(3) The amount specified in Section 12 of ITA 2007 shall similarly be £37,400..
I should say at the beginning that those of us who were in the House on Thursday will be aware that business closed earlier than anticipated. As a consequence, there was something of a hurry to table the amendments. I make no claim that amendment 1 is technically the finest amendment ever placed before the Committee. It is a rather hurried attemptwhich I considered to be the lesser of two evilsto submit a flawed but pertinent amendment that would enable the Committee to debate one of the significant issues that face many people in the country, namely the impact on savers of the reduction in interest rates that has occurred in recent months.
We must look at what we can do within the taxation system to help savers at this difficult time. Consequently, amendment 1, which raises the threshold for income tax on savings, is a quick and simple way to bring this matter to the Committee. My partys policy is to go further than amendment 1, but it is consistent with what the amendment is about, which is to help savers by reducing the burden of income tax on their savings. I hope that that clarification is helpful to the Committee, Mr. Atkinson, before I turn to some of the things that we can do to help savers in the context of clause 2.
I do not entirely understand what the hon. Gentleman is saying. How is the proposal different from the one we debated in the Chamber to remove tax altogether? In a sense it is rather hurried. Is his partys policy now that tax should be reduced to 10p or to nil?
That is a perfectly fair question. The policy remains the sameto reduce tax to nil. The amendment arrived literally as the Minister was sitting down on the Adjournment debateI do not want to conceal that from the Committee. Our policy remains the same, but it is only fair to the Committee that I explain that. If the Minister has been forced to examine in great detail the arguments about extending the basic rate, as I fear he may have done, I should perhaps apologise, but it was a needs must amendmentsomething that was to hand.
The Minister will be aware of our policy for 2009-10 to abolish tax on savings income for all basic rate taxpayers. Applying the 10p rate could be described as a halfway house. The amendment is designed to probe the matter.
The hon. Gentleman asks a fair question. We would expect amendment 1, in conjunction with new clause 2, which raises the personal allowance for pensioners, to cost £4.1 billion. We could have found the money by reducing the growth rate in public spending for 2009-10. When we produced the policy, the Government were proposing a 3.4 per cent. real-terms increase in the growth rate. We propose restraint, so that increase should be 2.6 per cent. To put it another way, the Government were going to increase public spending from £620 billion to £650 billion and we suggested that, of that £30 billion increase, £5 billion could be used to help savers.
I suspect there is a degree of sympathy across the Committee for a group of people who have, most of us would say, done the right thing by trying to put money aside and provide some independence for themselves, but who have found their income substantially reduced because of falling interest rates. We estimate that savers have lost approximately £22 billion of annual interest income as a result of rate cuts. Let me be clear: we think it was necessary to reduce interest rateswe are not criticising the Monetary Policy Committee of the Bank of Englandbut people have lost out as a consequence.
The hon. Gentleman is making a fair point about the impact of what has happened on savers. However, I want to press him a little further on how he proposes to finance the £4.1 billion cost. We have had debates in the Chamber about £5 billion of saving cuts this year, although his party has not given us any details about where they would have made those cuts. From next year, as he knows, we are introducing £5 billion-worth of efficiency savings. Is his party proposing another £5 billion on top of those efficiency savings to pay for this measure, which presumably would be continued into next year?
What we have is a policy for this yeara policy to find additional funds for savers this year and to make savings this year. There is still an opportunity for the Government to reconsider and to pursue the policy that we advocate. Assuming that they do not do so, next year, if we are in government, we will be in the position next year of having to assess the public finances to identify the savings needed to reduce public spending.
As the Minister has rightly said, the Government believe that it is perfectly possible to find efficiency savings of £5 billion, although that is not altogether surprising in a budget of £650 billion. We note that the Government do not seem to think that there will be any great difficulty in making those savings next year. We wonder why it cannot be done this year.
The hon. Gentleman said a moment ago that what had stimulated the Conservatives to bring forward this policy was a big cut in base interest rates and the impact that that cut had had on savers. Obviously, one sympathises with savers who are in that position. However, should we infer from his comments that the policy would no longer apply if interest rates rose to high levels again? Is it, in effect, like the Conservative fair fuel stabiliser, so that if we were to have very high interest rates, a penal tax would be brought in to punish savers, so that some sort of equilibrium was achieved? That appears to be the logical conclusion to draw from his description of the policy.
The hon. Member for Taunton sometimes allows his own version of logic to carry him away. There is a short-term and a long-term argument for savings. The short-term argument is particularly acute at the moment, because, as I am sure he is finding in his own constituency, there are people who have not spent rashly or not built up huge debtsquite the reversewho are still being hit hard, perhaps because of the recklessness of others. That is the short-term argument and that is why we are pursuing this policy.
