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If you augment too much your own borrowing, you might be punished by markets. If you are at the limits of what you can do, you can lose more with absence of confidence and loss of confidence than you would gain from the simple channelling of additional spending.
Daniel Kawczynski (Shrewsbury and Atcham) (Con): A very important group of savers is Equitable Life policyholders. Does my hon. Friend agree that the manner in which the Government announced their response to the parliamentary ombudsman means that there is a risk that the issue will be thrown into the long grass and that there will be a whitewash of the whole matter?
Mr. Hammond: As my hon. Friend will know, we have been calling for a very long time for the Government to publish their response on Equitable Life. We were surprised by the reference to the possibility of means-testing, but we will await the outcome of the deliberations that have been set in train to see exactly what is proposed for Equitable Life members. The Government need to ensure that that outcome is published sooner rather than later. [Interruption.] I hear the sedentary objection of the hon. Member for Leeds, East (Mr. Mudie) that I have not yet mentioned savers, but the title of the debate on the Order Paper is the Effect of economic policy on savers, and I wish to spend another minute at most setting out the economic policy background. I shall then explain its impact on savers.
The point of my build-up is to make it clear that monetary intervention should be the principal tool for addressing a recession that is born of a credit system failure. It is wrong to pile up more debt to try to solve a problem caused by excessive borrowing. The Government should learn the simple and obvious lesson that one cannot borrow ones way out of debt.
We now have in place measures to support banks ability to lend and borrow, through guarantees and the ring-fencing of toxic assets; direct lending to larger companies; reductions in interest rates in response to the threat of declining inflation; and, tucked away in the small print of Mondays announcement, preparations for quantitative easingthe printing of moneyas a contingency. Those are the weapons that are now deployed in the battle to rescue Britains economy.
Let me say clearly that it is a good thing for the economy that interest rates are falling. The sharp decline in the retail prices index posted yesterday and the 1.9 per cent. gap between RPI and RPIX, which essentially reflects changes in mortgage interest costs, underscore the massive effect of a monetary stimulus. For almost every family in Britain that has a variable rate or tracker mortgage, the impact of lower mortgage costs will far exceed the impact of the Governments so-called fiscal stimulus. Since October, interest rate cuts have saved British home owners billions, dwarfing the impact of the VAT cut.
However, that welcome relief comes at a price for all those who depend on savings and modest investments for their income. That means millions of British householders, almost by definition including many older people, who have done exactly the right thing for years, probably decades. They have saved diligently as they have worked hard, set their faces against the buy now, pay later culture and presciently been wary of the Prime Ministers boast to have ended boom and bust, and they have cautiously built some savings to fall back on in hard times. In short, they are the very people who have done what successive Governments have asked them to dopeople who have behaved responsibly during the Prime Ministers age of irresponsibility. Now they are seeing their savings income slashed and their plans destroyed. To add to their anguish, many of them will have had small holdings in bank shares, which are a favourite of small investors and particularly of pensioners. Those holdings will have been almost completely annihilated in some cases.
We estimate that savers have lost something of the order of £22 billion of annual interest income as a result of the rate cuts over the past few months. Thirty-eight per cent. of no-notice accounts now pay less than 1 per cent.
interest. Some banks, for example, the Julian Hodge bankone or two older Labour Members may remember that namealready offers 0 per cent. to savers with less than £1,000. Members of all parties will have anecdotal examples of constituents who are often retired and perhaps live on small company pensions plus state pensions, supplemented by a modest income from a small accumulation of lifetime savings. In many cases, the annual or semi-annual credit of interest to their accounts represents the only available free cash to buy small luxuries or replace big ticket items. Those people now feel betrayed. They are confused about why they should be punished, and bewildered by the fact that those who saved thriftily have to pay the price for a crisis created by those who borrowed and lent profligately.
The reasonable expectations of many millions of people, who have worked all their lives on modest incomes but have none the less scrimped and saved to support themselves in their retirement are being dashed. They are the innocent victims of Labours recession. They deserve better.
We believe that Government have a responsibility to help people through the recession. Therefore, earlier this month, my right hon. Friend the leader of the Conservative party set out our proposals to deliver help to those who have suffered most from the collapse in interest rates, which has benefited those of us who are borrowers. Under our plans, the basic and lower rates of tax on savings income would be abolished. That means that anybody who earns less than £32,000 a year and has savings income will pay no tax on that savings income. That means a potential saving of up to £7,200 a year. In addition, we will increase the tapered older persons tax allowance by £2,000 a year, thus providing more support for those above retirement age, who are basic rate taxpayers and who find that the decline in their savings income means that they need to work to make ends meet in retirement. They could be up to £400 a year each better off after tax.
There is a further bonus for some of the lowest income savers in the country. Her Majestys Revenue and Customs estimates that 3 million people in this country, who are on low incomes and are small savers, pay too much tax on their savings interest because they fail to claim the basic rate tax deducted at source, even though they are not liable to pay it. Under the Conservative plan to abolish savings income tax for all basic rate taxpayers, the banks and building societies would no longer deduct tax at source, ensuring that the 3 million low income savers would not pay unnecessary tax. At the same time, the tax system would be simplified.
