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Mr. Cousins: I am probably wrong to be tempted to intervene, but I am grateful none the less to the right hon. Gentleman for giving way. He ought to acknowledge two things. First, his last speech was about rising housing asset values, so he should acknowledge that asset values possessed by ordinary British people have never been greater than they are now in all their various forms. Secondly, the telecoms sale was, indeed, a sale—the £22 billion was a market response. It turned out to be thoroughly ill judged, but it was a market response none the less.
3.15 pm
Mr. Redwood: It was a market response in a rigged market, where the Government decided to sell the air, for heaven's sake. Our air is always for sale with this Government, and I suspect that they will put a tax on breathing when they have run out of ways to raise money for their nefarious and often wasteful purposes. The hon. Gentleman made one sensible point—of course house prices have gone up, which has led to increases in paper wealth for many people and practically all home owners. However, unless people resort to massive borrowing against the perhaps insecure foundations of that inflated asset price, they are not better off. They still need to live in their own home,
and do not have the real wealth generated by the ownership of a PEP, TESSA, ISA or any other asset that can be freely traded and spent when the need for money arises. The hon. Gentleman should therefore accept that many of us do not think that borrowing a lot against the security of our homes is a particularly good idea for consumption purposes, and particularly not as people get closer to retirement.People are being driven into such behaviour by the wreckage and carnage of their pension funds, which was caused by the £5 billion a year tax and the Government's insouciance about equity values. I therefore urge the Government to accept the advice of my hon. Friend the Member for Eddisbury and add to the Bill his new clause, or a Government variant drafted as they see fit. That would show for the first time during their term in office that they recognise the plight of the saver and want to rescue something at least from the disaster that they have created.
Mr. Djanogly: The Government's proposal to abolish the 10 per cent. tax credit that equity ISAs receive on dividend distributions is one of the most ill considered measures in the Budget, and clearly shows that the Government have simply lost touch with what the people of country want and what business needs.
My right hon. Friend the Member for Wokingham (Mr. Redwood) rightly mentioned the savings ratio, which has collapsed in recent years, reducing the large number of savers whom Labour inherited from the Conservative Government. Low interest rates may be good for floating rate mortgages which, of course, the Chancellor wants to abolish. However, for every borrower there are many savers, including millions of pensioners, and it is they who have been suffering under the Government. Indeed, under the leadership of this Government, our savings culture has been transformed into a debt culture, with credit card debt sky-rocketing to unprecedented levels, despite a stagnant economy.
The Government have dealt with that serious problem by hitting savers once again and smashing one of the few remaining tax breaks. The savings culture and, dare I say, prudence have been chucked out of the window in the Chancellor's desperate attempt to raise more money to spend on the black hole of our unreformed public services.
Mark Tami (Alyn and Deeside): Is the hon. Gentleman suggesting that the Conservatives are the party of high interest rates, and will they advocate that at the next election?
Mr. Djanogly: Interest rates reflect international markets. However, one of the last remaining tax breaks which gave the average low taxpayer a small window of opportunity is now being locked firmly shut by the hon. Gentleman's Government.
Business remains concerned about the continuing slump in equity prices, and increased concern for the market is stopping investment in companies and reducing their ability to move forward. Businesses have been calling for measures such as the abolition of stamp duty on shares, but the Government are having none of that. Not only does stamp duty stay, but they are regressing by discouraging investment in shares. Let us
not forget that business investment was 8 per cent. lower in 2002 than in the previous year—the largest fall since 1991. I repeat that the measure is bad for savers and will be bad for business. It is the measure of a Government who have lost their touch.
Mr. Baron: I am concerned about the abolition of the 10 per cent. tax credit for a number of reasons. The first is the simple unfairness of it. The only people for whom equity ISAs will remain attractive, as we have heard, are higher rate taxpayers. They will be the only people to benefit from the tax break in future, because they will not have to pay the difference between the higher and lower rate tax. Is that fair? I believe it is not. When the Government unveiled ISAs in 1997, we heard the Paymaster General shout from the rooftops that it was a tax system for savings that was to benefit the many, not just the few. Why do the Government appear to be discriminating against basic rate taxpayers in this form of saving?
