House of Commons Hansard Debates for 6 Dec 1993

Mr. Straw : I said that that was the way it appeared. That is certainly not the reality and I am glad to note that the Financial Secretary confirms that. As my hon. Friend and other hon. Members have said, about 90 per cent. of family credit beneficiaries receive the maximum family credit. Therefore, it is impossible for them to have the benefit of any disregard. Will the Financial Secretary confirm that? If, as we suspect, that is correct, how will the benefit help those in greatest need- -those who receive the maximum amount of family credit?

Mr. Dorrell : I am afraid that the statistic is not quite right, because fewer than a quarter of lone parents on family credit currently receive the full benefit. We expect the new allowance to help about 150,000 families, including 50,000 lone parents, who are currently on income support.

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Mr. Straw : The Financial Secretary confirms, if not the proportion of beneficiaries of family credit who receive the maximum amount, the fact that those who do cannot benefit from the change.

Mr. Dorrell : That is correct.

Mr. Straw : My hon. Friend the Member for Sunderland, North (Mr. Etherington) made a good speech and my hon. Friend the Member for Streatham (Mr. Hill) reminded the House of Samuel Johnson's connection to that great constituency and to the House. I used to wonder when I read "The Life of Samuel Johnson" why he made so many trips to Streatham. I think that Mrs. Thrale was the answer, and the trips seemed to be more than in the course of duty.

My hon. Friend the Member for Liverpool, Broadgreen (Mrs. Kennedy) made a powerful speech, as did my hon. Friend the Member for Ipswich (Mr. Cann) who, for a long time, was the leader of one of the best Labour councils in the country. The singular exception as a recipient of compliments is the hon. Member for High Peak (Mr. Hendry) whose speech was full of pernicious and vacuous cliches.

I wondered how anyone could make a speech composed only of pernicious and backward cliches until I read the biographical notes in "The Times Guide to the House of Commons", to which the hon. Gentleman has acceded. That tells us everything we need to know about the hon. Gentleman and his little speeches. It tells us that he was a public relations consultant to a public relations agency. I would not normally mention this, but it should be known by a wider audience. We are told that, sad to say, the hon. Gentleman was political adviser to John Moore. I am not surprised that he has gone on to make as many mistakes as his former boss.

There will be an opportunity to debate the settlement on local government at a later date, but I wish to make three points about it on this occasion.

I notice that no Minister from the Department of the

Environment--apart from the Minister for Housing, Inner Cities and Construction, who has just walked in, having changed out of a dinner jacket in five minutes flat--has adorned the Government Front Bench during the debate.

There is no doubt that the so-called settlement announced by the Secretary of State for the Environment on Thursday involves a substantial cut in what the Government planned to spend at this time last year in 1994-95 and 1995- 96. I have no idea why the Secretary of State for the Environment should seek to protest about this. Table 5.4 of the Red Book makes it clear that he accepted a cut of £860 million in plans for 1994-95 and £1.5 billion in plans for 1995-96--a three times greater cut than that experienced by any other Department. The Secretary of State's idea of negotiations with the Chief Secretary must be to go into his room holding a white flag and with his hands up. I cannot think of any other tactic that would have produced such a poor result.

I know that the Secretary of State for Education is desperate for me to mention him, and now I do. He should know, as a former Minister at the Department of the Environment, that if that Department is good at one thing it is bad briefs. As to the effect of this year's and last year's settlement on jobs, he was badly briefed by the Department of the Environment and parroted the same sort of claptrap that the Secretary of State came out with on Thursday--

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that last year's settlement had not led to any loss of jobs. I did not talk about teaching directly but about local authorities as a whole, and I was castigated for implying that there would be a loss of jobs.

The Secretary of State went further last Thursday and claimed that there had been an increase in the number of jobs in Birmingham. I have information from Birmingham city council, which probably knows more about its job numbers than the Secretary of State for the Environment does. During the past year, there has been a decline of 1,800 in the number of people employed in that city.

Across the country during the last year, a number of local authority employees have lost their jobs. Excluding all those who have transferred to the further education sector, where they are no longer employed directly by local government, those who have transferred to the grant-maintained sector and those who have transferred to contractors who are undertaking jobs previously done by local government, the number of people who have lost their jobs in local government exceeds 20,000. It is likely that we when we see the figures from the Local Government Management Board they will be higher.

