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23 Apr 2007 : Column 724

Mr. Redwood: That has nothing to do with this argument. The economy was growing strongly and the Conservative Government would have started to repay public debt over the cycle, just as the Labour Government did. I seem to remember that the Labour Government inherited Conservative spending plans and stuck to them. While they did so, the fiscal position improved greatly and we started to repay debt, so in a way it was a Conservative success that so much debt was repaid.

John Healey: Perhaps I could help the right hon. Gentleman. In response to my hon. Friend the Member for North-West Leicestershire (David Taylor), the level of net debt when this Government came into office was 43.6 per cent. of GDP; last year, it was a little over 37 per cent.

Mr. Redwood: The Minister is wrong to provoke me on this issue, because, in citing those figures, he does not tell the House that this Government have been masters of off-balance-sheet financing. They have allowed the most colossal pension fund liabilities to build up and have not put them on to the Government balance sheet. The Government and their friends around the world have legislated to make every company put its pension deficit on to its balance sheet, on the ground that in due course that deficit will have to be paid for—partly out of company contributions and partly, we hope, out of asset gains—so it is necessary in order to understand the trading position of every company in the country. However, the Government do not do that for their own balance sheet. They produce a balance sheet with just the Government debt on it, very narrowly defined, and do what the Minister just did by saying, “Aren’t we wonderful? The debt burden seems to be quite low by international standards.” However, the debt burden would be a minor part of the problem if they had to account in the same way as plcs. The Government would have to put £700 billion on to the balance sheet for the accumulated pension deficit in the public sector.

Ed Balls: The right hon. Gentleman would agree that the way in which we treat public sector pensions in the national accounts is exactly the same as the position that the previous Government took in 1997 and fully in line with the European accounts standards of 1995. Does he think that the proportion of private finance initiative liabilities that are recorded on the Government balance sheet is higher or lower than the proportion of PFI liabilities recorded in 1997?

Mr. Redwood: Again, the world has moved on. In 1997, companies did not have to put pension deficits on to their balance sheets, and neither did the Government, so there was symmetry. Now, companies have to put pension deficits on their balance sheets, whereas the Government do not. The other big difference is that, in 1997, most pension funds were in surplus, as there were not these huge liability problems; now, they are in massive deficit. I have been persuaded that it is right to recognise those deficits and to require that they are properly reported. The Government should have to produce an accurate and honest figure with their actuaries for the pension liability deficit in the public sector. Any sensible analyst would then add that to the borrowings through the gilt market that the Minister reported to the House.

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PFI liabilities are being understated. It is a question of the quality of the schemes and the likelihood of their going wrong, and the Government needing to spend a lot of money to reinstate the public services that were covered by them. There has been a massive build-up in PFI activity—the Minister will be proud of that—and it is now so important to the public accounts that it is misleading not to put on a much bigger figure for PFI liabilities on a contingent basis.

Ed Balls: The right hon. Gentleman knows that nowadays the majority of PFI liabilities are being recorded on the public balance sheet—indeed, over time, they all will be—whereas in 1997, a minority were recorded. His charge that it is this Government who have been concealing these things is not true. In the same way, if, in retrospect, public sector pensions should have been recorded on the public balance sheet in 1997, the position as regards national debt that we inherited in 1997 should have been much higher as a percentage of GDP than the 43.6 per cent. that my hon. Friend the Financial Secretary quoted.

Mr. Redwood: Of course, if one changes the accounting rules and puts on extra deficits, the deficit will be bigger. In 1997, the Conservative deficit would have been a bit bigger than the one that the Minister quoted, but this Government’s deficit would be massively bigger because, over the following 10 years, there has been a huge surge in pension and PFI liabilities. One reason why it now matters much more that PFI liabilities are not properly accounted for is that their quality has deteriorated. Under the Conservative Administration, when there were not many PFIs, there was a much greater attempt to ensure that there was a genuine transfer of risk to the private sector so that, if the scheme went wrong, the private sector, not the public sector, had to pick up the bill. I do not believe that that is true of the London underground public-private partnership, which constitutes a massively expensive and risky set of arrangements stretching over 30 years. I am not sure that the Government accounts reflect the full consequences of the cost of that scheme.

