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“The previous Government cut tax credits paid to funds and companies, so with immediate effect I propose to abolish tax credits paid to pension funds and companies.”—[ Official Report, 2 July 1997; Vol. 297, c. 306.]
It is clear when we read it, but we all know how the Chancellor delivers such things, particularly the difficult bits of Budget speeches. That was the first time.
The Chancellor’s announcement was misunderstood by less sophisticated members of his party. I do not say that critically; things such as tax credits on pension funds are subjects that usually hold the complete attention of only about 20 Members on either side of the House. The Chancellor’s statement produced cheers because some Labour Members thought he was announcing a tax reduction and he thought he had got away with it—or so he thought. However, by the next day—3 July, when I spoke in the debate—the Chancellor was angry because The Times had cottoned on to the full implications. History repeats itself. Only a week or two ago, he had a bad press on the morning following the Budget as people began to analyse what he had done.
In 1997, the Chancellor announced the original stealth tax. He chose it as a source of revenue partially because he believed that 999 in 1,000 people would not understand the statement he was making, so the money would not appear to come from their pockets. However, by the next day, as the hon. Member for Twickenham(Dr. Cable) said, people were beginning to criticise it. I looked up what I said at the time. Even then, we were talking about the fact that we had been considering but rejecting the same proposal and I said that there would be a profound effect on pension funds, pensioners and employers as a result of that dramatic and unexpected change, for which we were unprepared and which had never been mentioned in the general election eight weeks before.
Mr. Ian Taylor: Does my right hon. and learned Friend accept that there were some rumours that that might happen? Indeed, the first question put to the Prime Minister at Prime Minister’s Question Time in May was from me, and I asked him whether he would compensate pensioners for any of the proposed changes in advance corporation tax.
Mr. Clarke: There were rumours and I shall refer in a few moments to a book on the subject. There was considerable worry at the time about the matter leaking out before the election. The decision was taken in great secrecy by the group of four people to which the shadow Chancellor has already referred—the three hon. Members and our old friend, Charlie Whelan—in the Grosvenor House hotel and with the assistance of Arthur Andersen, the then well known consultancy and accountancy firm. That is how these proposals were devised and put together. It had nothing to do with Treasury advice and I have no doubt that this group discovered, as we had discovered, that the Treasury, as usual in these matters, had a range of opinions among officials, with some in favour and some against. It had all been tied up and decided before the Government came to office.
Mr. Dunne: For purposes of clarification, will my right hon. and learned Friend confirm whether that is the same Arthur Andersen whose partners advised Enron on its tax planning?
Mr. Clarke: There are probably even more victims to be added to the list, but I believe that it is indeed internationally the same firm, but no doubt some very good people worked for that accountancy and consultancy firm. It was Enron rather than working for new Labour that brought it to grief, but the firm did indeed work for both and helped to produce this particular proposal.
Why was the decision taken? They looked at the argument, familiar to anyone at the time, that if companies were stopped from paying dividends as demanded by pension funds and were encouraged to retain profits, it would boost investment. That was repeated and has been repeated again over the last few days. It was a convenient argument to use whenever people were looking in that direction to raise revenue. However, as the hon. Member for Twickenham said, subsequent events proved that that was quite untrue. In any event, I do not accept it because the idea that if a company has produced a surplus, the best form of investment for it is to plough it back into the same company—or that if it distributed that surplus to the markets, they could not find better ways of investing the money in other ventures and other businesses—is a somewhat preposterous one.
If anyone returns to that argument, as new Labour Ministers do, I hope that we will not go back to the absurd idea that successful companies should hoard all their profits and not return any of the money to the owners as if that were the best way of making use of the surplus generated. In today’s modern markets, which work very well, I believe that quite the reverse is true. All the pressures under the present Government are for share buy-backs and distribution of dividends because most people accept that that former argument was wrong and that the best way to proceed is to encourage the distribution of dividends so that the market can make use of them in new ways.