This time last year, the then Secretary of State, now the Home Secretary, was foolish enough to say that no job losses would arise as a consequence of what he announced last December. Will the Financial Secretary be as foolish as the Home Secretary was this time last year, and offer the same kind of commitment that no job losses will follow as a result of this settlement? In our judgment, there is no doubt that jobs will indeed be lost.

My third point concerns the Government's current policy of controlling the totality of local authority expenditure, including the amounts that authorities raise from their own resources. It is that policy which has caused the current financial crisis in local government. I have never disputed the notion that central Government--with the approval of the House of Commons--have the right to set the amount of grant that local authorities should receive and the manner in which they should receive it, and to cash limit that amount ; indeed, I fully support that notion, on which both sides seem to agree. What I dispute is the suggestion that it is right for the Treasury and the House to seek to control what local authorities spend from their own resources, and that authorities should then be accountable to the House and to Ministers rather than to their local electorates.

It should be borne in mind that

"the present procedures lump together expenditure for which Government has differing degrees of responsibility and this blurs the status of the varous aggregates"

of what central Government pay out by way of grant and what local government raises from its own resources.

"A further disadvantage is that by counting the total expenditure of local authorities in the planning total, insufficient attention is paid to the grants which central government provides to local authorities".

It is also worth pointing out that

"Very few other industrial countries plan public spending in this way. For federal states, such as Germany, the United States or Canada, this would conflict with their federal constitutions. But even in other unitary states such as France or the Netherlands the government generally makes budgetary plans only for central government expenditure."

Those three passages are taken from a White Paper entitled "A New Public Expenditure Planning Total", published in July 1988 by the

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year, his policy was the same as that of the Labour party : to exclude from the planning total what local authorities spent from their own resources.

Let me ask the Financial Secretary a question. If the policy so eloquently expressed by the present Prime Minister was good enough for him in 1988, why has it now been repudiated ? Why are we now in the absurd position whereby central Government, through a plethora of algebraic and other formulae, seek crudely to control the totality of local government spending ?

Let me put another important point to the Financial Secretary. There is no doubt that, in any one year, the Government's decisions on standard spending assessments and capping will be highly disruptive to the activities of local authorities, and that they cause jobs to be lost. Evidence increasingly suggests that, over time, such control does not affect the tramline of local government spending. That emerged from an important study conducted by the London School of Economics this time last year.

My hon. Friend the Member for Glasgow, Central made some important comments about VAT on fuel, which he described as a killer tax that would undoubtedly cause more people to die from hypothermia than would otherwise be the case. On a number of occasions, we have been challenged to say how we would raise the revenue. Several times before the Budget, my hon. Friend the Member for Dunfermline, East (Mr. Brown) went out of his way to point out that several billion pounds--not just £1 billion or £2 billion--could be saved by dealing with loopholes and tax avoidance.

The Chancellor looks up. His problem is that he fails to apply himself to detail. We now know that he has not read the Maastricht treaty ; nor has he read the appropriate accounts that were issued to the House last Friday. He damn well should, as should the Chief Secretary and the Financial Secretary. Paragraph 171 of the Comptroller and Auditor General's report, on the basis of information provided by the Inland Revenue, estimates the size of the hidden economy. It says :

"It is not possible to assess accurately the tax loss resulting from this hidden economic activity there may be an annual tax loss of several billion pounds per annum."

Those figures have come not from a press release of the shadow Chancellor, but the appropriation accounts published by the Comptroller and Auditor General with information from the Inland Revenue. Is the Chancellor repudiating what the Inland Revenue has told the Comptroller?

Mr. Kenneth Clarke : The hon. Gentleman is looking at the latest estimates of the kind of economy covered by black economy work in the home repairs, gardening and window cleaning parts of the economy. His hon. Friend the Member for Dunfermline, East (Mr. Brown) claims to be able to raise £2 billion extra corporation tax from closing loopholes. How much corporation tax is he going to get from off-the-books gardeners and window cleaners?

Mr. Straw : If the Chancellor had bothered to read the appropriation accounts, he would have seen that there is a big table of the amount of revenue of corporation tax that has been lost. It also states that the amount of income tax that has had to be written off has doubled from £883 million in 1991 to £1,694 million in 1992--a loss of £900 million in a single year.

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If the Secretary of State had read The Daily Telegraph, as I presume that he sometimes does, he would have seen an article on Friday that said :

"Britain's black economy' is now worth up to £48 billion a year with a subsequent loss to the taxpayer of several billion pounds". Instead of whingeing, the Chancellor should apply himself to sorting out the black economy and retrieving that money.

