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There is no doubt that the cost of this plan will be considerable. It will certainly add to the budget deficit in the short-term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy.
The Tories plan to help just some middle-income savers does too little. By funding it through public service cuts they are doing nothing for the millions of people who are looking to the Government to help them get through the downturn.
Mr. Brooks Newmark (Braintree) (Con): Under the Governments current economic policy, prudence seems to go unrewarded. Regrettably, the Government have still not reacted to the devastating consequences that interest rate cuts have brought to a generation of savers. The Government may be offering bail-out after bail-out to over-leveraged banks. However, they are failing to help, if not reward, those in our society who have put aside money in the form of savings, especially the more vulnerable in our society, such as pensioners, who are now seeing their standard of living drop daily.
We need a savings culture at the heart of our economy if it is to grow out of this recession. Thrift and prudence will ensure confidence and the ability to invest in the future. However, recent economic policy has only consolidated a longer-term trend that has emerged under this Government. That trend, which was exemplified by the Prime Minister when he was Chancellor, is towards a Government built on a mountain of debt and indulging in their own spending binge. Encouraged by the Governments poor household financial management, ordinary individuals have gone on a borrowing and spending binge too. The result is that in 2007 the household savings ratio fell to less than one third of what it was in 1997.
Cutting interest rates was indeed the right thing to do to deal with the current crisis. However, hanging savers out to dry in the process is completely unacceptable. We have now seen seven consecutive interest rate cutsthat is seven consecutive hits on savers and seven opportunities lost by the Government to give help to those who need it. Instead of looking after savers, the Government have written a blank cheque for the banksmany of them the very institutions that helped to create the economic mess. With taxpayers money keeping them afloat, those same banks continue to slash interest rates on savings accounts, which have reached as low as 0.1 per cent. for some instant access accounts.
Savers and borrowers are confused about how to play the game of interest rate roulette. With low returns on savings, high borrowing costs and interest rate cuts not being passed on to borrowers, people simply do not know what to do. With poor savings rates on offer and a drop in confidence in the banks, it is projected that 45 per cent. of people are less likely to save in the next three months. What is it that people save for? They save to put a deposit on a house, help provide care for themselves in old age or send their children to university. Without savings, none of that can happen, and that will have grave consequences for our economic recovery.
The Government may claim that their economic policies are offering real help to the people who need it most, but unfortunately those polices have failed to help the most vulnerable in our societythe poor and the elderly. With interest rates not expected to rise again in the near future, the Government must urgently create incentives to save again. Even bank bosses agree that we need tax incentives for our savers.
I thus ask the Minister at least to reflect on the proposals of my right hon. Friend the Member for Witney (Mr. Cameron) and the shadow Chancellor my hon. Friend the Member for Tatton (Mr. Osborne), as outlined in this debate by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond): to reduce to zero the 10p starting rate and the 20p basic rate of tax on savings, so that basic rate taxpayers pay no tax at all on their income from savings, thus helping them by up to £7,200 a year; and, secondly, to increase age-related personal allowances by £2,000 for those aged 65 and over, benefiting them by up to £400 a year.
To conclude, this debt-addicted Government are doing nothing for those who have been more prudent than themselves. To borrow more money to get the country out of its problems, according to Dr. Tempest, is a bit like telling a heroin addict that he needs more heroin in order to recover. This country does not want a legacy of debt; it needs a culture of saving and a Government who are willing to take urgent action to make it happen.
In a sense, we all have the same objective, which is to help the least well-off and those who are suffering most in these difficult economic circumstances. However, I think we are confusing two things: dealing with the current crisis, and what we should have for the long term in the form of savings mechanisms to encourage people to save. Those are two arguments, but we are rather confusing them at the moment.
As a number of hon. Membersmost recently my hon. Friend the Member for Islington, South and Finsbury (Emily Thornberry)have said, those who do not pay any tax will not benefit at all, and 60 per cent. of pensioners do not pay tax, so they will not benefit. I want an arrangement to help all the least well-off and to have it paid for by those who are most well-off: that is old-fashioned redistribution, which I have long supported, but it has been substantially reversed over the last 30 years. I have made the same speech many times about tax rates in the 1970s, comparing them with what they are now. If I had had my way, there would have been much more redistribution in the tax changes of the last 12 years, but I speak from the Back Benches and do not have much influence.
Tax relief on savings amounts to £20 billion a yearat least that, and possibly moreand most of it goes to those who save most, who are the rich, and those who pay most tax, who are the rich. It does not go to people on very low incomes. I suggest that one way of helping everyone on lower incomes would be to remove a substantial proportion of that tax relief and redistribute it into
such things as the basic state pension. If we took that £20 billion and put it together with the £12 billion we are spending on cuts in VAT, that would amount to £32 billion a year. With 11 million pensioners, that works out, I believe, at about £3,000 a year per pensioner. Well, I think that would be an excellent way forward.