Mr. Siôn Simon (Birmingham, Erdington) (Lab): Surely what this measure was doing was precisely removing the market distortion of the subsidy so that the company could decide for business reasons what was the best proportion to invest back in the business and what was the best proportion to pay back in dividends. That should not be distorted by the tax subsidy.
Mr. Clarke: That was the argument, but as I have just explained, I do not accept it and I do not think that subsequent history showed that it had that effect. It actually made no significant difference. That argument may have been used even by my predecessors in office, but it has been a convenient excuse to put forward when a Chancellor is looking for revenue.
Let me move on to how and why the decision was taken. Labour apologists for what happened keep going back to former decisions by my noble Friends Lord Lawson and Lord Lamont, which took place in quite different circumstances. It is relevant to look further into the precise time that we are talking about and the state of the economy then. The three Members I have identified were sitting in that hotel suite at the same time—precisely the same time—as my right hon. Friend the Member for Charnwood (Mr. Dorrell) and I were looking at the same proposition. We rejected the argument about distributing dividends and the argument that the pensions funds could carry this. It is possible to say that we came to a conclusion that, looking back, was preferable to the one that they reached. I do not believe that, in the end, in any event, that issue is what drove the three new Labour pioneers to the conclusion that they came to.
I turn to a book that has been cited once already—I thought that my hon. Friend the Member for Tatton (Mr. Osborne) was going to take all my speech when he opened the debate. The book is called “The Unconventional Minister: My Life Inside New Labour” and it is by the hon. Member for Coventry, North-West (Mr. Robinson). I commend it. I am grateful to him for giving me an inscribed copy when he produced it. I am using it only for political criticism of the decision and certainly no kind of personal attack on him or either of his colleagues. He is candid and makes it quite clear that they were searching for revenue. On page 88, when discussing looking at whether the calculations made by Andersen’s and being checked by the Treasury were right, he says:
“We needed the money. It had to come from somewhere”.
That was what actually drove the decision in that first tax-raising Budget in 1997.
Why did the Government need the money? The main problem was that they had promised not to raise personal taxation. That was a successful electoral ploy and totally
robbed me of the best argument that I was hoping to use against them. They were raising the money to fund their youth employment schemes and other measures. That is what it was for. The hon. Gentleman’s book reminded me that the windfall tax had been announced to pay for that, but it was not enough.
Mr. Geoffrey Robinson (Coventry, North-West) (Lab) indicated assent.
Mr. Clarke: The hon. Gentleman is agreeing. Well, it is his own book: it is a good source. The Government had to find some tax that they had not told anybody about in order to fill the shortfall. They may also have suspected that there was a kind of structural deficit and they had to do something about it. He refers to that as well, I think. But the key thing was that the Government believed that they had to raise some money without raising any personal taxation. It had to be corporate taxation and this move was the easiest way because it would raise an astonishing £5 billion per annum—and nobody would understand it apart from a few anoraks in the House and a few people in the pensions and accountancy industry. It was the original, and most profitable, stealth tax. That is how it all emerged.
A sadness is that the Government turned out not to need the money. It was the beginning of some extremely bad forecasting that they made in subsequent years. They were not able to anticipate where the dotcom bubble in America was going to take us. Nobody did; I did not when I made my remarks about recession. They began to run massive unsolicited and unexpected surpluses. It was years before they needed the money. Sadly, nowadays they are still spending about £6 billion a year and no one can find an easy way of getting out of this continued drain on pension funds.
They did what they did to raise the money and because it was a stealth tax. It did terrible damage to the pensions industry, pensioners and the legitimate expectations of many of our constituents.
I listened to the Chancellor defending himself and saying what a great decision it was and how he would make it again. He allowed fancy to run away with him. He was plucking things from the air to a quite extraordinary degree. The idea that I had used the argument that we were going to go into recession against him was nonsense. That came when the Governor of the Bank of England was raising interest rates and the Chancellor was raising taxation at precisely the same time, when we were already slowing down the economy. My right hon. Friend the Member for Horsham (Mr. Maude) and I were unlucky: all that happened was that the economy went flat. There were two successive quarters of stagnation. We never went into recession. But that was later.
