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Mr. George Osborne:
I am grateful for the hon. Gentleman’s advice that I should be gentler with the Chancellor in future. Will he explain something, because he is in an almost unique position to do so? He explained why the decision was made to raise taxation, and he made the point that the then shadow Chancellor thought that he had to tackle the budget deficit. Why was that decision kept secret? Why were those tax plans developed in such detail in opposition, kept, so he claims, in a safe in his hotel room, and never revealed to the public or perhaps even, as I understand it, to the leader of the
Labour party at the time? If that difficult decision, as the hon. Gentleman says, needed to be made, why was he not honest about that to the public before the general election?
Mr. Robinson: The hon. Gentleman is absolutely incapable of distinguishing between a fundamental point and a personal point. He is at it again, trying to imply that there is something wrong about trying to work out policies in opposition. I commend my book to him, as it will teach him how to behave in opposition, which he has not learned yet, as well as preparing him for government. Every party that makes a serious attempt to become the Government of this country does serious work in opposition with serious players, which is one reason the Opposition have been distinctly unsuccessful on three occasions in gaining the country’s trust. People saw through all that they said on immigration at the last election, as they saw through what they tried to do on tax in previous elections. They jumped on an apparently attractive bandwagon, but the wheels came off when they were under scrutiny. With that mind, let us deal with the central issue —[ Interruption. ] If Opposition Members would like to intervene, I am happy to give way.
Mr. Robinson: I will give way to the hon. Gentleman in a moment. He was very patient in waiting for the Chancellor to give way, and made a terribly telling intervention. I look forward to another one, but may I first deal with the point about the official advice that we received?
There were, as the right hon. and learned Member for Rushcliffe correctly said, a range of views in the Treasury and in the Inland Revenue, which were the two principal Departments giving advice. Initially, the Inland Revenue was dubious about the figures that we had worked out in opposition—only the Treasury computer held all the information needed to achieve an up-to-date and accurate estimate—because it had looked at the problem before, and the numbers were nowhere near as favourable to the overall proposition of the three interlinked changes as was later the case. We had to wait about two weeks until the Inland Revenue came back, thoroughly in agreement with the proposals that we had evolved. Indeed, the person who led for the Inland Revenue said that it was something that he had wanted to do for many years.
Mr. Robinson: May I just finish this point, because it fits the whole and may be of some interest to the House? As the right hon. and learned Member for Rushcliffe said, the proposal had been considered before, but it was rejected, principally because of the fear of political repercussions. He could not face up to making tough decisions, just as he could not face up to increasing interest rates or to making the necessary cuts that have since brought the public accounts back into balance. That is why the Opposition failed to do it—and it is that lack of political courage that dogs them to this day. They seek to exploit easy opportunities, and that hollowness means that they will be found wanting at the next election.
Mr. Stuart: Why was the public not told?
Mr. Robinson:
The figures were printed very fully, and the hon. Gentleman will find the £5 billion figure in
every relevant part of the documents relating to that time. I cannot see why there is any surprise about that. Everyone knew it then, and everyone knows it now. The figure was in the public domain. To my knowledge, nothing has been revealed, apart from the fact that the Opposition, with the help of some parts of the press, are trying to impose a construction that suggests that in some way the Chancellor personally rejected official advice from the Treasury. Nothing could be further from the truth. As I said a moment ago, and as the previous Chancellor said, a range of advice was available. Of course, officials gave us caveats and warned us of the dangers. They told us the same about the Bank of England, which is no doubt why the right hon. and learned Gentleman refused to make it independent, because he was fearful of what would happen if he did so. Just as we made the hard but correct decision on the Bank of England, so we took the hard but correct decision about the overall reform of corporation tax, which involved the abolition of tax credits. Any notion that the Treasury team or the Chancellor personally went against official advice is plain wrong. I hope that the House clearly understands that.
