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Column 830administratively more expensive. That is no reason for abandoning them altogether, but it is a reason for deciding that we must accept the cost of administering small savings, come what may.
The Government advanced the somewhat peculiar argument that they believe in promoting quality savings and that premium bonds are a low quality form of saving. That is where the point made by the hon. Member for Beaconsfield (Mr. Smith) comes into play. He was echoing what the Minister said on 20 June in Standing Committee. The point is that purchasers of premium bonds weigh up in their minds, when they go out to buy them, the balance of advantage between the chance of a big win and the guarantee of income against depreciation. They decide what form of savings they want to put their money into. They decide whether they want a guaranteed return to protect their money automatically against depreciation or whether having a flutter with a premium bond or two is something that they would rather do than go for some form of guaranteed income. The important point is that it is they who should make the decision. The Government should not make it for them.
The key is customer choice. It is not up to the Government to dictate in a somewhat lofty fashion what is good quality and what is poor quality saving. That is a tawdry argument. It is not for the Government to say that, because there is no form of guaranteed return on premium bonds and that people enter into premium bond schemes thinking that they may have a chance of winning substantially, but knowing equally that they may not, it is a low quality saving and, therefore, they will implement a penal threshold that will prohibit hundreds of thousands of people from going into the premium bond market. It is up to individuals to make their decisions. Until 1 July, that is how the system worked. We are calling on the Government to reverse the changes brought in on 1 July, to stand up for the small saver, and to accept the new clause.
Mr. Win Griffiths (Bridgend) : I would not cross the road to buy a premium bond and indulge in that type of flutter, but millions of people like to buy a modest number of bonds in the hope of winning the largest prize that is offered. It is no argument for the Government to say it is a low-quality form of saving.
The minimum investment of £1 when premium bonds were first introduced was changed to a minimum of £10 in 1985, which was roughly in line with inflation--though perhaps slightly in excess of it. At the present level of inflation, the minimum investment figure would need to be £12, so the Government's figure of £100 is excessive and would exclude on current figures about 80 per cent. of investors. Twenty-one per cent. of premium bond investors are old-age pensioners, and 19 per cent. of them purchase less than £100 worth of bonds. There can be no doubt that the Government's proposal will exclude a large number of people who want to make a small investment in the hope of winning one of the bigger prizes. The Government argue that the cost of each premium bond transaction is £2 and therefore it is not worth selling bonds to a value of less than £100. Figures provided in a written answer of 8 June reveal an overall increase in the amount invested since 1985 by those purchasing premium bonds in blocks of £10, £20, £30, £40
Column 831and £50. The aggregate of purchases individually having a value of between £10 and £50 in 1985 was £26.6 million, but had increased to £34 million.
In 1985, purchases of £10 worth of premium bonds accounted for 5 per cent. of the total value of sales in 1985, falling to 3.2 per cent. by 1989. However, the value of £20 purchases doubled from 0.6 per cent. to 1.2 per cent. Purchases of £30 worth of bonds increased marginally, from 0.7 per cent. to 0.8 per cent., while sales of £40 units fell marginally from 0.7 per cent. to 0.6 per cent. Sales of £50 units of premium bonds also fell, from 5.7 per cent. to 5.2 per cent. However, across all those denominations there was an overall percentage increase. If the Government want to set the lower limit at a figure higher than £10, an appropriate sum would be £20, which is the point at which there has been a doubling of sales over the past five years. A £100 cut-off point can be viewed only in the context of a desire by the Government to cut costs.
An article in The Sunday Times of 26 June suggested that the Government are introducing the £100 cut-off point as they no longer need to borrow money through premium bond sales because they are receiving so much into the Exchequer from privatisation and other measures. But if we are to believe the Department for National Savings' annual report for 1987, people willing to invest sums averaging more than £1,000 in the hope of having a good run of tax-free prizes were targeted in a drive to increase investment, which included direct mail.
The evidence is that the Government are encouraging people with £1, 000 or more to invest in premium bonds because the Government make a large profit from such investors, but that they do not want to be bothered with the ordinary investor, such as the pensioner who likes a little flutter. Such investors are not to be allowed freedom of choice, which is so vaunted an element in the Government's prospectus for the 1980s.
