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Ms Keeble: I should have asked the hon. Gentleman this question earlier when he was talking about the James review. Which specific areas should the Chancellor have considered for spending cuts that were excluded from the Gershon review but included in the James review?

Mr. Flight: There are a large number of areas. As the hon. Lady will be aware, broadly, the approach of Gershon has been to say, "Here are areas where money can be saved, such as better procurement and pooling back offices and various other things. Now, civil servants, try to find 2.5 per cent. savings." I was contacted by a friend who has been seconded to the Home Office who said that people there said, "We have not even got proper financial accounts to know what we are spending and how, and how we can effect the economies." That is a measure of how unsatisfactorily our public sector is run.

Broadly, the James review has considered matters area by area, detail by detail; in only a few areas has Gershon done that. I suggest that the hon. Lady would get an answer to her question if she read the summary reports of the James review and noticed that Gershon has not covered any of that territory.

I want to move on to two other big areas, but the essence of the point—I am concerned about complacency and, candidly, and so is the City—is that everybody knows that this country cannot afford not to reduce tax and regulation. We face the challenge of Asia. Most service businesses can move elsewhere and this country has become considerably less competitive. Capital inflows are trailing off quite worryingly and those who come to Europe increasingly go to central Europe, not this country. Unless we make our economy
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a good deal more competitive, we will have a less promising future than the Chancellor seems to think he is presiding over.

I want to say a little about pensions. Having talked to members of trade unions, I can see that everyone knows that the one thing that the Chancellor has really messed up has been our pension savings. Earlier in the debate, the Chancellor referred to my comments about the British stock market having halved. He does not seem to understand that as a result, first, of the £5 billion removal of advance corporation tax credit, the stock market fell 20 per cent. further than it needed to have done, because stock markets bottom when dividend yields cross over gilt yields. Logically, had 20 per cent. of dividend yields not been removed, the stock market would have bottomed 25 per cent. higher than it did. The extent of the fall led to forced selling by pension schemes, life companies and individuals, and a fall of 50 per cent. has understandably destroyed investors' confidence. If citizens no longer have confidence in long-term equity saving, it will not be possible for the whole economy to move forward satisfactorily, as that is where the money comes from for real investments.

A stock market fall of that extent, to which I referred at the time, has had a disastrous effect on equity savings, leading to the unwillingness of people to save. So far this year, there have been net withdrawals from individual savings account schemes. What bigger measure can one have of the loss of equity confidence? Again, if people think that pension funds will be able to accumulate enough through investing in bonds and cash, another thought is coming to them. The only way in which a sufficient amount can be accumulated over the long term is through successful equity investment.

My real criticism is not just of the £5 billion per annum that the Chancellor has taken away, but of the knock-on effects, which have been enormously greater. Outstanding final salary schemes still have deficits of around £100 billion. Coincidentally, if a price-earnings multiple is applied to the £5 billion loss of income—a multiple of 20 is a fair average—that is equal to exactly the £100 billion that is missing. More than 10,000 schemes have gone into wind-up, affecting more than 300,000 individuals. As the National Association of Pension Funds has recently warned, three quarters of employers' final salary schemes are facing funding difficulties. As companies must put that money into their pension schemes, that reduces their profits, and as their profits are hit, faith in equity investment in this country is hit.

I say to the Chancellor that the voters of Britain—not just the financial community—understand what has happened and do not like it. They are well aware of the biggest single area in which he has failed seriously.

2.33 pm

Mr. Martin O'Neill (Ochil) (Lab): I was very interested in the speech made by the hon. Member for Twickenham (Dr. Cable) and his desire, reflected in the shadow Chancellor's remarks, to secure a more independent base for statistics. I only wish that the hon. Member for Arundel and South Downs (Mr. Flight) had provided us with some statistical justification or
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evidence for the assumptions on which he based so much of his arithmetic. Indeed, if one wanted to examine the reasons for the difficult performances in the pensions industry, one need only look at such a so-called specialist and the way in which he glibly manipulates figures to suit his own purposes, as many of us have thought that many of the people responsible for pension funds elsewhere have done in the past. Certainly, such slick arithmetic does not make any serious contribution to an issue that vexes many people and has perhaps created greater distrust in the City and in financial institutions.

It is for reasons of that nature that we find that the savings ratio is not what we would want it to be—people do not trust financial institutions, because of mis-selling, bad calculation and failure to take account of basic demography. Consequently, while there may be some lack of sympathy for the performance of this Government in relation to pensions, there is no substitution of sympathy with the Conservative party, as evidenced by its woeful showing in the opinion polls.

Mr. Flight: I am well aware of the issue of mistrust in financial institutions. As a bottom line measure, however, does not the hon. Gentleman accept that the fact that ISAs—although largely about individuals buying individual shares and doing their own thing, and not the same as pension saving—have gone negative demonstrates that people have lost confidence in equity investment? That is the most worrying point.

Mr. O'Neill: I am not sure exactly what percentage of ISAs are accounted for by equity investments, in so far as many people take them through building societies and just opt for tax-free interest on a very safe investment. The hon. Gentleman, by his question, has illustrated my point: the evidence that he provides is, to say the least, superficial. We have had a repeated statement from the Chancellor today that the savings ratio has increased by 6.2 per cent. this year. I will not duck the charge that the savings ratio has been disappointing, but it is improving. It may be that people are taking money out of one account and putting it into another, although that is not what I wanted to talk about today.

The Queen's Speech has an interesting symmetry, because the preoccupation in debates earlier in the week was security, but in some respects no kind of security comes home more quickly to people than economic and financial security. If we are to sustain the economic security that many of our people still enjoy, with many people, certainly in my constituency, in employment for the first time in many years and enjoying a degree of security that they have not experienced previously in their working lives, we must recognise that there is a sense in which any financial or economic advantage that the country has will of necessity be short-lived.

We talked earlier about investment in research and development, and there was some disparagement of R and D tax credits. It is not long ago, however, that I and others, including Opposition Members, were coming to exactly the same conclusion—that to encourage companies to invest in research and development, fiscal incentives were necessary. There could still be other kinds of financial incentives to encourage investment beyond R and D.
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Let us face it: within British manufacturing, there is still gross under-investment per head. If there is any identifiable factor involved in the poor productivity that besets this country, that is it. In France and Germany, far more money is put behind each individual worker in manufacturing industry in the shape of newer and better kit. I have often argued that the engineering industry could benefit from that to a great extent, and certainly an engineering industry that is currently severely beleaguered because of the sad difficulties affecting part of the car industry, which historically has sourced its equipment from the west midlands and the industrial manufacturing areas of the country.

The critical point is that were we to see further deterioration in the predicament of MG Rover or the plight of Jaguar, or the failure to secure investment in another model at Peugeot in Coventry, the supply chain for the British motor industry as a whole could become endangered. In turn, that would make it less attractive, particularly for Japanese companies when making decisions on their next model.

Sadly, the cycle occurs every 18 months to two years. A supply chain is weakened and, having become less successful, is less attractive to potential investors from abroad in the models that we need to go on producing.

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