However, I am grateful for the hon. Gentlemans intervention, because it brings me on to some of the longer-term issues and in particular why we need to do more to encourage saving. That is a fundamental point about how we rebalance the economy.
We have not been saving as much as we used to. I know that there has been a recovery in the savings ratio in the last few months, as tends to be the case during a recession. The ratio was down at about 1.7 or 1.8 per cent and it is now up at 4.8 per cent. Nevertheless, the fact is that society as a whole has been borrowing too much and saving too little. Our level of household debt has become very considerablegreater than our GDP. Relative to the size of our economy, we have the highest household debt in the G7. Figures from Alliance & Leicester show that 13.5 million Britons did not save in 2008, which is 28 per cent. of the population. Research for MoneyExpert states that a third of adults face financial disaster within two months of losing their jobs, because we do not save enough as a society.
That has several impacts, one of which is a lack of resilience if there is a downturn in the economy, which is what we have unfortunately been experiencing, leaving individuals in a difficult position. The burden on the state also increases if individuals do not have their own savings to protect them from economic and personal difficulties.
The hon. Gentleman is making a powerful argument for the long-term merits of policy towards savers, but is now the time, in macro-economic terms, to incentivise savings? That is certainly not the normal understanding of a correct response to a recession.
We think that a tax cut would be helpful; the hon. Gentleman and I have debated such matters in the past. My party believes that the principal response do a downturn such as this should be monetary policy. As I stated earlier, we have no criticism of the reduction in interest rates that has occurred; we need a monetary response. Indeed, we have argued for a long time that more could be done to get credit flowing around the economy. Furthermore, the likes of Christina Roma, who is one of President Obamas advisers, argue that the multiplier effect of a tax cut, which is, after all, what we are advocating, is as significant as public spending.
I understand the hon. Gentlemans argument, but one of the difficulties surrounding the whole issue is that there never seems to be a good time to encourage saving. The Government have tended to enjoy the tax revenues from a boom and from a rise in stamp duty owing to an asset bubble and, as a consequence, they have not done enough to encourage saving.
I was going to make the same point as the hon. Member for South Derbyshire and speak of my concern about incentivising saving during a recession. However, I am interested in the response given by the hon. Member for South-West Hertfordshire to that point, because he appears to argue for a fiscal stimulus: he says that this is a good opportunity to cut taxes and put more money in peoples pockets. My understanding of the respective positions of the Government and the Conservative party is that the Government want an unfunded tax cut, but will only give money to people when they spend it, whereas the Conservatives want an unfunded tax cut, but will only give money to people when they save it. Is that the current position?
The point I am making is that the response to a recession should be monetary. The concern expressed by the hon. Member for South Derbyshire is that that would take resources away from public spending and direct them towards people who save. If one is worried about a Keynesian fiscal stimulus, there are those who still defend a tax cut rather than public spending and argue that it would have precisely the same effect. I return to my essential position that the response has to be monetary. Indeed, the hon. Member for Twickenham has made the point in the Chamber on at least one occasionI quoted in from the Committee of the whole House last weekthat, despite all the arguments, all parties essentially agree that the response should be monetary. There might, however, be a disagreement on fiscal measures on the periphery.
I wonder whether we are getting to the crux of the difference between the Government and the Opposition. The Government believe in more and more public spending, whereas the Conservative party believes in controlling public spending and giving tax cuts and more money to people. Does my hon. Friend also agree that it is extraordinary that he is being grilled so much more than the Minister? It is almost as though we are in power already.
I am grateful for my hon. Friends observation. Taking his second point first, I am happy to be grilled and welcome such tension about Conservative party policies, as I am sure he does, and he is quite welcome to intervene on such points.
The Governments position on public spending is somewhat schizophrenic. They state that now, in 2009, more public spending is necessary and that the Conservatives are all about cuts and being beastly generally, despite the fact that the Government have already slowed their public spending plans and have proposals for future public spendingnoticeably after the general electionthat are really quite tight and that will involve real-term cuts in departmental expenditure. Yes, there is a difference between our party and the Government: we believe that public spending restraint should start as soon as possible, whereas they are delaying those painful decisions.
There is a feeling, perhaps across the board and the only question is one of timing, that we need to do more to restrain public spending and to help savers. The argument we tend to hear from the Government and their supporters is that that might be right, but now is not the right time. However, the financial difficulties facing savers and the crisis within the balance of our economy are such that we do not have time to waste.