Interestingly, if that happened, the basic state pension would be about £150 a week, which it would have been if Mrs. Thatchers first Conservative Government had not cut the link with earnings. At that time, the basic state pension rose to 25 per cent. of average earnings, but it has gone down to about 16 per cent. now. If we raised the basic state pension to £150 a week per person, and eliminated means testing in the process, we would overcome all those problems and address the difficulty that the basic state pension is now below the official poverty level. Through that simple change, we could thus kill several birds with one stone.
I think that we could even go beyond that and look at higher rate taxes as well. My view is that we need a substantial reform of the income tax regimerestoring the 10 per cent. rate for a start. I would raise the threshold for the 40 per cent. rate somewhat and perhaps put in a 30 per cent. rate band in there, but, more importantly, put higher rate tax bands way above that. Perhaps we could go a small way towards where we were in the 1970s, if not anything like all the way. That is the logic. Redistribution is the way to help those who are least well off, and everyone would benefit, including pensioners with low savings, especially if the means-testing component was got rid of, so all savings were additional to the basic state pension. That is the way forward.
Interestingly, this could be done without any change in fiscal stance. If we raise taxes on the rich and spend the money on the poor, the overall fiscal stance does not change, so we are talking not about additional spending, but about shifting the burden of expenditure on to the rich rather than the poor.
The Conservative Front-Bench spokesman rightly pointed out that the multiplier effects of giving money to the least well-off are much greater than those of giving money to the better-off. Poor people spend all their money, because they have to, so the multiplier effect of their incomes is much greater than it is for the rich. Therefore, redistributing income from the rich to the poor would boost general consumer demand as well. The rich have a low propensity to consume, because they do not know what to spend their money on as they have so much of it, while the poor have to spend more just on simple things like heating and food every week. That would benefit the economy.
As for the long-term problem of encouraging people to save, the reality is that final salary schemes, particularly in the private sector, are dying out. Private savings schemes are insecure, and they do not offer good returns. It is estimated that one third of the likely return in such schemes is taken up with the costs of administration, advertising and so forth. Therefore, what we need is a comprehensive, substantial and compulsory state earnings-related pension schemeSERPSfor all, so we all save sensibly through our lives and when we retire we have a decent income related to our income during our working lives. That is the sensible way forward: a high basic state pension with no means-testing and a compulsory SERPS for all would overcome all the problems.
Finally, I have mentioned several times recently the idea of a state savings bank, where we could save our money and those on modest incomes would be guaranteed a return in the end. It would not be stock market-related, so it would not suffer if the stock market fell, and it would not be related to interest rate changes in the general economy, so ordinary people would know what they were getting back. There would be defined benefits and returns for their savings in a state savings bank. It would not, perhaps, provide the high returns of those who gamble on the stock exchange, but at least the income would be secure and would be above inflation, and the Government would have a good fund to invest in infrastructure. Also, because the bank would be in the state sector, it would, effectively, be underwritten. That is the way forward; that is what I want to see for the future, and I hope one day to persuade my Front-Bench colleagues to agree.
Daniel Kawczynski (Shrewsbury and Atcham) (Con): During the Queens Speech debate on 3 December last year, I tackled the Prime Minister over the Government response to Equitable Life. He promised me faithfully that the Government would respond before the Christmas recess. Regrettably, that did not happen, but, finally, last week we had a Government response.
Equitable Life policyholders have been battling for nine years over a demand for £5 billion in compensation, and I have to say that the apology the Government gave was long overdue. The Government refused to take responsibility for this fiasco, even though Lord Penroses report highlighted failures in the Government Actuarys Department. I pay tribute to the parliamentary ombudsman, Ms Anne Abraham, who undertook a very robust investigation into this. I applaud her, and my faith in the whole parliamentary ombudsman system has been restored, because she has been pivotal in forcing the Government to make a statement on this issue.
The Treasury Minister who gave the Government statement admitted regulatory failure and apologised, but said the compensation would be means-tested. As my friend Mr. Mark Coote, Conservative candidate for Cheltenham, said to me yesterday, why is there total support for depositors of Icelandic banks but not for Equitable Life policyholders? That is an important question. The overall liability in Icelandic banks amounted to hundreds of millions of pounds, whereas we are talking about a sum of £5 billion for Equitable Life policyholders. I am very concerned that rather than having an honest policy across the board for depositors, the Government are choosing to have the kudos for supporting Icelandic bank depositors, but not Equitable Life depositors, simply because of the amounts of money involved.
A very important part of the ombudsmans findings was that there should be an independent tribunal to assess compensation and assess all individual claims fairly. Instead, the Treasury has asked former Lord Justice of the Court of Appeal, Sir John Chadwick, to advise on how compensation should be made, and to do so according to a very restrictive brief given to him. That concerns me greatly.