Mr. Kenneth Clarke : That is a quite different set of loopholes from those usually used by the hon. Member for Dunfermline, East. The collection of the hon. Member for Blackburn is even tattier than that of the hon. Member for Dunfermline, East who usually describes as loopholes his proposals for increasing taxation on successful British business. It is scratching about among uncollected tax that goes with every system when the hon. Member for Blackburn knows perfectly well that this Budget will raise about half a billion pounds each year in closing tax loopholes that he has not identified. That sort of thing cannot explain his total lack of economic policy at any time in his speech.

Mr. Straw : I am sure that the chairman of the Inland Revenue and the Comptroller and Auditor General will be pleased to know in the morning that the Secretary of State describes the 300 pages of that carefully written document as evidence that I have been scrubbing about. It contains the most serious evidence of the extent to which people are fiddling their tax. I have not made it up. It says that there may be an annual tax loss of several billion pounds per annum arising from the black economy and the Secretary of State has done absolutely nothing about that. Even The Daily Telegraph does not believe him. That was why it ran a story on Friday about tax evaders who cost Britain billions of pounds.

The hon. Member for Macclesfield (Mr. Winterton) made a speech that was supportive of the Government in comparison to his previous speeches. Normally, there is no praise whatever for the Government in his speeches and we feel like tossing him a Labour party card. Tonight, there was an occasional half sentence of praise along with a lot of damnation. He said that the United Kingdom needs a clear economic strategy for growth and that we do not have it. The hon. Gentleman, on this as on so many other issues, was exactly right. There was no strategy in the Budget for economic growth ; nor was there any strategy for industry.

It has been interesting to see how comments that were favourable to the Budget on the day after are now turning sour. The excellent Mr. Peter Riddell wrote in a studied piece in The Times this morning : "The Budget is flawed as a long-term strategy The package adds up to an exercise in political survival Mr. Clarke may only be sorting out the errors of the past, but that may not save him, or the Tories."

As we know, the Budget has raised taxation in breach of all the promises that the Chancellor and every other Conservative Member made at the general election. The Budget will increase dependency, and will not reduce it. It does nothing to create a nation at work to replace the nation on benefit created by the Tories. The Budget is based on promises cynically given at the general election and cynically broken ever since. The Budget is proof of two things only : that the Tory party is now a party of high taxation and that the Tory party is a party which will never be trusted again by the British people.

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9.40 pm

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : The speech by the hon. Member for Blackburn (Mr. Straw) called to mind what was once said about Lord Whitelaw--that the more he blustered, the less he believed it. We have just heard the seventh contribution by Opposition Front-Bench Members to the Budget debate, and I found the experience immensely depressing. Economic policy should lie at the heart of political debate in this House and each year's Budget should lie at the heart of debate about that issue. Yet throughout this Budget debate, Opposition Front-Bench Members have made no serious attempt to address any of the issues.

Of course, it come as no surprise that the Opposition do not embrace the strategy espoused by the Government. What is disappointing is that every speech by Opposition Front-Bench Members has been lightweight, frivolous and dilettante. Their speeches have not sought to address the issues confronting the House. The issues of the Budget affect the lives of millions of people, yet Opposition Front-Bench Members seem concerned more with sound bites than with policy. The debate has been depressing for the quality of their speeches.

Where do the Opposition stand, for example, on inflation? The Government have made their position clear. We have defined our inflation objectives and we have made clear how we intend to attain those objectives. Furthermore, we are able to say that we are attaining them and that inflation is under better control than it has been for a generation. The retail prices index has been at under 2 per cent. throughout the year. The last time that that happened was in 1960. The RPI, minus mortgage interest payments--MIPS--is currently running at about 3 per cent. lower than expected and lower than at any time since 1968.

Not only the performance, but the prospects are good. Earnings are rising at half the rate of the slowest year during the 1980s. That, coupled with good manufacturing productivity, means that for the first time since 1960 unit wage costs have been falling throughout the year. That is the vital bedrock for the future security of the British economy. As my right hon. Friend the Member for Horsham (Sir P. Hordern) said, we have grown used to the euphemism of "demand management" being used as an excuse to cover for inflation and deficit. The Government have made it clear in the Budget that they do not intend to retreat behind that euphemism any longer, and my right hon. Friend was right to draw attention to the importance of that point.