Secondly, the measure goes against the Government's stated policy of encouraging long-term savings and encouraging people to make adequate provision for retirement. The current tax credit offers a significant incentive for basic rate taxpayers to save, and has proved to be extremely popular among that target group. The Government's own figures, for example, show how successful ISAs have been, building upon TESSAs and PEPs, in encouraging people in all income groups to save. I give one example. Of those earning under £10,000 per year, one in five has chosen to save in an ISA. That is an incredible figure.
There is little doubt that the tax credit encourages people to save money and build up a pool of savings to supplement their pensions, as they increasingly have to do, bearing in mind the pension tax that has sucked £5 billion out of the system and had a disproportionate effect on the stock market. I mentioned that one in five of those earning less than £10,000 was saving through an ISA. Looking at the broader income scales, we see that of those earning between £20,000 and £25,00, one in four saves in an ISA, and in the next group, those earning between £25,000 and £30,000, one in three uses an ISA as part of their long-term savings. The Government should not ignore those figures if they are serious in their intent to encourage savings for the longer term.
Mr. Bercow: Does my hon. Friend agree that the Treasury is classically guilty in this case, as so often, of short-termism in its thinking? If it pursues a policy that deters people on low incomes from saving in order in the short term to maximise its revenue, the chickens will come home to roost and the Government will ultimately face a higher bill to public funds in the form of means-tested benefits, as sure as night follows day.
Mr. Baron: That is an excellent point. There is a short-termism about the tax measure that worries me. It will contribute to a decline in savings over the longer term and add to the pension problems that the Government are manufacturing by way of the pensions tax. It is a problem that the Government will have to face over the longer term.
There is little doubt that the tax change proposed by the Chancellor will undermine investors' confidence in ISAs as a tax-efficient form of savings, and may reverse
the savings trend that we have seen. ISAs are a well-known "tax-free" product, but the tax levels will increase confusion among the public. That will serve no one's interest—neither the Government's, nor the public's, as I have suggested. It is interesting that in the United States, the Government seem to be moving in the opposite direction. The US is cutting tax payable on dividends and encouraging savings and wider share ownership, because it realises the benefits of so doing. The American economy has performed well, and we should look at that example as a means of encouraging savings and wider share ownership.The measure goes against the Government's longer-term aim of changing the proportion of public and private retirement savings from 60:40 to 40:60. The measure will not serve that purpose at all. I shall be interested to hear from the Minister how the Government believe the tax measure will help to achieve that stated objective. Recent research suggests that if the tax-free benefit is reduced or abolished on stocks and shares in ISAs, only one in three savers will continue to invest in that tax-free environment. That figure must worry the Government, if they are intent on improving the balance between public and private retirement savings.
I shall put two other brief points to the Minister, and I look forward to the reply. There is another sense in which the measure will distort the market. A number of other hon. Members have touched on the point. By reducing the tax incentive for people to invest in equity ISAs, the Government will increase the incentive to invest in cash and bonds, not shares. That probably will not be appropriate for most people's investment requirements. There is a danger that the Government will inadvertently create a scenario where the tax tail is wagging the investment dog.
People will increasingly see that there is no tax incentive to invest in equity ISAs, and may think that investing in cash or bond ISAs producing a higher short-term income is more appropriate, and certainly more attractive. Over the longer term, equities have proved to be the better investment. People of the younger generation especially should have a good element of their overall investments in equities, rather than bonds and cash. I ask the Minister to address the issue, because there is a danger that by removing the tax incentive for equity ISAs, the Government will inadvertently distort the market.
One or two other hon. Members have touched on my final point, which is about the way in which equity investment in the longer term benefits the economy. The United States fully appreciates that, which is why it has very recently reduced the tax paid on equity dividends in that country. We all know that economies and the business environment are becoming increasingly competitive. Companies must be able to look to stock markets to raise additional capital, but if shareholders shun the equity markets, that process becomes more difficult. Ultimately that has real economic implications for our standard of living and for the profits that pay for the public services that we all want.
To revert to the intervention by my hon. Friend the Member for Buckingham (Mr. Bercow), I emphasise that a short-term measure such as the Government propose will in the longer term produce a negative effect on the economy as a whole and the standard of living of us all. People will shun equity markets, which will ultimately have a detrimental effect on companies wanting to raise additional capital on the stock markets.
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