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I have addressed the first piece of this package: the stealth tax of £1.5 billion. The second piece was the incompetence aspect of the Bill—or what we think
could have been incompetence, judging by the fact that although the desire to align the upper earnings limit with the higher rate tax threshold was announced way back in March in the Budget 2007, somehow the Treasury forgot that in having people pay so much more national insurance they also needed to consider alongside that the relevant state second pension accrual. It does not appear to me that that accrual definitely was considered by the Government, and perhaps they can confirm whether it did make an appearance in the Red Book. It certainly did not do so in the narrative aspect of the Red Book. We have seen figures in the Red Book which it could be a part of, but can the Minister confirm whether those amounts that appeared in the pre-Budget report were already accounted for in the Red Book figures we had earlier in the year?
When asked by the then shadow Secretary of State for Work and Pensions, my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), whether that had been discussed at the time of the Budget, the then Secretary of State gave a vague answer that a range of pension measures had been discussed between the Treasury and the Department for Work and Pensions. However, it does not appear that the particular aspect we are discussing today was one of them; otherwise, presumably it would have been part of the public finance figures earlier in the year. Instead it was clearly identified as an issue in public only when it was raised by our Front-Bench team and other experts such as the PPI.
In its briefing, the PPI states that unless the link between the state second pension and national insurance contributions is broken before 2012
“it will also increase the annual build-up of S2P for people earning above the old UEL of £34,840...Those earning above the new UEL of £40,625 will build up a pension of £2.83 a week in 2009 compared to £2.38 without the Budget changes.”
So way back in April the PPI had already clearly seen this problem of the lack of understanding of the consequential impact of what was brought in in the Budget 2007. If the PPI and the Opposition could see it, why could the Government not see it? Perhaps in the wind-up tonight, we can be given a little more insight into the stage at which that was discussed in detail and whether it was before or after the Budget 2007. The sense I have is that it was after.
Of course, this is no insubstantial consequential change from the Budget 2007; it amounts to £730 million. The bring-forward of this upper accruals limit from 2012 to 2009 which was announced in the pre-Budget report in October had just one sentence devoted to it in the entire statement made by the Chancellor. I appreciate that at the time of the pre-Budget report statement the focus of the Government’s attention was on responding to a highly successful series of tax proposals by the Opposition, but even in this statement the new Chancellor drew precious little attention to the consequential amendment in the second half of the Bill. As my hon. Friend the Member for South-West Hertfordshire has set out, we are waiting to hear whether that omission from the Budget 2007 announcement was simply a case of the Treasury team not understanding the impact of its own national insurance changes, or whether the then Chancellor simply did not have the guts to be honest about this change with the public.
I realise that, as we have already touched on, the flat-rating of the state second pension was part of an overall pension deal that would see the state pension
once again linked to earnings—something that my party pushed the Government to do before the last election. However, they have always been reticent about confirming exactly when the earnings link would be re-established. The Turner report suggested that the date should be around 2009 or 2010, but in responding to those proposals, the Government talked about a time line of 2012 or, at any rate, of taking action before the end of the Parliament, subject to affordability.
I remember when I was still serving on the Work and Pensions Committee pressing the then Secretary of State for Work and Pensions on the impact of the affordability test and whether that was the core test that had to be passed. He was very keen not to box himself into any commitments one way or another, but given the changes that we are now faced with in this Bill, can the Minister say on what date the earnings link with the basic state pension will be re-established, in line with the pension reform deal that this House agreed?
The PPI has estimated that the pull-forward of the second half of this provision—flat-rating the state second pension earlier—to 2009 will cost the public £2 billion, so there will be a big impact. It will mainly affect employees and employers, who will not now receive the level of contracted-out rebates that they had planned to receive. That is no way to thank organisations and individuals who have made efforts to provide better for themselves, rather than relying on the state. As I said earlier, when the original commitment was made last year to re-establish the earnings link, the Government set themselves the key test of affordability. Most people can only say that since that time public finances have worsened, so can the Minister confirm when this link with earnings will be re-established? This is an issue of trust, and it is very important if we are to maintain the consensus on pensions that we achieved earlier in the year.
Let us not forget that the cost to business of introducing this Bill will be £30 million. Such businesses—the overwhelming majority of which will be small businesses—will face that cost three years earlier than was originally planned. The Minister needs to take that on board and—particularly given the capital gains tax debacle and the increase in corporation tax for small businesses—give us a sense of what she plans to do to help businesses cope with costs that they will have to bear earlier than they were expecting.
The impact assessment points out that this change will cost the Treasury £10.7 million. Given that this is an IT change, does that figure have built into it the inevitable disaster costs that we are so used to with this Government when they try to use IT to achieve anything? I hope so, because based on past and current—and no doubt future—performance, that money will be needed.
