I tabled this probing amendment to explore the transfer of further power over the retail prices index from the Chancellor to the board. The progress in the direction of transferring power is welcome, but it would be useful for the Committee to consider whether the powers that are retained by the Chancellor under clause 19 are necessary. We want to probe the Government’s reasons for retaining the Chancellor’s power to veto measures that constitute a fundamental change in the RPI, which would be materially detrimental to the interests of the relevant index-linked gilt-edged securities.
Clearly, one has to approach the matter with great caution. The Library note on the Bill tells us that the eight gilts relevant to our discussion have an outstanding value of some £90.8 billion. Of course, the Opposition would not wish any measure to be put in place that would require the Government suddenly and unexpectedly to have to repay £90.8 billion, because that would cause significant problems in terms of the public finances and market volatility, but the question arises whether the retention of the Chancellor’s veto in this context is necessary to prevent the risk from materialising. That is why I tabled the amendment, which would essentially transform the Chancellor’s power to veto a proposed change into a right merely to be consulted about the change after a decision has been made by the Bank of England and the board.
The thrust of the reform that the Government say that they wish to make involves trusting the board and the National Statistician to make hugely important, sensitive decisions that determine the flow of millions of pounds in capital markets every day. If they can be trusted to make other key decisions about the definition of crucial economic indices, we are interested to hear more from the Government about why they feel that those people cannot be trusted in total to make the decisions on the retail prices index. The Royal Statistical Society, for example, has said that given the importance of the RPI it is crucial to remove it from political control. We have at least to consider the arguments to see whether the transfer of power from the Chancellor to the board should be total.
If the amendment were made, there would still be a triple safeguard to prevent an irresponsible decision that would trigger automatic redemption from being made. Not only would the board have to be convinced that the change was needed, but the Bank of England would have to give its view of whether the proposal would constitute a fundamental change. Of course, the Chancellor would also have to be consulted.
The Treasury Committee has considered the matter over a number of years and it could find no other country in the world where the Executive retained control over definitional matters in relation to the inflation index. We should like the Government to give further justification for why they wish to make an exception, albeit one that is now more limited than in the past, because the Chancellor’s continuing role involves an exception—albeit one more limited in scope than previously. The concern is particularly significant in a month when inflation has climbed to its highest level for 15 years. At a time of rising inflation it is more important than ever to take measures to rebuild the credibility of inflation indices, which many now worry do not reflect the real cost of living. Given the pivotal importance of inflation for economic stability and policy and for families, there is surely an argument that the independent structures being set up in the Bill should take over full responsibility for the definition of the RPI and its derivatives.
The hon. Lady mentioned the necessity of a safeguard. Would it not be more appropriate if that safeguard were the Chancellor acting as an arbiter between the board and the Bank, given that that has been his traditional responsibility and index-linked gilts are part of our national borrowing?
There are arguments on both sides of the debate, which is why the amendment is probing. One of our concerns is that the Chancellor’s role in relation to the Bank of England is not necessarily transparent and his continued involvement could jeopardise public trust. When decisions are taken on changes to the methodology of the RPI, people could suspect political motivation even when there is none. I shall come on to that point in more detail.
The Treasury Committee first called for the removal of the Chancellor’s powers in relation to the RPI in 1998 and it set out its concerns in three reports—in 1998, 2000 and July 2006. The move to answer the Committee’s concern has been slow in coming. Clear tensions have emerged in the current RPI regime, which splits responsibility between the National Statistician and the Chancellor. Under the current rules, the National Statistician is responsible for the methodology used to compile the index, while the Chancellor covers its scope and definition.
That split responsibility caused concern when a move was made in February 2004 to incorporate hedonic regression methods of quality adjustment for a limited set of goods. It was intended to adjust more accurately for the impact of quality changes in the price of certain foods. There was a problem with communication, which again goes to the issue of trust. The ONS covered the matter briefly in its standard monthly press release; on the same day the Treasury issued a press release announcing that the National Statistician had made changes to the methodology of the RPI and that the Bank of England had indicated that they did not represent a fundamental change to the index. The debt management office had given holders of gilts early warning of the prospective changes, but that did not seem to filter through to a wider audience. The Statistics Commission criticised the way in which the news was disclosed and said that the ONS should have issued a separate press release to warn people of the changes and separate the decision from the Chancellor.
Such problems will clearly be mitigated by clause 11, but similar communication difficulties might arise in relation to the residual functions that the clause leaves with the Chancellor. There is an important lesson on credibility to be learned from the hedonics controversy. In examining it, the Statistics Commission noted that disquiet had been expressed that the change had been politically motivated, which was the problem I referred to in response to the intervention by the hon. Member for Hove. The commission noted that there had been speculation whether the developments flowing from the shift to hedonics had been released in small packages to avoid triggering gilt redemption clauses.
