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Mr. Hammond:
The hon. Gentleman is deliberately missing the point. There is always a case for helping the poorest pensioners, of course, but this is a specific initiative designed to deal with a group of people whose income has been catastrophically reduced in a very short period of time, and many of them, because they are retired, are no longer in a position to do anything about changing their planning for retirement. I am sure the hon. Gentleman has constituents who have contacted him to tell him that they are in such a situation. This is a targeted measure to deal with a particular group of
victims of this recession who have been severely affected, and in our view the responsibility of a Government in a recession is to try to help those who are worst affected by it.
Mr. Jeremy Browne: Will the hon. Gentleman give way?
Mr. Hammond: No, I will not give way at present.
The catastrophic collapse of lending by our banking system has been precipitated in no small part by the excessive dependence on wholesale markets. Effectively, those wholesale markets hoover up deposits of households in countries which save and recycle them as lending to countries such as ours which borrow. Under this Government’s watch, the UK savings ratio has declined from 9.7 per cent. in 1997 to just 1.8 per cent. at the last count. If we want Britain to kick the debt habit, and if we want to rebuild our economy on a sustainable basis and correct the huge external imbalances we have been running by borrowing money from foreigners so we can use it to buy their goods from them, we need to reinvent the savings culture in Britain. We need to undo the damage done by a decade of Government-encouraged borrowing and attacks on saving, like the Prime Minister’s £5 billion a year tax raid on pension funds, and rebuild confidence after the fiasco of the lost pensions and Equitable Life, which has already been mentioned. We need to start the process now if Britain’s economic recovery is to be built on a secure and stable financial footing.
The proposal that we put before the House today is one that delivers immediate help for hard-pressed savers, who have behaved responsibly during the age of irresponsibility, and clear support for savings after a decade of Labour’s debt binge. It is paid for by restraint and prudence in the growth of Government spending—outside that spent on schools, health, defence and aid—now, not next year, as Labour is planning. We seek a culture of thrift at the heart of government and a culture of saving at the heart of our economy. These changes will help people through the recession and provide strong foundations for the new economy that the Conservatives plan to build as Britain emerges from it, and I commend them to the House.
5.5 pm
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move an amendment, to leave out from “House” to the end of the Question and add:
“recognises the effects the global financial instability is having across the world and on the UK economy; notes that, as a result of Government action on financial stability, no individual depositor in a UK financial institution has lost savings; notes that the cut in value added tax, increased child benefit and £60 payments to all pensioners are helping families and businesses across the UK; further notes that 60 per cent. of pensioners pay no tax at all; believes savings are important in providing people with independence and security throughout their lives; welcomes cross-party support for the Saving Gateway Accounts Bill to help those of working age on low income; believes that the Saving Gateway will build on the successful pilots since 2002 to create savings accounts with the Government matching each pound saved with a contribution; notes that around eight million people on benefits and tax credits will be eligible for this incentive to save; further recognises the successful role that Individual Savings Accounts have played over the last decade with over 18 million people, including one in five people from low-income groups, choosing this method to save
tax-free; welcomes the fact that four million children now have child trust funds and millions more will benefit in future; and notes that the Government contribution to child trust funds increases to £500 both at birth and age seven for lower income families.”
The world economy—we did not hear much about that in the speech made by the hon. Member for Runnymede and Weybridge (Mr. Hammond)—faces its biggest challenge in generations. The International Monetary Fund has said:
“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.”
Our task in this global economic crisis is to navigate a path to get Britain through in the best possible shape and in a way that is fair to everybody. It is common ground in this debate that the crisis, with its impact on household finances and the necessary reduction in interest rates, is making saving harder. The policy priorities that I wish to set out in this debate are: first, providing clear incentives for people to save; secondly, good access to appropriate savings products; and, thirdly, improving the levels of financial capability.
