Mr. Robert Syms (Poole) (Con):
I thank the hon. Member for Leeds, East (Mr. Mudie) for keeping his remarks short so that I have time to speak. All politicians are in favour of people saving, although we are not
always in favour of people doing it yet. In the long term, saving is always good, but in the short term there are sometimes reasons for wanting people to spend.
People save in several ways, including through pensions. Unfortunately, partly because of the Governments changes to the tax regime and partly because of the history of pensions in recent years, many people do not now put their money into pensions, so we must restore confidence in the pension system. Another method of saving is through house purchase, but the recent housing boom has distorted the British economy. A third way of saving is by putting money into the bank, and there are several ways in which we can help people to increase their savings in the long term in order to help the economy.
The principal problem is that the unsustainable housing boom has been financed by banks, initially from depositors, but recentlyover the past two or three yearsfrom wholesale money markets, which have now dried up. The bubble has therefore burst. Most of the difficulties and problems that the banks are experiencing stem from property write-offs and reductions in the property market, rather than because they loaned money to Rover or Jaguar or a steel plantenterprises that actually produce something. That is the real problem, and we are facing a credit crunch. Whoever is in government, the focus has to be on getting lending going again between banks and attracting funds. Otherwise, we will face a massive contraction. On the issue of the money supply, there is a real danger of money starting to contract if the banking system does not start to work properly.
The proposals made by my Front Bench colleagues today are not actually about saving. Savers tend to be elderly and there are seven times more of them than borrowers. So when interest rates are cut, borrowers tend to take the money and save it rather than spend it, but when they are increased, those who have small bank account savings tend to see it as part of their income and spend it. Many pensioners in Poole have lost income from the low interest rates, and my colleagues are tryingin a small wayto give some money back to those who are more likely to spend it on paying the gas bill or the council tax, or other ordinary, everyday expenses, because everybody is under pressure.
It has been claimed in this debate that those on lower income levels have more propensity to spend. Those who are elderly and who have savings accounts certainly have a higher propensity to spend if interest rates are increased. My right hon. Friend the Member for Wokingham (Mr. Redwood) has argued for higher interest rates, and indeed cutting interest rates to present levels can be deflationary, because individual borrowers save and savers, especially the elderly, do not spend. The principal beneficiaries of lower interest rates are probably companies and, in the long run, that may be a good thing. However, if the low interest rates reduce the incentive for people to save in the short term and have a detrimental impact on the elderly, that is to be deprecated.
In the long term, we need proposals to increase saving, and it would be welcome if they were cross-party proposals, because getting our citizens to save more needs cultural change. The hon. Member for Leeds, East was right: we need to get people to put more savings into banks and return to the traditional Captain Mainwaring type of banking instead of the recent
approach of using hot money to stoke a boom in housing that, in the long run, will cause disruption in the economy and the loss of jobs, and hit our industrial capacity.
My hon. Friend the Member for Braintree (Mr. Newmark) set out very clearly the need for saving in the long term and why people should put some money aside for the future. My hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) pointed out in his contribution on Equitable Life what happens when things go wrong. There has been an undue delay in helping policyholders in Equitable Life, which has consequently eroded the confidence of savers in the saving market. We need to bear that in mind.
The hon. Member for Poole (Mr. Syms) talked about the dependence on the wholesale market for funding in recent years. I will come to that later, but he is absolutely right to say that the savers culture must be rebuilt to ensure that banks are less dependent on wholesale markets. That would make a significant contribution to increasing the stability of the economy as a whole.
The hon. Member for Newcastle upon Tyne, North (Mr. Henderson) said that there is nothing in the measure to help the poorest. I want to point out to him a comment that has popped up two or three times in the course of this afternoons debate. There are people who have a savings income who pay no taxor tax at only the 10 per cent. ratewho receive their savings net of tax and often do not know how to reclaim that tax. They are losing out. There is something in the policy for them, as it will make it easier for them to ensure that they receive their interest on a gross basis.
The hon. Member for Islington, South and Finsbury (Emily Thornberry) talked about how we would fund the policy. We have made a very clear proposal on how we would fund the tax reductions. We believe that that it is in the interests of the economy as a whole for that to take place.
The hon. Member for Leeds, East (Mr. Mudie) objected to the motion because it might be too politicalI thought that the House of Commons was here to talk about the political issues. He alighted on a particular point that has raised concern among Members on both sides of the House, which is the rate of interest that is assumed for the calculation of pension credit. People might want to return to that topic and to think about it.
The hon. Member for Luton, North (Kelvin Hopkins) gave one of his typical speeches about the rate of tax. Let me point out to him that we have a state savings bank in National Savings and Investment, which raises money to help offset the national debt. It has been
tasked with increasing the amount of money that it is to raise from savers this year. A state savings bank already exists, and that was perhaps the only point of agreement between us in our discussion this afternoon.
We need to return to the central point. Although it is right to tackle the recession using monetary policy and it is right to reduce interest rates, we need to remember that although low interest rates help to ease the position of borrowers, savers pay the price. As the returns on their ISAs and building society accounts tumble, so does their income. At a time like this, it is right to help those people who depend on interest income. That is why our policy to scrap the basic rate of tax on interest for basic rate taxpayers is designed to help savers today. It will reward people who have done the responsible thing through the last decade and have put money aside. It will help to cushion them from the fall in interest income that they will have seen over the course of the past few months.
