Finance Bill

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Rob Marris: The hon. Gentleman indicates that there is a problem with the savings rate being relatively low. If that is the case, why is money so cheap?

Mr. Davies: The hon. Gentleman does not entirely understand how such things work. Short-term interest rates are set by the central banking system, in our case by the Monetary Policy Committee of the Bank of England. That is what has caused interest rates to be what he calls cheap, by which I think he means that they are excessively low. I need hardly remind him that private savings are only one element of the aggregate savings in the economy. There are also two major agents, the corporate sector and the Government. The Government are substantially dissaving—in other words, borrowing substantial amounts of money. Against a background of low and falling saving by the domestic sector and rising borrowing by the Government and the corporate sector, which is saving a certain amount but cannot meet the pressure from the Government, it will not be surprising if long-term interest rates are found to be under upward pressure.

Rob Marris: Will the hon. Gentleman give way?

Mr. Davies: The hon. Gentleman cannot really want me to pursue the matter now. There will be other opportunities to discuss technical aspects of savings and monetary policy. I do not think that I would have your indulgence for long, Sir John, if I continued to do it now. I must move back to the impact on savings of the Government's proposed lifetime limit.

Another obvious perverse effect is that, when individuals see the total aggregate value of their pension investments approaching £1.5 million, they will have considerable incentive not to allow that limit to be breached. The risk-reward ratio that normally affects investors will be substantially changed. Normally, investors consider that it is worth taking a certain amount of risk with their money. If the

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investment proves to be successful, there will be a return and, if it is high risk, there is, of course, a chance of losing it. Investors balance the two. Now they will say to themselves, ''If I make a risky investment and I lose it, I lose it, but if it is successful, I will lose it as well, because I will go through the £1.5 million glass ceiling.'' As a result, people in that situation will not make risky investments. Far from investing in venture capital and such things, they will not even want to make equity investments. They will go in for cash or near-cash fixed-interest instruments of that kind.

Another aspect of a normal, healthy saving system is that those who are relatively wealthy provide a disproportionate amount of the risk capital required by the economy. It is enormously valuable to the economy as a whole that people are prepared to take considerable risks. However, none of us would responsibly advise people on low incomes with small savings and modest prospects for their retirement income to undertake such risks. It would be utterly irresponsible to put widows and orphans into venture capital or something of that sort, but it is important for somebody to go into venture capital.

The Government have produced a system under which, against a worrying background of falling aggregate savings, they will ensure that nobody has an incentive—or that those who do have a much reduced incentive—to go into the higher-risk end of the investment spectrum. That cannot be rational. It would have a disproportionately damaging effect economically.

I do not know whether the Government took such things into account when they came up with their half-baked proposals, but it is clear from what my hon. Friend the Member for Tatton said about the failure to consult the Government Actuary's Department that an enormous amount of work that should have been done was not, and that everything was careless and slapdash. I am afraid that some of the other relevant considerations were not properly taken into account.

Mr. Stephen Pound (Ealing, North) (Lab): Many of us who could not claim to be experts in the field are learning a considerable amount from the erudition of the hon. Gentleman. He will be familiar with column 571 of the Hansard report of the debate on clause 194, in which the hon. Member for Tatton severely, and rather cruelly, chided and criticised him for failing to move amendment No. 113, and went on to say that there would be a two-hour gap in the schedule because of his absence. I have found many of the comments of the hon. Member for Grantham and Stamford (Mr. Davies) to be so helpful and educational that, were he to feel the need to fill the two-hour gap, I, for one, would not object.

Mr. Davies: The hon. Gentleman is very kind—at least, I think that he is being kind. My hon. Friend the Member for Tatton has not drawn my attention to the remarks that he made in my absence. I do not spend my free time simply reading Hansard and it happens that I have not come across those comments. No doubt I shall now have to give way to my hon. Friend.

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Mr. Osborne: Clearly, the hon. Member for Ealing, North (Mr. Pound) has put the worst possible construction on what I said, which was merely that one of my hon. Friend's amendments was selected for debate on Tuesday, but he was not here to move it. I merely said that we should therefore have more time to discuss other things. To suggest, as the hon. Member for Ealing, North did, that that was an attack on my hon. Friend is rubbish.