The Department for National Savings received a large number of complaints about the higher level of minimum purchase. I wonder whether the Minister is aware of the scale of that protest. All the evidence is that people of small means are happy to forgo any interest on their investment in the hope of making a tax-free capital gain from premium bonds. It is not too late for the Minister to think again and to make millions of people much more contented. When one considers the current state of the opinion polls, that aspect is not one which the Minister can ignore. I should not want to do anything that would help him politically, but there is widespread concern that millions of investors will be arbitrarily excluded by the £100 cut-off point, which has no economic or fiscal justification other than the Government's dislike of having to meet the cost of £2 per transaction unless an individual purchases at least £100 worth of premium bonds. I ask the Minister to consider small investors and to accept the new clause.
Mr. Tim Smith : It is a fascinating commentary on the priorities of the Labour party that of all the areas of tax reform that might be thought important, when it comes to starting the Report stage of the Finance Bill, with the opportunity to instigate a major debate on tax reform, the Opposition's choice of subject is premium bonds. It is also a perverse comment on the House. Although the premium bond scheme is important, there are many more important areas of tax reform that the House ought to be debating.
Mr. Robert Sheldon (Ashton-under-Lyne) : I remind the hon. Gentleman that my right hon. and hon. Friends also tabled new clauses 1, 2 and 6, but they were ruled out of order. They dealt with very important matters concerning privatisation and the amounts that the taxpayer received as a result of sales of public assets. I would dearly have loved to participate in a debate on those new clauses, but they were not selected. Perhaps that is one of the problems about our rules of procedure.
Mr. Smith : The fact that those new clauses were not selected has nothing to do with me. They would have affected only a handful of companies. Surely most people are more keen to hear the Labour party's views about the aspects of tax reform that affect most taxpayers. For example, what does the Labour party think about the reform of income tax? We are not considering that. We are discussing the details of the premium bond scheme.
The hon. Member for Islington, South and Finsbury (Mr. Smith) advanced three arguments against the changes that the Government recently announced and which took effect from 1 July. First, he pointed out that the savings ratio had fallen substantially over the past few months. That has happened not so much because savings have diminished as because borrowings have increased. Of course, the savings ratio is a net figure.
The hon. Gentleman said that the only measure that the Government had advanced to encourage savings was an increase in the tax relief for personal equity plans. By far the most effective way of securing an improvement in the savings ratio is an increase in interest rates. We have had a substantial increase in interest rates, which has cut borrowing and encouraged savings. The idea that improved tax relief for PEPs has anything to do with encouraging saving is misconceived. The PEP scheme is about encouraging people to invest in equities. The chances are that there will not be great additional savings because of the tax relief for PEPs, but that because of the relief people will reorganise their investments to take advantage of it. National savings, of which premium bonds form a small part, are part of the Government strategy to encourage an improvement in the savings ratio. It must be obvious that when the Government are running a large surplus they have rather less need than in previous years to have an attractive national savings package. For that reason, I certainly would not want an improvement in the interest paid on premium bonds. If people are content with the present interest rate, so be it. I agree with the hon. Member for Bridgend (Mr. Griffiths) : I do not think that premium bonds are attractive and I, too, would not want to participate in that scheme.
Are premium bonds an investment? The hon. Member for Islington, South and Finsbury described them more than once as an investment. I can see that they are savings from the Government's point of view, because they contribute to national savings. Putting one's money into a premium bond is not my idea of an investment. The game was given away when the hon. Member for Islington, South and Finsbury described buying premium bonds as "having a flutter" and the hon. Member for Bridgend talked about a "type of flutter". That is how people see it.
One not only loses one's stake but gambles on whether one will get a return. If one has only one or two bonds, the chances of getting any return -- [Interruption.] It is not an investment. If an investment adviser advised a person to
Column 833put his money into premium bonds, he might well be guilty of failing to give best advice, as provided for in the Financial Services Act 1986. I am doubtful whether premium bonds are an investment at all, according to the standards by which I judge investments. The chances of getting a return are remote for the person who puts only a few pounds into premium bonds. All that happens is that he sees his pounds devalued by inflation over the years.