Paul Farrelly (Newcastle-under-Lyme) (Lab): The right hon. Gentleman says that risk was more properly transferred to the private sector. Will he comment on the massive profits that were made through refinancing the rolling stock leasing companies after the privatisation of British Rail?

Mr. Redwood: The fact that people make a profit out of something does not mean that they are not absorbing risk. It means that they have successfully managed it and moved it on. The point is whether, if something goes wrong, the risk resides with the public sector. In many PFIs in the health service and in education, the risk clearly rests with the public sector because it cannot turn around if the PFI goes wrong and say, “That’s all right, we’ll just close the hospital” or, “We’ll close the school.” Those public facilities are important and would have to be kept going. The private sector knows that when it enters into negotiations with the Government.

When I was in the Cabinet, I remember vetoing PFI schemes for hospitals in Wales because I believed that it was cheaper to pay for them out of the long bond market or through taxation. That is what we mainly did on my watch.

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Mark Tami: Can the right hon. Gentleman send the money back?

Mr. Redwood: The hon. Gentleman makes a crass point from a sedentary position. [Interruption.]

Mr. Deputy Speaker: Order. I am sorry to interrupt the right hon. Gentleman, but there has been far too much noise from the hon. Member for Alyn and Deeside (Mark Tami). He should not intervene from a sedentary position—it interferes with the debate.

Mr. Redwood: If the hon. Gentleman examines the record, he will realise that I made health the No. 1 priority in the Welsh Office budget. I made considerable increases and backed several schemes to improve Welsh hospitals. I also kept smaller hospitals open—I understand that that is now more trendy with the Government after a time when they subscribed to the “big is best” idea that closing them made sense. I shall not therefore take any lessons from the hon. Gentleman about being nice to smaller hospitals that need investment.

The amendment goes on to discuss the “U-turns on pensions policy” and the failure

We have heard a lot already about the subject, especially from the hon. Member for Wolverhampton, South-West (Rob Marris). It would be wrong to re-enact our debate last week on that important subject.

I agree with much of what the hon. Gentleman said about climate change but, in the least convincing part of his speech, he said that there were bad people around and that they had damaged pensions. However, the one “bad person” whom he did not mention was the Chancellor of the Exchequer. I am delighted that he admitted that, if one removes £5 billion a year of tax credit from the pension funds, they are worse off. It was extraordinary last week to hear the Chancellor answering my intervention by saying that they would not be worse off and that it was fine to take £5 billion from the pension funds. I believe that he also said from a sedentary position that, if I took away 20 per cent. of his income, he would not be worse off, either. My response is, may we please take away 20 per cent. of his income and give it to the pensioners who are suffering, because they would find that valuable, even if he does not think that a fifth matters much?

We cannot get away from the fact that the tax raid on pension funds did much of the damage. Actuaries and some of my hon. Friends have referred to the figure of £100 billion. That is a little more than the current accumulated deficit of the main funds, as recently stated. That symmetry is interesting.

The hon. Member for Wolverhampton, South-West is right that there is good news, in that people are living longer and that that has a cost for pension funds. If one takes a piggy-bank approach, the cost is taken care of by the increased contributions that companies are now making, recognising the extra longevity to which the actuaries have woken up in the case of the pension funds. One is left with the rather neat symmetry that the combined pension deficits equal the amount of money that the cumulative effect of the removal of tax credit had taken out of funds, and that the deficits are
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now fortunately reducing because much extra money has been put into the funds—contributions are increasing because they are, at last, being a bit better managed.

Funds are now benefiting from the small increase in or stabilisation of the yield on long gilts in the past few months. When the long gilt yield was falling, the deficits continued to rise because that was the way in which the sums were calculated. It did not necessarily mean that the pension funds could not pay the pensions. The Chancellor’s success at selling billions and billions worth of Government debt on ever lower interest rates was one reason why the pension funds were so badly exposed because of the way in which the figures were calculated.

Paul Farrelly: Does the right hon. Gentleman agree that one of the problems with British business has been a lower propensity to invest than some of our counterparts in the rest of the world and that that is partly due to the immense pressure on publicly quoted businesses to pay out larger dividends than in other countries? Does he also agree that any measures to level the playing field and encourage investment benefit our prosperity and pensioners over a longer period?