My hon. Friend the Member for Croydon, South (Mr. Ottaway) also drew attention to the importance of ensuring that the Government have a credible counter-inflation policy.

Where stands the Labour party on all those issues? It would be unfair for me to say that Labour Members have said nothing. In March this year, the hon. Member for Dunfermline, East (Mr. Brown) delivered this line :

"We know enough to eschew the notion that inflation can simply be ignored."

The Opposition have learnt that much. Within a year of becoming shadow Chancellor, the hon. Gentleman has learnt that inflation cannot be ignored. I suppose that we should be thankful for small mercies.

Ms Armstrong : The Chancellor told us in his Budget statement that inflation would rise. By how much does the Chief Secretary expect it to rise next year?

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Mr. Dorrell : The hon. Lady will have to make do with the Financial Secretary. The Government published forecasts on Budget day demonstrating that inflation would be well within the 1 per cent. to 4 per cent. target range throughout the forecast period covered in the Budget.

The hon. Member for Dunfermline, East has said that he eschews the notion that inflation can be simply ignored, but what more does he say about it? Does he endorse the Government's counter-inflation objective? Does he endorse the criteria which were set out as to how that objective will be delivered? If he does not endorse the objective or the criteria, what would he put in their place? All that we have as a substitute for a policy is what one might call "Brown's Law"--that interest rates should be fixed by the formula of x minus 2 per cent., where x is the prevailing rate of interest. Whatever the circumstances, interest rates--according to the hon. Gentleman--are too high. His calls for reductions in interest rates would be more persuasive if he could think of a single occasion in the past five years when he or any of his hon. Friends have argued for an increase in interest rates. It is always the Opposition's case that they are 2 per cent. too high. That is their case now, as it was right through the late 1980s. We now know that at that time the Opposition were telling us that there should be further cuts when in fact interest rates were not too high but too low.

We do not get much about monetary policy in Labour speeches either in this debate or outside the House. What of fiscal policy ? In the Budget, my right hon. and learned Friend made the Government's position crystal clear. The first table of the Red Book sets out my right hon. and learned Friend's plans for the elimination of the current deficit by 1997-98, and the total elimination of the budget deficit by the end of the planning period.

My right hon. Friend the Member for Worthing (Sir T. Higgins) expressed some scepticism about the unified Budget procedures. He is less than totally enthusiastic about those new procedures, but I must say to my right hon. Friend that the new procedures have allowed us, in preparing and presenting the Budget, to demonstrate the proper balance which should exist between spending and revenue plans. Table 1.1 of the Red Book allows my right hon. and learned Friend to show how he intends to eliminate the current balance and to set clear plans to eliminate budget deficit altogether. That will be done by reducing the share of national income taken by current spending and by increasing the share of national income accounted for by Government revenues within a reasonable period.

The unified Budget that my right hon. Friend the Member for Worthing is sceptical about poses a challenge to the Opposition as well--and a challenge to which, on the strength of their contributions to the debate, every Opposition Member has failed to rise. Do the Opposition agree that we need to plan to eliminate the current deficit ?

Mr. Peter Mandelson (Hartlepool) : Yes.

Mr. Dorrell : The hon. Member for Hartlepool (Mr. Mandelson) says yes, so that is something. I must tell the hon. Gentleman that every one of his hon. Friends on the Front Bench sat motionless. They do not know whether they are in favour of eliminating the Budget deficit.

Mr. Straw : When the hon. Gentleman referred to the right hon. Member for Worthing (Sir T. Higgins) I thought he was about to deal with the right hon. Gentleman's more

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substantial criticism of the Budget. The right hon. Gentleman said that the Government were planning to take out by way of reducing the PSBR "too much, too soon". Will the Financial Secretary comment on that criticism of the Government's PSBR plans from the right hon. Gentleman ?

Mr. Dorrell : I am sure that it was a slip of memory, but the hon. Member for Blackburn did not mention in his speech the subject that was raised by my right hon. Friend. The hon. Gentleman did not express a view as to whether the Government were moving too fast or too slowly in eliminating the budget deficit. He did not set out an alternative strategy to the House, nor did he tell us whether the budget deficit is too high or too low. The hon. Gentleman did not say what should be done about it. All that we have heard from the Opposition is a variety of different ways in which they think that the Government should spend more of the taxpayer's money. The hon. Gentleman asked me a direct question about job prospects in local government which I will answer. In looking to the future for local government, the important thing is that we should ensure that the opportunity exists for services to be maintained and improved at acceptable cost to council tax payers. That is why, in a year in which the Government, in the central planning of their expenses, have insisted on a zero cash increase, with increases in pay paid for by increases in productivity, we are planning for a 2.3 per cent. increase in local authority expenditure. That will allow local government the opportunity to continue to see services improve without imposing unreasonable costs on council tax payers. That is the right set of objectives to give to local government in the coming year.