There are various questions that were not answered by last weeks statement, and that is why I have said that I am concerned that this matter could end up as a whitewash, and be kicked into the long grass; the Minister
outlined neither the scale of the compensation nor the timetable for it. Those factors have huge implications for Equitable Life policyholders, and the situation is causing them profound anger and further frustration. There are rumours that they will receive only a fraction of the £5 billion to which they are entitled. As I have said, the policy involves means testing, and that could cause huge delays in the payments.
Sir John Chadwick will decide things, and I will help any of my constituents who feel that they are being neglected in this matter. I will personally take their case to Sir John Chadwick when he sets up the adjudication panel. When will people get their money? The relevant Treasury Minister refused to confirm that payments will be made in 2009. Surely interim payments must be made. For these people to have waited such a long time, and for them now to be told that they may not even receive compensation in 2009, is simply unacceptable. Even more shockingly, the Treasury Minister says that the Government may not even be able to comply with the parliamentary ombudsmans request that this whole matter be done and dusted within two years. Again, that is simply unacceptable. So far, 30,000 people have died over the past nine years waiting to receive their help. I will hold the Government to account if any of my constituentsregrettablydies while waiting for compensation, and I will demand that the compensation be given to their widows or widowers.
What happens next? Sir John Chadwick will have to find an office and staff to sift through the thousands of records that the Government want him to look out before awarding any payments. The Government need to give him proper resources. What resources will he be given to undertake this huge task that they have set him? How much will his budget be? What will Ministers do to ensure that the payments are made as quickly as possible? I feel so passionately about this matter, not least because of the letters that I have received from Equitable Life policyholders in my constituency, that I intend to set up the all-party group on Equitable Life policyholders, and campaign on their behalf. I will hold Sir John Chadwick and the Government to account over the next 12 months, to ensure that no stone is left unturned in this matter.
I do not support the motion because it is clearly political. There is a theme running through politics at the moment. It is the Conservatives sayingthey do not say it modestly, as the hon. Member for Twickenham (Dr. Cable) doesthat they said something first. They hear of something, they say it and when Labour does it they say, They are stealing our ideas. This is another such example; the Prime Minister came out of No. 10, there was an indication that he was considering this as part of the Budget and immediately it became an idea for the Conservatives. It was interesting that the Conservative spokesman tried to trap the Minister into saying that he objected to the idea and that he would not support it, when the hon. Gentleman knew that my hon. Friend might have to eat his words after the March Budget. Thanks to comments from the hon. Member for Twickenham and my hon. Friend the Member for
Newcastle upon Tyne, North (Mr. Henderson), it is clear that the Opposition proposal would not help the poorest savers because the return on their savings is so small that a tax rebate would be of little interest.
The best consequence of the debate has been the spotlight on interest rates for savers and the Treasurys calculations. The figure varied from 7 per cent. by Liberal Democrat Members to 10 per cent. by Conservative Members, but it is clearly not acceptable or realistic. If the Government were realistic and provided an actual figure, more people would be able to obtain tax credit, but they are being denied it at the moment because of the false figures based on their pensions. It is good that that has emerged from the debate.
Until the hon. Member for Braintree (Mr. Newmark) came on the scene, Opposition spokesmen, including those on the Liberal Democrat Bench, did not mention the real culprits. The debate started with the suggestion that the crisis was caused by the Labour Government, and we are so busy having a political argument that we have failed to mention the people who really caused it and who are prolonging itthe bankers. That should never be forgotten, and we should not allow the Conservatives to let them off the hook. To do so would be serious because the time will come for the House to introduce regulations to prevent a crisis from occurring and, when the hurt has passed, months later, the bankers will say, You cant do that, because it would stop us making money. We will have forgotten how they behaved and the trauma that they caused. It is important to understand what they have done, to stop trying to make political capital, and to keep the real culprits in the dock.
Mr. Andrew Pelling (Croydon, Central) (Ind): Does the hon. Gentleman believe that regulation should be introduced so that we can set minimum rates for savers? He is right to say that tax relief on virtually no return is worth nothing. If we are going to regulate, perhaps we should regulate on that as well.
Saving is a matter not for the Government, but for the banks. When I mentioned the 0.01 per cent. interest that most major banks are paying to savers, the hon. Member for Twickenham said that the banks are recapitalising. Making saving unattractive is a strange way to recapitalise.
I made a point about a pensioner putting £1,000 into a Barclays account, which would earn a pound a year. How can the banks recapitalise with proper depositsnot the funny money that has caused all the troubleif they are paying £1 a year interest on £1,000? The banks should be making saving attractive to bring new customers in. If they want to recapitalise, they should do so with money from customers.
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