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Column 263
Buckley, George J.Callaghan, Jim
Campbell-Savours, D. N.
Canavan, Dennis
Clark, Dr David (S Shields)
Clelland, David
Clwyd, Mrs Ann
Cousins, Jim
Cryer, Bob
Dalyell, Tam
Dixon, Don
Dunnachie, Jimmy
Eastham, Ken
Flynn, Paul
Foster, Derek
Godman, Dr Norman A.
Graham, Thomas
Haynes, Frank
Henderson, Doug
Hughes, John (Coventry NE)
Jones, Barry (Alyn & Deeside)
Jones, Ieuan (Ynys Mo n)
Leadbitter, Ted
Loyden, Eddie
McFall, John
McKay, Allen (Barnsley West)
McMaster, Gordon
Mahon, Mrs Alice
Maxton, John
Nellist, Dave
Pike, Peter L.
Skinner, Dennis
Smith, J. P. (Vale of Glam)
Vaz, Keith
Walley, Joan
Wareing, Robert N.
Welsh, Michael (Doncaster N)
Wilson, Brian
Wise, Mrs Audrey
Wray, Jimmy
Tellers for the Noes :
Mr. Harry Barnes and
Mr. Terry Lewis.
Question accordingly agreed to .
Ordered ,
That so much of the Lords Message [12 November] as relates to the Clyde Port Authority Bill, the London Underground (Victoria) Bill, the Tees and Hartlepool Port Authority Bill and the Shard Bridge Bill be now considered.
The House accordingly proceeded to consider so much of the said Message.
Ordered ,
That the promoters of the Bills may, notwithstanding anything in the Standing Orders or practice of this House, proceed with the Bills, in the present Session ; and the Petitions for the Bills shall be deemed to have been deposited and all Standing Orders applicable thereto shall be deemed to have been complied with ;
That the Bills shall be presented to the House not later than the seventh day after this day ;
That there shall be deposited with each Bill a declaration signed by the Agents for the Bill, stating that the Bill is the same, in every respect, as the Bill at the last stage of its proceedings in this House in the last Session ;
That each Bill shall be laid upon the Table of the House by one of the Clerks in the Private Bill Office on the next meeting of the House after the day on which the Bill has been presented and, when so laid, shall be read the first, second and third time and shall be recorded in the Journal of this House as having been so read ; That no further Fees shall be charged in respect of any proceedings on the Bill in respect of which Fees have already been incurred during the last Session.-- [The Chairman of Ways and Means.] Message to the Lords to acquaint them therewith.
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Overseas Government Debts
10.19 pm
The Financial Secretary to the Treasury (Mr. Francis Maude) : I beg to move,
That the draft Debts of Overseas Governments (Determination of Relevant Percentage) Regulations 1990, which were laid before the House on 15th October, in the last Session of Parliament, be approved.
The regulations form part of the proposals announced by my right hon. Friend the then Chancellor of the Exchequer on Budget day, which were discussed thoroughly during the Committee stage of the Finance Bill. The proposals introduced some changes to the tax treatment of doubtful sovereign debt ; they are now contained in the Finance Act 1990.
Tax law allows relief for doubtful debt up to the amount estimated to be bad. While that works reasonably well for most debt, it proved very difficult to make accurate estimates of the amount of sovereign debt that will not be repaid, and large changes in estimates can have a significant effect on Exchequer receipts. As a result, we introduced some changes.
The new system preserves the principles on which tax relief is based, but will give greater certainty about tax deductions, and phases the cost of large changes to the Exchequer. It lays down rules--contained in the regulations--for calculating the maximum amount of debt eligible for relief, and sets some limit to the amount of relief allowable in any one year.
The regulations set the rules for measuring the extent to which a particular debt is irrecoverable. More specifically, they set the relevant percentage that is the maximum amount that can be allowed as a deduction for tax purposes. Each debt will be measured against the factors set out in schedule 1 of the regulations. Scores will be allocated, and the total score will be converted to give the maximum percentage of debt allowable as a deduction.
The regulations are broadly similar to the Bank of England's guidelines to banks on what provisions they should make on prudential grounds. Those guidelines are known as the matrix. One of the ways in which the regulations differ from that matrix is their exclusion of one of the more subjective factors, which requires an assessment of a country's present and future economic and political conditions. They set a definite percentage of debt that is tax-deductible, whereas the Bank of England matrix provides bands within which provisions for a country might be expected.
