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Kelvin Hopkins: I agree very much with what my right hon. Friend is saying. The Opposition are talking about making Budget cuts worth £5 billion, and it is clear that local government—especially children’s services—would be in the firing line. Budgets for children’s services are under pressure already, but does he agree that the danger is that they could suffer even more, with the result that there would be more cases such as those of baby P and Victoria Climbié?
Mr. Timms: My hon. Friend is right. I think that local government would have to bear some £240 million of the cuts, and that children’s services would have to accept their share of that. The Opposition’s draconian proposal is being rushed forward on the pretence that everything could be done in a few weeks, when it clearly could not. It is especially ill advised to bring the proposal to the House at this point in the cycle, just as we enter the major downturn that all of us can see, and that the International Monetary Fund has talked about.
Mr. Ellwood: Will the Financial Secretary give way?
Mr. Timms: I failed to give way to the hon. Gentleman last time, so I will do so now.
Mr. Ellwood: I am grateful to the right hon. Gentleman for being so gracious. It was mention of the IMF that made me get to my feet. He glossed over Monday’s efforts by referring simply to “further measures” that were to be taken, as if someone merely had to pop back to the shops to get a pint of milk in addition to the other groceries. It was a massive step to borrow more money in addition to the sums in the pre-Budget report, which were, of course, huge in their own right. Will the Financial Secretary tell us whether we will be drawn back to this Chamber, for a third time, to hear the announcement that we are to be bailed out by the IMF?
Mr. Timms: The announcements in October succeeded in saving the banking system. That has been recognised very widely, and this week we have set out a further set of measures aimed at restarting lending. In particular, the measures reflect the fact that so many non-UK banks have withdrawn lending. The Icelandic banks are the most obvious examples, but there are others as well. The measures are designed to fill some of the need that has not been filled until now.
I want to say a little more about the proposal that the hon. Member for Runnymede and Weybridge has put to the House. It is a classic “robbing Peter to pay Paul” policy, of the kind that only the do-nothing party opposite could have devised. I have mentioned the obvious problem with cutting government spending as we go into a recession. If the hon. Gentleman does not know what the problem is, I am certain that the new shadow Business Secretary will be happy to explain it to him.
The hon. Member for Runnymede and Weybridge has said roughly what he would do to fund his proposition. What is the benefit of the savage and swingeing cuts that are being proposed? He has not explained the planning behind them, or how they will be drawn up as we go into a recession.
Mr. Hammond: The Chancellor has said that he can find cuts worth £5 billion in 2010-11, so would the Minister describe those as “savage and swingeing”? If they are not, why is the £5 billion reduction in spending increases this year savage and swingeing?
Mr. Timms: As my right hon. Friend the Chancellor explained in the PBR, we have put in place a very careful piece of work. It began with the PBR, is to be reported on in the Budget and implemented a year after that, and it will allow us to make the savings that we have announced. The hon. Gentleman is saying that he could do the equivalent in a couple of months, thus allowing him to fund the proposal that he has put before the House. If I have understood him correctly, even on his own terms there will be a substantial fiscal contraction in 2010-11, because I presume that he will not be making further reductions beyond the £5 billion in that financial year. If he does want to make further reductions, we would be very interested to hear about them. Of course, the tax reduction that he proposes would stay in place in that year, with the result that there would be a large hole in the Opposition’s spending plans.
Mr. Hammond: No, there would not.
Mr. Timms: Yes, there would. I should be very interested to hear the hon. Gentleman explain how he would make up that £5 billion, and I gladly give way to him.
Mr. Hammond: The Financial Secretary asks me a question, but if he thinks about it, it will be clear to him that lowering the rate of increase in Government spending in the current year would lower the baseline. Applying the increase that he proposes to apply the following year would mean that we would still have the savings to fund the tax-cut package that we have announced.
Mr. Timms: But the hon. Gentleman’s argument to the House is that there is a set of measures that can be introduced this year, which otherwise would have been introduced the following year. He cannot have the money again in that following year—he will have spent it on the tax reduction—so there is a large hole of several billion pounds in his spending plans. He needs to explain where that money will come from.
Let me say a little about what the effect of the Opposition’s proposal would be. The average family on less than £30,000 a year—the proposed beneficiary of the tax reduction—pays less than £5 a year tax on savings at present, so the average family would save £5 a year from the proposal. That is the price for the spending cuts that the hon. Gentleman is urging on the House.
As I said, 60 per cent. of pensioners do not pay tax. Of course, the VAT reduction is a significant help to them, with a retired single person benefiting to the tune of £110 on average from the VAT reduction, and a retired couple benefiting by £225. The new shadow Business Secretary was right to argue a few weeks ago that cutting VAT is the best kind of fiscal stimulus.