Across the world, policy makers face tough challenges in responding to the global credit and commodity price shocks. Our macro-economic framework gives the Bank of England’s Monetary Policy Committee the means to support the economy through these difficult times, avoiding unnecessary volatility without compromising the commitment to long-term stability. The primary objective of monetary policy is to deliver price stability in order to provide high and stable levels of growth and employment. It also benefits savers, because inflation erodes the value of savings. Yesterday’s sharp fall in inflation, reflecting the impact of the VAT cut before Christmas, is welcome news for savers and others.
Mr. Andrew Tyrie (Chichester) (Con): The Minister opened his speech by saying that he wants to encourage saving. Will he say whether, over the next 12 months, he wants the British people to increase the share of their income that is saved, decrease it or keep it at the same level?
Mr. Timms: The household saving ratio has increased, but I shall come to what I have to say about savings in a few moments and I shall respond to the rather ill-thought-out proposal that the hon. Member for Runnymede and Weybridge put forward.
Daniel Kawczynski: The Minister welcomes the cut in the rate of inflation, but that rate is still significantly above the target set for the Bank of England. Is he not concerned, as we enter such a downturn, that we still have such high levels of inflation? That is a very toxic mix.
Mr. Timms: The hon. Member for Runnymede and Weybridge has just told the House that inflation is falling too fast. The projection that we set out at the time of the pre-Budget report is broadly right—inflation is likely to be on target next year. Although the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski) is right to say that 3.1 per cent. is outside the Government’s target range, the reduction from 4.1 to 3.1 per cent. is very welcome, not least for savers.
Mr. Hammond: The Minister has, disappointingly, described the package of proposals that I have set out as ill-judged. Does that mean he rules out the abolition of basic and lower rate savings income tax in the Budget?
Mr. Timms: I think that we do rule out £5 billion-worth of spending cuts in two and a half months’ time.
Kelvin Hopkins: In saying that encouraging savers was the sensible thing to do, the Minister did not mention another factor—the security of savings. Given that the stock market is subject to many vagaries, and given the interest rate changes, does he agree that there is a strong case for a state bank, with guaranteed returns? It would be efficient and cheap to administer, because it would be a national scheme, and it would be something in which ordinary savers would have absolute confidence.
Mr. Timms: I always listen with great interest to my hon. Friend’s contributions in such debates. He made an interesting contribution yesterday, and I hope that he will do so in this debate. However, the Government’s view is that banks are best run in the commercial sector.
My hon. Friend was right to provide the opportunity to draw attention to the fact that, as a result of the Government’s intervention, no individual saver with a UK bank has lost money in the turmoil of the past few months. On Monday, my right hon. Friend the Chancellor announced a further package of measures to support the banking system and to safeguard the millions of jobs at risk from the continuing difficulties in the financial system.
Mr. Tobias Ellwood (Bournemouth, East) (Con): Will the Minister give way?
Mr. Timms: I want to make a little more progress, but I will then gladly give way to the hon. Gentleman.
My right hon. Friend’s package of measures was aimed at replacing the lending capacity lost because of the withdrawal by foreign banks and other institutions from lending in the UK and the barriers preventing UK banks from expanding their lending. The package extends existing measures to support the economy through the downturn, including the package of support for the financial system announced in October to protect ordinary savers and others, and the fiscal stimulus to support the wider economy announced in the pre-Budget report.
Saving is vital to provide independence throughout people’s lives, security if things go wrong, and comfort in retirement. Since 1997, our strategy has been to promote saving and asset-ownership for all from childhood, through working life and into retirement. Our approach has been underpinned by the principle of progressive universalism—providing support to all, with the greatest support for those who need it most.
The market for savings is competitive, and several firms are offering rates well above the Bank of England’s rate. Savers can boost their income from savings by shopping around for the best interest rates. Some attractive deals are available, and the Financial Services Authority publishes comparative tables of savings accounts in its money made clear programme.
