my hon. Friends on the Front Bench will respond to that when they reply to the debate, but my understanding is that the change was made to assist in investment—something that I, as a member of the Trade and Industry Committee, consider to be very important.
However, if it was such a bad thing to remove the dividend tax credit, why did the present Opposition cut it five times when they were in government? I return to a question that I asked earlier. Lord Lamont was Chancellor in 1993: did his special adviser at the time support his statement that dividend tax credit distorted the commercial decisions of British companies? The shadow Chancellor refused to answer. He merely resorted to an easy jibe, claiming that I was asking a planted question. That made me wonder why I bothered to stay up late reading so many articles and newspaper commentaries—many of which blamed our current pensions difficulties on a variety of different factors.
My right hon. Friend the Chancellor said that dividend tax relief halved under the Conservatives, so we are entitled to ask whether Mr. Cameron supported the argument that there would be an impact on investment decisions.
I turn now to the article by Stephen Yeo that has been quoted before. I do not know the extent of his relationship with the Conservative party, as I do not share the great interest exhibited by some of my hon. Friends in such details. However, Stephen Yeo is a partner at Watson Wyatt pensions consultants, and he has said that
"scrapping tax relief was not behind funding problems."
"I don't think it is even in the top three reasons."
I understand that Opposition Members respect Mr. Yeo and listen to what he says, but he is not the only commentator who does not consider that scrapping dividend tax relief posed serious difficulties for the viability of pension funds. Most of the money gained from cutting dividend tax relief was returned to companies through changes such as the cut of 2p in the pound in corporation tax. The aim was to remove the bias against investment, and to encourage companies to make decisions about future investment based on commercial rather than tax considerations.
We are forced to return to the question of what the present Government inherited. That is quite nice, because we are usually told that far too much time has passed to allow us to talk about what happened under the previous Conservative Government. We are supposed to have moved on from all that but the Opposition have given us the opportunity to return to such questions, as this debate takes us back to the circumstances of 1997.
At that time, the UK was suffering from historic under-investment. For every £100 invested here, Germany invested more than £140, the US and France £150, and Japan more than £160. The various measures taken by this Labour Government have meant that we have had continuous growth since 1997. We have managed to cut the historic cost of unemployment by getting people into work and creating 2 million more jobs.
The hon. Lady has repeated what the Chancellor has said—that part of the motivation was to increase investment. However, what evidence is there that investment has increased? As far as I can see, the facts suggest that investment as a percentage of gross domestic product is at an historic low.
The economy is far healthier than it was. The Opposition seem to want to denigrate the economic success that has been achieved. They cannot say that there has been no investment: in my constituency, companies have been able to invest and to create new jobs. Even Conservative party advisers such as Stephen Yeo do not say that the dividend tax cut was responsible for what has happened with pensions.
No, as my time is running out.
The suggestion is that the abolition of dividend tax relief was the reason for the present serious problems with pension funds. However, no reference has yet been made in the debate to the TUC, which represents many of those who have suffered as a result of what has happened to pension schemes. If the proposition behind the debate was correct, I do not believe that the TUC would say the following:
"Neither employers nor opposition politicians should be allowed to get away with blaming Gordon Brown for cuts in occupational pension schemes. When the tax rules were changed, pension funds were generally in surplus. Many companies had got used to long contributions holidays, and with typical UK short-termism had no plans for restarting contributions. Many companies used pension surpluses to make people redundant through early retirement.
But when reality returned and employers started facing bills for their pension schemes once again, the retreat from quality schemes began. Stock market pressures and longer life expectancies have caused far more difficulties than the tax change".
Most serious commentators have highlighted three factors behind the development of the problems with pensions. First, employers took pension holidays when the going was good in the 1980s and 1990s, and they did not begin to contribute again when things started to go pear-shaped. Secondly, firms rushed to get involved in the dotcom bubble, which ended with the stock market fall of 2000. According to the Pensions Commission, in the 1980s and 1990s companies should have been investing, not cutting their contributions. As was said in earlier exchanges, they should have been looking at factors such as the increase in life expectancy and realised that more money, not less, needed to be put into pension schemes. I hope that such issues will be discussed in a more serious debate on pensions tomorrow when we consider the Pensions Bill.
