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Mrs. Liddell: The hon. Gentleman makes an interesting point. Is not the logic of his point that it is up to companies to decide whether it is in their long-term interest to retain or distribute profits? The tax credit system we seek to abolish put a distortion into the system. It created a subsidy for the distribution of profits, and thereby removed the freedom of company boards to determine their long-term future.
Mr. Davies: I can tell the hon. Lady that I have sat on the boards of companies, and not for one moment would I have been influenced by that consideration. I would always have adopted the first principle, and I would adopt it now if I were on the board of a public company. I would say that we will determine the pay-out ratio on the basis that we pay out everything to our shareholders, except where we believe that we can reinvest at equivalent risk at equivalent returns--or, of course, at lower risk or better returns.
Beyond that, we have an absolute fiduciary responsibility to hand the money back to the shareholders to whom it belongs. They can then decide how to reinvest it themselves. I would leave tax distortions out of the matter.
Mrs. Liddell:
The hon. Gentleman makes my point for me. Companies are in the best position to judge what is
Mr. Davies:
The hon. Lady has not been listening to me; she has been weaving a web of fantasy of her own. I said nothing of the kind. I said that there were two possible sets of consequences relating to the pay-out ratio. As a company director I would wish to operate on the basis that there would no change in the pay-out ratios of British companies as a result of the abolition of the dividend tax credit.
The hon. Lady implied that that was the basis on which good management would operate, and I agree with her. If she accepts that, she pulls the rug out from under the feet of the hon. Member for Dudley, North, who argued that one of the supposed benefits of the abolition of the dividend tax credit would be an increase in the retention ratio.
I suggested a second scenario, in which the company was being slightly less objectively and professionally managed. There, the effect of abolishing the dividend tax credit would be to increase the pay-out ratio in order to satisfy the demands of a majority of shareholders.
Yvette Cooper (Pontefract and Castleford):
Does the hon. Gentleman accept that there will be pressure from shareholders on the decisions that companies make, and that those shareholders in the form of pension funds will have an incentive to call for dividends to be paid to them, rather than their potential dividends going into the long-term future of the company and the increase in the value of that company over time?
Therefore, the distortion comes via the shareholders. Even if other board members are as far-sighted as the hon. Gentleman, the shareholders will put pressure on them to pay out now, rather than to hold the money in investment for the long-term future of the company.
Mr. Davies:
It is typical of traditional Labour myopia about industry to see some antithesis between shareholders and companies. There is no antithesis at all. A company consists of nothing more or less than its shareholders. The members of the company are its shareholders. The board of directors is there only in a fiduciary capacity to manage the shareholders' money. There can be no antithesis or conflict arising between them in a properly managed company.
The rest of the hon. Lady's point supported my argument that the effect of the abolition of the dividend tax credit will be that some shareholders--the present gross funds, the institutional shareholders and the poor non-tax-paying individuals whom I mentioned earlier--will put pressure on companies to increase the pay-out ratio over what the board of directors would normally consider its responsibility to decide.
Mr. Heathcoat-Amory:
Does my hon. Friend recall that, when there was a 5 per cent. reduction in the ACT credit, the consequence was that, in some cases, pension funds, which own many of the companies, required a higher distribution to compensate for the tax credit that they were no longer receiving? Will he confirm that he has observed the paradoxical element in the proposals, which may lead to a higher distribution, higher dividends
Mr. Davies:
I agree with my right hon. Friend. He touches on a minor but intriguing theme of the Budget. When the Labour party goes astray, it usually does so by compounding an initial error made by a previous Conservative Administration. It is true that previous Conservative Administrations made a few mistakes, otherwise I suppose that we should still have a Conservative Administration. The Government seem to have said in so many aspects of the Budget, "You sinned a little, so we will sin a great deal more."
If the Government had examined the consequences for company pay-out policy following the 5 per cent. reduction in ACT a few years ago, they would have seen that those consequences were exactly the opposite of those advanced by their propaganda machine and so ably represented in the debate by the hon. Member for Dudley, North.
It has taken some time to deal with the illusions betrayed by the hon. Member for Dudley, North, but I shall return to the essence of the clause and the need for the amendment. One hopes that, before the Treasury made such a disastrous proposal, it considered the consequences of abolishing a dividend tax credit. As we shall probably find later, when we discuss foreign income dividends, little consideration and no consultation took place. The Government must confront the damage that would be caused by the Bill, which was not anticipated and which gives rise to confusion and consternation.