Ms Keeble: Does my right hon. Friend agree that although increasing tax thresholds and providing tax breaks for savers is attractive, the biggest risk for pensioners is through the economic and banking instability that threatens their pension schemes? That is why the Government are right to prioritise economic, financial and banking stability through the current measures to secure stability for people in the longer term.
Mr. Timms: My hon. Friend is absolutely right. That is the Government’s priority, and that is what we have been attending to. In a few moments, I will say a little more about the benefits for savers, but the proposals that the hon. Member for Runnymede and Weybridge made are much less attractive to savers than he suggests.
Mark Hunter (Cheadle) (LD): The Minister is right to encourage people to think more positively about saving. Does that mean that he now recognises that my hon. Friend the Member for Twickenham (Dr. Cable) was right back in 2003 when he warned about irresponsible levels of lending and pointed out that if the then Chancellor had not dismissed those warnings, more people might have been encouraged to save, instead of racking up more and more personal debt?
Mr. Timms: What has happened to the savings ratio is interesting. It has been on a long-term downward trend, and at the moment it is approximately where it was in the late 1950s. It went up until the end of the 1970s, and has been falling since. There has been a similar trajectory in the past couple of decades in most English-speaking countries.
The key statistic on savings ratios is net national saving, which combines the savings of households, firms and the Government, and I shall give the House some figures.
David Taylor: My right hon. Friend is right to say that savings ratios fluctuate. The Conservative spokesman quoted a higher rate in 1997, but in 1992 it was 1.1 per cent. In the 20 years to 2007—10 years under the Tories and 10 years under this Government—the average savings ratio was 3.7 per cent. and it was about that level in 2007. There is nothing surprising about that.
Mr. Timms: My hon. Friend is right. Net national saving as a percentage of gross domestic product was 3.4 per cent. in 2007, close to the average over the period since 1987 of 3.7 per cent., and much higher than the 1.1 per cent. low recorded in 1992—and, incidentally, much higher than the rate in the United States. It helps that British households are spending a smaller proportion of their income on debt interest. Total household sector interest payments are 6.2 per cent. of disposable income today, compared with more than 11.9 per cent. in 1990. That makes a big difference.
Mention has been made of ISAs. We introduced tax-advantaged individual savings accounts in 1999, and they have succeeded in developing and extending the saving habit and distributing tax relief more fairly. More than 18 million people—about one in three British adults—now have an ISA, many more than held the predecessor products. The annual investment limit for ISAs rose to £7,200, of which half can be saved in cash. We want ISA tax relief to be distributed as fairly as possible, so that support is targeted at those saving modest amounts. In that way, people who would otherwise not save can see the benefits of doing so.
Kelvin Hopkins: I understand that ISAs are aimed at people on modest incomes, but because tax relief on them is available at the higher rate, the rich ensure that they take full advantage every year. Would it not be better to restrict tax relief to the basic rate?
Mr. Timms: It is right that we have strong incentives for saving. The model that we have now provides those incentives and we have seen a good rate of take-up of ISAs among people on low incomes—significantly higher than was the case with PEPs and TESSAs—and that is important progress.
The hon. Member for Runnymede and Weybridge talked about tax on savings. As he knows, tax on savings interest is automatically deducted by banks and building societies at a rate of 20 per cent. through the tax deduction on savings interest scheme. We announced in the pre-Budget report a campaign to encourage some 1.5 million pensioners to register their accounts and so receive their interest tax-free, and of course that is an option available to anyone in that category. I hope that it will be widely taken up.
Mr. Hammond: The Financial Secretary is right in what he says about ISAs, but will he confirm that one in three savers is not saving through an ISA and that 40 per cent. of pensioner savers do not have ISAs? Older people perhaps tend to stick with what they know and, as I have said, we should change the system to accommodate them, rather than expecting them to adapt to the system.
Mr. Timms: I would hope that the hon. Gentleman would join me in drawing people’s attention to the advantages of saving through an ISA. The tax-free cash amount of £3,600 is a large amount in terms of typical household saving, and it is right to draw people’s attention to the opportunities available to save free of tax.
