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8.19 pm
Mr. Alan W. Williams (East Carmarthen and Dinefwr): I welcome the content of the Gracious Speech, including the proposed legislation on the working families tax credit. I have not looked at it in detail, but I am fully aware that it is targeted on low-paid workers and will provide up to £220 a week free of tax. That will mean a minimum of £5.50 an hour for a low-paid worker with one child and of £6.40 an hour for an adult with two children, and that will help to make work pay and to eliminate the poverty trap. I very much welcome those measures.
In the economic arena, I welcome the Bill on financial services and the markets. We know that much better regulation is needed in the City--in the stock exchange and in Lloyd's--and I am sure that the Bill will accomplish that.
The debate has been general, covering many aspects of the British and world economies. I shall direct most of my comments to the prospects for our economy over the next few years. We are all aware that a difficult year lies ahead, partly because of the high pound which we inherited but which went even higher as interest rates were increased and as sterling became a safe haven for those speculating against the euro and the Asian currencies. However, we are now recovering from those problems. Interest rates are falling and the pound has dropped 10 per cent. from its peak value back to the level that we inherited.
Global problems--in Asia, particularly Japan, in Russia and to some extent in south America--mean that the growth forecast for next year has been revised down to 1 to 1.5 per cent. We all hope that that growth will be achieved but other forecasts challenge whether it will be--we shall have to wait and see.
I am pleased that, in the thick of things next year, there will be a large reflationary package at the very time that one is needed--the £40 billion for health and education will come on stream from next April. That will involve capital expenditure, which will be a big boost for the construction industry and those who manufacture health care equipment, for example. It will also involve labour intensive employment, as more teachers, nurses and health care workers will be needed. It will inject demand into the economy at a time when manufacturing continues to face problems.
The minimum wage will also take effect from next April, and that will help hundreds of thousands of low-paid workers. The £2.95 extra in child benefit will particularly help young people with families, who are among the poorest in the community. Those measures will be socially progressive and redistributive; by giving greater spending power to poorer people, they will also help to sustain the economy.
Looking further ahead, I think that interest rates will unquestionably fall, first to 6.75 per cent. Labour Members and people outside the House--from industry and from the trade unions--are calling for further reductions.
In his comments to the TUC last September, Eddie George made it clear that the 2.5 per cent. inflation target was symmetrical--when inflation is more than 2.5 per cent., the Monetary Policy Committee must raise interest rates, but when it seems as though it will in 12 or 18 months be less than 2.5 per cent., the judgment must be to lower interest rates. The system contains an automatic stabiliser. Opposition Members have magnified the doom and gloom this evening; they have tried to talk us into deep recession. However, if what Eddie George says is true, we can look forward to interest rates reducing to 6 or even 5 per cent. by the end of next year.
As interest rates fall, there will be a boost to economic growth. I am sure that Treasury forecasts for 2000-01 are based on the underlying assumption--it cannot be spelt out, as the Chancellor may not reveal market-sensitive figures--that interest rates will fall to below 5 per cent. in one or two years, and that will stimulate growth.
Mr. David Ruffley (Bury St. Edmunds):
Will the hon. Gentleman give way?
Mr. Williams:
I will not, as so many Labour Members want to speak and I want to confine my remarks.
The fact that the 2.5 per cent. inflation target is symmetrical makes it much wiser than the target of the European central bank. The European economy generally is suffering. One of the dangers for the euro is that the European target is for an inflation rate of less than 2.5 per cent. There is no automatic mechanism whereby, when inflation is at 1.5 or 1 per cent., interest rates will be reduced. In Germany, for example, interest rates are holding up despite the fact that inflation is not a problem--it is virtually zero--whereas unemployment certainly is one.
I hope that, over the next few years, through the influence of Oskar Lafontaine and eventually ourselves, the European central bank will operate on the same terms as the Bank of England, so that interest rates are automatically reduced to stimulate demand when the rate of inflation falls below its 2.5 per cent.
I believe that, in three to five years, the problem will be how to control the boom. Interest rates are destined to fall to 6 or even 5 per cent., but we want Britain to be able to join the euro by the time of the next general election, so interest rates must have fallen not only to 4 or 3 per cent. but to whatever level European interest rates are in 2001.
If the Bank of England reduces interest rates too rapidly, there is a real danger of an uncontrolled boom in property and land prices. However, we have dealt with the problems that may arise in the next 12 months very well thanks to the package of public expenditure that will come into effect next April. The problem at the time of the next general election will be how to control the demand that will be injected into the economy when interest rates fall to 4 and 3 per cent.
On the euro, there is no question but that the European economy needs massive reflation and a co-ordinated expansion. On the world scene, Europe has a balance of payments surplus of $100 billion, whereas the United States carries a deficit of $200 billion--and thank goodness for that, as it is propping up the world economy. We need expansion in Europe not only to absorb Asian goods and the exports of countries that are drifting into deeper recession, but to provide employment for our people.