This Bill sums up the Treasury as we so often see it today—stealthily taxing people, and combining that with a dash of incompetence. Small businesses hit by the capital gains tax grab will attest to this, and after today so will millions of pensioners. The former Chancellor was keen to go out with a flourish, and this Bill is rooted in the changes that he made in his final Budget earlier this year. He wanted to give the British public the impression that he was a tax-cutting Chancellor, but we all now know better. He may have celebrated his elevation to the office of Prime Minister, but his Treasury legacy
will be stealth taxation and incompetence, which is a toxic tax cocktail for the British public to have to stomach. With this Government, simplification has become a byword for raising tax and the cover under which businesses and people saving for pensions are all too often made the victims of Treasury daylight robbery. Worse, this Government have destabilised the consensus that we are hoping we achieved in reforming pensions. Put simply, it is not good enough. We are not buying it and all the signs are that the British people are not buying it, which is why we will be voting against this Bill tonight.
7.24 pm
The Exchequer Secretary to the Treasury (Angela Eagle): I want to begin by wishing all Members who have given the Chamber priority as we approach the Christmas period, a happy Christmas; I hope that they have a nice break. The compliments of the season to everyone.
We have had an extraordinary debate today. We see that the Conservatives are going to vote against a Bill that helps to put into effect a tax cut that will benefit, or not disadvantage, 21 million people; that will take 600,000 pensioners out of tax completely, a point that was not even mentioned this evening; that will take 200,000 children out of poverty—child poverty did not feature much, either; in fact, I am not sure that it was even mentioned by Conservatives—and that will help to make work pay.
Angela Eagle: I was going to get to the hon. Gentleman soon enough, but I am happy to give way to him now.
Mr. Heald: Can the hon. Lady point to the clause in the Bill that she is referring to?
Angela Eagle: Although the Bill is a technical measure, it is a key part of the process that puts into effect the announcements made on national insurance and pension provision in the Budget 2007. Many Opposition Members have spent time talking about the Budget, and this Bill is one of the enabling provisions that will ensure that the personal tax measures announced in the Budget can be put into effect. It is therefore only fair and right for me to set out the wider context of the changes that were announced and that the Bill will help to put into effect, so that those who are listening get the whole story, rather than a partial, tiny bit of it, which is what we heard during most of today’s debate.
Mr. Gauke: If the hon. Lady is talking about the context of the 2007 Budget, she will remember from when we were both members of the Treasury Committee the evidence given to us by the Institute for Fiscal Studies showing that 5.3 million households, most of which were among the lower-paid, lost out as a consequence of that Budget.
Angela Eagle: The IFS also said at the time of the Budget that the
“income tax and NI package has been cleverly designed to limit the number of losers to one-household-in-five at a modest overall cost to the Exchequer”.
So there was actually much praise from the IFS for the overall balance of the package that this Bill helps to put into effect.
The hon. Member for South-West Hertfordshire (Mr. Gauke) talked about simplicity and said that we should be wary of it. He also shied away from a direct question. I had to ask him more than once about the Opposition’s attitude now to the pensions consensus that had been developed, and which was put into effect during the passage of the Pensions Act 2007. I asked him a direct question—whether the flat-rating of the state second pension was still part of the consensus, and whether the Opposition had now decided that they did not wish, in opposing this Bill, to see that crucial part of the Turner commission reforms put into effect.
In the light of the hon. Gentleman’s refusal to answer that question, we have had a huge flip-flop from the Conservative party on what was meant to be a consensus. When the Pensions Bill, which referred to this exact—
Kelvin Hopkins: I hope my hon. Friend will forgive me for feeling slightly uncomfortable about having a consensus with the Conservative party on this matter. If, by breaking and moving beyond the consensus, we are making a more progressive move, which will help those who are less well off, is that not a good thing?
Angela Eagle: My hon. Friend, whom I admire and respect, should have a close look at what the distributional effects of flat-rating the state second pension are. Such an approach ensures that those paying over the upper earnings limit will not receive earnings-related extra accruals after 2030. Flat-rating the state second pension is a progressive thing. It appears that the Conservative party, after being in a consensus, has decided that it does not want something as progressive as that.
Interestingly, when the state second pension consensus, which the Bill puts into effect, was being forged, the Conservative spokesperson in Committee, the hon. Member for Eastbourne (Mr. Waterson), said that
“abolition of the S2P and state earnings-related pension scheme rules would result in marginal reductions in second pensions for some older workers, but that is more than made up for by the earnings-uprated basic state pension.” ——[Official Report, Pensions Public Bill Committee, 30 January 2007; c. 199. ]
By that argument, he blew out of the water all today’s claims about the Bill being a stealth tax, because he explained precisely the balance of the personal tax package that the Bill helps put into effect. Although the upper earnings limit increases cost money, that money is recycled and given back to people by the later changes in pensions uprating and the earnings relation.
Yet, a few weeks later—we have seen more of this again today—the shadow Work and Pensions Secretary said that the provision was
“a new stealth tax on retirement”.