David Taylor (North-West Leicestershire) (Lab/Co-op): The hon. Gentleman is making an interesting opening speech. Does he agree that, by definition, the poorest pensioners are those on the lowest incomes and that 60 per cent. of pensioners, who have the lowest incomes, currently pay no income tax? They will not benefit one iota from the hon. Gentlemans announcement. Those higher up the income spectrum can already make considerable use of individual savings accounts, which enable them to save in a tax-free environment.
The hon. Gentleman is right to the extent that the package covers people who have planned throughout their lives on the basis that they were
accumulating savings to provide themselves with an income in retirement. Their circumstances have radically changed through what has happened to interest rates in the past few months. He makes an important point about ISAs. Of course they are available, but 60-odd per cent. of small savers and a disproportionately high percentage of pensioners prefer to save in ordinary bank or building society accounts. Frankly, it is not for the Government how to tell them how they should save. We need to adapt the system to accommodate the problems that they are now facing rather than airily telling them that there is a solution if only they would do things in the way in which the Government would like.
Kelvin Hopkins (Luton, North) (Lab): Following the question from my hon. Friend the Member for North-West Leicestershire (David Taylor), the hon. Gentleman will know that something like £20 billion is already spent on tax relief for savers. The overwhelming majority of that goes to the rich and the better-off. Could not the hon. Gentleman pay for his scheme simply by taking away that £20 billion? If he does not do that, he will make the fiscal situation worse.
Mr. Hammond: If the hon. Gentleman has not already looked at our policy, which was announced several weeks ago, he should bear with me for a moment to understand exactly how we are going to pay for our proposal, as I shall spell it out.
Let me first give the House some examples of how our proposal will affect people. A 60-year-old couple who are retired and have a total pensions income of £12,000 a year each would be about £400 a year better off. A 40-year-old single mother who works part time and earns £10,000 a year, but who has some savings that produce £800 a year in income, would be £160 a year better off. Those over the retirement age who benefit from the older persons allowance would do even better. A 65-year-old couple who are retired with a total pensions income of £14,000 a year each currently pay £902 in income tax each, which amounts to £1,804 in total. The tax bill on their pensions would fall to just £502 each, making them about £800 better off in total. If they also had £1,000 a year each in interest from savings, they would pay nothing at all on that savings interest and would save another £400 a year, which means that they would be £1,200 a year better off in total. I could give other examples.
Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): When petrol prices were at their peak last year, I can remember the hon. Gentleman arguing passionately that the Government should introduce a fuel duty adjustment process that would result in a cut when prices were high and trigger a compensatory amount when they dropped. Now that petrol prices have dropped, has he factored into his calculations what impact that 5p increase would have on savings, particularly those of people on low incomes and pensioners, and on the overall fiscal position? Or has he abandoned the proposal?
Mr. Hammond: The hon. Gentleman refers to the fuel duty stabiliser policy, which is a perfectly sensible mechanism. However, its impact would depend entirely on the point at which it was introduced. The measure is fiscally neutral over the fuel price cycle, but its impact at any point in time will depend on when it was introduced.
Let me address the point that the hon. Member for Luton, North (Kelvin Hopkins) made. The proposal
that I have set out is a fully funded tax cut. It is not, as some members of the Government have claimed, a fiscal contraction. The proposal is to take money that the Government would have spent and give it back to a hard-pressed group of taxpayers to spend for themselves. We would fund the package for savers and pensioners by reducing the overall rate of growth in public expenditure in 2009-10 from the current projection of 3.4 per cent. to 2.6 per cent., producing a reduction in spending growth of £5 billion a year, of which £4.1 billion would be needed to fund the commitments that I have just set out, based on the Treasurys figures.
Mr. Hammond: I will give way in a moment, but let me finish spelling this point out first. Within that overall spending total, we are pledged to match the Governments existing plans for 2009-10 for spending on health, schools, defence and international development, with all other Departments receiving in aggregate a 1 per cent. real-terms increase.
Mr. Flello: If the hon. Gentlemans plan is to maintain spending on health, perhaps that answers my question, because I was going to ask him whether the Conservatives list of things to axe included the brand-new £350 million hospital in Stoke-on-Trent, the oncology department or the new maternity unit. He may have answered that question, so what is he going to axe insteadthe police officers and police community support officers in Stoke-on-Trent or Crossrail?
Mr. Hammond: The hon. Gentlemans Government are pledged to cut £5 billion from the previously projected spending total in the following year, 2010-11, and they say that they can do that without cutting any front-line services at all. May I therefore suggest that the hon. Gentleman address his question to them and ask how they will achieve that £5 billion spending cut?
The Financial Secretary to the Treasury (Mr. Stephen Timms): I do not think that the hon. Gentleman can duck my hon. Friends question so easily. Let us take the transport budget, for example. What the hon. Gentleman is proposing is that, with effect from two and a half months time, that budget will be reduced by £840 million. Where is the money going to come from?
Mr. Hammond: I think that the right hon. Gentleman knows this, but he is quite wrong to speculate what individual budgets would be. We have ring-fenced health, schools, defence and international development budgets; we have said that the remaining Departments will receive, in aggregate, a 1 per cent. real-terms increase. We have notneither have the Governmentallocated the projected spending increase outside those ring-fenced Departments to individual Departments at this stage.