I return to one of the reasons why encouraging saving is important and would be helpful. In recent years we have seen a boom and an explosion of debt and asset prices, not only in the UK, although we have a particular problem, but in much of the west. As a consequence, we face significant global imbalances. In 1997, gross foreign current liabilities were £1,100 billion; by 2008, that figure had quadrupled to £4,400 billiona sign of the expansion of banking liabilities as a consequence of the savings being created in countries such as China.
To give another example, in 2001 the customer funding gapa definition used by the Bank of England to express the difference between what banks have lent and borrowed from British households, businesses and institutionswas nil. By June 2008 it was £740 billion, as a consequence of banks funding themselves 40 per cent through wholesale sources. I mention that because there is an imbalance within the global economy. In countries such as China, huge savings were being made and the Chinese economy was clearly expanding rapidly, but because the culture of saving in China and in parts of the developing world is so strong, those savings have essentially come to the UK. We have had an imbalance whereby the west has been consuming while the east has been saving. That creates a degree of instability, which I think is a factor in a lot of the difficulties that western economies have had in the past couple of years.
Since August 2007, those wholesale sources of finance have dried up, and that caused the credit crunch. However, we can also look to the fact that over a long period we in the west largely stopped saving. I shall not exaggerate the impact of our policy and say that the tax cuts that we propose for 2009-10 will effect a transformation. It is a wider problem and there are other factors influencing the fact that we have not been saving enough. However, we could signal the direction that we are going in.
I note that the BBCs Robert Peston refers to the new capitalism, one element of which is a stronger sense of saving in the UK and other western economies. With interest rates coming down to historically very low levels, the signal to those who may be thinking of saving is, Is it really worth putting money aside for a rainy day? When things get difficult, you do not get anything for your savings anyway. That is the immediate difficulty we face.
Although flawed, I hope that amendment 1 has enabled the Committee to probe what we can do to help savers and whether we can reduce income tax. I shall give a couple of examples that relate, not to increasing the pensioner allowance, but to abolishing tax at basic rate for savers. A 60-year-old retired couple, with a total pension income of £12,000, could be £400 a year better off. A 40-year-old single mother, working part-time and earning £100,000, with savings producing £800, could be £160 a year better off. Our proposal is affordable, it would help innocent victims of the downturn and it would signal, in the longer term, that we value savings. We are going to have to save more as a society and we, as a Government, should do what we can to help savers.
I start by thanking my hon. Friend for arguing for savers. I will look at savers who are pensioners. I have been concerned about the Governments apparent dismissiveness of the impact on pensioners of the reduction in savings interest. In its utterances, the Department for Work and Pensions has been minimising how the impact will fall on pensioners and, particularly, whether it will increase the number of pensioners likely to fall below the margins that one would normally expect. That is partly due to the statistical approach that it uses.
The figures for 2006-07, which are probably the most complete, show that something like 72 per cent. of pensioners were in receipt of income from investments. That is a huge number. The average income was more than £50 per week, which is a significant amount of money. By using the median rather than the average, we can bring that down to £7 and, therefore, dismiss it as insignificant, but even then, if an individual was relying on a notice-based deposit account, their income would have fallen from £7 to £2 a week, as a result of the interest rate cuts. Will the Minister say whether the Treasury is as dismissive of the effect of interest rates on pensioners as the Department for Work and Pensions seems to be?
The amendment would extend the 10 per cent. starting rate for savings income from a band of £2,440 to a band of £37,400. I will respond to the amendment, although I will also comment on what we have now clarified as Conservative policy.
Responding to the points raised by the hon. Member for Henley, it is certainly the case that, although low interest rates have greatly helped families with mortgages, for example, they have reduced the returns for savers. The Government are not at all dismissive of that. I can understand why the amendment has been tabled and I agree that savers need help in difficult times, but I do not agree with the approach set out in the amendment.
The hon. Member for South-West Hertfordshire has helpfully clarified that this is a one-year proposal and the Conservative party would not be committed to it for future years. However, because of the way that income is ordered when an individuals tax liability is calculated, with tax on savings income being calculated after income from other sources, such as employment, self-employment and pensions has been taxed, the effect of the amendment would be to make the 10 per cent. savings rate disproportionately valuable to savers with higher incomes. That would cost the Exchequer about £250 million.
The concern about disproportionality is even greater in relation to the proposal to abolish tax on savingswe have clarified that that is the Conservatives policy. When that proposal was first announced in January, there was some confusion among Conservative Front Benchers about how it would affect higher rate taxpayers. The shadow Chief Secretary said that it would not help higher rate taxpayers, while the shadow Chancellor said that it would. I believe that the shadow Chancellor was right. Indeed, the example that the hon. Member for South-West Hertfordshire just gavea rather puzzling example about a single mother working part time, earning £100,000 a year
Ah, but the hon. Gentleman said £100,000. It makes more sense to refer to someone earning £10,000. Nevertheless, on the basis of his proposal, there would be a benefit for higher rate taxpayers as well. The amendment does not go that far, but it would cut the basic rate on savings to 10 per cent. and would suffer from a similar drawback of being disproportionately valuable to savers with higher incomes.
