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Mr. Letwin: I understand why the hon. Gentleman found his hair starting to rise a little. Our proposal is progressively to lift pensioners out of means testing by progressively raising the basic state pension. If he thought I was saying that we would raise the basic state pension first to a level that would get all pensioners out of means testing, and then link it, he was misinterpreting my remarks. We are suggesting their progressive removal from means testing.
Dr. Cable: I thank the right hon. Gentleman for that clarification, which makes his proposals a good deal more affordable. Such changes would have to be very progressive and slow to be remotely affordable. I have done the sums myself, and lifting all pensioners out of means testing would cost about £13 billion a year. The proposals that he advanced on removing the new deal—there are arguments for and against that—and means-tested provisions would not come remotely near to meeting that sum, unless we were talking about a long and slow phasing-in process.
Mr. Letwin: As we seem to be following the tradition of having an interesting discussion, it is worth pointing out that we estimate that our proposals would lift the first million pensioners out of the means-tested benefit trap over the first Parliament. The system would be progressive and thus take some time to achieve its full effect.
Dr. Cable: If that is the case, I think that the right hon. Gentleman's suggestion may be quite similar to our proposals, albeit using a slightly different mechanism. It is possible to move in that direction if we consider a limited group of pensioners. If that is his proposal, it is less sensational than I thought, but more credible. If we want to get all pensioners out of the means-testing system in the long term, we must start to grapple with tricky ideas such as raising the pension age, which the radical pension reformers are talking about. I did not hear the right hon. Gentleman mention that, but such measures must be introduced if we want radical reform. We will have to wait to read the small print tomorrow to find out where this all leads.
The right hon. Gentleman framed the debate by considering whether there is a problem with personal debt—I agree that there is. Thoughtful interventions from Labour Members challenged whether that was the case and echoed several arguments that have been put forward in the academic community, especially, by people such as Professor Steve Nickell, who is on the Monetary Policy Committee. They ask whether there is a debt problem, so it is useful to rehearse some of the arguments, because although it is not altogether clear that there is such a problem, it is true that on a balance of probabilities, a serious problem is building up.
There are two key points to consider. The level of personal household debt as a measure of people's income is about 135 per cent. That figure has never been approached in recorded economic history, so we are
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considering a new phenomenon. People such as Professor Nickell argue that that is fine and that most people are coping with it in practice, as the hon. and learned Member for Redcar (Vera Baird) said. Few people, with the exception of low-income debtors, are defaulting on their debt, so most people are coping. Additionally, people say that the ratio of payments to income is not exceptional. However, that will be true only while interest rates remain close to their current levels, but all the evidence shows that there is now a movement towards significantly higher interest rates—I am not advocating that, but describing what is going on in the world. That is happening in the United States, it will probably happen in the European Union and it is certainly happening here. One need only look at what is happening in the forward markets, which expect interest rates to rise significantly and are factoring that into market expectations. Once interest rates move up by 1.5 or 2 per cent., many of the comfortable assumptions about the ability of debtors to sustain their repayments become very questionable.
There is another key point of the argument, which was put to me by the Chancellor when I first raised the issue in Treasury questions. We may complain about the debt, but on the other side of the household balance sheet there are some pretty juicy assets, so on paper things do not look too bad. The problem is that almost all those assets are in the prices of people's houses. One can take different views about whether houses are overvalued. Most of us are not qualified to pass judgments on that, but bodies that are technically competent to make such judgments, such as the International Monetary Fund, are extremely worried and are arguing that on most plausible measures house prices are probably 20 to 30 per cent. above what we would expect them to be on some economic test. Many others in the City see the problem as a good deal worse.
Were the correction to take place, there would be the problem of large numbers of people finding themselves in negative equity, which, as the hon. Member for Luton, North (Mr. Hopkins) reminded us, has occurred before. For those reasons, we must regard the problem seriously; there are high risks. The problem will not necessarily prove unsustainable, but the risks are mounting. The fact that the Governor of the Bank of England and his deputy have been so pointedly clear about the dangers should be a warning to us all.
What should be done about that in policy terms? What concerns me most is the vacuum of responsibility. When the Government came to office, they made what many of us felt was a sensible decision to subcontract monetary policy to the Bank of England. They also subcontracted regulation to the Financial Services Authority. Those were wise decisions, and the functions have been generally well executed by the bodies given responsibility. However, some big new problems are looming as a result. There are asset bubbles in housing and—potentially—in other things, and big problems of household debt, but it is not at all clear who is responsible for that.