It would appear that actuaries suddenly woke up and realised the cost to pension funds of increasing life expectancy. They started getting worried and demanding that each year any potential liabilities should be brought forward. I am not an accountant or an actuary, but other contributors will probably come in and make more points about the impact of that in terms of decreasing confidence in pensions.
It is hypocritical of the Conservatives to accuse my right hon. Friend the Chancellor when they themselves were responsible in considerable part for creating the conditions in which contribution holidays were taken by companies. My right hon. Friend John McFall, the Chair of the Treasury Committee, quoted Adair Turner's report, which cited the changes introduced by Tory Chancellor Nigel Lawson in the Finance Act 1986, which forced companies to take contribution holidays. It said:
"indeed not only did contributions fall but they were required to fall by deliberate government policy ... the Finance Act of 1986 ... required pension funds to identify whether ... they had a surplus of 5 per cent. or more, and to take action to remove the surplus within five years, or else lose some part of their tax exempt status."
So the Conservative party cannot deny its responsibility for what was clearly an important factor.
I am proud of a number of things that we have done to assist with pensions. I am proud of the number of pensioners in my constituency who have been taken out of poverty. I am proud that pensioner households will be £1,500 better off in 2007-08 as a result of the way in which the tax and benefits system has developed. I am proud that the average household will be £2,200 better off and that the 2007 Budget will lift a further 60,000 pensioners out of paying tax. I am pleased that we have introduced the Pension Protection Fund and that extra money has been announced for it in the Budget.
A lot of things have been put forward by the Conservative Opposition that have not been based on a serious analysis. My concern is that we should return to having a serious debate. I agree absolutely with Justine Greening that these are serious issues. None of us would undermine that assertion. I do not think that the to and fro of political polemics, in which I now find myself engaging as well, necessarily helps us take those arguments forward. These are serious issues.
I am coming to the end of my time, if the hon. Gentleman does not mind. We need to look at issues such as increasing take-up of pensioners' entitlement. I applaud the work of welfare rights teams and other organisations in my constituency to increase benefits take-up. We need to look at investment decisions and the effects that they have.
We desperately need a consensus on the future of pensions. I thought and hoped that that was the direction in which we were going, so I have not found today a helpful diversion. We need to look at the future of our pensions system, which was created in conditions very different from today's. Demographic changes have taken place since them. In the past we had different family and working patterns. We were not dealing with the problems of carers, for example, which I talked about in the Second Reading debate on the Pensions Bill. I hope that we can return to a serious debate on those issues, which are complex and difficult, and that we will get away from the back-biting and polemics and move seriously towards the consensus on our future pensions system that we so desperately need.
I am a company director and the trustee of a pension fund, and I have put that in the Register of Members' Interests.
Before I came into the House I was involved with the direction of investments for a wide range of pension funds and I have in other capacities kept in touch with the pension world. In all my adult life, I have never known the occupational pension movement to be as weak as it has been from 2002 until today. We need to understand why it is weak and the origins of the problem and we need to look carefully at the Chancellor's defence of his actions.
The Chancellor and the Economic Secretary to the Treasury were at their cleverest today as they sought to find a contortion of an argument to get themselves off the serious charge made by my hon. Friends on the Front Bench and others—that one of the main causes of the disarray in pension funds has been the removal of about £5,000 million a year of income by the cancellation of the tax credit and the advance corporation tax system that was in operation before this Government came to power.
The Chancellor's main defence seemed to be that it was good for companies to have that money taken away, that it meant that the companies would be able to invest more in themselves and that this would create extra value. One of the most important trustee rules in most pension funds is that they cannot invest in the company concerned, because that would increase the risk. The whole idea of a pension fund is that it should be separate from the company itself. However, if we take the Chancellor's argument more generously, we could suppose that he was looking at the whole population of companies and he thought that, had there been this shift from distribution to investment, all companies would have done better. Of course, the truth is that that shift did not occur. We have heard good evidence already today that the payout ratio of profits going in dividends actually rose despite the change in the tax system.
So the Chancellor is left arguing the rather ludicrous proposition that if you take a fifth of someone's income away they will be better for it. I asked the Chancellor of the Exchequer the terribly simple question—he is an intelligent man—whether, if I took a fifth of his income away, he would be worse off or better off .