None of the excerpts that the Opposition have read out from the official papers delivers the formal burden of official advice that we received, which was that we should proceed with the overall reorganisation of the corporate tax system. The CBI itself—and I spoke personally to Adair Turner—was in favour of the overall reorganisation. In particular, the industry as a whole wanted to get shot of advance corporation tax. If ACT were abolished, tax credits had to go, and if that happened, there was every reason to provide a more balanced and even pattern—a level playing field—of corporate taxation that would not favour dividends, capital investment and retention, still less companies that wanted to reinvest funds that they could not profitably use in their own business. That would be left to the market and not to an invented and distorted tax mechanism that no one ever had in mind when ACT was introduced.
I come back to the two central points on which I am pleased to base my personal contribution. This is a serious debate, and it should be about a serious problem that the country as a whole faces. I hope that, after this unwanted and unnecessary political intrusion instigated by the Opposition, we can return to the consensual approach adopted by the main parties in the House. The reasons we made that decision were quite clear, and it was based on the burden of advice from the Inland Revenue and from the Treasury that we should proceed with the changes that we were making. It was necessary, as were the other decisions that we made about the independence of the Bank of England, about raising interest rates and about closing the gap in the disastrous public expenditure levels that we inherited from the Tories. I do not want to rehearse again the specious and fallacious arguments made by the Opposition, which were comprehensively demolished by the Chancellor in his major contribution. I hope that the shadow Chancellor will take on board what I said earlier, because in such head-on confrontations, the message that reverberated around the House is that he has some way to go before he reaches the measure expected of a shadow Chancellor. As for us, we stand by those decisions: they were right then, and they are right now. We have problems—let us face them responsibly.
5.57 pm
Mr. Peter Lilley (Hitchin and Harpenden) (Con): It is a great pleasure to follow the hon. Member for Coventry, North-West (Mr. Robinson), whose amiable lack of self-regard enables him openly to admit that Labour deceived the British electorate at the last election. He sees nothing wrong in developing policies in secret, which it refused to admit. As an aside, I got wind of those policies before the election. I held a press conference during the election campaign alleging that it was the Labour party’s intention to abolish advance corporation tax. Only the Financial Times took me at all seriously, publishing a comparatively modest article saying that that was allegedly being considered by the Labour party. No one else paid any regard to the matter, and even I scarcely believed that it really intended to do it. None the less, I shall put in some context the decision that subsequently followed.
When I became Secretary of State for Social Security, the first crisis with which I had to deal was the Maxwell pensions crisis. The former Labour Member for the Milton Keynes area had left his companies’ pension funds bereft of hundreds of millions of pounds, so tens of thousands of pensioners’ livelihoods and future were at risk. We had to deal with that—we did not do so, but that is not the issue today. It meant, however, that I had enormous sympathy for my successors when they faced a Chancellor of the Exchequer who introduced a tax that took billions of pounds from the pension system, which affected every pensioner and future pensioner in the country. Indeed, on the night that he introduced that tax, I described it as the Robert Maxwell memorial tax, because no one before the Chancellor had thought that they could get away with removing money from pension funds without anyone noticing until it was too late. That is what our Chancellor did, but he has not got away with it indefinitely—only for too long.
I want to look very simply at the Chancellor’s record on pensions and his reasons for introducing this change. He inherited a system that, in the words of the right hon. Member for Birkenhead (Mr. Field), was the “envy of the world”. He inherited an occupational pension scheme that was accepted as the jewel in the crown of pensions systems worldwide. As a result, we were enabled to build up funding, savings and investments for future pension liabilities in this country to a level that was not only more than that built up by any other country in Europe, but more than all the other countries in Europe put together had saved and invested to meet their future pension liabilities. We faced less of a potential burden of tax to fund our future pension liabilities than those countries, and we were generating a huge annual flow of savings, which were available for investment in this country or to acquire assets abroad to meet the burden of future pensions.