Secondly, the hon. Member for Islington, South and Finsbury said that he was worried about the effect of the changes on the small saver, and I understand that. I am not sure that we necessarily want to encourage people to undertake this form of saving. It is a bad investment. I doubt even whether it is a good gamble. It is the best gamble for the person who can afford to put in £10,000. Then one's chances of getting a monthly prize are 11 to 10--there is nearly an even chance of getting a monthly prize. Over the year, on average, one will receive 10 or 11 prizes, the value of which will vary. Premium bonds are not a good bet for anyone, but they are a better bet for a large holder. For a small holder, they are not a good bet. Perhaps it would be better if we did not encourage people with small sums, which perhaps they cannot spare, to buy premium bonds. 5.15 pm
Thirdly, the hon. Member for Islington, South and Finsbury made a point about the administration of national savings. The Government are right to be worried about those costs. I suggest that the Public Accounts Committee, of which the right hon. Member for
Ashton-under-Lyne (Mr. Sheldon) is Chairman, might consider those administrative costs. The hon. Member for Islington, South and Finsbury said that some changes have been made recently. I suspect that they occurred because the cost of administering some small accounts did not justify their continuance. The Treasury is right to be concerned about the high administrative cost of small holdings. We have heard that 1,300 staff are employed to administer the premium bond scheme, and that does not seem unreasonable, given that there are 20 million holders. We have been told that the costs of administration were 1.1 per cent. of the value of the bonds, which probably compares favourably with unit trusts in the private sector. The Public Accounts Committee could usefully consider that issue. Whether £100 is the right level is a matter for judgment. Usually, in privatisation issues, the qualification level has been rather higher. However, it is true that when the premium bond scheme was introduced in 1957 one needed to buy only one £1 bond. Inflation may well have multiplied that by a factor of 10, but certainly not by a factor of 100.
Labour Members have not advanced sufficient arguments to warrant supporting the new clause. I intend to oppose it.
Mr. A. J. Beith (Berwick-upon-Tweed) : The hon. Member for Beaconsfield (Mr. Smith) said some very strange things. He said that the purpose of the Chancellor's improvements to the PEP scheme was not to attract more small savers and to broaden the number of savers. The Chancellor has said that it was indeed intended to extend saving. He has trumpeted the PEP scheme as an illustration of his desire to extend saving and to make it
Column 834attractive to more people. It is against that background that we must judge this action by the Government as likely to have precisely the opposite effect and to discourage small savers. I am surprised at the hon. Gentleman for casting doubt on some of the Chancellor's motives behind his PEP proposals.
Then the hon. Member for Beaconsfield suggested that, because premium bonds are a poor investment, the only sensible thing to do is to put more, rather than less, money in : whereas the logic of the argument is that, if they are a poor investment, people should not be encouraged to put a great deal of money in them. If the Economic Secretary were to say to me, "I am thinking of putting £5 on a bet that England will win one test before this series is over," I might say to him, "As a mixture of patriotism and a long shot, perhaps you can consider it." If the hon. Gentleman were to say to me, "I will put £100 on the possibility that England will win one test before the series is over," I would tell him that that would be very foolish. The unwiseness of such a speculation would lead me to counsel a small investment only. Those who rightly argue that premium bonds are a pretty poor bet should be the last to suggest that the minimum investment required be increased.
If it is the essence of the Government's argument that premium bonds are not quality savings, there are a number of steps that they could take. They could, for example, allow people to invest much smaller sums and not tempt them to invest large sums. That is the purpose of the new clause, as it was the basis of our arguments in Committee. If it is a bad bet, with an underlying rate of interest of only just over 6 per cent., none of which may accrue to the investor because he might not win a prize, people should not be encouraged to make a high minimum investment.
The Government could take other steps. They could improve the underlying rate of interest, but there is no sign of their doing so because they realise that they are on to a good thing. They are charming a great deal of money out of a great number of people for a very low rate of interest, which most of the investors never even receive. That is a comfortable arrangement for the Government. Indeed, substantial parts of the private sector might wish that they could follow suit.
If the Government believe that investment in premium bonds is poor quality saving that should not be encouraged, they have another option : they could abandon it altogether. Because of the Government's high rate of return, they will not do that, but they could at least stop advertising it and stop sending out direct mail encouraging people to invest in it. The Government are indulging in rather curious double standards. They cannot both condemn the product and try hard to sell it. Indeed, they are trying to sell it more selectively. They cannot be bothered with a £5 minimum investment in premium bonds, but they want to open the door to the few people prepared to invest £10,000. That would allow the Government to offer the service for very little expenditure. They would have a comfortable return for a minimum of effort.