I must make it clear that the commission concluded that the changes were not politically motivated and that they were objectively justifiable, but that the Chancellor’s continuing role had led some to look for political motives behind the change. It concluded that more transparency and information was required to reassure the public about the governance of the RPI. It went on to state:
“We believe that there is a strong case for going further than this and looking again at the Chancellor’s special role in respect of the RPI.
The Commission is not persuaded that there is public benefit in treating the RPI differently from other key statistics.
We believe that this tends to undermine confidence that the construction of the index is handled in an impartial way.
It is therefore also likely to have presentational disadvantages through the suspicion it engenders.
In short, the current arrangements create the worst of all possible outcomes.”
What concerns me—I would like to hear the Minister’s views—is the suspicion that changes to the index are politically motivated. That suspicion was identified by the commission as a source of concern and it could persist, even with the limited powers retained by the Chancellor.
The suspicion could be fuelled by the position of the RPI advisory committee. For many years, that committee of learned experts played a role as a guardian of the RPI. The committee provided a degree of transparency and independence in a system where the Chancellor had a unique role in relation to a hugely important index. However, that transparency has been lost since the current Chancellor took over at No. 11 because the committee has not met. It can only be convened at the request of the Chancellor and he has chosen not to do so.
That is one of the reasons why disquiet has been and continues to be expressed at the Chancellor’s role in relation to RPI, even if the changes go through. It would be interesting to hear the Minister confirm that the committee has not met since 1994, and it would be useful if he clarified whether he envisages a continuing role for the committee in dealing with the problems and the concerns about the Chancellor’s role in relation to RPI. Will it continue, for example, as an adviser to the board or the National Statistician, rather than to the Chancellor?
In conclusion, the Committee will be well aware that even the smallest changes to the index can save the Chancellor many millions of pounds in benefit and interest payments. It is vital that we get the RPI arrangements absolutely right, which is why the Opposition are seeking a degree of further clarification from the Minister about how the residual powers retained for the Chancellor will work and how they can be justified.
Were the amendment not a probing one, I would certainly urge my colleagues to vote against it if it were to be pressed. On a minor level, it is not properly worded because it should have removed the word “of” as well, but on a more major level, the amendment is completely potty. It is potty for some of the reasons adverted to, but not made absolutely clear by the hon. Member for Chipping Barnet in a very long speech. The matter dates back to about the year of the hon. Lady’s birth. Many older members of the Committee will remember, during the run on the pound and subsequent devaluation in 1967, the phrase used by the then Prime Minister, Harold Wilson: “the gnomes of Zurich”. As a result, legislation was passed in 1968 for index-linked gilts. The index linking is important and it carried on until 2002.
Labour Members, if not Opposition Members, will remember that the under the Conservative Governments who were in office for two thirds of the period between the passing of the 1968 Act and the changes of 2002, and in particular under the Government of John Major, the national debt doubled. Under the present Government, until very recently, we have been paying it off. The national debt is considerably lower than the one we inherited in 1997, and unlike the situation under the Conservative Government, we have something to show for it.
What would happen if the amendment were to be passed? It would take the matter of redemption out of the hands of any Government. The hon. Lady adverted to one point but did not make it entirely clear. At this point, I shall refer to the explanatory notes, which will please all hon. Members. Stockholders, if there is a change in the RPI calculation, have the right to require the Government to redeem the stock. That is the£90 billion in the Library note to which the hon. Lady referred. That could happen overnight under the terms of those gilts, and it would have, as the explanatory notes put it:
“a significant impact on financial markets and potentially on public finances.”
If 90 billion quid became repayable by the Treasury overnight, it would have to rush off to the money markets to try to borrow another £90 billion, which would cause chaos and be most undesirable. That is why, as the Bill is worded and in contradistinction to the amendment, and because of the delicate nature of that power and the overhang from previous years of Conservative borrowing, it leaves the matter ultimately with the Chancellor of the Exchequer. Given that the stocks are due for redemption between 2009 and 2030 and that the hon. Member for Tatton (Mr. Osborne) hopes—vainly—to be Chancellor of the Exchequer during that period, I say to the hon. Lady that I suspect her hon. Friend would be absolutely horrified if such an amendment was accepted.
The hon. Gentleman refers to the point at which the relevant securities will be redeemed. Is there an argument for some kind of limitation on the Chancellor’s residual role, to ensure that it comes to an end when the relevant gilts are no longer in existence?
They may come round more frequently, as all good things do, under a Labour Government.
It goes on to 2030; we do not need to worry about introducing a sunset clause. It would be completely potty if the amendment were to get anywhere near causing a vote, and I suspect that the shadow Chancellor would agree.
I do not want to speak to the amendment; I have a question about the clause. It may stem from ignorance on my part. I can understand why it is important to have a clause on the index of inflation; it is probably the most crucial of all economic indicators. It links to so many other things, including benefit indexation and index-linked gilts.
