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8.45 pm
The Budget introduces a cut in corporation tax. There are other benefits for corporations, which, to an extent, will allow companies to make up any shortfall that might occur as a result of these measures. In some cases, companies have been taking substantial pension holidays. They will have no difficulty in making up the shortfall.
Labour has said that, in the long term, there is a need for a new savings account for individuals which will build on the experience of TESSAs and PEPs, and will encourage long-term savings, which would be encouraged through tax relief. I very much look forward to the day when it will be introduced.
Mr. Gibb:
It is always a pleasure to follow the hon. Member for Dudley, North (Mr. Cranston), who always makes my speeches sound interesting.
I was disappointed that the Government felt unable to accept the amendment that I tabled. The measure will cause additional alarm in the pensions industry, as it is still reeling from the disastrous effect of the abolition of credits on dividends. The additional concern--the right hon. Member for Llanelli (Mr. Davies) hinted at this--is whether the Government ultimately intend to tax other income received by pension funds, such as interest income and income from property. They have already broken the principle that pension funds should be tax-free vehicles. The Labour party may now think why not go the whole hog and tax everything that a pension fund receives. That would be a nice little earner to fund the Labour party's next spending bonanza.
Mrs. Liddell:
Perhaps the hon. Gentleman will tell the Committee whether in his election manifesto he supported the previous Government's proposal to take away the tax-free contribution of employees' pension contributions. Does he believe that that is an effective way to deal with employees' pension contributions?
Mr. Gibb:
There was no mention in my manifesto on that issue. I shall continue.
I refer hon. Members to clause 19(4), which provides a definition of income. It says:
The Government's decision to confiscate 11 per cent. of the value of pensions has already had a very damaging effect on confidence--the confidence that people feel when they are paying into a pension fund that was formerly considered a safe haven.
Mr. Cranston:
Can the hon. Gentleman provide evidence to support his claim that the figure is 11 per cent?
Mr. Gibb:
The same calculations have been used before. It can be assumed, for example, that about 55 per cent. of the assets of an average pension fund are held through United Kingdom equities. If 20 per cent. is applied to that figure, the total is roughly 11 per cent.
Mr. Cranston:
All other things being equal.
As I was saying, pension funds were considered a safe haven, but they are now deemed a reasonable quarry for an ever-hungry Labour Government.
The Government have not given enough thought to the severe consequences of their decision to abolish tax credits on dividends. They have not thought about, for instance, the circumstances of someone who is self-employed or in non-pensionable employment and is already paying the maximum 17.5 per cent. of his net income into a personal pension fund. Thanks to this measure, that person will now need to increase his contributions to maintain the value of his pension, but the law prevents him from increasing his contributions beyond 17.5 per cent. if he is to receive a tax deduction. Why have the Government not raised the limit?
I note from page 46 of the Red Book that the Government have considered the impact that the Bill will have on companies. As is made clear in paragraph 2A.7, businesses will have to make higher pension contributions, and that will have an effect on corporation tax receipts. I can only say "Well done" to the Government--but what about the effect on local authorities? Why have the Government not made extra provision for higher local government contributions to employees' pension funds?
What will happen to councils that are already spending up to their capping limits? Should they cut services? Should they make people redundant? Or should they--as the Prime Minister suggested to the House, and as the Economic Secretary to the Treasury reiterated in the debate--simply rely on the fact that local government pension funds are not due for revaluation for a year or two, and do nothing about it until then? Is that the conclusion that the Government reached once they got round to considering the consequences of this measure? If so, I hope that no responsible local authority will follow that advice.
Why did the Government decide to allow higher-rate and basic-rate taxpayers to keep the tax credit on dividends, but refuse to allow non-taxpayers to reclaim it? Was it yet another deliberate attack on pensioners, two out of three of whom are non-taxpayers, or was it yet another unforeseen consequence of an ill-considered and ill-thought-out policy?