Mr. D. N. Campbell-Savours (Workington) : Does not the presence of a Treasury Minister demonstrate the scale of the problem? Should not an Overseas Development Minister be dealing with the debate? Does not that show that the Treasury is the prime motivator behind policy in this important area, rather than Foreign Office
Ministers--particularly the Minister for Overseas Development? Charities and other outside bodies interested in overseas development have alleged that the Treasury is interfering, and is preventing Government from making the right decisions and adopting the right approach. Does not the presence at the Dispatch Box of the Financial Secretary to the Treasury prove their case conclusively?
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Mr. Maude : It would be rather eccentric for a Minister other than a Treasury Minister to come to the House of Commons to introduce Inland Revenue regulations.The Inland Revenue published the regulations for consultation, and we have accommodated most of the helpful and constructive comments that we received. The draft version that we are debating tonight forms an integral part of the changes that we have introduced to the tax treatment of doubtful sovereign debt. The regulations will, I believe, bring welcome certainty to what has been a very uncertain area of tax law.
10.23 pm
Mrs. Ann Clwyd (Cynon Valley) : That was an unusually brief ministerial introduction.
The current debt crisis is clearly devastating. In the words of Luis da Silva, a prominent Brazilian trade unionist,
"The Third World War has begun. A quiet war that is destroying Brazil, Latin America, and nearly the whole of the Third World. Instead of soldiers, it is the children who are dying. Instead of the wounded, there are millions of unemployed and the old. Instead of broken bridges, we see broken factories, schools, hospitals and whole economies This war uses debts and interest as its most important weapon, and it is a more deadly weapon than the atom bomb." Lula, as Luis da Silva is known in Brazil, and the children, the unemployed, the sick and the mothers struggling to cope have not been invited to the debate tonight. They are not able to contribute, but their lives are affected by the numbers and percentages that we are discussing.
Perhaps, in the view of Conservative Members, we are talking only about relevant percentages as a basis for granting tax relief on bad debts owed to Britain's commercial banks. We believe that we are talking about debt relief or, more specifically, the lack of it and the fact that millions of people are suffering unemployment, ill health and plummeting living standards because their Governments are handing over their nations' wealth to creditors.
In this debate, the creditors under consideration are the commercial banks. But I hope that we shall on future occasions debate the debts owed to Governments too. But of all the major actors in the debt crisis, the banks bear the greatest responsibility and have suffered least. At present, the Third world owes $338 billion to the commercial banks. United Kingdom banks have the third largest share, after the United States and Japan. Last year alone, commercial banks worldwide received $20 billion more from poor countries than they gave in new loans.
The effect of that transfusion from south to north has been a roll-back of development in Latin America, Africa and parts of Asia. Decades of progress have been undone. Income has fallen back to the levels of the mid-1970s in real terms. As Governments spend more and more on servicing the debt, the percentage of their budgets spent on health has fallen on average by a half in Latin America and the Caribbean. Infant mortality and malnutrition have risen alarmingly. I cite as an example the Philippines and the debts incurred during the Marcos era. Debt servicing grew from 11 per cent. of the Government budget in 1980 to 46 per cent. in 1986--the same percentage of the budget that the British Government allocated that year to our defence, education, social security, welfare and housing.
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As debt servicing soared, spending on social services in the Philippines sank by more than a third in real terms. Not surprisingly, by 1985 the percentage of families living in poverty in the Philippines had risen to 59 per cent. and real incomes were back to their 1975 levels. A quarter of all children in that agricultural land are now malnourished. As half the population are children, the on-going austerity, poverty and malnutrition will have enormous implications for future generations.With Latin America dependent on exports of primary commodities for three- quarters of its export earnings, it is not surprising that the scramble for foreign exchange has encouraged the plundering of natural resources and the destruction of fragile environments. As the Brundtland report put it :
"Latin America's natural resources are being used not for development or to raise living standards, but to meet the financial requirements of industrialised country creditors."
I am speaking from the Dispatch Box tonight because we in the Opposition are talking about development and how to get it started again. I only wish that Conservative Members took the same view. Have they listened to the views of their Minister for Overseas Development, or has the Foreign Office not even bothered to explain that the number-crunching in the Treasury is crushing people's lives in the third world? If the Conservative party was to put overseas development in the Cabinet--giving it the sort of priority that the Labour party gives it--the Minister would perhaps have more clout in arguing for more money for the poor.