Mr. Straw : I am grateful to the Financial Secretary for dealing with part of my question. I raised a more fundamental issue, however : why are the Government now following a policy that is directly opposed to that followed by the Prime Minister when he was Chief Secretary and published in the White Paper in 1988? All the points that the Financial Secretary has just made were known to the Prime Minister then, so why was the policy changed?

Mr. Dorrell : For reasons that were set out clearly when we published the rationale for the new control total last year--namely, that we thought it important to have a more effective control on the total level of public expenditure accounted for by the state in its various forms in order to deliver the reduction in the share of national income accounted for by expenditure set out in table 1.1 of the Red Book--an issue about which the Opposition have eschewed any comment during the debate.

Whenever he is challenged about the Opposition's plans for fiscal policy or particular spending or tax proposals within the fiscal balance, the hon. Member for Dunfermline, East produces the same answer. He tells us that growth will solve all the problems--that there will be no difficult choices, just the opportunity for continued soft-focus sound bites. There will be no choices, no rough edges, no difficult decisions to be made.

As the shadow Chancellor puts so much weight on the prospect of growth so fast that it would absolve him from having to make any difficult decisions, we might have expected him at some time during his various utterances to let us have some ideas about how he would generate growth. What did the shadow Chancellor have to say about how growth will be created in the economy? The best that

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one can say of his utterances is that they are misleading, and most of them are either misunderstandings or plain wrong.

There is no better way of illustrating that than to look at what the shadow Chancellor had to say about investment. Hon. Members on both sides of the House agree about the importance of investment. Despite what the hon. Member for Dunfermline, East said, the Government's record is rather good. If we compare the most recent six years--the six years from 1987 to 1992-- with the six years when the Labour party was last in power, we find a 49 per cent. increase in real terms in business investment and a 70 per cent. increase in real terms in investment in plant and machinery. In the 1970s, United Kingdom investment grew at a rate roughly two thirds of the G7 average, whereas in the 1980s it grew at a rate roughly 175 per cent. of the G7 average. The Government's record of promoting and creating the circumstances for growth of investment-- [Interruption.] My hon. Friend the Member for Macclesfield (Mr. Winterton) may be sceptical about some aspects of it, but he cannot argue with the figures, which show clearly that the investment track record of the Government through the 1980s boosted our investment performance both as compared with our own previous record and as compared with that of our G7 competitors.

Mr. Richard Burden (Birmingham, Northfield) : Would the Financial Secretary care to comment on housing investment? What does he think will be the consequences of the 8 per cent. cut in housing investment in the Budget for my constituency, where residents of the Egghill estate are told that they should turn on their taps or open their windows in the middle of December because that cuts down on condensation? Birmingham needs £1.3 billion of housing investment just to do up its housing stock. Where is the housing investment that will enable Birmingham to do that?

Mr. Dorrell : I was talking about business investment, which does not include housing investment. I must tell the hon. Member for Leicester, East (Mr. Vaz) about housing investment. We intend to deliver--in fact more than deliver--the manifesto commitment that we gave for new housing development. Furthermore, we shall do that by involving the private sector, which is something that the Labour party never counts in any of its calculations for the development of investment or economic activity.

When looking at how one promotes investment, it is important to understand why we saw such an improvement through the 1980s in this country's investment performance. The Government, including my hon. Friend the Member for Macclesfield, believe that the way to promote investment is by promoting profitability and seeing the opportunity for companies to make profits and achieve a return which attracts new investment in the future. That is why we have created the lowest rate of tax on corporate profits anywhere in the developed world. We also believe that to attract investment into an economy it is necessary to ensure that the labour market is sufficiently flexible not to frighten off internationally mobile investment projects. It is because we have put in place the incentives and the necessary steps to create that regime that we attracted 40 per cent. of all inward investment into the EC in the late 1980s.