In 1997, when the Chancellor took over, occupational schemes were generally well funded: they were secure, they were growing, they were giving earnings-related pensions to an increasing number of people and they were fairly taxed without disincentives to save. Let us take each of those points in turn and see what has happened under the tenure of this Chancellor.
Mr. Wayne David (Caerphilly) (Lab): Will the right hon. Gentleman give way?
Mr. Lilley: May I make a little more progress? I will happily give way when the hon. Gentleman has something about which to ask a question.
Pensions were well funded in 1997. We know that because when the Chancellor introduced the tax, one reason that he gave was that they were over-funded—he thought that they had too much money. Now, the deficits are measured in billions of pounds. I have asked the Library for the figures, and it puts the gross deficit shortfalls of pension funds at some £76 billion, which is a turnaround from surplus to deficit that is commensurate with the net present value of the £5 billion a year taken from pension funds and its impact on the value of those funds’ assets.
The Chancellor had the cheek to suggest that my hon. Friend the shadow Chancellor needs a lesson about the value of assets, but it is he who needs the lesson. What is important is whether assets exceed liabilities, which was the case in 1997. Now, the liabilities of pension funds exceed the assets. That is the Chancellor’s record, which he must answer for, and the lesson that he needs to be taught.
We were told then, and we knew well, that occupational pension funds were secure. Robert Maxwell had delivered a blow to confidence, but that blow was enormous precisely because up to that point no significant public company had ever gone into bankruptcy while being unable to meet the liabilities of its pension funds. Such pension funds were sufficiently well founded that even if the company did not survive, the pension fund did, or if the funds were underfunded, they were met by the resources of companies. When I faced the Maxwell pension crisis, I asked officials, “What normally happens in such cases?” They said, “This has never happened before”, so secure were we. Now it happens all too often, and all too many companies have failed leaving deficits in their pension funds. Hence the amendments that Conservative Front Benchers will introduce tomorrow to the Pensions Bill, when Opposition and Government Members will have an opportunity to try to make good the deficits and help the pensioners who are now caught in an occupational pensions system that is no longer as secure as it was.
The Chancellor has mentioned £8 billion being made available, albeit over 60 years, which is a measure of the crisis that he has created.
David Taylor: On pension fund deficits, surely the right hon. Gentleman should refer, at least in part, to the fact that after a long boar market the FTSE 100 was at about 7,000 on 31 December 1999, and that it halved to 3,500 by March 2003. Surely that played a huge role in the decline of pension funds, at least for a period—as we sit here today, it has, of course, almost climbed back to those levels. Why does he not refer to that? It is important, is it not?
Mr. Lilley: I am grateful to the hon. Gentleman to doing so for me. I entirely take the point. Markets go up; markets go down; markets go back up again. When they go down, it is like the tide going out—it reveals who was swimming without wearing any swimming trunks. When the market went down, it revealed the shortfalls in the provision that the Chancellor had made available and the problems that he had created.
The system was growing before this Chancellor came into office, but now pension funds are closing. The
majority of them are closed to new members, and two thirds of final salary systems have closed on his watch. Lord Turner has forecast the virtual euthanasia of final pension occupational schemes. The crown jewel of the occupational pension system has been successively plundered and sold off to the fences.
The Chancellor inherited a system that was fairly taxed and well incentivised. The system was fairly taxed in the sense that it was designed so that people did not pay twice. Having paid taxes on their incomes and made savings—the companies in which they invest pay tax—people did not pay a further round of tax, which is what the complex system of advance corporation tax credits was all about. The tax credit reflected the value of the tax—when taxes went down, the tax credits went down. The bulk of the reductions reflected that, rather than being a cut in the credits without any corresponding cut in the tax for the most part.
Mr. Dorrell: My right hon. Friend has touched on an important point of principle. My right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) referred to the fact that that option was rejected when he was Chancellor, partly because the arguments about rebalancing investment flows were rejected and partly because the tax change implemented by the Chancellor introduced for the first time double taxation on pensioners—taxation on income into the pension fund as well as taxation of the pension paid to the pensioner.