Mr. Hammond: I am sorry to press the Financial Secretary on this, but not enough is being done. He knows that the Government have been trying to get people to take up pension credit for the past five years with limited success. The Department for Work and Pensions has accepted the power of inertia and has set up the personal account scheme on a contracting-out basis rather than a contracting-in basis. Ministers can tell people about opportunities, but they cannot make them take them up. Would it not be more sensible to create a system that would give people the benefit of the tax relief automatically?
Mr. Timms: I shall come in a moment to the flaws in the hon. Gentleman’s proposal, as I see them, and explain why I do not support it. However, I shall first return to my point, which was that I hope that he and other hon. Members would join me in drawing people’s attention to the opportunities available for tax-free saving that anyone can take advantage of.
We have talked a great deal in this debate about pensioners. It is worth making the point that the reform of pensions that we have legislated for will lead to a significant boost in the attraction of pension saving, with mandatory matching employer contributions into personal accounts. Let us look at the things that we have already put in place. The above-indexation increases in the personal tax allowances in the 2007 Budget lifted 600,000 pensioners out of tax entirely. By April next year only 40 per cent. of pensioners over 65 will pay income tax at all, and 60 per cent. will pay no income
tax. Of course, pensioners are benefiting this month from the additional £60 payment being made to them, and to others, too— [ Interruption. ] That is quite right; the Conservatives opposed that payment.
As we have heard, the Conservative party has proposed raising the personal allowance by £2,000 for people aged 65 and over, which would cost about £1 billion. As has been pointed out, that is of no benefit at all to the clear majority of pensioners who do not pay tax at all. The Conservatives propose to fund that, as we have heard, by cutting Government spending—a disastrous proposal as we move into a downturn like this one. Timing is key. The hon. Member for Runnymede and Weybridge is proposing a big reduction in Government spending at the point when, as all of us can see, we are moving into the most difficult downturn for a very long time.
Mr. Hammond: I must pick the Minister up on his use of slack phrasing. The proposal is not to cut government spending but to restrict the growth of public spending to a slightly lower level than that proposed by the Government.
Mr. Timms: As the House knows, the Government spending plans have been published and are being developed. They take effect in two and a half months’ time, and the hon. Gentleman appears to be seriously telling the House that those figures should be reduced by £5 billion with effect from then. He does his party no favours by bringing to the House proposals that clearly have not been worked out. He has no idea where the £5 billion will come from, and he really should have an idea before he comes to speak at the Dispatch Box.
Ms Keeble: Did my right hon. Friend hear the hon. Member for Runnymede and Weybridge (Mr. Hammond) say that pension credit had been a limited success? It has helped thousands of pensioners in my constituency, particularly those with savings, and particularly women. The hon. Gentleman has not said whether he would make his tax cuts available to women pensioners who retire at 60; he has only mentioned pensioners over 65, excluding a great swathe of women pensioners who have a particularly hard time after retirement.
Mr. Timms: My hon. Friend is absolutely right. The pension credit has been a successful intervention in achieving a dramatic reduction in pensioner poverty, particularly among women.
Daniel Kawczynski: In the statement on Equitable Life last week, the Chief Secretary to the Treasury could not confirm that the first compensation payment will take place in 2009. The Government might even fail to meet the parliamentary ombudsman’s criteria for full redress within the next two years. Will the Financial Secretary give me an assurance that he will do everything possible to try to work on an interim payment for some of our constituents, many of whom have waited for nine years for compensation and many of whom, regrettably, will die before compensation is paid?
Mr. Timms: As the hon. Gentleman knows, my right hon. Friend the Chief Secretary set out the scheme that we want to put in place. I can assure him that we will move forward with that as quickly as we can. There is nothing more I can say about that at this stage, but we certainly want to make quick progress.
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