I had hoped to be able to explain to the House measures such as the saving gateway proposals, which I am glad have commanded widespread support. Those give people on lower incomes extra incentives for saving, and are to be introduced nationally next year. The child trust fund is an important innovation to encourage saving from early childhood. The employee share schemes that we introduced and encouraged have been very effective. We have offered debt advice support, and a developing programme of financial capability education in schools. Instead, given the time, I shall conclude.
The Government have taken comprehensive action to support the financial system that British businesses and individuals rely on. We are creating the right incentives to encourage saving and open up to everybody the benefits of banking, saving and other financial products. We are working to ensure that everyone who needs it can get free, impartial debt advice and the information to make informed financial decisions to provide for themselves and their families. We are navigating a path to get Britain through in the best possible shape, doing it in a way that is fair to everybody, and making sure that we are in a position to make the most of new opportunities when the recovery comes. The alternative urged upon us by the hon. Member for Runnymede and Weybridge would be unfair and deeply damaging to the economy at this point. I urge the House to reject the motion.
Mr. Deputy Speaker (Sir Michael Lord): Order. Before I call the Liberal Democrat spokesman, I inform the House that an eight-minute limit on Back-Bench speeches will apply once the Liberal Democrat spokesman has finished his remarks.
5.33 pm
Dr. Vincent Cable (Twickenham) (LD): I shall try not to test the patience of the House by giving another political rant on the state of the economy, the banking system and the rest of it. I will try to pay the motion the compliment of addressing the issue that it raises: the problem of savings. That is an entirely proper issue and it is timely. For the most part, I agree with the motion, but not with all of it.
I detect that the shadow Chief Secretary’s speech is becoming a bit of a stump speech. It has at its heart two powerfully argued propositions, one of which is that this is a disastrous Government pursuing disastrous policies. The second is that this is an ungrateful Government pursuing Conservative policies and not expressing proper appreciation for doing so. From the Liberal Democrat point of view, those are entirely consistent arguments with which we have no difficulty in agreeing, but the hon. Member for Runnymede and Weybridge (Mr. Hammond) may have to decide which of the two he wants to pursue.
The hon. Gentleman is right that there is a savings problem. Savers are among the biggest casualties of the recession and it is right that we focus on why that is so and whether anything can be done to remedy their problems. He focuses on one group of savers who have a problem—people with variable interest deposits in banks. I am not sure what share of total British savings they account for, but almost all the hon. Gentleman’s policy prescriptions are based on that narrow, specific group.
It is probably helpful to reflect on the wider problem of savers. The savers who are currently most concerned are those who are on defined contribution pension schemes, and people who are getting private pension notices through their door every quarter and dare not open the envelope because of the damage that has been done by the halving of the value of the stock exchange. This is where the real haemorrhage of savings is taking place. He is right to focus on deposit accounts or those that carry interest, but that is only one corner of a much bigger problem.
Before getting into the details of the policy, I want to try to look at the big macro-economic argument that flows backwards and forwards and that was unleashed by the Conservative leader’s speech on savings a few weeks ago. There is a great danger of getting into a ludicrous caricatured argument that says on the one hand that spending is good, saving is bad, and on the other hand that saving is good, spending is bad. Lying behind a lot of the arguments we have that rather nonsensical polarisation of the argument.
Of course it is necessary and right that we think about ways of building up long-term savings. We have an ageing population and it is essential that savings are built up for long-term care, for pensions and, for the younger generation, for deposits on homes, for higher education and much else. So of course we have to think about policies to encourage long-term saving. The problem that we have at present is a substantial difficulty that many people have because they are frightened. They are frightened because they have lost a lot of value in their savings, and they are frightened because of the loss of their job. Because they are frightened, they do not spend the money that they would otherwise spend and therefore hoard it. The purpose of policy in this world, whether it is cutting interest rates or fiscal policy, is to try to encourage them to be confident enough to spend that money. That is in no way in conflict with a sensible policy of encouraging long-term savings.
David Taylor: Of course the hon. Gentleman is right; the definition of household saving is very narrow. Aggregate household assets are about £8.5 trillion, which is exactly five times the aggregate household debt that the shadow spokesman was agonising about a moment or two ago. The way in which many people save is by capital repayments of their mortgage, and that is not reflected in most of the figures that the hon. Gentleman used.
Dr. Cable: That is true, of course, but the household balance sheets have taken a hell of a knock, have they not, as a result of falling house prices, which accounts for a large part of those assets?
Daniel Kawczynski: May we have a firm answer from the Liberal Democrats on the issue of Equitable Life? Policyholders are claiming £5 billion in compensation as a result of the Government’s regulatory failure. If the Liberal Democrats were in government—it is highly unlikely, but if they were—how much would the hon. Gentleman commit to paying of that £5 billion?
Dr. Cable: I am amazed at that intervention because when we had the statement last week, I was here and answered it unambiguously. I do not think that the shadow Chancellor or his deputy were here. I made it absolutely clear that we supported the ombudsman’s recommendation. Several of my colleagues and several Conservative Members are rightly pressing for a proper debate and a proper statement about what the compensation scheme amounts to. It could be generous or it could be very limited; we do not know the details and we need to know what the Government are proposing. The principle behind the ombudsman’s recommendation for compensation for the victims of mis-selling is clear, and I made that clear in my response last week.