The 1990s will not be any better than the lost decade of the 1980s unless substantial and comprehensive debt relief is achieved. I accept that it will not solve all the problems of the third world. As Filipinos know, economic mismanagement and corruption, with earthquakes and hurricanes, do enormous damage. But however good the Government, the weather or world markets, there is no chance of stability and prosperity across the south without substantial debt relief. Western Governments must take action now to secure it. We are discussing a statutory instrument that could be an instrument of debt relief. Our long-term aim is to reduce debt to the level at which developing countries can sustain regular payments without overburdening their economies and their people. The figures in the statutory instrument and in the Bank of England matrix give an estimate of their ability to do exactly that. Our long-term aim should be to reduce debt by the percentages that the Treasury and the Bank of England have supplied. Just imagine--a British Government official guide to debt relief! I am sorry to say that all we can do at the moment is imagine. The Government refused to seize the opportunity to encourage debt relief when they voted down Labour's amendments to the Finance Bill. They are happy to sit back handing out tax relief to commercial banks and to watch the poor of the third world suffer.
Under British tax law, the Government are granting tax relief to commercial banks on the considerable provisions that they have set aside to cover doubtful debts to developing countries. According to this statutory instrument, provisions of about 50 per cent. of toal loans to developing countries will be regarded as bad, and therefore eligible for tax relief. The banks write down the debt in their accounting books and claim tax relief on the so-called loss. In practice, they do not write down the debt, but claim the full amount of the original debt from the
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developing country. Having protected shareholders by making provisions, they can take a tougher negotiating stance with their impoverished debtors.The amount of tax relief given on banks' provisions in 1988 is estimated to be about £1.7 billion--more than the Government spent on the entire third world aid programme. It is estimated that, last year, Barclays claimed £305 million in tax relief on its provisions against doubtful country debt ; NatWest claimed £395 million ; Lloyds claimed £453 million ; and Midland claimed £184 million. That must be a ludicrous situation. The British taxpayer is subsidising the profits of United Kingdom banks but discouraging them from using those provisions to reduce Third-world debt. In other countries, such as the United States and Belgium, tax relief is not granted until debt reduction has been agreed by the banks.
Labour's proposal is to make tax relief conditional on the provisions being translated into debt relief. Debts must be written down in practice, not just in the books. If no debt relief is granted within, say, two years, the tax relief should be clawed back. Tax relief is supposed to be for irrecoverable debts. If part of the debt is truly irrecoverable, the banks should be willing to cancel that part.
The tiny change that the Prime Minister, when Chancellor of the Exchequer, announced in this year's Budget discriminates for the first time between a commercial sale of discounted debt and a sale to the debtor Government, which therefore contributes to debt relief. I welcome that recognition that tax law can be used to encourage debt relief, but the change does nothing to encourage the many other methods of reducing debt servicing, nor to encourage banks to use the enormous provisions already set aside for debt relief up to the prescribed levels.
The Brady plan and this year's World Development Movement report called on Governments to use tax, regulatory and other measures to encourage debt relief, yet the Government, who say that they support the Brady plan, refuse to take even this tiny step. Our proposal would cost the taxpayer nothing and would help debtor nations, yet still the Government reject it. In practice, the proposal might save the Treasury money, as banks would not get tax relief if they refused to grant debt relief.
What objections to the plan could the Government possibly have? Someone may tell me that the charity laws are generous enough and that the banks can claim tax relief if they donate debts to charity, as the Midland bank did to the United Nations International Children's Emergency Fund. However, such donations are insignificant compared with the mountain of debt. I am not asking the banks for charity ; I am simply asking that they take their share of responsibility. Surely the tax laws should enforce that responsibility.
Some will argue that the banks cannot afford to give debt relief. Do hon. Members really think that the people in the debtor countries should pay if that means untold damage to their development? United Kingdom banks have now set aside a provision of up to 70 per cent. of their third world loans. They could afford to reduce them by that much if only there were a mechanism to bring that about. In 1988, the profits of the big four United Kingdom
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banks were £4.4 billion, and around 30 per cent. of that came from international operations. While the Third world suffers, the banks continue to rake in the profits.Some hon. Members may question why banks should have to share the costs of bad loans. To put it another way, why should millions of people overseas sacrifice their poor living standards, their health and their education to repay loans, many of which have brought them no benefit? Let us consider the example of the Bhattan nuclear power station in the Philippines, which has cost $2.3 billion so far. Loans have come from Barclays bank, among others, and interest payments on the loan are $350,000 each day. That is about $2,000 since I started speaking in this debate.