It is unfortunate that the Government's attitude to a £100 minimum investment in premium bonds is characteristic of their attitude to national savings in general. The £5 minimum deposit in a national savings account was a serious blow to those trying to encourage the habit of saving among young people. Many people simply cannot find £5 at one time. They want the opportunity to save regularly through small sums. The
Column 835Government's attitude is spreading to all aspects of national savings. If they get away with this proposal, they will probably raise the minimum national savings deposit again and again and shut off many avenues for the smaller savers.
Mr. Arbuthnot : Is not the logic of what the hon. Gentleman is saying that those who have only small sums to invest should not choose premium bonds?
Mr. Beith : I certainly would not advise them to invest in premium bonds. However, as experience has shown that half the population wants to invest in premium bonds, it is not right to make the only way that they can do so be by investing large sums. They may not have very much money and they should be allowed to invest small sums. Indeed, gambling is least harmful when it is neither compulsive nor involves large proportions of an individual's income or disposable resources. The Government are moving in the opposite direction by making one of the forms of investment that comes closest to gambling available only to those prepared to invest large sums of money. They are closing the door against the small saver, and that is particularly unwise with premium bonds.
The hon. Member for Beaconsfield pointed out that the Government do not need to be worried about national savings because their requirements for funds are now significantly lower. The Government have the opposite to a funding problem ; they have a budget surplus, so they do not need a great deal of national savings. The hon. Gentleman missed the point about savings. One of the arguments for saving at a time of high inflation, especially with the problems in the British economy during the past 12 months, is that savings divert from consumption. One of the pressures in the economy during the past year has been the consumption of imported goods in the domestic market. It is therefore sensible for the Government to encourage saving.
We want to press the Government on the whole issue of encouraging small savings. If large numbers of people who are not saving could be encouraged to do so, it would have a beneficial effect in the current economic circumstances. The arguments for national savings are not simply those of Government funding ; they relate also to the general health of the economy. That applies not only to national savings but to all forms of private sector saving. It is currently in the public interest to encourage saving, even though the Government's need of funding is much less than it was when national savings were first introduced and some of the other savings devices were invented. Premium bonds are not a good method of saving and I would not recommend them. The Government run the scheme and want to encourage people to participate in it, but only if they put up a large stake. It is little different from replacing a small stake slot machine in a public place with one in which the minimum stake is a very much larger coin--a £1 coin instead of a 20p coin. The likelihood is that that will encourage people to be less prudent when putting money into premium bonds. It is part of the Government's attitude towards small savers that must be changed for the good of the general health of the economy and the encouragement of more widespread saving.
Mr. Ian Taylor (Esher) rose --
Mr. Deputy Speaker (Mr. Harold Walker) : I call Mr. Marshall.
Mr. Taylor : You have made an understandable mistake, Mr. Deputy Speaker, but one which I am glad to say our wives do not make.
Mr. Deputy Speaker : I beg the hon. Gentleman's pardon.
Mr. Taylor : I wish to begin by declaring a lack of interest. Having been a premium bond holder for many years, I have yet to win anything and, indeed, can no longer remember where I have put my bonds. That might tell the House something about my character that I prefer not to mention.
Premium bonds were introduced at a time when the Government of the day were searching for any idea that might knock up some savings and help with the national debt. Subsequently, many more sophisticated methods of savings have been developed, not only by the Government but by the private sector. There has been an incredible change in the way that building societies attract private savings. They use many techniques, such as saving on a regular basis correlated with save-as-you-earn option and share purchase schemes. Those techniques have enabled the small investor to put money aside regularly. They provide a much more interesting and, hopefully, fruitful form of investment than premium bonds have ever offered. The original objective of premium bonds, which was to enable the small investor to save simply, is no longer relevant because there are many other schemes through which the small investor can accumulate his savings. The rate of return on premium bonds is difficult to calculate, so it is increasingly unlikely that they would be recommended by any prudent financial adviser-- as my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out. As the savings market becomes more sophisticated, more and more small savers will be encouraged to put their money into schemes other than premium bonds and there will be a relative decline in interest. Indeed, the Government have introduced new techniques to encourage investment, such as through the employee share ownership schemes which feature largely in the Budget and which involve many workers putting aside sums of money to purchase shares in the companies for which they work.