Mr. Peter Viggers (Gosport):
I hope that the hon. Member for East Carmarthen and Dinefwr (Mr. Williams) is right in his positive approach to the economy, but I take the gloomy end of expectations. No former Soviet Union country has yet got back to its gross domestic product of 1989, and their targets mean, if they are successful, that they will return to such levels in about 2002. Similarly, Indonesia, where we are the largest investor, is at a standstill and Japan's problems remain unresolved. The particular importance of all this to the United Kingdom is that we are proportionately the largest exporter among all the major countries. If other countries cannot afford to import, we will be proportionately the heaviest losers. The Chancellor of the Exchequer is not responsible for economies overseas but he is responsible for his forecasts, for sticking to one that no one else believes and, above all, for the blunder of fixing public expenditure for three years in his first Budget. He will live with that for the next two years.
I want to restrict myself to the matter in respect of which the Government probably raised the highest hopes about thinking the unthinkable: pension provision. The right hon. Member for Birkenhead (Mr. Field) was given the brief of following through the Labour party manifesto pledge to
The issue is urgent. A recent NatWest survey showed that a weekly income of £179 a week per person is needed to provide what was defined as "financial contentment" in retirement. A pensioner with less than £106 a week would face financial difficulties. On that basis, one in five people currently working are heading for a comfortable retirement, half are heading for financial difficulty, and a third will be entirely reliant on state benefits. If we compare the figure of £179 for a comfortable retirement with the single pension of rather more than £70 and the couple's pension of rather more than £110, plus income support if relevant--if that is paid, council tax and rent will also be paid--we are way off the level necessary for comfortable retirement.
The half of the population that is funded in pension schemes is well funded. Britain has about £850 billion in pension assets, which is equivalent to 77 per cent. of GDP, compared with a tiny 7 per cent. in France and 14 per cent. in Germany. There is a growing gap in pension provision that the Government, if they were compassionate, would deal with.
I am sure that there is a significant lack of understanding among people about pension provision, partly because it is a long way off and not something that they can really grasp and partly because the sums of money involved are very large. Take the single pension of £70 and consider how much it would cost to increase it to the amount deemed by NatWest to provide comfortable retirement: another £100 a week. To fund that, we need to apply a multiplier of about 16, so £80,000 would be required to yield the necessary £5,000 a year to make someone up from current pension provision to the amount deemed to be comfortable. The amounts are large.
What have the Government done? What could they do? I recognise that this is not the policy of either party, but I believe that it is necessary to increase the basic state pension. When the Conservative Government linked the basic state pension to prices rather than incomes, it was necessary because it was a crucial ingredient in our fight against inflation. However, the comparative diminution of the state retirement pension has gone too far and an integral part of pension planning should be to increase it.
Secondly, we must help those with the lowest incomes to enable them to provide for their own pensions. Significant amounts are involved: something like 15 per cent. of income is necessary to build up that sort of funding. The first tranche of support that an individual at the lowest level gives to his pension merely raises him to the means-tested benefit and so is completely wasted. He would get nothing back for it if his contribution did not take him comfortably above the means-tested level. Compulsion is clearly a necessary element, or there would no reason for the poorest to save for retirement.
In dealing with this conundrum and planning the way ahead, the Government are committed to
Secondly, the booklet states:
The Government have gone for the opposite route and run for cover by resorting to means-testing. That is the coward's way out and is unfair. It gives benefit to those in the greatest need, but where does it leave those who have made substantial sacrifices to provide for themselves? It erodes incentive and is socially corrosive. It is also very expensive. A universal benefit costs 2.5 per cent. of the total cost to administer but a means-tested one costs about 7 per cent.
In response to parliamentary questions, I have elicited the fact that heating allowances cost 10 per cent. of their total cost to administer. Those are very large amounts that result in substantial bureaucracy. The basic state pension can be administered for 45p a week while income support costs £5.45 a week. Those differences are so enormous that they must be taken into account with the argument of fairness.
What have the Government done so far on pensions? They have achieved one major act--the abolition of advance corporation tax relief for pension funds. That will reduce the amount available to pension funds by £3.9 billion this year and £5.4 billion next year. As an article in The Economist said on 6 December 1997,
"lay the foundations for a modern welfare state in pensions and community care."
After an unhappy 18 months, he found it necessary to leave. This is a crucial, much misunderstood sector. I have a declarable interest in that I am chairman of a pension fund. I am not a beneficiary but it gives me an interest in the subject.
"deliver significant savings over the longer term"
from the social security budget. We have a conflict: better pensions versus significant savings--how to square the circle. I believe that it can be done. The authority that I quote, rather to my surprise, is Lady Castle, who wrote with Professor Peter Townsend a booklet entitled, "We can afford the Welfare State". The three principles that she spells out are correct. First she says:
"If we want to encourage people to move from welfare to work, we must reduce the area of means-testing, not extend it."
The right hon. Member for Birkenhead understood that, Lady Castle does and I certainly do. It is disappointing that the Government are going down the means-testing road.
"We must resurrect the state basic pension as the foundation of security in old age for everyone."
I agree. Thirdly, it states:
"It should be compulsory for everyone to contribute an adequate second pension."
I agree with that, too.
"A Government keener on redistributive clobbering of the middle classes without breaking its pledge not to raise income tax rates might have dreamed up something exactly like this."
It has caused damage to pension funds and those who benefit from them.
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