He did answer. My hon. Friend is quite wrong. He answered from a sedentary position and he said no, he would not be worse off. I have a simple suggestion for the Labour Front Bench. If it is the case in Labour economics that you are not worse off if you take a fifth of your salary away, will they all take a fifth of their salary and give it to the pensioners who do not have enough pension as a result of the policies that the Labour Government have been following? They would find it useful, and obviously the Chancellor does not think that it is very useful to himself.
The Chancellor said that it would not make him worse off because he knew what was coming next. The second part of my question was, if taking a fifth of his income away would make the Chancellor worse off, would not taking a fifth of pension funds' dividend income away make them worse off? The Chancellor is left trying to argue that it does not make them worse off if the Government take that money away.
Perhaps the Chancellor does not understand the full power of compound arithmetic. A pension fund is a long-term fund. It may have a life of 50 or 100 years; it depends how long the company goes on making those promises and how long the members and pensioners live before the fund has finished its task. Every year, all those pension funds are receiving £5 billion less—probably more than that now; the Chancellor will not tell us the accurate figures—owing to the cancellation of the tax credit. It is not just that the pension funds are short of £5 billion a year. They would invest that £5 billion. Given that equities and property have been doing well in most of the years I have been involved with markets, after, say, seven years the £5 billion would be £10 billion because the £5 billion would have increased by 10 per cent. per annum. The funds would have £10 billion more just from one year's dividend tax credit that has been forgone. Then the next year another £5 billion has gone missing; in 10 years the amount forgone would be perhaps worth treble. So a large amount of money has clearly been forgone by the pension funds.
We then come to the Chancellor's second very clever argument. He says, "Ah, yes, but between 1997 when the money began to be taken away and 2000, stock markets went up." Yes, that is quite true, Chancellor of the Exchequer. So he says, "Therefore, no damage was done because what pension funds lost on the dividend tax credit they made up on the share gains." This is where stopping the clock at 2000 is an important part of the trick argument. From 2000 onwards, there was a sharp crash in the market.
If the Chancellor were here he would say, "Yes, but markets around the world fell so it was not just a British problem and it was not a result of my actions." I have looked at the extent of the market falls in Britain and around the world. The evidence is clear that the British stock market fell by considerably more than the New York, Frankfurt and Paris stock markets. All the major markets performed rather better than the UK market. We can make a strong case that the extra decline in the London market reflected the economic policy of Her Majesty's Government, especially the taxation policy.
I will make a concession. It was not just the removal of the tax credit; another important tax change had quite a big impact on share values and that was the decision to take £22 billion out of the leading sector at the time—the telecoms industry—in the form of the auction tax so that companies could carry on trading. That had a huge impact on the share values of Vodafone and BT, which were the leading investments in most pension funds at the time. There was a double effect. The pensions tax—the biggest item—and the telephone tax completely smashed the equity valuations in typical UK pension funds.
Although I do not accept that there is any connection between what the Chancellor did and the so-called drop in the equity market, if the thesis of Mr. Redwood was true and if that situation is continuing—because there has been no real change in the position over the past six years—the stock market would not have recovered to more than it was when it crashed. That would not have happened if the right hon. Gentleman's thesis was true.
I am afraid that the hon. Gentleman does not understand stock markets. On an earnings multiple valuation, the market has not actually risen at all in recent years; all that has happened is that earnings have gone up a bit and the stock market has kept pace with that rise. In real terms, the stock market is well below where it was at the market peak and it has not yet moved on to a higher valuation basis, as it had done before the full impact of the changes was discounted by the market.
I am not saying that the entire market drop was the direct fault of the tax changes. Quite a bit of it was a worldwide phenomenon; liquidity was withdrawn by central markets around the world, so world markets dropped. The extra fall in the United Kingdom is clearly the result of tax changes in the UK, so the Chancellor's argument for getting out of jail tonight—that because share prices rose for a couple of years all was well—has to be looked at in the light of the fact that what happened next was that share prices fell. Clearly, if £5 billion is taken out of companies' income, their shares will be worth much less.
I did the sum for the Government shortly after the first Budget. In the Budget debate, I said from the Dispatch Box how damaging the proposals would be. I then made a back of the envelope calculation that they would cost £100 billion. It was an easy sum to do, because in those days the markets valued companies on 20 times earnings. In effect, £5 billion was being taken from company earnings, so multiplying that by 20 meant that there would be a £100 billion capital hit. In practice, the excess drop in the London stock market was more than £100 billion compared with other world stock markets, but that reflects the telecoms tax and other adverse factors that were then discounted by stock markets.