Mr. Lilley: My right hon. Friend is absolutely right. Any fair system taxes money either when it goes in or when it comes out, but not when it goes in, when it is in there and when it comes out again, which is where we are heading under this Government.
There is another change that no one has mentioned so far, which is the double whammy that this Chancellor landed on the pensions system, namely, the resort to extensive and almost universal means testing. That has meant not only that the pensions system bears more taxes, but that the incentive to save is reduced, particularly for those on middling and low incomes. That will have a serious, long-term deleterious effect on savings and provision for pensions in this country, not least because it means that most providers of pensions are now afraid that they will be acting unwisely if they advise someone who is not very rich to save and invest, which is surely a serious indictment of the situation that this Chancellor has created.
The Chancellor justified what he did in his Budget speech and subsequent interviews in three ways. First, he said that the measure would increase investment. Figures from the Library show that when the measure was introduced business investment amounted to 10.4 per cent. of GDP—it subsequently went down before recovering again to 10.4 per cent. of GDP. The measure has not raised the level of investment in this country—I will not pretend that the decrease was due to the tax change—and it has failed in the central thing that it was supposed to do.
The Chancellor said that the measure would discourage dividend payouts. As we all know, dividend payouts follow a cycle, but in the nine years since the measure was introduced, the payout rather than falling has risen compared with the nine years before its introduction. The amount is only small, but the measure has had the opposite effect, if any, to that which the Chancellor proposed and forecast. He imagined that there would be
a complex system whereby even though the cash flow of companies would clearly be reduced by this tax measure—there is no way of taking money from companies and pension funds that does not leave them with less—they would none the less invest a higher proportion of a reduced cash flow, which would increase asset values in the long term sufficiently to offset the effect of the money that was taken out. That was an absurd, incredible and complex thesis that I am pleased to say the Chancellor did not resurrect today, although it will be interesting to see whether his devoted colleague and potential successor will do so in the wind-ups.
Finally, the Chancellor said that it could all be paid out of surpluses—that these pension funds were awash with money that served no purpose, and that they could pay it out at a rate of £5 billion a year with no harm done. As we have seen, however, those surpluses were available at that time but subsequently disappeared and have been replaced, by and large, by deficits on a fairly substantial scale.
Ed Balls: I will resist the temptation to ask the right hon. Gentleman about pensions mis-selling. I am following his argument very carefully. Is his refutation of the Chancellor’s argument based on the fact that dividends—the profits paid out by companies in the UK—have been rising over the past 10 years under this Government?
Mr. Lilley: No, it is not, but never mind. If the hon. Gentleman reads the text in Hansard he will be able to see what I was saying.
The Chancellor said that the percentage of dividends paid out would decline; in fact, it has risen. [ Interruption . ] I am sorry—the percentage of profits paid out as dividends.
Ed Balls: Let us be clear: the right hon. Gentleman is saying that dividends have been rising over the past 10 years.
Mr. Lilley: I was referring back to the Chancellor’s Budget speech, when he said:
“The present system of tax credits encourages companies to pay out dividends rather than reinvest their profits.”—[ Official Report, 2 July 1997; Vol. 297, c. 306.]
If he introduced this measure to discourage paying out dividends, he has failed, as companies paid out a higher proportion in dividends in the subsequent nine years than they did before.
Mr. Lilley: I will allow the hon. Gentleman one last attempt.
Ed Balls: Given that the overall level of profits for corporations in the UK is at a record high, if the level of profits paid out in dividends has gone up, that means that dividends going to pension funds and to recipients of those profits have also been rising. The right hon. Gentleman is therefore saying that profits and dividends being paid out have gone up over the past 10 years, which is a fair point.
Mr. Lilley: That series of interventions by the hon. Gentleman was probably worse than his contribution on the “Today” programme. All that he may end up saying is that the Chancellor successfully achieved the opposite of what he intended, but it was not such a bad thing after all.
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