The power station stands on a seismic fault, and it is far too dangerous ever to be switched on. Just keeping it idle but safe requires 400 engineers. Allegations of corruption and malpractice are still being investigated. The commercial banks expect the Filipinos to pay for that monstrous monument to mismanagement. Why should creditor banks and contractors, who either knew or should have known what they were funding, not take their fair share?
I anticipate that Conservative Members will say, "Oh no. Voluntary debt relief is very nice, but it is not for the Government to intervene. Commercial debt is a matter for creditors and debtors." What rubbish. Governments have been intervening in the commercial debt crisis all along, but to protect the banks and not to help the poor. Taxpayers are already bailing out the banks with tax subsidies. The whole idea of the Baker plan and of the Brady plan was for Governments to support commercial debt reduction even if that were done through voluntary market measures. Debt deals go hand in hand with International Monetary Fund instructions on economic reform and are now often supported by the IMF or by the World bank. That Governments are intervening is not in question. The question is, "Is not it time that this Government started using regulations to help indebted nations instead of just boosting the banks?"
A new instrument of debt relief is essential because the debt relief measures used so far have been welcome small steps, but have not gone nearly far enough. The Brady plan has not even lived up to its own modest expectations. Nicholas Brady was aiming at a 20 per cent. reduction in commercial debt in three years, but the banks have been slow to make reductions in debt and in debt servicing. Hence the estimates of the International Institute of Finance show that debt reductions through debt swaps and other Brady measures in the current year amount to about $22 billion, only 10 per cent. of the total commercial debt owed by Latin America and the Caribbean. In contrast, David Knox, former vice-president of the World bank for Latin America, warned us only last summer that Latin America needs a 70 to 80 per cent. reduction in commerical debt if there is to be any prospect of sustained economic growth.
For the low income countries not covered by the Brady plan, a reduction in their $6 billion commercial debt is also vital. Although small compared to their official debt, the commercial debts are blocking desperately needed trade credits. The World bank's facility established to buy up those debts from the private banks at high discounts is not working because the banks refuse to play ball. We must now also consider eastern Europe. Poland is struggling with a $40 billion debt which brings the case for debt relief even nearer to home. Only Government action
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will ensure significant commercial debt relief. Only Governments, not banks, can take the lead, co-ordinate the banks and ensure that the burden is shared internationally.The central point is not difficult to grasp even if the implications are far-reaching. The Prince of Wales made the point well recently when he said :
"Most of all, we have to find a way of doing something about the burden of international debt. I really don't see how developing countries can be expected to achieve sustainable development and at the same time meet huge debt repayments."
If there is to be any hope for development in the 1990s, debt relief is essential. The Government should realise that there are several policies that they could and should implement. First, tax relief on provisions set aside by commercial banks should be made conditional on debt relief. Debts must be written down in practice, not just on paper.
Secondly, new procedures must be established to adjudicate on illegitimate debts involving allegations of corruption such as the $2.3 billion nuclear power station in the Philippines to which I referred.
Thirdly, the Government should consider establishing a special scheme to give additional debt relief to finance environmental protection measures in developing countries. That should apply not just to national parks but to major reforms such as agrarian reform aimed at reducing a country's dependence on exploiting and exporting natural resources and finding sustainable livelihoods for the poor. Fourthly, Governments should revise the instructions to the IMF and the World bank so that they can be more assertive in pursuing debt reduction.
Fifthly, the Government must back international debt relief initiatives with legislation and regulations that ensure that all commercial banks take their share of the burden.
Finally, new initiatives on commercial debt must be accompanied by substantial action on official debt. The new Trinidad terms are another welcome small step, but they leave out many countries. They also leave out the EEC and World bank debt and they leave too much debt still to be paid by the very poorest of all.
In his speech setting out the Trinidad terms for dealing with debt owed by the poorest countries to Governments and official agencies, the then Chancellor of the Exchequer said :
"I would look for a comparable response from the banks in the claims they hold."
If the Government want to show how seriously they take their new Prime Minister's words, they could start translating those hopes into regulations to promote reductions in commercial debt.
10.43 pm
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