Corporation tax was used in mitigation. In my last Budget, I reduced the small companies rate of corporation tax—quite the reverse of what has just been done by the Chancellor. My recollection is that the Government did not cut corporation tax until 1998—and they did not actually cut it. They took the headline rate down by 2 per cent., but they altered the method of payment to quarterly on advance estimates so that the cash flow into the Treasury was increased by what they did to corporation tax. It is bizarre to use that excuse. Until very recently, the Labour Government had been raising corporate taxation incessantly during all the time in which they had been in office. The Chancellor then went into even wilder fancies by saying that corporate
profits had risen as a result of the decision. I cannot for the life of me understand how corporate profits rose.
As has been pointed out, the inescapable fact is that the decision, on international financial reporting standards calculations, has cost at least £100 billion over the years. The cost is now running at £6 billion a year. Compared with the previous arrangements, 20 per cent. of the dividend income of pension funds is being sacrificed to the Treasury. Whereas nine out of 10 members of occupational pension schemes were in defined benefit schemes when we left office, only one in 10 is now in a defined benefit scheme. It is estimated that deficits in the pension industry are running at about £100 billion, which is exactly the figure that has been extracted so far by the tax.
The reaction to this is relevant. The way in which the Chancellor gets carried away by using different time scales to make his points, clutching at figures from the past and making wild assertions about what has happened casts serious doubts on his judgment and where we were going. Yesterday, the Secretary of State for Defence came to the House in almost as big a pickle. He had made a quite appalling error of judgment, but he admitted that he had made a mistake and actually apologised for it. Had he not admitted that he had made a mistake, he would have been roasted alive on the Floor of the House, so he made a sound political judgment. I am afraid that the Chancellor’s instincts are totally different. The very fact that he is criticised makes him defend his decision more vigorously by using wild arguments to justify it. He seems oblivious to the fact that although the decision was not the only cause of the problem—there was also longevity, the fall in stock market values and the mad regulation and valuation—he has done great damage to the pensions industry and his judgment was seriously—
Madam Deputy Speaker: Order. The right hon. and learned Gentleman’s time is up.
5.41 pm
Mr. Geoffrey Robinson (Coventry, North-West) (Lab): I am pleased to follow the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke). He started his speech in a serious vein, but he seemed to degenerate into using the unfortunate tone of voice and personalised criticism that we have sadly come to associate with the shadow Chancellor. As I tried to say to the shadow Chancellor last time I commented on his remarks, I do not know why he wishes to demean himself in such a way. The more he personalises his attacks on the Chancellor and makes them as unpleasant as he does, the more his behaviour borders on a form of paranoia and suggests that he lacks self-confidence. If I may offer him some advice—although he seems to have found much in my book, I doubt that he will take this from me across the Chamber—he would do well to moderate the personal nature of his attacks . [ Interruption. ] That remark was meant to be constructive; it was made to the hon. Gentleman in perfectly cordial terms.
Let me address a couple of points made by the former Chancellor. He makes a great deal of his four-year period as Chancellor. The Opposition often talk about the golden legacy that we inherited in 1997 —[ Interruption. ] Calm, calm. I am prepared to say that we did not find the usual mess left by Tory Governments. However, two significant aspects of the economic situation were of
great concern, so we had to address them immediately. The first was the public debt. I have the figures for the former Chancellor, given that he seems to have forgotten them.
When the right hon. and learned Gentleman took office, we had a massive public sector deficit of £42 billion. The reason the deficit had been allowed to run that high in 1992 was quite clear: the Conservatives wanted to win the election. To some extent, they succeeded in winning the election on the back of an unsustainable public sector boom and investment in the public sector. The deficit rose to 5 per cent. of gross domestic product, which was an exceptional figure by anyone’s standards. When the right hon. and learned Gentleman vacated No. 11, he left us with a structural deficit—or a deficit at any rate; he never answered my questions about whether it was structural—of £22 billion. During his four years of stewardship of the Treasury, his forecast for the deficit was wrong every year because he overestimated by 100 per cent. the reduction that he actually achieved.