As for the impact on pensions, one can distinguish five consequences that flow inevitably from the abolition of dividend tax credits. The first is that personal pensioners and those with defined-contribution, as opposed to defined-benefit, occupational pensions--there are millions of people in those two categories--will be significantly worse off.
It simply will not to do to say that, although those pensioners are worse off because of the abolition of dividend tax credit, they are better off because the stock market has done well over the past few months. That would be thoroughly hypocritical, because the Government have not the faintest intention of reintroducing the dividend tax credit if the stock market should cease to perform so strongly.
When we introduce tax measures, we must always consider the effect if other things remain equal. If this measure is implemented, those two categories of pensioners--millions of our fellow citizens--will be decisively worse off. We heard an estimate of 12 per cent., which more than justifies my saying significantly worse off. There is no escaping that fact.
The second category is the defined benefit occupational schemes--the traditional occupational schemes in this country. Again, money is being taken away from them. There is no doubt that someone will be worse off; who will it be? In so far as there is a surplus in those funds, some or all of which might have been allocated to pension benefits of one kind or another, clearly the pensioners in those schemes will be worse off.
In so far as those pension schemes go from an actuarial surplus to an actuarial deficit because of the necessary writing down in the prospective rate of return on the funds
that every actuary will have to undertake, the companies that have established those defined benefit schemes will be worse off. Under the law, they will have to make additional contributions.
I complained about that on Second Reading. I said that it was quite irresponsible for the Government to introduce a proposal that will necessarily have a considerable impact on corporate post-tax profitability without making any estimate of the impact on the corporate sector: to what extent it will reduce corporate profits that are available for investment or distribution. Clearly, the effect will be more than significant--although we do not know whether it will run into many hundreds of millions or many billions of pounds a year.
It is particularly disingenuous of the Government not to make such an estimate when they make much of the fact that they have reduced the nominal rates of corporation tax in the Budget. It is all very well saying that they will reduce corporation tax by 2 per cent., but if not only the utilities, which are targeted in a discriminatory way and face a substantial increase in their corporate taxation, but other companies, which will have to make additional, unexpected and unbudgeted pension contributions, have a new levy imposed upon them, the net position will be a great deal worse. The net impact of the Budget on the corporate sector will be, without the slightest doubt, negative to the tune of several billions of pounds--although we do not know by how many.
I invite the Economic Secretary and the Paymaster General to intervene in order to give the House that figure. I shall gladly give way now. The hon. Gentleman merely smiles sheepishly: he has not the faintest intention of satisfying my curiosity. There are two reasons why he will not do that. First, he does not know the figure--in which case, he has not done his homework properly. It is a disgrace that the Treasury should advance proposals of that kind without conducting some elementary costing exercises. Secondly, he may know the figure, but he does not want to tell me. He knows how unpopular the news would be for British industry, which would read it in Hansard tomorrow morning--or perhaps the figure would be announced on the airwaves well before then, as I suspect it would be pretty sensational.
The more reticent, shifty and evasive the Government become every time I question them about this point, the more I am forced to conclude that they have something nasty to hide. If the figure is not calculated by the Government, it will be calculated in due course by analysts in the City and by the actuaries of the various pension funds involved. It will take many months to aggregate the calculations, but, when they are released, the 1997 Budget will be viewed as a grievous one that imposes substantial burdens on industry.
Despite all the rhetoric and the Mandelson propaganda about the Government's being friendly to business and wanting investment, their deeds totally belie their words. My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke) is correct: it is only a matter of time before the British people realise how badly they have been taken in, and then there will be political retribution for the guilty.
A third inevitable consequence of abolishing dividend tax credits and reducing the yield from pension savings will be fewer pension savings. That is an automatic
consequence: if one reduces the yield from a particular investment, one reduces the volume of that investment. We shall have fewer pension savings, and no doubt fewer savings as a whole, in this country. I pointed out on Second Reading what a curious move that is at a time when the Government claim that the economy is overheating and when, logically, they should encourage, rather than penalise, savings. Considerable aggregate economic damage will flow from that action.
The fourth important consequence has been mentioned this afternoon. Some funded occupational pension schemes with defined benefits are in the public sector. Local authorities are a good example--civil servants are not, because they have a pay-as-you-go system. Public sector occupational pension schemes are funded, and therefore will lose the income that is currently represented by dividend tax credits. Some schemes will go into actuarial deficit, or surpluses--where they exist--will decline.
4.45 pm
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