He said that despite the fact that his party supported flat-rating the state second pension when the Pensions Act 2007 was going through Parliament. The Conservatives are now voting against it, so what are we to make of the opportunism demonstrated by the position that the main Opposition party has taken today? We can conclude that the Conservatives are searching for press releases and headlines. They are giving one impression one minute and the opposite impression when they are in front of audiences. They say what they think a particular
audience wants to hear, hoping that nobody will put two and two together and realise that they are saying one thing to one audience and completely the opposite to another.
Where will that approach get the Conservatives? It will mean that few people will take seriously their pronouncements on cross-party consensus and on their approach to these policy matters. If they are in favour of flat-rating the state second pension, why have they been so hostile today to the measure that implements it? If they were so against it in the first place, why did they not even bother to vote against it when it was debated during consideration of the Pensions Act 2007?
The hon. Members for South-West Hertfordshire and for Putney (Justine Greening) asked whether we knew at the time of the Budget that there was an issue about aligning the state second pension flat-rating the, upper earnings limit, and the changes that the Bill brings into effect to prevent unintended windfalls for those who earn above the higher earnings limit. We knew that that was the case, so this is not, as has been alleged, incompetence; in fact, the figures featured in the Red Book as part of the national insurance contributions calculations. We were aware of the issues involved, but we had to work up the policy options in detail to come to a workable solution in this complex area of public policy.
Justine Greening: In that case, why was there no mention of this proposal in the Red Book?
Angela Eagle: The arithmetic in the Red Book took account of it. We knew that there was an issue about increasing the upper earnings limit faster than had been expected. We also knew the implications that that would have in terms of unlooked-for and unearned windfalls for higher rate taxpayers with respect to the state second pension. We were working through policy on this, but if the hon. Lady were to look, she would see that the issues are taken account of in the Budget arithmetic.
The hon. Member for South-West Hertfordshire made no real mention of child poverty or pensioner poverty, but he was very concerned about the small number of people earning above the higher earnings limit who may make minor losses because of some of the changes to the state second pension. That again proves that the Conservative party is for the few and not for the many.
The hon. Member for Rochdale (Paul Rowen) made an interesting speech, in which, to his credit, he talked about child poverty and his concerns about whether the target could be reached. He also made some comments about pensioner poverty, and I tried to bring those to his attention at the time. He said that he supported the Bill in theory and that he liked the first part of it but not the second. He supported the increase in the upper earnings limit, but then said that his party was going to vote against the Bill anyway; that seems an odd thing to do. He said that he had problems with the upper accruals point and the state second pension point. Again, we can talk about that, although the Liberal Democrats have a distinct policy on a citizen’s pension, which he discussed and which has been consistently put forward. It involves some difficulties and issues, but it has been their policy for a long time.
I cannot understand why the hon. Gentleman feels that the Bill needs to be voted against when he supports
at least half of it. If he wished, he could have raised some of these issues in Committee. We could have debated whether his concerns could be accommodated in some way and whether we could make progress, but he has decided, despite supporting at least half the Bill, that he must vote against it.
Paul Rowen: I am happy to make an offer to the Minister across the Floor of the House. Will she give us a guarantee that the money that will be saved by the upper earnings accrual will go straight into ensuring that the state pension is, from next year, put back to being related to earnings? Does she agree that that would be a progressive move that all parties could support?
Angela Eagle: I am not so certain that hypothecation of income in that way is exactly as progressive as the hon. Gentleman says it is. Despite his interest in child poverty, by voting against the Bill he is saying that the 200,000 people who are being raised out of poverty by the changes as part of the personal tax package that the Bill puts into effect should not be. He refused to talk about the 1.8 million fewer children who are in absolute poverty as part of the changes that we have made in the past 10 years, including the 600,000 fewer in relative poverty. Perhaps he and I could agree that that is better than the doubling of child poverty that we saw in the previous 18 years. After all, we have a consensus on some things across the Floor of the House.
The hon. Gentleman had some surprising thoughts about pensioner poverty increasing hugely, when in fact we spend £11 billion a year more in real terms than was spent on pensioners in 1997. That money has been focused on those in need and we have lifted close to 2 million pensioners out of absolute poverty. Nor did the hon. Gentleman mention that, as part of the changes in personal taxation that the Bill helps to introduce, 600,000 extra pensioners will be taken out of tax completely. That means that once these reforms have been introduced 57 per cent. of pensioners will pay no tax whatever. I hope that he might now admit that he should have at least recognised the progress that this Bill will make in that regard.
Steve Webb: The Minister was given notice about an hour ago of this question and I hope that she can now answer it. Can she confirm that every pensioner in Britain is getting a smaller share of national income now than each pensioner was getting 10 years ago? She has had a chance to receive a note, so is that true or not?
Angela Eagle: The hon. Gentleman should realise that this is the first Government ever to cut the link between age and poverty. People over 60 are now no more likely to be in poverty than any other cohort in society. That is an achievement of which this Government can be extremely proud, and the hon. Gentleman should applaud that achievement.
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