That was the first matter that we had to tackle in one way or another, and through a combination of factors. The other matter—and it relates to why we made the Bank of England independent, and why the first act of the incoming Labour Chancellor was to show that he had the resolve to face the issue of whether it was necessary to raise interest rates—arose because the Conservative Chancellor, no doubt from sound party political electoral considerations, had refused Bank and Treasury advice to raise interest rates time after time, and month in, month out. Those were the twin matters that we had to address. The incoming Chancellor addressed one of them by taking the courageous political decision and brave economic decision to make the Bank independent. We all know that the present shadow Chancellor said that that move was a mistake, and he even voted against it, I think.
Mr. George Osborne indicated dissent.
Mr. Robinson: He indicates that he did not vote against it, and I am prepared to accept that, but he certainly was not very vocal in his support for the measure. As for the right hon. and learned Member for Rushcliffe, the former Chancellor, in the weeks after we took the decision, he said that it was a mistake. Those were the two fundamental decisions that we had to take. Part of the issue, and I see that we must confront it as honestly as I did then, was that we had to raise money, via the windfall tax, for our welfare to work programme, which was £5 billion. We raised a bit more than that in the end. The programme was successful, and people were successfully employed. Another issue was a general closing of the gap, which we successfully achieved, perhaps even to a greater extent that we dreamed that we could. We then went into budget surplus, but we did not do that by dodging the difficult decisions, by finding some local bandwagon that we could jump on, or by flirting with a superficially attractive idea that makes a brief apparition on the political stage. We did it by facing up to the fundamentals and taking difficult decisions.
The shadow Chancellor, who is a recent convert to the idea of facing up to the issues, has the courage to say to his party’s Back Benchers, whatever groups they are in—there seem to be so many of them; I cannot keep up with them these days—
David Taylor: The Cornerstone group.
Mr. Robinson: Yes, and there is the No Turning Back group. They want £40 billion of tax cuts, but the shadow Chancellor will not say where they are to come from, and of course he will not say that his party will reinstate the tax credit system. Of course he knows that it would be wrong to do so. I hope that later we will hear from the Secretary of State for Work and Pensions on the steps that we are taking to deal with the real problems that we face.
We heard very good contributions from the hon. Member for Twickenham (Dr. Cable), who led for the Liberal Democrats in this debate, and my right hon. Friend the Member for West Dunbartonshire (John McFall), who is the Chair of the Treasury Committee. He made a serious contribution on a serious problem. We face a savings problem and a long-term pensions problem, and we have to find consensus to deal with that. Those who have chosen to make a personal attack on the Chancellor and to turn the issue to temporary party political advantage have done nothing to advance the debate, which is one in which the whole House and all the parties have to engage. That has been made clear— [Interruption ]—not by the hon. Member for Beverley and Holderness (Mr. Stuart), who makes an interjection from a sedentary position, but by many others in the House. The shadow Chancellor does nothing to contribute to the debate, given the tone of voice that he used and the party political way in which he deliberately sought to exploit an issue that is of public interest, but not for the reasons that have been given.
David Taylor: Was my hon. Friend as disappointed as I was to hear the right hon. and learned Member for Rushcliffe (Mr. Clarke), the last Conservative Chancellor, misrepresent the position in relation to advance corporation tax? The former Chancellor said that the changes were made to increase cash flow, and it is certainly true that there would be increased cash flow at the start, but would that not simply re-profile the amount of corporation tax that would fall due? It would not alter the total. To misrepresent matters in that way does not improve the case one iota.
Mr. Robinson: My hon. Friend is correct, and I fear that the right hon. and learned Member for Rushcliffe, who did not have much interest in the detail of policy while he was in the Treasury, may not have understood that point. One thing that we did when we corrected the whole matter, when we abolished dividend tax credit, was to introduce a new instalment payment system for corporation tax. Of course, inevitably linked to that was the removal of advance corporation tax; in fact, there was a cash flow advantage to the Exchequer, of which the Confederation of British Industry was very aware. I will come back to that point in a moment.
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