Mr. Mudie: The hon. Gentleman mentions fear, but is there not another matter that I hope, in his pragmatic and common-sense way, he will raise, which is the interest rate paid by the banks, and the fact that while they would not pass on the rate cut for borrowers, they passed on the cut to savers? When Barclays now has a rate, not unusual and copied by many others, of 0.01 per cent.—in other words, a pensioner putting £1,000 in would get £1 a year interest—surely that must have a greater effect than anything that we can do on getting people to save.
Dr. Cable: The general public’s complaint is that the banks are neither fully passing on interest rate cuts nor benefiting their depositors; they are trying to build up their margins. They have to do that, but it has not been enough.
I was glad that the hon. Member for Runnymede and Weybridge (Mr. Hammond) made it absolutely clear that he supported the policy of continuing low and falling interest rates. He was quite clear, so there is no point in my cross-questioning him about that. I am intrigued, however, because in debates I am often paired with the right hon. Member for Wokingham (Mr. Redwood), who gives a very good Conservative case; he is highly economically literate, and makes his case well. I think that he argues that interest rates should now be increased. I am glad that there is clarity about what appears to be a somewhat different approach starting from the same premises.
As the motion rightly says, the problem is that people who have very low interest rates on their bank deposits feel that they are suffering and disadvantaged. I understand that. People in my constituency often come up to me and say, “Isn’t this awful? What are we going to do about it?” Some points can be made to reassure them. First, if we are going into a deflationary environment—as we almost certainly are; that is what the Bank of England is warning us about—merely to have a bank account that is increasing in real value in a world of falling prices is compensation in itself. We have not got to that point, so people are not seeing it, but that is coming down the road.
Furthermore—this relates to the Equitable Life intervention—we should stress that all bank depositors have been fully protected: their deposits have been guaranteed and completely underwritten by the state, and in that they are unlike investors in many other forms of saving. Finally, many bank depositors are enjoying a reasonable rate of interest on fixed-rate deposits. I happen to be married to somebody who, as much through accident as through anything else, has ended up with a 6 per cent. fixed interest account in the Nationwide. She is laughing all the way to the bank. Many borrowers, however, are not getting the advantage of low interest rates. The balance of advantage between borrowers and lenders is not at all straightforward.
Let me get to the heart of the issue. Given that savings are a problem in the long term, what should we do to help savers? I am thinking particularly of low-income savers, who are rightly the focus of the discussion. I was surprised that the hon. Member for Runnymede and Weybridge made no reference to one of the biggest sources of difficulty for low-income savers—the way in which the benefit system operates. People on pension credit effectively pay a 40 per cent. marginal rate of tax
because of how the tapering system operates. For people on low incomes, saving is not worth while because they are penalised through the pension credit system.
There is one particularly wicked inhibition on savings in the benefit system: if people with savings of £6,000 or more apply for pension credit, the Government assume that they are earning a 7 per cent. return on that account. That contrasts with 2 per cent. on main ISA deposits in national savings. Why is the rate 7 per cent., a penal disincentive to some of the poorest people in society? If we really tried to help people on low incomes with savings—that would come at a relatively low cost—we should address that anomaly. My colleagues did a calculation to the effect that about 500,000 really very poor people are being penalised £800 a year as a result of how the savings disregard system operates.
There is common ground in the House on how we should look at savings reform. Like a lot of Conservative Back Benchers over the years, Liberal Democrats push for reform of the annuity system, which is a major discouragement to many forms of saving. I ask the Minister to reflect on one technical point. In this current banking crisis, the mutuals are essentially at a relative advantage because they do not have to worry about shareholder return. But the building societies often report that they are at a considerable disadvantage in attracting savers because they have to pay disproportionately for the cost of the depositor protection scheme. They seem to have a good point, albeit a technical one, and I should be interested to know whether the Government accept their case.
Much more important than either of those two points is the fact that in order to save, consumers—savers—need to feel that they have a sense of protection and that they are not going to be ripped off by cowboys. We have had a couple of decades of endless scandals, with private pension mis-selling, endowment mortgages, split-cap trusts and, of course, Equitable Life. If people are operating in an environment where they know that their savings are not safe because they may have been mis-sold, they will not save. They must have very strong consumer protection in order that the savings culture can be revived.
Kelvin Hopkins: I agree with what the hon. Gentleman is saying. Is it not significant that the building societies that demutualised, many of which are now banks, have got into deep trouble, whereas most of the mutuals in the building society sector have survived relatively well? Perhaps we were mistaken in allowing the building societies to demutualise in the first place. Indeed, when I came here I tried very hard to persuade the Government to stop demutualisation.
Dr. Cable: We both did, but we did not succeed, and that was a loss. I entirely agree with that.
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