Mr. Redwood: That is not a difficult question. Of course successful investment is welcome in an economy. Any measures that we can include in the Bill to raise the rate of successful investment are welcome. I am not sure that cutting the corporation tax rate and taking away many of the allowances is the way in which to achieve the goal, but I would rather do that than nothing because the headline rate has a psychological effect. It is the first thing that any company considers when deciding where to locate its investment. However, we need genuine tax cuts—the Exchequer taking less money so that more money is left in company coffers to spend on investment.

The hon. Gentleman says that the problem for British business is that it distributes too much in dividends. I do not believe that that is the case from examining current world markets. A typical yield on a quoted British equity is 2.5 or 3 per cent. That is not a high rate of running return on a share and it does not represent a high proportion of free cash flow.

If the hon. Gentleman wants to know where much of the free cash flow is going, two things make big inroads into it. The first is the tax system, which we are discussing, and reducing the rate from 30 to 28 per cent. is only a small help when allowances are also being removed. The second is the need to invest far bigger contributions in pension funds because of the disastrous tumble into deficit, which we have examined at some length today and previously. If the Government could find a way to solve the pension problem and if they could get their corporation tax rate down a little more, there would be more free cash flow for British businesses to invest.

It is a good time for several sectors and businesses to invest. The rates of return on capital are not bad and there is a satisfactory gap between the borrowing rate—even at the new higher rates of interest—and the rate that one could expect to earn on one’s capital.
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Reluctance to do more relates to pressures on companies’ cash flow from the Government and the pension fund element.

The relatively rosy picture is based on averages. Ministers will tell me—as I have just told them—that the rate of return on capital is not bad and that there is a worthwhile margin on average. However, people trying to run process industry in this country would say that it was not true for them and that the Budget does nothing to sort out their problems. A glass maker, a brick maker, a cement maker or a paper manufacturer has considerable problems, mainly from the gas price and energy prices but also from the regulatory backdrop. There is a dreadful exodus from this country of much process industry. The most visible example was the decision of British Steel——then Corus, now Tata Steel——to go to the Netherlands rather than Britain for its new big investment. It did not go to the Netherlands because labour is cheaper there—it is not—but because the Netherlands combines a better tax regime and a lower gas price. The Budget does not tackle that to try to claw back some territory so that we can reinforce those businesses that remain in Britain in process industries with big energy bills and encourage new investment and new companies to come here.

Perhaps the Government’s wish is to hit their climate change targets by de-industrialising Britain. One way we could hit the Kyoto-plus targets for climate change is to export all the heavy energy using industries. However, that would not help the world problem because we would simply export our heavy energy users to overseas territories that probably use even more energy less efficiently. I recommended that the Government see whether anything can be done to ease those pressures on British process industry, which is suffering particular problems.

Paul Farrelly: I was discussing the issue of gas prices with the pottery industry and the British Ceramics Confederation on Friday. I would like to correct the right hon. Gentleman on a point of fact, as the price of gas in Europe is lower now. The real issue is ensuring that structural impediments are removed in order to end the volatility in the UK. Although it may be against his better judgment, I urge him to support the EU in its efforts to do that.

Mr. Redwood: It is certainly true that the spot price is now lower than when we had a crisis, but people are still deterred from increasing their investment here or coming here to invest because of that volatility and because the spot price might move up again. Worse still, it could be possible to run out of gas completely. We reached that very difficult position the winter before last, when a shortage was a consequence of the fact that the right decisions had not been taken to put the necessary measures in place.

Do I support any EU attempts to solve this problem? Of course I do. What is the EU meant to do? It is meant to apply competition law to the gas industry in Europe so that when there is a shortage in Britain in future and we are sending strong price signals that we would like to buy more gas, more gas is actually forthcoming. It was a disgrace that the EU was unable to get the gas market to clear properly when Britain was bidding much more than the continent for gas, but
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the gas was not made available. I hope that the EU will solve that problem, but I fear that it is not about to, so the solution must lie here in Britain with a combination of financial measures and giving the right encouragement to the industry to put in the facilities that are needed to get available energy supplies competitively. New businesses here would then meet higher standards of energy conservation and fuel efficiency.

Our amendment says that we do not believe that the Government are getting very far in tackling climate change in the Finance Bill—and I agree with my right hon. Friends about that. I noticed that, under the section headed “Environment”, the Government put through a number of increases in fuel duty rates. I am sure that the Government would say that it is good to make petrol and diesel dearer, as it may deter people from using as much at the margin.