How does that compare with what the Labour party proposed? Although I have said that we have not heard

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much from the Labour party about its monetary policy, we have not heard much from it about its fiscal policy. We do, of course, repeatedly hear from it what it proposes to do, for example, on social costs. We heard from the Leader of the Opposition when he went to the TUC meeting in September. He said that he was proud that the Labour party fought the last election on the policy of a national minimum wage, and that it remains a cornerstone of its new deal for low-paid workers.

It may be that, but it will not do much for investment. Again at that meeting, the Leader of the Opposition reiterated his support for the social chapter and furthermore promised a new right for trade unions that did not exist even in the 1970s : that employers would, under a new Labour Government, be legally obliged to recognise trade unions.

I wonder how that will play with those mergers in multinational companies who are trying to attract internationally mobile funds to come and invest in Britain. The reality is that when the Labour party reduces from generality to detail, every one of its details would have the effect of frightening off the investment that it says that it wants.

That is not all. The Labour party says it wants investment, but who are the big investors in Britain? Let us start with the privatised utilities. The Labour party wants to put a windfall tax on them.

Mr. Straw : Lower their prices.

Mr. Dorrell : That is exactly what the Labour party does not want to do. It wants to suspend the regulation and impose a windfall tax to safeguard the high prices so that it can raise extra tax out of what it calls excess profits. By its approach to the utilities, the Labour party would undermine the investment intentions of those privatised utilities.

That is part of a wider strategy, as my right hon. and learned Friend the Chancellor said earlier. It is not just the utilities that would face a higher tax if there were a re-elected Labour Government. When the hon. Member for Dunfermline, East wants to raise tax from business, we now know that he calls it a loophole.

I shall tell hon. Members on the Opposition Front Bench about corporation tax. The hon. Member for Dunfermline, East says that he wants to end underpayment of corporation tax. In plain English, he wants to put up the rate of corporation tax. He wants to abandon the foreign income dividend scheme. In plain English, he wants to

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insist on double taxation of profits of international companies based in Britain. He wants to end ACT on scrip dividends. For the first time--this is an important breakthrough for the Labour party--it is criticisng British companies, not for paying too much in dividends, but for paying too little. The ACT, it says, should be imposed because those companies are artificially depressing their dividends. Through all of those measures, the story is consistent. It is to impose tax on business, blind to the implications of that extra tax burden for the investment plans of British business.

This has been another disappointing day, with no hint from either of the Opposition Front Bench spokesmen on monetary policy or fiscal policy as to where they stand on the supply side changes. The only policy package with any detail sketched in is their commitment to reregulate the labour market- -the one policy that would be damaging to economic prospects and investment in business. Every time they face a choice on economic issues they go the wrong way. They are a Jekyll and Hyde Opposition--in favour of investment and against investors, in favour of business and against business men, in favour of wealth and against wealth creation. They can never bring themselves to face choices and make the right choice to deliver the recovery that they say that they want.

It being Ten o'clock, the debate stood adjourned.

Debate to be resumed tomorrow.

PARLIAMENTARY COMMISSIONER FOR ADMINISTRATION Ordered,

That Sir Anthony Durant be discharged from the Select Committee on the Parliamentary Commissioner for Administration and Mr. Anthony Coombs be added to the Committee.-- [Mr. Kirkhope.]

HEALTH

Ordered,

That Mrs. Jacqui Lait be discharged from the Health Committee and Mr. Michael Bates be added to the Committee.-- [Sir Fergus Montgomery, on behalf of the Committee of Selection.]

SOCIAL SECURITY

Ordered,

That Mr. David Willetts be discharged from the Social Security Committee and Mr. Bernard Jenkin be added to the Committee.-- [Sir Fergus Montgomery, on behalf of the Committee of Selection.]

TRANSPORT

Ordered,

That Mr. Peter Luff be discharged from the Transport Committee and Mr. James Hill be added to the Committee.-- [Sir Fergus Montgomery, on behalf of the Committee of Selection.]

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Fund Management

Motion made, and Question proposed, That this House do now adjourn.-- [Mr. Kirkhope.].

10 pm

Mr. Austin Mitchell (Great Grimsby) : I rise to such an enthusiastic leaving of the audience to call, in this brief Adjournment debate, for a separation of roles between fund management and dealing in currency trading so that fund managers in currency trading are not required to trade in- house where they are at the mercy of the in-house dealers. I ask this so that we can protect the consumer and preserve the integrity of the financial markets. The particular instance that I wish to outline arises from information brought to my attention by a young man, Evan Souliotis, former manager of the American Express bank international currency fund and its discretionary management programme. The first fund started with $18 million, but when he took it over, it had dwindled to $8 million, and the second was a new fund, which he created, with $2 million at its disposal.