The Chairman: Order. This is all very amusing and lightens our proceedings, but I think that we are in danger of straying rather a long way from the amendment.

Mr. Davies: Thank you, Sir John. I think that the hon. Member for Ealing, North is understandably trying to create bad blood between me and my hon. Friend the Member for Tatton, but he will not succeed.

It seems to me that, before I return to the important matter before the Committee, I should apologise for not being here on Tuesday. I knew for some time that I would not be here on Tuesday, but I did not know that my amendment would be reached, because the entire schedule of the Committee's work was changed last week, much to my surprise. We did not keep to the schedule that I expected when I tabled the amendment. However, I understand from other sources that the Government are favourably inclined to action in the context of my amendment, and I hope that that is true and that my effort was not entirely wasted. I am sure that the Committee was able to use the time usefully.

I should draw the Committee's attention to another perverse effect; this affects more than the thousands or tens of thousands of people who may be in danger of going through the lifetime limit of £1.5 million. An oblique reference has already been made this morning to the fact that, in so far as those who may have relatively high salaries and who therefore may be in danger of going through the limit may be members of a defined benefit occupational scheme and may have some influence over its investment policy, clearly, in the present circumstances, for the same reason that I gave in relation to personal pensions, that influence would be in favour of the scheme running no risks, rather than making an effort to make a capital gain.

Capital gain would just result in the imposition of a tax penalty on the individuals with slightly higher wealth. Therefore, that section of the members of such a scheme would favour its adopting a very low-risk strategy and investing in cash or near cash assets. That might be very bad for the economy as a whole and for those scheme members who should, given their position, salary, age and other characteristics, benefit from a scheme that did have a considerable equity element. I see great difficulties there.

One thing that has not appeared in any public comment I have seen is an explanation of why the Government went down that particular route, rather than the obvious one of limiting contributions, perhaps on a lifetime basis. I hope that we will hear why from the Financial Secretary when she addresses the Committee. There is considerable danger and

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clumsiness in respect of the present annual basis, and I am happy that the Government have rethought it.

If one has a lifetime limit at all, why not place it on contributions? If people succeed in making good investments, which is good for them and good for the economy, good luck to them. They have taken the risk, so let them enjoy the benefit. The rest of society will certainly enjoy the benefit of people being prepared to put capital with tax protection and tax advantages into high-risk investments. One still has the equity element and the reductions, or at least the constraints, on the total tax loss—the opportunity cost—of the pension system to the Treasury, because one still has the annual limit on contributions. It seems such an obvious way forward.

Can we have a reasoned explanation why the Government have not gone down that route? I can hardly believe that even this Government did not think along those lines before they took what may have been the wrong decision.

Mr. Jack: My hon. Friend the Member for Tatton made an excellent case for amendment. When he said that he thought that a less than transparent process had been used to determine the £1.5 million lifetime allowance and other matters connected with its calculation, the body language of the Financial Secretary indicated that she felt that it was entirely transparent.

Will the Financial Secretary put on record exactly how the limit was put forward? I suspect that the Government may not immediately agree with the amendment. If she is not totally persuaded by his eloquent argument, I ask her to spell out in detail why the amendment is not acceptable.

In even greater detail, I would be interested to know if the Financial Secretary prays in aid cost as an argument for the measure. What is the net cost of the tax relief contained within the pension proposals before us? I mentioned the Barber judgment to the hon. Member for Wolverhampton, South-West because pensions are effectively pay postponed, as far as I understand it and as defined by the judgment. There is a logic that, if one puts money into a fund, one postpones the taxation on it by virtue of the relief that one receives, only to offer up the income that is therein generated by the fund for subsequent taxation.

There is a difference between the amount of money at one point, to pick up the point made by hon. Member for Wolverhampton, South-West about tax foregone, and the amount of tax that is subsequently brought in from taxation on pension fund income. If there is a difference between the two, it is the net cost of relief on pensions.

We have not discussed the net cost. For the sake of clarity, I would be grateful if the Financial Secretary, if not now then later in writing to the Committee, advised us about the net costs of the proposals. It is very easy for Treasury Ministers to pray in aid very large numbers in arguing against relief such as that in the amendment, but the net cost of relief on pensions may well be a lower number.

 
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