My question relates to the fact that we have two measures of inflation—the CPI and the RPI. The CPI is no less important because it is the indicator that the Bank of England uses when setting interest rates. It is therefore just as important as the RPI. Why is there no comparable statement of the process safeguarding the integrity and the independence of CPI calculations? The answer in part is that the CPI is a European index, and people no doubt place their trust in the Commission as the ultimate repository of statistical honesty, and we do not need a European index to be embodied in British legislation.
However, it is a practical point. The CPI is currently being reviewed in order to take account of the fact that it does not capture housing costs. There is some discussion about the fact that the CPI might be adapted separately for the UK in order to capture housing costs ahead of any change made by EUROSTAT. Who safeguards the process by which the CPI, as well as the RPI, is compiled? Has it been omitted from legislation for good reasons or simply because no one thought it was necessary to do so? It is not a challenge to the provisions of the clause; it is simply a question about the thinking behind its drafting.
Let me start by thanking the hon. Member for Chipping Barnet for the welcome that she gave to the Chancellor’s transferring his essential powers over the RPI to the board. I know that the Treasury Committee and others have followed it closely and encouraged my right hon. Friend to do so for some time. I am glad that we can do so. We will have the right provisions to protect essential public finance interests and the stability of the financial markets, as I shall explain later.
Essentially, the hon. Member for Chipping Barnet invites me to explain the peculiarity of the UK’s debt market, which lies behind the role that we propose for the Chancellor. As the Committee knows, all giltsare issued under a prospectus, and in the UK the prospectus of certain index-linked gilts contains the right for the holders of those gilts to redeem them early at par, or face value, under certain circumstances relating to changes in the construction of the retail prices index.
The hon. Lady said that it seems that no other country has such provisions as those that we propose. That is because the prospectuses for index-linked gilts issued in other countries do not contain the obligation for the Governments of those countries to redeem those gilts in such specific circumstances.
Were the clause to be triggered at a time when gilts were trading below face value, there could be real and severe consequences to the financial and debt markets and to public finances, as my hon. Friend the Member for Wolverhampton, South-West has pointed out. That is why clause 19 provides that before the board makes any changes to the RPI it must consult not the Chancellor but the Bank of England about whether the change constitutes a fundamental change in the index that would be materially detrimental to the interests of the holders of the relevant index-linked gilts—in other words, whether it is likely to trigger the clause in those prospectuses. If, and only if, the Bank of England is of the opinion that the change would be materially detrimental, the board must obtain the Chancellor’s consent to that change. Should the Bank determine that the change is not fundamental or materially detrimental to the holders of certain index-linked gilts, the Chancellor will play no part in making any proposed changes.
The hon. Lady’s amendment proposes that in the narrow and specifically defined circumstances that I have just mentioned, consultation with the Chancellor would be required rather than consent. I do not accept the amendment—I hope that she will accept my argument—because it does not provide adequate protection against the possible consequences for the public finances or the severe disruption of an orderly gilts and wider financial market.
I want to give an indication of the scale of the potential consequences. This is hypothetical, but nevertheless we might find circumstances in which it could be the case. If the Government had to redeem the index-linked gilts, that would lead to large-scale refinancing of up to £91 billion of additional and unplanned gilts. To put that in perspective, it is three times the average annual gilt issue, which stands at about £31 billion. There could also be real fiscal costs, as the hon. Lady will appreciate, principally because it is likely that new gilts would need to be issued at higher yields than those being replaced. That could lead, we calculate, to additional fiscal costs of up to an average of £0.9 billion a year for the financial years through to 2030-31. That is why it is crucial that the Chancellor, as the Minister who is democratically accountable in the end for public finances, retains the ability to prevent such a potentially costly event. Its possible impact under the circumstances set out in the Bill is on the public finances and the financial markets, not on statistics. It is right, therefore, that the Chancellor should make the final decision rather than the board.
That is not to say that we would expect the role of the Chancellor to be triggered. The Bank of England has not assessed any of the changes to the RPI since 1997 as fundamental and materially detrimental to the holders of the relevant index-linked gilts. Accordingly, even if the provision had been in place since 1997, the Chancellor’s role would never have been triggered.
There was an exchange between the hon. Lady and my hon. Friend the Member for Wolverhampton, South-West about the use of a sunset clause. Although there is not a sunset clause in clause 19, all the gilts to which it refers are due to expire in 2030 so there is de facto an automatic end to the point at which the Chancellor’s role and consent would be required. In relation to the question posed by the hon. Member for Twickenham, it is necessary to have a clause not because the RPI is somehow a statistic that is first among equals and more important than the others but because of the matter of redemption rights in certain index-linked gilts that attach specifically to the retail prices index. That is the purpose of the clause and the reason for it and the safeguards. The hon. Lady said that this is a probing amendment. I hope that she has probed far enough and will accept the unamended clause.
The Minister’s comments are useful, as was this discussion. I do not propose to press the amendments to a vote, but I emphasise that the RPI advisory committee could play an important role in enhancing transparency in this whole process, and I remind the Minister of my comments on that. I beg to ask leave to withdraw the amendment.