There are more effective ways of targeting supportparticularly for savers who are likely to be facing the greatest difficulties, such as pensioners. That is why the Budget announced three measures to support older people in particular. First, from October this year, we will raise the ISA limits for those aged 50 or over. More than 18 million people hold ISAs, so that will provide support to many savers through the tax system. That is one particularly successful measure of a raft of measures that the Government have taken to increase saving in the economy.
I have two brief points to make on ISAs. One is on the rather complicated system of different limits depending on ones age. Can the right hon. Gentleman explain why he has done that? Secondly, how much does he think a person can benefit from the reduced tax as a consequence of the increase in the ISA threshold? Given current interest rates, does he agree that the most it can be is about £30 or £40 a year?
I have not done that calculation, but the figure that the hon. Gentleman suggests may well be right. Of course, his argument a few minutes ago was about the need to increase the incentives to save. Raising the ISA limit in such a way will be a significant incentive.
Secondly, HMRC is launching a tax back campaign, which will contact 2.7 million pension credit recipients. The campaign will encourage pensioner savers to reclaim any tax that they have overpaid on savings and, where possible, register their account to receive income from their savings tax free in the future. Again, that will help pensioners with savings.
Thirdly, and perhaps most significant, the Government will increase the capital disregard in pension credit and housing and council tax benefit for pensioners to £10,000 from this November. That will significantly increase the generosity of pension credit for those who have savings. More than half a million low-income pensioner households will benefit by £4 a week on average, those on the lowest incomes by up to £8 a week.
Those measures are certainly welcome. Will the Minister expand a little on the assumed interest rate that is taken into account in calculating the entitlement for housing benefit, when savings that are vestigial that lie within that limit are taken into account? That issue concerns many pensioners whom I represent.
I am aware of the matter, and it has been raised from time to time. It is not accurate to describe that as an assumed interest rate. The assumption that is made is that if someone had a significant capital sumin the future we are talking about over £10,000it would be perfectly appropriate for them to use some of that, as well as the interest earned, to meet their expenditure. It would not be right to ignore entirely the benefit of that sum in meeting to expenses.
No, it is simply a recognition of the fact that people with savings are able to draw on them to meet their needsthat is, after all, the purpose of savings. That has always been the case, and the basis of the pension credit capital disregard.
That package is much more effective in supporting savers at risk in the current difficulties than the approach suggested in the amendment. In 2011-12, the Government package will cost £190 million a yearnot much less than the amendment suggests, and the package will be much better targeted at those who most need the help.
Mr. Atkinson, I have a few remarks on the clause stand part. Clause 2 will raise the basic rate limit from last years £34,800 to £37,400 this year, a rise of £800 over indexation. Taken together with the £130 above-indexation increase to the personal allowance made by the next clause, it means that nobody will pay a higher-rate tax on incomes below £43,875. It is an increase in the higher-rate threshold, which will support middle-income families during the global downturn. It also takes the higher-rate threshold for 2009-10 to the same level as the upper earnings and profits limits for national insurance, the point at which somebody stops paying the main 11 per cent. rate of national insurance and starts paying the additional 1 per cent. rate.
In 2011-12 the threshold at which someone starts to pay national insurance will be aligned with the tax-free personal allowance. The levels at which individuals start and stop paying the main rates of tax and of national insurance will be aligned for the first timea simplification that will be widely welcomed.
One feature of the broad-based fiscal consolidation announced in the pre-Budget report last year included increasing the rates of national insurance by 0.5 per cent. Alignment of the national insurance primary threshold and the income tax personal allowance will mean that those with incomes of less than £20,000 and subject to the full standard rate of national insurance will gain more than they would lose from the rate rise at that point. Looking at all the changes since April 2008, no one with an income of less than £40,000 will be worse off.
The Budget changes build on the pre-Budget report, securing further consolidation targeting the 2 per cent. of individuals with the highest incomesthose most able to contributewhile protecting those with lower incomes. I invite the Committee to support clause 2.
I shall respond principally to the Ministers remarks on amendment 1 and our policy on savers. Let me be clearit has been clear throughoutthat our policy to benefit savers was to benefit only basic rate taxpayers and pensioners on modest incomes. That has been the position all the way through, and I hope that that is clear, notwithstanding the remarks of the Minister.