It is curious to note that in clause 10, there is a 2p increase in biodiesel and bioethanol on a price base of 28p and only a 2p increase in standard petrol and standard diesel on a price base of 48p. The Government are sending out a signal that they want people to stick with the more polluting methods and not switch to biodiesel and bioethanol at the margin, because there is twice the rate of increase on the fuels that are apparently more friendly than there is on the less friendly fuels. If we look at road fuel gas, which I thought should have a lower rate of duty because it is thought to be more environmentally acceptable, we see an increase of almost 3p on a 10.8p base, compared with 2p on a 48p base for standard petrol and diesel. That takes a bit of explaining.

Other Members referred to air passenger duty as being a clumsy mechanism for getting to grips with inefficient aircraft—older aircraft in the main—and air services that do not have many people on them. I agree with those who say that if we are to use tax as a means of trying to reduce air passenger journeys at the margin—it will reduce the growth rate rather than cut it—we need to look into ways of trying to capture what is meant to be the mischief here, which is people travelling on planes with not many people on them or travelling on old or dirty planes or a combination of the two. Clearly, there is a green case to be made there.

Any Government keen to do something about carbon output should do more audit work than the present Government have so far done on the ways in which carbon dioxide is emitted into the atmosphere. There are some glib assumptions in the present debate that are not always true. It is assumed that trains create no carbon dioxide emissions and are always a good thing because some of the sums are computed on the basis that trains run on nuclear power-generated electricity. However, even electric trains use a mix of electricity, including some electricity produced from fairly old and dirty coal power stations.

It is also assumed that buses are always better than cars, but it depends on how many people are travelling on the bus and how old it is. On average, buses are very old and have very few people on them, so the bus is not always the immediate green answer. If we are to take the issue seriously, we need tax incentives to promote new buses and we need a transport Minister who can design bus services that people, along with industry, want to use in order to make it a green option, which it
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is very often not at the moment. I believe that we will solve most of those difficulties through technology, which is making far bigger strides in greening private motorised transport than in greening either the train or the bus.

Similarly, we need to do a proper analysis on the home of those measures that can make a really favourable impact. I understand the Government’s argument that they wish to reward zero-carbon homes. I am not one of those to make cheap jibes about the matter tonight, because I am happy for the Government to reward something, and if it is possible to have a zero-carbon home and people are clever enough to implement it, I am happy for them to get off paying a bit of tax for the privilege. However, it is fair to note that that will not be a great world-beating policy. At the moment, it is difficult to secure a zero-carbon home and there are not many people immediately volunteering to get that particular tax relief.

Mark Tami: The right hon. Gentleman mentions a raft of measures that he believes could be taken. I believe that what we really need to do is invest in the next generation of nuclear power stations, but it is something that his leader seems very coy about. Does the right hon. Gentleman agree with me on that? [Interruption.]

Mr. Redwood: I am wisely warned that that question invites me to stray rather far from the Finance Bill. If I can ask the hon. Gentleman to conceal his excitement, that is one of the issues that will be covered in the forthcoming economic assessment report. I warn him that it is not an easy question to answer, as an awful lot of complicated arithmetic will have to be done by all sorts of people to come up with a sensible answer to that problem. What I can tell him is that if we were in government, we would have decided it by now, because the matter is urgent. We need to know what the Government are going to do, because we are very close to the point where the nuclear stations have to be retired or closed. If we do not replace nuclear with nuclear, another fifth of our generating capacity is going to be generating carbon dioxide—unless there is a magic formula on renewables.

Paul Farrelly: The right hon. Gentleman is making a thoughtful contribution. I would like to turn not to nuclear, but to bioethanol, which he mentioned earlier. Crucial issues need to be addressed about the replacement of rain forests with sugar cane, just as they do about the total carbon impact of using palm oil from south-east Asia. What serious consideration is being given to those policy issues—apart from his own thoughtful remarks—by his Front Benchers?

Mr. Redwood: I am sure that that particular debate will be covered by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) in his forthcoming report. Our Front Benchers will then consider his remarks. I defer to my right hon. Friend, who knows rather more about that particular set of issues than I do. Once again, I think that we may be straying a little far from this year’s Finance Bill.

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