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3.30 pm
The Economic Secretary to the Treasury (John Healey): We have heard a full and useful exploration of the issues behind and surrounding new clause 1. The hon. Member for Eddisbury (Mr. O'Brien) is right to say that the ISA is the Government's primary vehicle for savings. My hon. Friend the Member for Newcastle upon Tyne, Central (Mr. Cousins) pointed out that ISAs have been a great success. In fact, there are 14 million, not 12 million, investors in ISAs in this country—6 million more than the number of investors in TESSAs and PEPs at their peak—and ISAs are starting to reach those groups that were under-represented in terms of saving through PEPs and TESSAs. About 7.5 million investors have accounts with stocks and shares and thus attract the current tax credit.
The hon. Member for Eddisbury hugely overstates the likely impact of the proposed measure, which his new clause is designed to prevent. Referring to a point he made based on the PIMA analysis, it is true that there has been a switch into corporate bonds in recent times. However, that principally reflects the state of the markets. Bonds may be seen to be a safer investment. However, as the hon. Member for Billericay (Mr. Baron) pointed out, bonds do not have the same potential for long-term growth that equities have. Investors will return to equities when they feel more confident about doing so, and the hon. Gentleman emphasised that he wanted that to happen.
My hon. Friend the Member for Newcastle upon Tyne, Central explained his concern about recent investors in equity ISAs. I shall examine the considered points that he made in his short contribution, and I am sure that my hon. Friend the Financial Secretary will do so as well when she returns to take up the reins of this portfolio.
Mr. Flight: Does the Minister not agree that as a matter of principle, it is undesirable to have tax signals that could drive investment decisions? There are all sorts of reasons why people might buy bonds or equities, but the Government should recognise that a better deal on taxation of income being available on bond interest than on equity dividends will have an impact on the way in which moneys flow. In principle, that is not a good thing.
John Healey: I think that the hon. Gentleman is referring to the fact that corporate bonds attract a relief at 20 per cent. and the tax credits are currently set at 10 per cent. However, I hope he understood my earlier point that that has not been a major driver of the recent switch to bonds.
The hon. Member for Eddisbury accuses the Government of imposing a stealth tax. A measure that was the subject of a high-profile announcement and was confirmed in the 1998 Budget, and one for which there is a long lead time and a five-year transition provision, can hardly be described as a stealth tax.
The hon. Member for Yeovil (Mr. Laws) asked the direct question about cost. The Treasury estimate of the cost of the new clause is approximately £200 million. The hon. Gentleman took me to task, claiming that the tax relief creates no new saving and that ISAs simply affect the distribution of existing savings. That is simply not the case. ISAs have been an undoubted success. More than £115 billion has been subscribed into ISAs since they began in April 1999; about 14 million investors—almost one in four adults in this country—hold ISAs—
Mr. Laws: Will the Economic Secretary give way?
John Healey: Let me finish my point. I might pre-empt the hon. Gentleman's intervention. He is especially concerned about those on low incomes. In fact, the holding of ISAs has increased at all income levels.
Mr. Laws: I am grateful to the Economic Secretary for addressing my specific concerns. Given the amount that the Treasury is spending on ISAs through tax relief, will he tell us whether it has made any estimate of the effect in terms of increasing the overall stock of saving, rather than shifting between different forms?
John Healey: I have no estimate with me as to the narrow point that the hon. Gentleman raises.
Mr. Alex Salmond (Banff and Buchan): I am afraid that I do not think that it is a narrow point. Unless those on the Treasury Bench know about the impact not only on one savings instrument, but across the range of savings, how on earth can they analyse and direct policy? If the Treasury does not know about that issue now, perhaps it should study it and investigate the effect on not only one aspect of savings, but on the overall savings ratio.
John Healey: The hon. Member for Yeovil asked me whether I could give him an estimate of the precise calculation and I responded that I could not do so. I hope that that is clear.
At the risk of suggesting that the right hon. Member for Wokingham (Mr. Redwood) overstated his case, I say to him that the scale of incentive, especially for the majority of investors—perhaps this does not apply to him—is modest. I shall explain the detail a little later. He asked what pro-savings policies the Government were putting in place—an issue that is relevant to the comments and concerns of the hon. Member for Billericay about balance between public and private pension provision. I could reel off a long list of such policies, but I shall not bore the House. A short list would include the Inland Revenue's simplification of tax treatment for pensions, the development following Sandler of a suite of simplified financial products to
encourage saving, the child trust fund introduced by the Chancellor, the saving gateway—a savings account targeted at low-income or younger individuals, with Government match funding for all the money saved—and the Financial Services Authority's decision to proceed with the abolition of the polarisation regime.
Mr. Baron: I appreciate that the Economic Secretary is addressing each point in turn, but may I suggest to him that this is a question of proportion and effect? The point is that the number of ISAs has grown exponentially in recent years. While he lists a series of other initiatives that would encourage saving, the bottom line is that they are dwarfed by the total moneys that are currently contained in ISAs. The Treasury should bear that in mind.
John Healey: I am glad that the hon. Gentleman pays tribute to the success and growth of ISAs. Of course, the point that he makes is being borne in mind as we consider future policies.
I should like to deal now with some of the points that the hon. Member for Eddisbury made in the more measured parts of his contribution. He outlined his reasons for tabling his new clause and spoke about extension of the 10 per cent. tax credits payable on UK dividends in ISAs and PEPs beyond 5 April next year, when they are due to finish. He described the effect that he considers that ending the payable tax credit will have on savers who are basic and lower rate taxpayers, as well as on equity ISAs as a whole.
I say to the hon. Gentleman that the ISA and PEP payable tax credit cannot be considered in isolation. It has to be considered in the context of the major and carefully balanced 1997 package of corporation tax reforms designed to rebalance the effect of corporation tax on the economy. Before that, the payable tax credits on dividends acted to make distributing profits more attractive than reinvesting for growth. We removed that distortion while reducing the rate of corporation tax. As part of the changes, pension funds' payable tax credits ceased in 1997 and individual non-taxpayers have not been paid the credit since April 1999. Charities' payable tax credits also ceased in 1999, although we gave charities transitional relief on a sliding scale until April 2004 to help them to adjust. We also wanted to allow ISA and PEP investors sufficient time to adjust their investment portfolios to take account of the change. Exceptionally, the 10 per cent. ISA and PEP payable credit has therefore been available for a period of five years, from April 1999 until April 2004.
Mr. Flight: Does the Minister accept that when these changes, whatever their merits, were made, the taxation of dividends received by individuals was adjusted to end up much as it had been? It is therefore inconsistent not to leave at least a modest tax advantage on equity investment within ISAs. There is no consistency between the two aspects.
John Healey: I hope in a moment to explain the impact of the move that we have made.
The withdrawal of payable tax credits for ISAs and PEPs does not represent a new or additional tax: it simply means that an additional payment is no longer to
be made. Of course, tax credits remain and continue to cancel out any tax liability for individuals liable to tax at lower and basic rates.
Mr. Baron: Will the Economic Secretary please address the point that I and other hon. Members have made, namely that many people feel that the removal of the tax credit discriminates against basic rate taxpayers because they gain no advantage whatsoever from investing in equity ISAs, whereas an advantage remains for higher rate taxpayers? The Government seem to be discriminating, however inadvertently or unintentionally, against basic rate taxpayers. Would the Economic Secretary address the unfairness of that situation?
John Healey: I shall explain why the threat posed by the removal of this payable tax credit has been hugely overstated and why the claims about severe discrimination against those on lower incomes and lower and basic rate taxpayers are similarly overstated.
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