Those who may not fall within the classic category of small investors are, nevertheless, keen to put aside relatively small sums, and for them the personal equity plans are both interesting and attractive. They answer the needs of small investors and there are major tax incentives for them to adopt those schemes.
Premium bonds are an outdated investment. It would be prudent for the Government to insist on a minimum purchase level because the scheme's administrative costs are high. It is counter-productive if the Government are losing £2 for every £10 subscribed in small units. It does not make sense for the Government to be that profligate on administrative costs. In addition, as I said earlier, if people wish to have the fun of a gamble, building societies and banks enable small savers to accumulate sufficient money to purchase a batch of bonds.
For all these reasons, the Government are right to consider having a minimum purchase level for premium bonds and the Opposition's new clause asking for more inquiries into the performance and administrative costs of
Column 837premium bonds is unnecessary. It is accepted by hon. Members on both sides of the House that more people in Britain should save rather than consume and I hope that the Government will introduce more measures to encourage that trend. Future Finance Bills should contain even more incentives for people to put money into PEPs. There should be even more opportunities to reduce the administrative costs of PEPs.
Such schemes, along with employee share ownership, are sensible and desirable objectives for the Government. They should not continue to market premium bonds in small units, as they were originally marketed, which are no longer as attractive as they once were. I strongly support the Government's attempt to reform the area and I shall not support the new clause.
Dr. Lewis Moonie (Kirkcaldy) : The contributions of the hon. Members for Beaconsfield (Mr. Smith) and for Esher (Mr. Taylor) are ample illustration of how out of touch Conservative Members are with the feelings of ordinary British people.
Let me at the outset declare an interest. I possess premium bonds--£17 worth of them. They have accumulated over the years but I have not won a sausage. I have never come anywhere near a prize. My mother-in-law has an even smaller holding and she has won two or three times, which shows that a big holding is not necessary in order to make a return.
We should lay the fallacy that premium bonds are a good investment for somebody who is well-to-do and a bad investment for somebody who is poor. As an investment they do not hold water. As a gamble, they do. The return on the money put in is in direct proportion to the number of units bought. The chance of a unit winning is the same whether one has 10,000 or 10. A person who increases his holding from 10 to 10,000 increases the risk 1,000 -fold. A holder of a larger number of bonds is more likely to win a prize than the holder of a few, but only in proportion to the number held. Not only that, but inflation cuts into one's money. That is particularly true under this Government when the value of a £10,000 holding for a person who is not lucky enough to win a prize, which could well be the case, will drop by £800 this year, thanks to the Government's excellent economic policies.
The Economic Secretary wrote to me on the subject in June after I made representations to him on behalf of several constituents--not necessarily my supporters--who contacted me about the problem. His comments illustrate the Government's reaction to the scheme. He says :
"Like all government departments, National Savings has to operate within a cash limit. So they regularly review their administrative costs to see if sensible economies can be made to make the business more efficient and less expensive to run. National Savings priorities are also affected by the fact that the government is no longer a borrower but is currently repaying debt. Consequently the main need for savings is to refinance borrowings which are due for repayment and to improve the quality' of debt. High quality savings are those which people will retain for some time and cannot withdraw to spend at short notice without any financial penalty."
That illustrates some of the Minister's justifications for changing the scheme.
The Minister went on to say :
"Each Premium Bond purchase costs National Savings nearly £2 (a significant portion of which is the fee payable to Girobank.)"
Column 838The Public Accounts Committee could well look into that to see whether the Government are getting a good deal. The Minister goes on :
"So small transactions are very unattractive when National Savings are economising on their running costs."
He goes on to raise the red herring of the average purchase price being over £150, but I grant that he does say that lower levels of purchases account for a far higher percentage of the total number of transactions which, as has been said, is well over 80 per cent. of the savings.
