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The Chancellor committed two great sins of commission by imposing a heavy burden of taxes on pension funds and introducing extensive means-testing, but he committed an even greater sin of omission, which was the failure to cope with the growing issue—I would not call it a problem; it is a good thing that people are living longer—of longevity. The Government failed to address that for their first eight years in office. Why is that? I suspect that it is in large measure to do with their misrepresentation of the pension proposals that we published ahead of the 1997 election. Having so grossly and grotesquely misrepresented our proposals for reform, they could not return to the issue until it was all in the past, when they came back with something not entirely different from what I had proposed. It is a case of dishonesty being the root of a failure to act subsequently.
I believe that on this issue the Chancellor has revealed his failures of judgment and unwillingness to accept when he has made mistakes. It is time to drive home to him that he seriously damaged the glories of the pension system that we had in this country by taxing it, means-testing it and failing to adapt to the longer life expectancy that we all now enjoy.
6.15 pm
Mr. Siôn Simon (Birmingham, Erdington) (Lab): Being a socialist, I am a compassionate sort, and I think that Labour Members have been unduly hard on the Conservatives. My right hon. Friend the Chancellor and my hon. Friend the Member for Coventry, North-West (Mr. Robinson), the former Paymaster General, were very mean to the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), and to the shadow Chancellor. The Conservatives should be congratulated—not only those on the Front Bench, but those in the serried ranks of their predecessor generations, of whom there have been rather a lot in the past 10 years—on the only successful piece of guerrilla politics in what has otherwise been a sterile, acrid, wasted decade of opposition.
Opposition day debates on spurious subjects and specious axioms are nothing new—indeed, they are the very stuff of these afternoons. It is unbelievable that we are having this debate today, 10 years on, and we can only look forward to the rest of the series of retro-debates. Perhaps next week we could have one on the calamitous independence of the Bank of England and the consequent interest rate crisis, on the disastrous introduction of a national minimum wage and the consequent inflation shock, or on the disgraceful cuts in corporation taxes which accompanied the removal of the pension fund dividend subsidy, thereby causing a sharp, immediately discernible and outrageous rise in investment. Or, with a slightly different flavour, we could debate the consistent reduction of the dividend subsidy by successive Tory chancellors—a gradual phasing out of this market distortion, catastrophically prefiguring its eventual, extremely successful, removal by the Labour Government in 1997.
When the removal of a subsidy becomes a smash-and-grab raid, we really are in the world of doublespeak and upside-down-think. Even “credit” is a misnomer when the institutions in question do not pay tax. This was a subsidy, and one that was widely understood to have serious, long-term, structural, negative effects on the
level of investment in the economy. Everybody knew that. We knew it when I worked in the global HQ of a FTSE top 10 company in the early 1990s. The dividend was deleterious, but there was no choice because of the tax regime and because of the expectations that it created in the City. Even the Tories knew that perfectly well. Even Norman Lamont, advised by the right hon. Member for Witney (Mr. Cameron), knew it. That is why he said exactly that when he cut the subsidy for the fifth time in 1993.
Mr. Redwood: Does not the hon. Gentleman understand that it was advance corporation tax—not a subsidy, but a rebate of a tax?
Mr. Simon: It was not advance corporation tax. We are talking about the dividend tax credit, as it was called, which was a subsidy paid in cash to pension funds, which do not pay tax. I am afraid that it is the right hon. Gentleman who does not understand.
This was a subsidy widely understood by the Tories to be deleterious; otherwise, why would they have phased it out gradually on five successive occasions? Their Government were not only pouring cash unnecessarily down the necks of pension funds but incentivising companies to pour their cash down the necks of pension funds instead of reinvesting it into their businesses. Not only did everybody know at the time that something needed to be done, but no serious, impartial, disinterested commentator is in much doubt that, as part of a package including cuts in corporation taxes and increasing capital allowances directly to stimulate investment, it worked.
Mr. Kenneth Clarke: The hon. Gentleman has been encouraged to perpetuate the myth that the great scheme involved cutting corporation taxes. That was not the aim. I refer him to the book of the hon. Member for Coventry, North-West (Mr. Robinson), which makes clear on page 86:
“In the first place, if we were simply to get rid of ACT and leave the other existing arrangements for the payment of corporation tax in place, we would face a net loss to the exchequer in cash-flow terms of over £1 billion per year. This was unthinkable. The road to reform should take us in precisely the opposite direction”.
He goes on to describe the way in which they ended up producing a system that resulted in a cash flow to the Treasury of more than £20 billion.
Mr. Simon: I think that I reviewed my hon. Friend’s book when he published it. It is an enjoyable read, but I believe that I said at the time that it was perhaps imperfect. It has misled the right hon. and learned Member for Rushcliffe to overlook the fact that at the same time as the dividend subsidy was removed, the main rate and the small firm rate of corporation tax was cut as part of a package that succeeded in stimulating investment. The investment in the economy, profitability and the size of the pension funds increased significantly between the policy’s introduction and the dotcom crash of 2000. Everybody knows that.
Mr. Graham Stuart: I wish to ask a simple question. Does the hon. Gentleman believe that taking money out of the pension funds in some way boosted them?