This one clause is the most damaging and far-reaching clause in the Bill. It will raise £3.95 billion in 1998-99 and £5.4 billion in 1999-2000. That is more than the
windfall tax raises, and it is an ever-recurring annual event. It is equivalent to a 3p rise in income tax. It will result in millions of people paying more into personal and occupational pension schemes, and in companies having to pay higher employer pension contributions. It will take 11 per cent. off the value of the nation's pension fund assets, and it will cause pension fund managers to switch whole swathes of investment--billions of pounds--out of equities and into other assets. As we discovered earlier, they will be transferring their money from authorised unit trusts, for instance.
That will force local authorities to sack staff or raise the council tax. It will undermine confidence in the sanctity of pension funds as a way of saving. It will increase the likely level of state dependency in the decades ahead, which will feature an ever-aging population. It vandalises one of the great successes of the past 18 years of Conservative government--the fact that the country has built up £650 billion in private pension fund assets.
The clause was introduced in a rush, as a wheeze to raise billions of pounds for future spending plans, but its unforeseen consequences are hugely damaging to pensioners and to the country as a whole. I urge hon. Members to throw it out.
Mr. Geraint Davies (Croydon, Central):
I would not describe that speech as interesting.
Let us put this matter in context. Who is the pensioners' friend? What legacy did we inherit, and what does that legacy mean for pensioners? On 1 May, we inherited a situation in which Britain was falling down the skills league and the earnings per head league, so that, of the 15 member states of the European Union, only Portugal, Spain and Greece were below us. Was that good in the long term for pensioners investing in UK equities? UK plc became weaker and weaker under the Tories because of under-investment, year after year, in human and physical capital. The big challenge we faced was to put pensions on firm ground for the future.
We also inherited an enormous public sector debt, which we had to control. The Tory legacy meant future tax rises, which threaten future pensions. That is the real economics of the situation. The short-termist, accountancy approach taken by the Conservatives has taken Britain down the economic league of countries. In the present unstable consumer boom, the economy is disabled by undercapacity due to under-investment, and there is a propensity for inflation to increase and for interest rates to zoom up, which is not in the interests of home owners or of investors.
As for Conservatives being the pensioners' friend, we all know that, in the past, because of their economic mismanagement, they increased VAT on fuel, which hurt pensioners, and then tried to do it again. More than half a million people were missold pensions, and that problem was never sorted out. We need no lectures from Conservative Members, given their legacy of short-term chaos and long-term inadequacy.
I have said before and I shall say again that the Chancellor boldly created conditions in which pension funds could prosper. They can prosper only if UK plc is profitable in the long term. The delegation of responsibility for setting interest rates to take the risk
premium out of investment in Britain and thus reduce long-term borrowing rates was a great move for pensions. The reduction of corporation tax to the lowest level in Europe, which will make the United Kingdom attractive again for international investment, was another brilliant move, as was the tax reduction for small and medium-sized enterprises. Those changes will help the prospects of pension funds that invest in British industry.
What is advance corporation tax and where did it come from? In the first instance, ACT was a neutral measure to speed up the payment of corporation tax. Under the previous Government, tax credits were used to subsidise dividend payments to pension funds. On the face of it, that seemed very good, but it created a distortion. The judgment about what proportion of operating surplus should go into dividends--into the City--and what should be reinvested in research and development, future products and profitability was distorted in favour of the former. Other major trading nations, such as Japan, the United States and Germany, do not have such a distortion: they invest more in research and development, in innovation and in new products. It is not surprising that those countries are going up in the skills league.
"'income', in relation to a pension fund, means income derived from investments or deposits held for the purposes of the pension fund".
Why does it say "investments" and "deposits" and not simply UK equities? After all, only UK equities are being taxed in the clause. Is this a Freudian slip, revealing the Government's long-term plans for pension funds? The industry, pensioners and people contributing to pension funds would appreciate a statement on that from the Minister--a statement that categorically rules out any intention further to tax pensions in the future, or at least during the lifetime of this Parliament.
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