The Minister attempts to justify the increase in the minimum amount by acknowledging that there are those who may find saving up £100 beyond their reach, but he says that he wonders
"whether people with only a small sum at their disposal would necessarily find Premium Bonds, which do not offer regular interest but only the chance of prizes, the best place to put their money." That is the whole point. The person who buys premium bonds is not putting his money away in the expectation of seeing it grow ; he is putting it away as a gamble with the hope that he will win a prize as a result. It is a form of gambling, fair enough, which has been legalised or institutionalised by successive Governments over the years. There is no question of the Government stopping it, so far as we know. They claim to be in favour of it in the same way as everyone else, so why debar 85 per cent. of those who purchase small quantities of premium bonds from doing so, turning the scheme into a rich man's club?
It is clear from the Minister's letter to me that he has no concern for the many small investors or gamblers who will be debarred from participation in what is, from the Government's point of view, an ideal savings scheme. After all, it is a long-term method of saving. Despite the fact that people can take their money out when they like, they do not. Like me, they have had premium bonds for as long as 20 years and have left them to gather dust in some corner of a drawer. That is what people do. They do not buy them and trade them in two of three weeks later.
From that point of view, premium bonds are a high quality form of saving. They carry an absurdly low interest rate, particularly under the Government's present inflationary policies which push their real rate of return down to an all-time low. Overall, the scheme is cheap to administer because the costs are one off at the time of purchase. There are no continuing costs of administering accounts as in other forms of saving. It would be much fairer if, when the Minister replies, he were to compare the total cost of administering the scheme with other forms of savings, rather than singling out one detail for comparison.
The Government should tell us what their ultimate intention is. Do they intend to keep the premium bond scheme going or not? Have they looked into alternative methods of purchase in order to reduce the initial cost? Have they compared the overall costs with other forms of national saving? Have they looked at other methods of discouraging early redemption or even charging a fee for the purchase of bonds, which people might well find an acceptable alternative to debarring them from purchasing them altogether? I suspect that the Government have not.
This is a small matter to those such as the hon. Member for Beaconsfield who have their airy-fairy heads in the clouds. They have no concern for the views of ordinary people and that is why the Government's popularity is
Column 839sinking faster and faster, week by week. They have a callous disregard for what people think, and ultimately they will pay the penalty for it.
Mr. Arbuthnot : Like the hon. Member for Kirkcaldy (Dr. Moonie), I would cross the road to buy a premium bond. He and I are in the same league. I declare an interest because in about 1981 I bought myself about £10 worth of premium bonds. I have to disagree with my hon Friend the Member for Beaconsfield (Mr. Smith), because that was the best investment that I ever made. I have not won any prizes, but the pleasure that I have had from notionally spending my £250,000 is out of all proportion to the mere £10 that they cost me. I have calculated that, with my £10 worth of premium bonds, I can expect to win a prize within the next 116 years. If the Conservative party remains in government, health care will improve so much that by then I shall be a hale and hearty 152- year-old. I shall not regret that investment.
I bought £10 worth of bonds because that was the minimum investment at that time. If I were making the same decision today I should buy £100 worth. I would increase rather than reduce my saving. The hon. Member for Islington, South and Finsbury (Mr. Smith) mistook my intervention in his speech on that point, although I am sure that he did not do so deliberately. Some people will be unable to afford £100, although luckily, under this Government, they will be fewer than otherwise. Such people should consider whether they should invest in premium bonds in the first place. Perhaps they should consider more sensible investments which would bring them more money, if less imaginative pleasure.
The hon. Member for Berwick-upon-Tweed (Mr. Beith) made an extraordinary speech. He said that people with small savings should be advised not to buy premium bonds but that we should encourage them to buy bonds by making it as easy as possible. It is characteristic of his party, although not usually of him, to advise people both to do and not to do something in the same breath.
Mr. Beith : My advice was simple. People should not buy premium bonds, but if they do, they should not buy many.
Mr. Arbuthnot : I am not sure that I understand that. The hon. Gentleman advises those with the least money to buy premium bonds. My advice to them is that if they are to make the savings that they should try to make, they should make a more sensible investment. The hon. Gentleman should not ignore the costs of administering tiny holdings such as mine. It is uneconomic to administer my £10 investment. For the Government, mine is a bad investment. While the increase in the minimum investment to £100 is not overdue, it is justifiable and we should support the Government.
Mr. Quentin Davies (Stamford and Spalding) : There has been a remarkable consensus in the House that premium bonds constitute a poor investment instrument. If our constituents read Hansard and take our investment advice seriously--which they should not, because we are not registered or competent investment advisers--and if they have any regard for the financial acumen of either major party, they will buy even fewer premium bonds.