Mr. Simon:
No money was taken out of the pension funds. A previous Government’s cash subsidy, which was being given to pension funds but was not advancing their interests, was removed for the long-term benefit of the economy. That was immediately perceived to be
successful. That is what happened. The notion that any current problems or changes in the pension industry are attributable to the removal of the subsidy in 1997 is not simply wrong but ridiculous. That is why I am so impressed, as a partisan politician, that the Conservative party has got the subject on the Order Paper an unbelievable decade later.
Let us consider Kaletsky’s column in The T imes last week. I do not know whether hon. Members have read it—none, strangely, has mentioned it. I commend it to everyone. One of the many comments that he made was that
“the claim that the 1997 ‘tax raid’ was the main cause of pension fund closures, or even an important contributory factor, is simply false.”
“The fact is that the pre-1997 pensions industry was not remotely as healthy as its lobbyists have claimed. The closure of traditional private sector pension funds was already becoming inevitable because of regulatory changes imposed by successive governments over the previous 20 years.”
We know what kind of Governments they were in the 20 years leading up to 1997, do we not? I do not recall that they were Labour Governments.
Let us be clear: even it were not for the dotcom crash that wiped £250 billion off the value of the stock market; even if contribution holidays—encouraged by Tory Governments through their capping of surpluses—had not been recklessly overused, and even if life expectancy had not risen so dramatically, there would still be major challenges for the pensions industry because of the serious regulatory changes, which fundamentally altered the landscape of the industry, the implications of which were not properly foreseen or understood when the Tories introduced them.
Having to pay spouses’ pensions, protect pensions against inflation and offer equitable treatment to early leavers had, along with life expectancy, already doubled the cost of providing private pensions. To quote again the esteemed and disinterested Kaletsky in The Times:
“The last straw... was the Major Government’s panic reaction to the Maxwell pensions scandal.”
He finally quotes Stephen Yeo, as several others have done, who advised the Tories on pensions. It is a shame that he did not tell them at the time that the business of getting rid of the subsidy being responsible for a pensions catastrophe was nonsense.
The Tories know it is nonsense, so what on earth is the motion doing on the Order Paper? To any student of economics or public policy, it would be baffling. To the student of politics—of the cynical, deceitful, disreputable way in which it is possible to practise politics—it is instructive. Hon. Members too often have recourse to Josef Goebbels’s line in 1933, which they often misquote and misattribute, that
“any lie constantly repeated eventually becomes the truth”.
It is not a line that fits our purpose here because it is far too strong. Conservative Members have not been lying about the matter, obviously.
However, the variation on Goebbels’s theme that dear old Willie Whitelaw played to the Conservative party conference in 1985, when he said that
“we must never forget the value of constant repetition to get our message across”
is not strong enough because it does not include the implication that it does not matter how misleading or
lacking in truthful content the message that the party in question is conveying is—all that matters is how often one says it.
Any young proto-politicians who seek instruction in the worst excesses of the dark arts should note the sheer, dogged, determination, during a period of utter barrenness, despondency and failure, to keep the non-story alive. Looking back through the records, there is quite a roll of honour from the Conservative point of view, though a complete rogues’ gallery from the point of view of serious debate about the pensions on which people are obliged to rely often at the most vulnerable time in their lives.
The right hon. Member for Hitchin and Harpenden (Mr. Lilley), whom I greatly esteem in many other contexts, opened the Budget debate about which we have heard so much in 1997, and claimed that the change in the dividend subsidy, combined with the windfall tax—perhaps another potential Opposition day debate; “the windfall tax on the private utilities” might be a good topic for next week or the week after—was
“a double whammy for pension funds; it is the Robert Maxwell memorial Budget.”—[ Official Report; 3 July 1997; Vol. 297, c. 430.]
In the same year, the right hon. Member for Richmond, Yorks (Mr. Hague) stated that the Budget was
“a double whammy against pensions... It is a smash and grab raid on pension funds in this country”.—[ Official Report; 2 July 1997; Vol. 297, c. 321.]
There is the double whammy theme. In 1998, the right hon. Member for Horsham (Mr. Maude) wittily reminded us:
“Last year we had the Robert Maxwell memorial Budget, with its vicious raid on pension funds.”—[ Official Report, 14 July 1998; Vol. 316, c. 198.]
Vicious? The Chancellor removed a subsidy to stimulate investment—and a year later it is “vicious”.
In 1999, the right hon. Member for Wells (Mr. Heathcoat-Amory) told us:
“In the Government’s first Budget, there was a £5 billion a year raid on pension funds as a result of the withdrawal of dividend tax credits.”—[ Official Report, 28 April 1999, Vol. 330, c. 351.]
In 2000, Mr. Michael Portillo, typically lyrical, stated that
“the Chancellor is still taking £5 billion a year from the pension funds of people who are now saving for their retirement. He is attacking the people who are trying to do the right thing and want to be independent. He is impoverishing future generations of pensioners, driving more and more of them to be dependent on the state.”—[ Official Report, 13 December 2000; Vol. 359, c. 662.]