On the package referred to by the Minister, I do not intend to spend a great deal of time on the issue of ISAs, Mr. AtkinsonI am sure that you would warn me off from doing so. To be fair, the Minister has a point about the increase in the ISA limits being a symbolic message of encouragement to saving. However, I note that he did not disagree with my numbersin practice, it is likely to be around £30 or £40 per person in the current climate.
May I press the hon. Gentleman on his earlier point, that the position of his party is clear on whether higher rate taxpayers will benefit from the measure or not? His point was the point made by the shadow Chief Secretary. However, the shadow Chancellor told the BBCs Money Box programme on 10 January:
Of course thats entirely truethat if your entire income is savings and youre a higher rate taxpayer, then you benefit like other people do from the fact that the basic rate goes to zeroand we never said otherwise. Indeed Ive made that point as well.
So, the shadow Chancellor is telling us that higher rate taxpayers will benefit from his proposal.
I have the Q and A that was circulated internally. We have made it clear that the policy is targeted at basic rate taxpayers. We shall continue to have a tapering system. Indeed, in that interview on Money Box, some of the criticism that my hon. Friend the shadow Chancellor was getting was that the policy would not benefit some pensioners who were earning somewhat more. The policy is clear.
The tax back campaign raises two important points, one of which is how our policy would help the lower earnerspensioners who do not receive enough from their savings to pay the basic rate of income tax. There are a large number of such people, who do not always get their tax back and do not always go through the process to reclaim. That is not to say that we do not welcome the Governments initiative to encourage more people to get their tax backindeed, I raised the point with the Minister this time last year, asking what the Government were doing about it, and the Low Incomes Tax Reform Group has campaigned on the issue for a long time. None the less, a reasonably substantial number of peoplein particular, a reasonably substantial number of pensionersare not getting their tax back in the way that they should and I suspect that that will continue to be the case. Our policy would help those people.
Indeed. My hon. Friend is right that our policy would be a lot simpler to administer and that there would not be a need to campaign for pensioners to reclaim the tax that they had overpaid. So he is absolutely right, and his suggestion is clearly helpful.
I note the comments made by the Minister with regard to the national insurance contribution rises. I do not intend to get into a lengthy debate on that issue. I noted that the Minister chose his words very carefully when he discussed who would be gaining and who would not be losing. However, the fact remains that the NI contribution increase that is designed to come into effect immediately after the election will make those people who are earning £20,000 worse off.
I also note the Ministers comments about the alignment between the upper earnings limit of NI and a higher rate of income tax, which was part of the package announced in 2007. I would be grateful for clarificationthis is a genuine questionabout a point he made that slightly confused me, which was about the lower earnings limit. As I recall, the original proposal in 2007 was that the point at which one started paying NI contributions and the point at which one started paying income tax was going to be the same. However, that got rather confused by the compensation package for the 10p rate and the increase in the personal allowance. However, there was not an equivalent increase for the point at which one starts paying NI contributions, so that we lost that very simple two-tier system. From what the Minister has saidmaybe I have missed a pointthe implication is that by 2011 we will be back to that system.
Mr. Timmsindicated assent.
I am happy to do so. I can confirm that, as we announced in the pre-Budget report, we will align the national insurance primary threshold to the level of the income personal tax allowance, with effect from April 2011.
Having said that, however, I would be grateful if the hon. Gentleman explained the mechanism for achieving the effect that he has described to the Committee, which is that the abolition of income tax on the first part of peoples savings will not benefit higher rate taxpayers. For example, take someone who has earnings of, say, £30,000 and savings income of £20,000, so that their total income puts them into the higher-rate tax band. Presumably someone in that position would benefit from the zero rate that the hon. Gentlemans party proposes, so that there would be a benefit to higher-rate taxpayers, as the shadow Chancellor said on Money Box. I cannot see what mechanism there could be for avoiding the effect that the shadow Chancellor saidrightly, I thinkwould apply.
I am glad that the hon. Gentleman broadly welcomes the tax back campaign. Let me just make the point that, as we will discuss further when we consider a later clause, 62 per cent. of pensioners pay no income tax, thanks to the very substantial rises in age-related personal allowances that this Government have introduced. A much, much higher proportion of pensioners are out of tax altogether than was the case in 1997.
On the issue of age-based personal allowances, I will try not to stray into the next debate. The intention is that savers will benefit at basic rate only. I note that the Government were able to increase personal allowances in a way that did not benefit higher rate income tax payers. We are confident that we can find mechanisms in order to deliver our objective, which is to help basic rate payers.
I beg leave to withdraw the amendment.