---

Mr. Letwin: There is no doubt that that is accurate—it constituted a smash and grab raid. The Government grabbed a large amount of money, and smashed a large amount—clearly, my right hon. Friend's approximate figure of £100 billion is of the right order of magnitude—off the value of savings in this country.

Vera Baird: We must keep our feet on the ground about this alleged smash and grab. The Tory Chancellor Norman Lamont twice cut the rate of the advance corporation tax concession, of which the right hon.
 
5 Jul 2004 : Column 616
 
Gentleman now makes such major complaint, and clearly saw it as an anomaly even then. I have not heard about any Tory cuts to restore it.

Mr. Letwin: I shall come on to what we intend to do to remedy those bad effects. The problem with the hon. and learned Lady's argument, which is exactly what I was about to discuss, is that the £5 billion raid was not in the context of a large number of other measures of the kind that my right hon. and noble Friend Lord Lamont was then taking to try to encourage savings. Alas, it was in the context of a set of other raids on savings, decreasing their tax advantages.

This Government have reduced significantly the attractiveness of individual saving accounts, for example. ISAs are now significantly less attractive in many respects than their tax-exempt special savings account and personal equity plan predecessors, which were the brainchild of none other than Lord Lamont and his colleagues. In various and important respects, the Government have made savings less tax advantageous in this country. There is no getting away from the fact that that can only have one effect directionally: it cannot increase the savings ratio; it must tend to reduce it. As we know, as an empirical fact, that the savings ratio has on average gone down by a third, and point to point, by a half, some of that is undoubtedly caused by the Government's actions. They are not the main ones, however, as I will come on to the real disaster story in a moment.

Vera Baird: Let me come back to the advance corporation tax. The right hon. Gentleman is wrong that it was not accompanied by other measures. The corporation tax rate was cut at the same time. I asked him once, and I ask him again, whether there are any plans to restore this alleged concession, which was the source of such a smash and grab.

Mr. Letwin: I shall come on to something that we will do to cure the biggest of the problems that are attached to, and are the cause of, the reduction in savings. That is the first place to put the money. We would like to do many things, but there is one that we must do. I shall deal with that now, because without it, as far as the long-term picture for savings in this country is concerned, we are sunk.

One of the saddest things about the Government is that they started with the possibility of a real improvement in the character of our country through the achievement of a real consensus. The right hon. Member for Birkenhead (Mr. Field) came into government at the beginning of this Government's tenure with great hopes invested in him not merely by Labour Members—I suspect that many Labour Members did not invest great hopes, including the Chancellor, who hoped that he would soon disappear and achieved that ambition—but by Conservative Members and by the country more widely, and rightly so. For many years, he had with passion, vigour and intelligence identified a critical feature of the problems facing this country—means-tested benefit dependency was causing an erosion of the savings culture. He set to work to try to deal with that, and he received the backing of my hon. Friends. I remember walking into the Lobby with him and his friends on the Labour
 
5 Jul 2004 : Column 617
 
Benches, to the discomfiture of some Labour Members, on a famous occasion, as we were so determined to support actions that could rescue us from an over-dependence on means-tested benefits in this country. Alas, as we all know, it did not take terribly long for the Chancellor to destroy not only the ambitions but the policies of the right hon. Gentleman and to move in precisely the opposite direction.

The Prime Minister, when he was Leader of the Opposition, said that he wished to see the right hon. Member for Birkenhead think the unthinkable. Little did he know that the Chancellor of the Exchequer was going to think the unthinkable—that means-tested benefits should be widely expanded in Britain by a Labour Government. That was a most astonishing, and much more importantly, catastrophic turn of events. Fifty-four per cent. of our pensioners are now on means-tested benefits of one kind or another, and the number is growing apace. Most people believe that, on present policies, it will not be long before three quarters or so of our pensioners are on means-tested benefits of one kind or another.

The right hon. Member for Birkenhead has rightly made it clear what he thinks the effect of this is and will be. He said that the message is going from grandmothers to grandchildren, "Don't bother to save dear, it didn't do me any good." What does he mean? He means something clear: if a person has saved throughout their working life less than £180,000, there is a strong chance, and a great likelihood, that they will find at some point, at the end of their working life, that they are losing between 40p and 85p in the pound for each pound of income from saving. It is not worth it.

Of course, the savings industry recognises that. It is terrified of mis-selling, appropriately, and is therefore increasingly not aiming to sell savings policies to a group of people whom it knows will typically lose a large part of income from savings later in life. It knows that that could be regarded, ex post facto, as a terrible example of mis-selling.

Alas, much of our nation's saving has always been through inertia. Much of it occurs only if the savings industry makes us save by coming to us with the product. When the industry desists from that for fear of mis-selling because of means-testing of benefit for those in retirement, the savings ratio drops. That is the single biggest cause of the present problem—the present disaster—of the reduction of a savings ratio that was already too low by a third—or by half, depending how it is measured. Until the increase in means-tested dependency is dealt with, this terrible problem will continue.

There has also been a catastrophic social effect. I do not know what single thing could do more to harm the social fabric of the country than a message sent to hard-working people who save that saving is not worth it, and that those who have saved will be clobbered. That strikes me as profoundly wrong—and it is another of the points made so powerfully and passionately by the right hon. Member for Birkenhead over so many years.

Mr. Bill Tynan (Hamilton, South) (Lab): The right hon. Gentleman has made great play of his belief that
 
5 Jul 2004 : Column 618
 
means-tested benefits are the main problem in terms of poverty. What would he tell the individual in my constituency who found that she did not qualify for the minimum income guarantee because she had £26,000 in the bank, and now finds herself—with that £26,000 in the bank—gaining by £46 a week from pension tax credit?

Mr. Letwin: I would tell that lady that when we have done what we need to do, and what the country needs us to do, and what the hon. Gentleman's party will eventually agree with us must be done, she will be as well off as under the present scheme, but people will not have the same disincentives. What we need to do as a country is take our courage in both hands, and raise the basic state pension to the point at which it will cross over with pension credit.

Ms Keeble : Will the right hon. Gentleman give way?

Mr. Letwin: I will in a moment, but I want to make this point because it is absolutely critical. Opposition Members can then debate it at length. I do not think that anyone could accuse me of having been ungenerous in giving way.

Unless we take our courage in both hands, we will not solve the problem. The difference between the basic state pension and pension credit is that, unlike the basic state pension, pension credit is means-tested. In our first Parliament, we can lift a million pensioners out of means-tested dependency by raising the basic state pension in line with earnings, and we need to do so. We need to meet the associated costs, and my spending plans provide for that. Half will be met by erosion of the entitlements of those whose basic state pensions are rising to means-tested benefits that they will not need because their incomes from the basic state pension will be rising. The other half, in those first four years, will be met by removal of almost all the new deal, which has been an expensive failure.

At the beginning of the present Administration, a million young people were not in work, not in training and not in education. Now, £310 million a year later, with a new deal for the young unemployed, what do we find? A million young people are not in work, not in training and not in education. What a way to spend money that we could be spending on raising the basic state pension and restoring the incentive to save.

---