Are the Government responsible, through the Treasury? Is the FSA or the Bank of England responsible? Indeed, who in Government is responsible for the issue of long-term savings, about which the right hon. Member for West Dorset talked? Is there a
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Government policy on long-term savings? My hon. Friend the Member for Northavon (Mr. Webb) asked the Financial Secretary some time ago about the mandate of the Government agency responsible for national savings. The answer was that it did not include savings. He was told that it has other roles, but savings was not one of them.
What has happened in practice, and has happened over the past few weeks, is that the Governor has exceeded his mandate. There is nothing in his mandate that tells him that he is responsible for house prices and personal debt, but he has taken responsibility for that because no one else is doing so and because he can see the dangers. The problem is that he has only one policy instrument: interest rates. The danger of using interest rates to deal with such a scenario is that the British economy will become even more imbalanced.
One of the key trends in economic performance over the past seven years under this Government has been the extent to which the growth of the economy has been driven by personal consumption. There has been quite impressive and steady growth, but it has been driven by personal consumption and boosted by personal debt. Of the average 2.8 per cent. growth, 2.3 per cent.—about 80 per cent.—has been driven by personal spending. Trade has deteriorated—net exports have detracted from economic growth—and there has been little contribution from business investment. If interest rates are used to deal with the asset bubble in the housing market, the exchange rate will inevitably be pushed up, as the hon. Member for Luton, North pointed out, making it even more difficult to export and to compete with imports, and making investment even less profitable. As a result, the economy becomes even more imbalanced.
What are some of the other policies that the Government should be considering? I helpfully produced a 10-point plan, and shall make a few suggestions relevant to our debate. First, the Government ought to look at the structure of incentives for savings and investment. It is striking that there is no restraint on borrowing. If I go into a bank, I can see that the walls are covered with advertisements urging me to take out credit cards and additional debts. All the bank employees earn bonuses by pushing out more debt to their customers, but there is little compensating incentive for anyone to invest their capital. Indeed, if someone tries to invest a few thousand pounds they have to go through a complicated process of filling in forms with a financial adviser. Those procedural difficulties have understandably arisen from past mis-selling, but they have resulted in an enormous bias in the incentives system to borrow and not to invest. I hope that the Government, in their review of the Financial Services and Markets Act 2000, will consider and analyse the fundamental issue of incentives. Is there over-regulation of investment and under-regulation of credit provision?
Secondly, I urge Ministers to consider the important but neglected issue of payments insurance. If large numbers of people get into difficulties with their mortgage—they might not, but they might—insuring their payments will be an important safety net. There is a market for payments insurance, but it is unsatisfactory. The margins are enormous, it is provided by a handful of brokers and banks, and it is not taken up by most people. There is a lot of mis-selling—
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the institutions that promote the mortgages also promote the insurance—and there is little genuine competition. It is a classic example of something that calls for Government intervention—the Office of Fair Trading needs to look at the market and make sure that it works better—so I hope that they are persuaded to take an interest in it.
Thirdly, the right hon. Member for Hamilton, North and Bellshill (Dr. Reid) has touched on the issue of debt distress and people who are affected by loan sharking and comparable activities at the bottom end of the market. The paper produced by the Department of Trade and Industry makes some sensible suggestions, but the process of implementing them is slow, so it would be helpful if the Financial Secretary told us when they will come into effect. For example, there are sensible recommendations about stopping the ludicrous practice of penalising people for making early repayments, which would do a great deal to change the culture and encourage people to adopt a more prudential approach to personal finance.
Finally, to expand a debate that I had with the Financial Secretary about 18 months ago, the Government should develop their initiatives on financial advice—a subject in which she takes a personal interest. It should not be impossible to get the industry—the banks, insurance companies and so on—to set up, through a small levy, a national system of genuinely impartial personal advice. At the moment, it is difficult to get independent financial advice, because most advisers are tied to the industry, and the polarisation changes do not make their position any easier. A system of genuinely independent financial advice centres dealing with people before they get into difficulties, not afterwards, would go a long way towards easing people's anxieties before they enter into major financial contracts. The Government want to develop such proposals, but I can see little evidence of their doing so. Perhaps the Minister can reassure us that progress has been made on that agenda.
8.48 pm
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