Souliotis found when he took over the fund and began the new fund that, as the manager charged with the responsibility of getting the best deal for the clients of the fund, he not only had to do his dealings in-house but, in a situation that amounted to playing poker, the opponents in the game-- the spot dealers in the currency trading room--knew his hand, and knew his expectations from the technical information that he had to produce each day.

Therefore, the dealers had the advantage over the fund manager, and they were dealing with him in a monopoly situation. They did not have to compete for his business : he had to go to them, and they could give him the prices that suited them, rather than the keener prices that would have been obtainable had he been able to deal outside where the spreads were wider.

Furthermore, the dealers could use him to generate profits for themselves. They were required to take two points off every trade for their own trading accounts, a requirement which the customers were not told. In addition, they could hypothetically take points for themselves, and it looked from the history of the fund, the records, as though that had been happening. That was a monopoly in which the fund manager was required to deal through in-house dealers and could not go outside for better prices, and exploitation was possible, theoretically and in practical terms.

We are dealing with huge sums. Let us take a $10 million trade, which is levied two points in and two points out, and add a hypothetical five points each way for the dealer. That is 14 points going astray on the trade, which would generate $10,000 a day in points subtracted from it. That is the equivalent of 22 per cent. interest for that fund over the whole year--all lost to the customers of that fund, and all pretty well untraceable. There are voice tapes, which are kept for two to three months, but they do not show the comparative prices outside. There is also an audit trail, but it is difficult to trace anything--not least, what competitive prices were at the time that a trade was made. In a monopoly, there was no opportunity to go outside--as American Express itself did, when currency trading, in going outside its own dealing room.

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The situation was open to exploitation and to the churning of customers' accounts. That churning clearly went on before Souliotis took over, which is why the fund dwindled from $18 million to $8 million.

Having quickly assessed the situation, Souliotis restructured the fund. He lessened its exposure to the markets and cut the number of trades to stop the churning. He also kept a close eye on the dealing room, going in to secure better terms and narrower spreads for his customers. He made himself a nuisance, but the fund's performance improved. Its share price rose month by month and was profitable for the fund's customers over the six months that Souliotis ran it. That profitability, however, was at the expense of the bank, which ceased to make the previous easy profits from churning and points on each trade. Eventually, Souliotis was kept out of the dealing room, and then was fired.

Not unnaturally, Souliotis went to the regulators, and must have stumbled with sheer delight into that thick--in every sense--and dense undergrowth of regulatory structures that we call self-regulation. find out what is happening in the City, particularly in dealing rooms. It is a fairly closed freemasonry, whose secrecy is paralleled by the profits involved in maintaining that secrecy.

We know little of that closed culture other than when we see on our television screens flashing lights and people shouting at each other. The real nature of those dealings is a closed book for most of us. We should be grateful to Souliotis for telling us what happened in this case.

The Securities and Futures Authority agreed that

"opportunities for such malpractice appear to be many." It agreed also that the audit trail that is typically produced makes the detection of such abuse altogether more difficult. It added, "Sorry, it's not our business-- it's for the Bank of England." The Bank of England adopts a rather Nelsonian attitude to regulation. At first it said, "It's not our business, either." Later it said, "This complaint comes from a disgruntled employee and should be treated as such."

When the former Member for Birmingham, Selly Oak--Mr.

Beaumont-Dark--and I took the matter up with the Bank of England, it assured us that it had inquired thoroughly into the matter. However, the bank's solicitors stated :

"To the best of our client's knowledge no investigation is current or was carried out by the Bank of England."

So much for its thorough inquiry.

That was hardly surprising, for when we met Eddie George, then deputy Governor, he did not appear to me to understand commercial dealing rooms. He had spent a lot of time in the Bank of England's own dealing room, but that must be like a gentleman's club compared with the realities of commercial dealing rooms. Mr. George appeared to believe that such dealing rooms behaved like boy scouts--that one only had to tell them what to do, order them to be good and instruct them to operate at arm's length and they would immediately do so. He seemed to assume that they were honourable people.

I felt some disappointment after treading through this country's regulatory structures. The oversight committees of the United States Congress took a much keener interest in the evidence that came to light and that I was able to

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