Column 840At a time when interest rates are rising, the opportunity cost of holding premium bonds, as opposed to other instruments, increases, so logically still fewer people should hold still fewer premium bonds. As a result, it is fair to assume that premium bonds will account for an even lower proportion of total savings than at present. I share the surprise of my hon. Friends that the Opposition feel that it is worth putting so much emphasis on this tertiary issue, whether we are considering fiscal policy or aggregate savings and what can be done to increase them.
Several of my hon. Friends have made the interesting point that, like any other savings instrument, premium bonds have a fixed transaction cost. That cost is the same whether £100, £1,000 £100,000 or any other sum is invested. As it is a fixed cost, for relatively small sums it is a high proportion of the total amount being saved and for larger sums it is a smaller proportion of the total amount and may be insignificant.
Against that background, it is curious that the Opposition oppose the Government's new regulations which establish a minimum amount of £100 for any one investment in premium bonds. If the Government do not make such a regulation, the transaction cost on relatively small sums will be too high a percentage. For example, a transaction cost of £2 on an investment of £10 represents 20 per cent. of the investment. Even if the Government paid no premiums in the form of prizes, 20 per cent. of the sum that they received would go on the cost of registering the purchase of the bonds.
Dr. Moonie : Does the hon. Gentleman agree that the initial cost is paid by the bond holder because the bond is not included in the draw for the first three months after the purchase is made?
Mr. Davies : The essential point is that a fixed transaction cost can be a high proportion of the sum invested when the investment is small. The Government, that is to say the taxpayers, lose out because the cost of raising the money or attracting that proportion of national savings is high. The money does not go to the saver but is simply wasted on transaction costs.
It is extraordinary for a party that aspires to manage this country--heaven help us--to advocate a policy under which the Government and the taxpayers lose money in the course of promoting a particular savings scheme and the saver does not receive that money or enjoy a return on it. There is a high cost to the Government and a low return, and, therefore, a low inducement to save. That is not a rational policy for husbanding the nation's resources. I hope that the Opposition will have second thoughts about that policy and consider whether it is a sensible approach.
What can be done about premium bonds? Can any change usefully be made? Several hon. Members on both sides have suggested a possible answer to that question. Premium bonds are a curious hybrid instrument. They are neither a gambling instrument nor a savings instrument. They are not an effective savings instrument.
Mr. Chris Smith : I have listened carefully to the hon. Gentleman. He has just made the extraordinary statement that premium bonds are neither a gambling nor a savings instrument. Surely they are both.
Mr. Davies : If the hon. Gentleman had listened he would have heard me say that they are neither an effective gambling instrument nor an effective savings instrument. I hope that the hon. Gentleman will not deny that I used the word effective in both contexts. They are an attempt at a savings and a gambling instrument, but they are not effective as either. They are not effective as a savings instrument because the return is not sufficiently high and, as I have already said, at a time of high interest rates the return is particularly unattractive. They will not attract more savings, and--as I have already pointed out--relatively low levels of individual unit investment will not make them very attractive to the Government either, because the transaction cost involved in their issue will be disproportionately high.
Premium bonds are not very effective on either the demand side or the supply side : they neither induce households to save nor attract funds into national savings in a way that is cost effective for the Government. Nor are they effective as a gambling instrument, because they are competing against all the other forms of gambling available to the consumer and are structured in such a way that investors do not lose their stake, which means that the potential reward is much lower. Those who gamble on roulette or the horses tend to think in terms of the sum that they will receive if they win. By definition, premium bonds can never compete.
Mr. Win Griffiths : I admit that I have made a very quick and rough calculation, but it would appear from the figures provided in the answer to which I referred earlier that the amount invested in premium bonds worth between £10 and £50 has increased slightly ahead of inflation over the past few years. That suggests that, at a time when savings have been going down, premium bonds have been a relatively successful way for the Government to raise money.
Mr. Davies : The hon. Gentleman should remember that interest rates, both real and nominal, have risen significantly during the past year, for reasons of which we are all aware and of which many of us entirely approve. I do not think that indices running over a number of years are necessarily relevant to a policy decision that must be made now.
