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Mr. Darling: We went to the electorate and told them that we would introduce a windfall tax. Surely the hon. Gentleman will accept--I know that the Tories do not--that those companies were very rich in cash because they were sold at knockdown values. Privately, even some of those companies will admit that.
Mr. Kirkwood: For a variety of reasons, some of which I have adverted to, it is rough justice. I simply do not accept that attacking the utilities was fairer than going to the electorate and arguing honestly the reasons for raising the money. If the Chief Secretary is right--I hope that he is--that the aim is to create a virtuous cycle from which people will benefit, income tax increases would generate such a virtuous cycle in a manner that is much fairer and more progressive and transparent than the Government's windfall proposals.
I accept and do not complain that the proposals were in Labour's manifesto. The Government were absolutely open and honest about the tax and they deserve credit for it, but their openness and honesty do not persuade me that the tax is right. We have a clear difference of opinion on that.
Sir Robert Smith (West Aberdeenshire and Kincardine):
Would there not be another benefit if the Government had grasped the nettle and raised income tax? If they had, perhaps the Bank of England might not currently be under such pressure to raise interest rates, doing greater damage to the economy and to potential investment.
Mr. Kirkwood:
In future, I think that the Government will regret all those indirect and untoward effects. There is an honest difference of opinion between the Ministers and the Liberal Democrats, which I accept.
The Chief Secretary tried to justify the Government's position on withdrawal of dividend tax credits by saying that he wants to discourage companies from paying dividends rather than reinvesting profits. I understand that, and believe that he could have mounted a taxation argument to justify the Government's decision to move in that direction, but I do not think that the way in which the Government withdrew the credits, the short time frame over which they did so or the amount of money that will be raised, enable Ministers to found a sound argument.
If Ministers had said to the House, "We are going to do this. We will have proper consultation and, over time, we will move in that direction," we would have been willing to listen. However, grabbing £5 billion overnight, as the Government have done, might damage the trust that the Chief Secretary and the Government will require if they are to reform pensions in the United Kingdom. They will need that trust in future to work with pension funds. It was a bit thin for him to say that pension funds are flush with cash and that the withdrawal is a mere bagatelle meant to refine the taxation system. I was not persuaded by that section of his speech.
I have also re-read the Chancellor's exposition in which he tried to explain why he withdrew the credits. I was not convinced before, and I remain deeply sceptical of the Government's position. The same types of people, such as pensioners, will be hit by withdrawal of dividend tax credits as will be hit by the windfall tax. I think that withdrawal is another measure suggesting that the Chancellor is determined to avoid deployment of transparent, fair and income-related taxation, concentrating instead on complicated measures that might initially seem to be company taxes but which, in time, will be shown to have a huge negative impact on individuals' savings.
The broad impact of depriving pension funds of £3.5 billion per annum will require each of the 19 million members of active pension schemes to contribute an extra £190 per annum simply to maintain the same growth level. That situation is deeply worrying.
Mr. Andrew Rowe (Faversham and Mid-Kent):
Ministers have said that one of their intentions is to try to move from the short term to the long term. Is it not most likely that someone who sees the flow of dividends from
Mr. Kirkwood:
I agree that that is another indirect effect. I agree also with the Chief Secretary's view that we should consider such matters on a much more long-term basis. I will support any earnest attempts by the Government to achieve such a shift in emphasis. The hon. Member for Faversham and Mid-Kent (Mr. Rowe) is absolutely right: withdrawal of credits will not only have the effect that he mentioned but will undoubtedly cause other untoward and unforeseeable changes in people's behaviour.
I have two questions for Ministers, which perhaps the Financial Secretary to the Treasury will deal with in her reply. Is any work being done by Ministers to consider whether the rebate awarded to those who have opted out of the state earnings-related pension scheme will be upgraded to deal with the shortfall? There is a perfectly good case for that being so. If we do not do something along those lines, people may be tempted back into the state scheme, and that would not be sensible. It is an important question, which may well determine whether we support the Opposition motion. I am inclined to do so, but, if I had a positive answer from the Government on this point, I might be tempted to vote for them and increase the congestion in the Government Lobby.
The second question is equally important but slightly different, in that it refers to the impact of the proposals on local authorities. If the Government are to proceed as they have said, to be fair they will have to provide some compensation for local government settlements. The effect of the proposals on local government pension funds will be pretty dramatic and, in some cases, very dramatic.
It will cost my authority upwards of £1 million; that is an employer's contribution of nearly 3 per cent. of payroll, and will come out of capped expenditure in a local authority with a relatively small amount of money to play with in the first place. If the Government are to be fair in introducing a change of this magnitude, the position of local authorities must be dealt with in some way. Even an undertaking to consider the matter at some stage in the future would encourage me to think that the Government were being more responsible about these changes than appears superficially to be the case.
The fact that the official Treasury line seems to be that pension funds will be substantially insulated from the changes because they are "in surplus" worries me, because it assumes four things. First, that the existence of a surplus necessarily justifies a Treasury raid, despite the fact that the surplus belongs to the fund members and companies that have over-contributed. Surpluses are not necessarily a bad thing; they can be quite a good thing, but it is up to the companies and members of the fund to decide what to do when there is a surplus.
Secondly, the assumption is that a surplus is permanent and cannot be reversed or lead eventually to a shortfall whereas, in fact, it could do so in some circumstances. Thirdly, more than half of the 19 million people with occupational or personal pensions are in money purchase schemes. For them, the concept of a surplus does not exist because their ultimate pensions are entirely dependent on the size of the fund on retirement. The Government have not taken proper account of that fact.
Finally, the Government seem to assume that no pension funds are in difficult financial circumstances or under financial pressure. The implication is that no one will be badly hit by the proposed changes. I think, however, that some could be badly, perhaps even fatally, hit.
It appears that the Government have made the political judgment that pension funds are a soft target. They are seeking to raise an amount of money which is very difficult to justify and in a way which we might all regret. It is not fair on the companies involved. The actuarial revaluations that will be required and the higher administration costs and so on will drive a wedge between the Government and the pensions industry. The industry believes that the change is indefensible. There has been little or no consultation, and the industry believes that there is no logic or justice in the proposals. I am worried that that will make it difficult for the Government to make progress in this important aspect of public policy in future.
Mr. Terry Rooney (Bradford, North):
I congratulate the shadow Chancellor on initiating a debate on pensions, something that he singularly failed to do in his six years as Secretary of State for Social Security. It is nice to see him initiate a debate on such a vital issue.
When we consider pensions, we have to examine the history of occupational pensions, how they came about and their purpose. There is no doubt that the best type of pension scheme to be in is an occupational pension scheme on a final salary basis--
Mr. Greenway:
And which is funded.
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