The student should pause at this point and remember that that is not only not true, but ridiculous. Everybody knows that it is ridiculous. The Conservatives know that it is ridiculous. When they were in office, they did exactly the opposite from what they say. However, now they simply keep saying it—year after year and over and over again.
In 2001, Lord Strathclyde warmed to the theme:
“I cannot think of any tax rise”—
“more retrograde than his massive tax raid on pensions savings... How can this assault and battery of prudence be defended?... ‘it is like Gordon Brown leading a £25 million Brinks Matt robbery every day of the working year.’”—[ Official Report, House of Lords, 14 March 2001; Vol. 623, c. 853.]
That goes on and on, right up to three weeks ago, when the hon. Member for Chipping Barnet (Mrs. Villiers) told us about the famous time when the Chancellor “dealt a body blow” to savings with what has now become “his £100 billion raid” on pension funds.
The Chancellor removes a £3.5 billion to £4 billion subsidy to stimulate investment and it becomes a vicious, £100 billion raid on pension funds. For cynical, self-serving, misleading party politics, I take my hat off to the Conservatives. It is remarkable that they managed to get the motion on the Order Paper without the Clerks rolling about laughing and the printers becoming so hysterical that they could not get the document out.
However, for serious debate about people’s economic security, it is not funny. To call the ending of a damaging £4 billion subsidy, which the Tories were in the process of phasing out five or six times, a £100 billion smash-and-grab tax is not only ridiculous but disreputable. To be so baldly at odds with the facts is not clever, but to scare people about something that can make them feel so vulnerable is not kind. It is for that serious reason that Labour Members will be glad to vote against the silly motion tonight.
6.30 pm
Mr. Stephen Dorrell (Charnwood) (Con): I begin by declaring an interest as a trustee of an occupational pension fund, and as a director of the associated principal employer.
I want to congratulate my Front-Bench colleagues, for an eerily similar reason to that being used by the hon. Member for Birmingham, Erdington (Mr. Simon) to attack them. Over the past 10 years, the Chancellor of the Exchequer must frequently have quietly congratulated himself on the relatively low amount of political pain that he has had to suffer for the huge amount of money that he has taken out of the occupational pension schemes in this country, and for the damage to which that has contributed during that period. I welcome the fact that a combination of the Freedom of Information Act 2000 and the activities of The Times and of my right hon. and hon. Friends on the Front Bench has now brought the issue into sharp relief in the political debate. Those on the Conservative Front Bench should be warmly congratulated on that.
It is worth reminding ourselves why it has taken so long for this issue to take off as a subject of political debate. As my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) knows better than most, and my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) probably knows even better, anyone who tries to explain pensions issues in a political context fights an uphill battle. It is too easy for the issues surrounding pensions to degenerate into impenetrable jargon. That is precisely why the Chancellor chose this target in the privacy of the top-floor suite of the Grosvenor House hotel before the 1997 election. It also explains why he chose to present the reality of this tax increase on the pension funds in very delphic language during the 1997 Budget.
If people make an issue sound complex, there are usually two explanations. One is that the speaker does not understand the subject; the other is that they have something to hide. The Chancellor has consistently made this subject sound complex, but not because he
does not understand it. He is a very bright man; he understands it with absolute clarity. He has made it sound complex because he has had something to hide, and my Front-Bench colleagues are to be congratulated on at last revealing what he has spent 10 years hiding.
Stephen Hesford: The right hon. Gentleman has, like me, been listening to the debate. Unless I have missed something, no two people have given the same figure for this alleged pension raid, either on his Front Bench or in any other part of the House. Why is that? Is it because no such figure exists, or because nobody understands the issue, as he has just been describing?
Mr. Dorrell: I propose to stick with what I understand and, more importantly, with what my pensioner and employer constituents understand, namely, that it was a key factor of the Chancellor’s policy in 1997, as was made clear by the hon. Member for Coventry, North-West (Mr. Robinson), to levy a significant additional tax revenue out of the pension funds. We can argue about the number; the figure that most of us will stick with is £5 billion. The Paymaster General clearly thinks that it is more, because he has drawn the attention of the House to the fact that dividends have risen over the past 10 years, so £5 billion might be an underestimate. The key fact is that that money was previously flowing into the pension schemes, and now it no longer does so. The key questions when additional tax is being levied are: who pays the tax and what is the consequence of levying it? I shall go on to discuss that question in a moment, but I shall give way to the Paymaster General first.
Ed Balls: I am the Economic Secretary. I am grateful to the right hon. Gentleman for giving way. I know that he has a great deal of expertise in these matters, partly because of the time that he spent at the Treasury, where he conducted a review into barriers to long-term investment, which was known as the Dorrell review. If a freedom of information request were to reveal the contents and background papers of that review, what would that tell us about the review’s attitude to the dividend tax credit as a barrier to long-term investment?
Mr. Dorrell: We do not need a freedom of information request, because we had the details in glorious technicolour from my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who was Chancellor at the time. It was revealed that we had assessed the options for this measure as a tax-change proposal, and that we rejected it on three principal grounds. The first was a purely practical one, namely, that we feared the effect that it would have on pension funds. The other two were issues of principle, both of which are important to the debate.
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