I have tried to demonstrate--and I have not been contradicted on this point, although I have allowed a number of Opposition interventions--that premium bonds probably will not set the markets alight, in either the savings or the gambling sector. They are neither competitive nor a cost- effective way for the Government to raise money from small savers, even if small savers are likely to be induced to invest large sums in aggregate across the country. What, then, should we do about premium bonds? I have no objection to their remaining, although I believe that, for the reasons that I have given
Mr. Deputy Speaker : Order. We are now shifting away from that difficult definitive line between the new clause and a general discussion about the premium bond scheme. We cannot engage in the latter.
Mr Davies : I accept that, Mr. Deputy Speaker, but the point raised in the new clause about the minimum amount that is to be available for purchase at any one time itself raises the question whether premium bonds constitute an
Column 842effective contribution to national savings. In the light of arguments produced this afternoon, I feel that it would be a good idea for both Government and Opposition to give some thought to whether an instrument could be devised that satisfied the gambling instincts of the British public--perhaps a kind of national lottery, in which the investor may lose his stake, but the return--
Mr. Deputy Speaker : Order. I do not think that the hon. Gentleman heard me the first time. I repeat that we are discussing a narrow modification to the premium bond scheme, not gambling, lotteries or the premium bond scheme in general.
Mr. Davies : I hope that I have said enough to demonstrate that if the Opposition have any suggestions to make about the Government's new premium bond regulations--which, surely, can be assumed from their tabling the new clause--they should be thinking along rather different lines. That, surely, is a legitimate observation. The course on which they are embarked is not sensible ; nor is it targeted towards either increasing savings or ensuring that a greater proportion of the potential consumer demand for gambling facilities is mobilised to the benefit of national savings and the Government's fiscal surplus. It is also not a very effective way of increasing the return to the small saver.
In my view, the new clause addresses none of those important and legitimate concerns. I should like to think that, before the end of the debate, the Opposition will give some thought to them, and consider making a more valuable contribution.
Mr. Allen McKay (Barnsley, West and Penistone) : I have been tempted to speak by some of the remarks that I have just heard. We have been presented with what is probably the financier's approach to money--and monetary--matters. I have written to the Minister many times, enclosing letters that I have received which beg me not to allow the Government to change the present arrangements for premium bonds. Our new clause is concerned with the ordinary person's approach to how he should deal with money, how he should save and how he should encourage his children to save, which is probably more important. I first came across premium bonds when I won £50 in a draw at work. If I had not bought £50 of premium bonds, I would have gone up the road and spent the money. It was very handy to be able to purchase premium bonds there and then, on a whim. I still have them. They were a very poor investment, without a shadow of a doubt : other forms of investment could have made a good deal more. Nevertheless, I had the choice and was entitled and able to deal with it. The increase in the minimum investment from £50 to £100 takes that choice away from many people.
Mr. Ian Taylor (Esher) : When did the hon. Gentleman make his investment? Allowing for inflation, that £50 could well be worth the £100 that is now being suggested.
Mr. McKay : Inflation is one of the reasons why it was a poor investment. The point is, however, that at the time it was a good one. Spending my potential winnings gave me a good deal of pleasure, because each month I was sure that it was my turn. That is why one-armed bandits make so much money ; everyone lives in hope. My son had considerable savings from his grandfather, who had two schemes. One was to buy a premium bond,
Column 843and the other was to keep a savings book. Not only did he show my son two ways of saving money, but he encouraged him to save. People who gamble do not buy premium bonds. However, the bonds allow grandfathers, such as my son's grandfather, to encourage their grandchildren to save in the manner that they think is best. That is important. The people who wrote to me said that they had very little money to pass on to their sons or grandsons but that they could teach them about the value of money in some shape or form.
Mr. Quentin Davies : Will the hon. Gentleman give way?
Mr. McKay : No, because I know what the hon. Gentleman will say. I agree that if we want value for money, we should encourage people to invest their money in other ways. However, that is what people have chosen to do. If I told my constituents how to spend their money they would tell me where to get off--and quite rightly so. Those who have written to me want to be able to purchase premium bonds in £10 units. Why should we take that right away from them? Why should we take away from people who genuinely want to purchase premium bonds in £10 units the opportunity to do so for their sons or grandsons, or even for themselves? The Treasury is using a hammer to crack a nut by taking away from people the opportunity to buy £10 premium bonds. The Government should think again.