The Secretary of State for Work and Pensions is shaking his head in disagreement; in the wind-ups it will be interesting to hear his argument why taking £5 billion a year from company income does not have a negative impact on values and why one should not calculate how much more the London stock market fell than other stock markets.
The point made by Judy Mallaber, which was the Chancellor's argument, too, was that the measure would increase investments. However, the reality is that investment, especially as a percentage of gross domestic product, went down, which in itself leads the Chancellor's thesis to fall flat on its face.
My hon. Friend makes another extremely good point. Other colleagues have also referred to it. On the Labour Government's watch, 1 million manufacturing jobs have gone and a large amount of industry has transhipped to more clement locations abroad, with better tax and regulatory structures and a more favourable environment for business. Judy Mallaber lives in a dream world when she says, "But we all know it's so wonderful". Tell that to the 5 million people on benefits who cannot get a job. Tell that to the million people who lost manufacturing jobs in recent years. Tell that to the hundreds of thousands of people who no longer have access to final salary schemes or whose promises from such schemes will not be honoured in full, or who are nervous because they fear that those promises may not be honoured.
Labour Members—although not normally the Chancellor, I am pleased to say—seem to think that the origins of the problem lie in the so-called pension holidays. It is true that in the 1990s a number of companies either cut their contributions or ceased to make them, which was sometimes beneficial for employees, because some of the schemes had employee and employer contributions. However, Labour Members really must understand how pension funds operate in this country. Each fund has to have not only an independent trustee board, but a consulting actuary who has to produce a calculation to tell the trustee board and the employing company how much money has to go into the scheme to ensure that pensions can be paid in the future. All the companies that cut, or removed, their contributions had signed actuarial certificates stating that they need not put in more money; indeed, they were often told that they could not put in more money.
The rules are still the same. There are limits on how much anybody can put into a pension scheme, because it is a tax shelter. The rules are clear: a pension scheme cannot be overfunded beyond a certain amount, because it would be an unreasonable use of the tax relief, and that is right. The Conservative Government were right to impose a limit on the tax relief for funds and the Labour Government were right to continue with it. However, it is quite wrong to say that companies are to blame for a shortfall that emerged 10 years later; they had super-solvent funds at the time and the rules and regulations and tax requirements meant that they could not put more money into the schemes. Indeed, it would have been foolish of them to have done so.
The Pensions Commission concluded that although employers should have been increasing contributions during the 1980s and 1990s, in fact they reduced them. Can the right hon. Gentleman explain that conclusion?
It is wrong. The funds all took sensible advice when they were solvent, which was why they were allowed to stop making contributions. Had nothing else changed they would have carried on being able to meet their promises. At a certain point they would have resumed making contributions, depending on the balance between liabilities and assets in the valuations.
But that is precisely the Chancellor's defence. If conditions had remained the same as they were when he made his decision, we would not be having this debate. What happened was that the conditions changed much later on. It was the changed conditions that made pensions go down, not the Chancellor's decision.
Of course conditions changed; the main change was the tax increases that did all the damage. Subsequently, actuaries decided that they wanted to make more provision for longevity, which needed to be paid for.
There is a certain symmetry in the figures. My £100 billion guesstimate—a rough guess based on a simple calculation—has been turned into a much firmer figure by people who have made sophisticated calculations. They are trained actuaries—unlike me—and they say that £100 billion is not a bad estimate of the damage done by the tax changes. The longevity problem created a potential extra deficit, which is being taken care of by the increased contributions. The symmetry is interesting because the cumulative aggregate deficits are about £75 billion—they were about £100 billion but the stock market has performed better recently, which has helped—which is similar to the figure that many actuaries say would be the discounted cost of forgoing the £5 billion or more of income in the form of the tax credit that is being removed year after year.
One of the things that Government could do to help the debate is to provide proper information so that we can calculate the figures more accurately. I have often asked them to give me the run of numbers for the imputation tax credits forgone over the past 10 years. I believe that the £5 billion included charity funds, so perhaps in the early days the figure was not £5 billion for pension funds overall, but I suspect that it is rather more now because the distribution rate has gone up, as have profits and dividends, so one would expect the credit to be worth more. I assume that is why the Government will not give me the figures, because if the amount were lower they would want people to know. However, it would be good if