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8.30 pm
The Economic Secretary and other Labour Members will not be surprised to hear Liberal Democrats saying that it would have been more honest for the Government
to put up income tax rather than finding a back-door method of doing exactly the same thing unevenly. Effectively, that is what is happening. My worry is that the Government think that taxing the corporate sector does not affect individual citizens, when clearly it does. Certainly, the way in which this measure is being applied will do so. I might ask the Economic Secretary whether that is wise or whether a compensating adjustment is coming down the track.
The Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field), is charged with a comprehensive review of social security and pensions, which could clearly lead to a recommendation--most of us expect that it will--that individual citizens should make a substantial compulsory contribution to the pensions industry to achieve future top-up pensions to replace SERPS and provide care in the community and for people's care in their old age. As a consequence, the financial institutions will, potentially, have massive additional income. Perhaps they are being persuaded to back off and swallow this measure quietly because of the benefit that may come at a later date.
If that were the case, it would be regrettable, because those are real issues--one for the long term and one for the here and now. The here and now is that people will almost certainly have to find additional money to get the same pension benefit that they started paying for when the tax relief was built in.
I have some sympathy with the argument that tax reliefs are a distortion in the marketplace. I hope, however, that the Economic Secretary will not quite follow the line of argument of the hon. Member for Pontefract and Castleford, who has the ear of all sorts of people who influence policy and who suggests that all tax reliefs are a bad thing and a distortion and should be abolished. Or are only some of them bad?
What is a good or a bad tax relief is a subjective analysis, as is the effect of such reliefs. It has always been an accepted part of Government policy that tax and tax reliefs are not merely revenue-raising powers but are about altering people's behaviour--for example, to encourage saving or to discourage the buying of polluting equipment, and so on. Ministers put forward those arguments on many occasions. Indeed, the Chancellor of the Exchequer chose to argue that the massive and additional increase in the petrol tax in the Budget was an environmental measure. Of course, it was nothing of the kind--it was a revenue-raising measure. The argument used to justify it was that it would discourage the use of cars, which was good for the environment--the consequence is not arguable.
I hope that the Government do not believe that all tax allowances are equally bad. It would be helpful if they gave us a broad indication of which allowances they think are good and which bad, so that we can anticipate those that might be strengthened or introduced and those that might be abolished or reduced. We are all beginning to have to second-guess Government thinking.
This is a serious issue. I do not dispute that the Government have some valid arguments on their side, but introducing the measure at short notice, without full consultation and the opportunity for all the implications to be assessed and for those affected to get answers to their questions, was not wise, desirable or the right way to do things.
I hope that I can give the Government the benefit of the doubt--they thought that in their first Budget they had to do something that would bring in extra revenue, that this was the way to do it and that they were likely to get away with it now. We have on the record Ministers' suggestions that, in future, they intend to consult about tax changes. They intend to have a consultation on the future of corporate taxation. I hope that we will be able to have proper, informed debates in the House and with organisations and interested parties outside it, so that never again will a major tax change, which will bring in £5 billion a year for the foreseeable future, be forced through the House in a matter of days before any of us have had a full opportunity to assess its implications. Fundamentally, that is why we will vote against the clause.
Mr. Cranston:
I should be more persuaded by the Opposition's claim that they are the pensioners' friend if my hon. Friend the Economic Secretary to the Treasury did not have to spend so much of her time clearing up the mess left by the previous Government because of the huge misselling of pensions. I should also be more persuaded if the Office of Fair Trading had not published a report this morning on the nature of the pensions industry and the extent to which it has not been adequately regulated.
Opposition Members have mentioned our manifesto in this and previous debates. I am prepared to give way if they can tell me how many of their 22 tax rises between 1992 and 1997 were mentioned in their 1992 manifesto--I suspect, none.
The background to this measure is this country's imputation system. We attempt to avoid the double taxation of dividends. Other countries do not have the same approach. ACT is a product of our system. For example, the United States does not have our imputation system.
Mr. John Swinney (North Tayside):
Is the implication of the hon. Gentleman's opposition to double taxation that he wants to wipe away the double taxation treaties that this country has with a variety of other countries, to try to get some consistency in the taxation system?
Mr. Cranston:
The hon. Gentleman completely misunderstands. The imputation system was designed to avoid double taxation in the sense of taxation when the moneys are in the hands of the company and then in the hands of shareholders when they receive dividends. That has nothing to do with double taxation treaties between different countries.
As the American experience demonstrates, our system is not universal or sacrosanct. The result of our imputation system, however, is that, in the case of pension funds and charities, a tax credit is paid. Base rate taxpayers do not have to pay anything in taxation on dividends because of the system, but pension funds get paid a credit.
As my hon. Friend the Member for Pontefract and Castleford so lucidly explained, that leads to a distortion in the way in which decision makers, such as pension funds, invest. They invest in United Kingdom equities to a greater extent than they would otherwise have done because of the tax credit. It also means--this is one of the themes of the Office of Fair Trading report--
Mr. Gibb:
Will the hon. Gentleman explain his last statement, which I, and I suspect many hon. Members, do
Mr. Cranston:
I am pointing out that the measure affects the portfolio decisions of pension funds. As we have seen in recent days, the speculation is that pension funds will turn from UK equities, for example, to commercial property, foreign equities or gilts.
The OFT report has underlined that the present system gives protection to inefficient fund managers. We know that fund managers have been able to produce good results and to charge high fees--I must be careful, because of the previous occupations of some Conservative Members--and we know also that fund managers have been able to earn extremely large salaries, even when particular funds have performed less well than funds that have merely tracked the FT stock exchange index. The current system leads to distortions in investment decisions taken by pension funds and to other inefficiencies.
Mr. Denzil Davies (Llanelli):
I do not follow my hon. Friend's argument. It has already been said that pension funds used not to pay tax on dividends, rents from property developments or gilts. In future, they will pay tax on dividends but not on rent from property development and gilts. The anomaly, if there is one, lies in the fact that until now all the investment income of pension funds was tax-free. That has nothing to do with the imputation system.
Mr. Cranston:
I find that intervention helpful. If my right hon. Friend reads the report of my speech in Hansard, he may follow my argument, which I hope and trust is correct.
The economic health of pension funds turns in the long run on the state of the economy. In other words, it turns on general economic conditions, including the stable long-term growth of the economy, and the Government have taken steps to ensure that there will be stable long-term growth. My hon. Friend the Member for Pontefract and Castleford has alluded to some of the measures that have been taken, such as the steps to ensure the operational independence of the Bank of England.
In assessing claims of the losses that pension funds will suffer, we must give some attention to how pension funds are valued, which is on a discounted cash flow basis. In other words, actuaries measure cash assets earned through dividends, which are discounted in accordance with ordinary accounting practice. There is growing pressure from international accounting groups to move away from that approach and to use market valuation, which is to value the assets and then to adjust them, for example, for inflation.
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