Mr. Timms: The hon. Gentleman is simply going to have to do better than that. He is proposing changes with effect from two and a half months time. He is telling the House that he has a proposal and he is asking the House to vote for it. It is a proposal to reduce Government spending by £5 billion, as he said, with effect from two and a half months from today. Where is the money going to come from?
Mr. Hammond: If the right hon. Gentleman will tell me which Departments are going to take the hit of his £5 billion reduction in 2010-11 [Interruption.] Well, he is telling the House that he can make those cuts without any reductions in front-line services. Let us suggest a few things that might be done. We could scrap some of the failing IT projects; we could stop hiring agency staff at £200 an hour; to tick the head-count reduction boxes, we could cut down on some of the consultants used in the civil service. Perhaps we could scrap the £62,000 dinners and ask the Health Secretary, who thinks that £1 million is small beer, whether he can come up with some ideas to help the right hon. Gentleman with his problem in 2010-11.
In order to deal with the Chief Secretarys claim that what we have announced represents a fiscal contraction, I want to cite what was said by Professor Christina Romer, the chair of President Obamas council of economic advisers. She found that the multiplier effect of tax cuts on the economy is as large as three, while the consensus multiplier from Government spending is about one. Our tax cuts will stimulate more spending and more growth than the additional £5 billion of Government spending would if it remained as Government spending.
Households everywhere are tightening their belts and businesses have had to make themselves more efficient and leaner in order to survive, so the Government must do the same. Indeed, as I have already said, the Government have committed themselves to reducing the growth of public expenditure by an additional £5 billion in 2010-11, and they say that they can achieve it without any cuts in public services. If it can be done in 2010-11after a general electionwhy cannot it be done in 2009-10? The Government need to show the same sense of urgency that families and businesses are having to show to respond to this crisis in the real world. I commend that policy initiative to the Government. After all, the Prime Minister is on the record as saying that he would like to do something to help savers. I urge the Government to implement this policy in the 2009 Budget.
The Government can be as dismissive of our policy as they like at this stage, but my hon. Friends will remember that they were dismissive when we suggested the national loan guarantee scheme, but they adopted it. They were dismissive when we said that the preference shares to the banks were over-priced, but they have swapped them for ordinary shares without a guaranteed payment. They were dismissive when we said that the terms of the inter-bank credit guarantees were wrong, but they subsequently slashed the price. They said that our plan to provide tax breaks to employers who create jobs lacked credibility, but now they have done precisely what we proposed. They have adopted our proposals for the national loans guarantee scheme; they have adopted our proposals on financial incentives to employers; they have adopted our recommendations for changing the terms of the preference shares; and they have adopted our proposals on the inter-bank guarantees.
All that is not bad for a do-nothing party. The truth is that we are the do something effective party. Most, if not all, of the Governments effective interventions have been based on previously announced Conservative policy initiatives. [Interruption.] Government Ministers dare to suggest that we revel in the difficulties facing the economy, but let me tell [Interruption.]
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. I am sorry to interrupt the hon. Gentleman, but we should not have a sedentary argument going on across the Chamber, as it is detracting from the debate.
Mr. Hammond: Government Ministers have dared to suggest that we revel in the difficulties the economy is facing, but I tell the Minister this: nothing could be further from the truth. We have no wish to inherit a shipwreck. It is in all our interests to minimise the damage that this Governments recession will cause to the future prospects of the British economy and its ability to deliver on our aspirations for the future of our society.
I therefore urge the Government to considernot for an immediate announcement, but for a Budget initiativethe proposals set out by the Conservative party. Instead of simply attacking them in a ritual party political response, why not look at them and consider their merits, in order to deliver relief to those hard-pressed savers and pensioners whom the Prime Minister himself has said he wants to help? Why do the Government not show some solidarity with struggling businesses, families and home owners across the country and commit not even to tightening their belt, but merely to reducing slightly the rate at which they are increasing the girth of their belt compared with what they had planned to do, and to doing so now instead of next year?
It is the responsibility of Government to provide, where they can, short-term support to those worst hit by the recession, but it is also the responsibility of Government to prepare the country for recovery. That means that responsible intervention by a Government during a recession must pass two tests: it must help people, families and businesses in the short term, but it must also strengthen the economy for the recovery. The Governments VAT cut failed that test: it is questionable whether it is helping anybody very much in the short term, but what is certain is that it will lead to higher debt and taxes, undermining confidence and undermining our economy in the recovery. Our proposed package to support savers will, by contrast, help some of those most severely affected during the recession, but will also send a powerful signal about the need to rebuild the savings culture in Britain.
David Taylor: The hon. Gentleman has cited the example of a pensioner couple aged over 60, each with a pension income of £12,000. Does he agree that a quick calculation suggests that they are likely to be in the second highest quintile of incomes and that therefore 60 per cent.almost two thirdsof pensioners will gain absolutely nothing? What have the poorest pensioners done to deserve such neglect by the Conservative party in its economic policies?
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