Our policy is not just a short-term policy. It is a policy for the long term. It is not just about helping people who are living off savings today, but about encouraging people to save in the long term. Over the course of the last decade, the Government have presided over a collapse in the savings ratio. As part of the golden economic legacy that the Government inherited in 1997, the savings ratio was 9.9 per cent. It has fallen to 1.8 per cent. In 1997, people saved £54 billion. In 2007, that figure was down to £20 billion. When the Government came into office, one in 10 families had no savings. The most recent figures show that one in three families have no savings.
We are paying the price for the casual attitude that the Government have shown towards savings over the past decade. People are entering the recession ill-prepared for the strain on their finances. The collapse in the savings ratio means that people with low savings are likely to face more financial distress. They do not have the money for a rainy day, the cash for an unexpected expense, or the buffer that will tide them over a period of unemployment or of short-time working.
The Governments amendment shows that they have been complacent. The measures that they have introduced, such as the child trust fund and the savings gateway, are so far unproven. They have not tried to encourage savings across the country as a whole.
The price of that complacency has been borne by families and business. Savings are the bedrock of family finances, but they are also the foundations of a stable economy. Without adequate UK savings, borrowers become increasingly dependent on the flows of capital into the UK. At the start of this decade, bank deposits broadly matched the amount of lending required in the economy. Cash in the bank was enough to fund loans to families and businesses, but the story of the decade has been that borrowing has risen without being matched by savings or bank deposits. Instead, it has been funded through international wholesale markets. In December, the Bank of England believed that the funding gap was £740 billion. That means that we need to find three quarters of a trillion pounds to fund borrowing at current levels.
Mr. Hoban: No, as the hon. Gentleman and I have discussed Northern Rock many times before. I know that he has a particular constituency interest in that bank, but its business model depended not on UK savers but on being able to suck in money from across the world. Today, it is not just one bank that faces that problem but the banking sector and the economy as a whole.
Mr. Henderson: I am grateful to the hon. Gentleman, and I understand why wholesale banking is a target at the moment. However, if surplus funds in countries such as China have to work their way through the international banking system, can that happen only through deposits? Is there not a case for intermediary markets as well?
Mr. Hoban: We need to get the system into balance. Part of the problem at the moment is that we have been overly dependent on capital inflows. As my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) said earlier, we are in effect borrowing money from overseas savers to buy the goods that we import.
Over the past few months, those flows have ceased to come into the UK economy, with the result that it has seized up. Credit has ceased to flow in the markets, and we must try and restore the correct balance between saving and borrowing. It is not about saying no to wholesale markets, but rather about getting the balance right. If we are to restore stability to the economy as a whole, we need to get a better balance between what people save, borrow and invest.
The savings culture is not just about families: it is also about businesses, and strengthening the foundation of the economy. By restoring the savings culture in the UK, we will help families take greater control over their finances. We will help them to take responsibility for the future and to ride out the bad times, but we will also increase the stability of the economy as a whole. We must decrease our dependence on wholesale capital flows, reduce volatility, and increase stability.
Over the past 10 years, the Government have neglected the savings culture and gambled with our economy. People who have depended on savings are facing hardship, and those without savings face fear and uncertainty. People need to save more: higher levels of saving will help them take responsibility for the future and ride out the rough times, and they will also support greater investment in the economy.
By neglecting savings and creating a spend now, pay later economy that is built on weak foundations, the Government have caused instability for families and businesses alike. The Oppositions plan to scrap the basic rate of tax on savings for basic-rate taxpayers is the right policynot just for those who depend on savings for their income today, but to encourage tomorrows savers too.
I believe that we need that change if we are to bring stability back into this country and put the right balance back in place. The Government have not really tackled that issue over the past decade, but that is the sort of change that we need. I believe that only a change of Government will bring it about.
The Economic Secretary to the Treasury (Ian Pearson): For the most part, this has been a thoughtful debate, and to that extent I agree with the hon. Member for Fareham (Mr. Hoban). We had some good contributions from my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson), for Islington, South and Finsbury (Emily Thornberry), for Luton, North (Kelvin Hopkins) and for Leeds, East (Mr. Mudie), and contributions also from the hon. Members for West Suffolk (Mr. Spring), for Braintree (Mr. Newmark), for Shrewsbury and Atcham (Daniel Kawczynski) and for Poole (Mr. Syms).
In the years since the Labour Government came to power in 1997, we have had a savings record that we can be proud of. We have taken a number of steps to encourage saving. The system of individual savings accounts that we introduced in 1999 has been highly successful. As hon. Members know, around one in three British adults hold an ISA, and only last year we acted to make ISAs even more attractive to potential savers, making them more flexible and easier to use and raising the annual tax-free investment limit to £7,200.
The child trust fund that we introduced provides every child with £250 at birth, or £500 for children in lower income families, and again at the age of seven. The policy is designed to strengthen the saving habits of future generations, promote financial inclusion and ensure that at age 18 every child will have access to a financial asset. We are delighted that more than 4 million children now hold a child trust fund account.
We are implementing a new scheme, the savings gateway, which we hope will come into operation in 2010. The savings gateway is a cash savings scheme that aims to promote saving and financial inclusion for those on lower incomes, and it provides a financial incentive to save through a Government contribution of 50p for each pound saved in the scheme, up to a monthly limit. The scheme has already been positively piloted and it will help kick-start the saving habit among those who have not saved before, as well as helping those who are currently excluded to enter the financial mainstream. Furthermore, pensions tax relief of £30 billion gross is available.
The hon. Member for Runnymede and Weybridge (Mr. Hammond) fails to give credit where credit is due. By all means let us debate the savings-related issues that exist between our parties, but let us not forget that there are savings products out there that are benefiting individuals throughout the country. On the off-chance that a saver has tuned into the debate or might Google it at a future date and might want advice from hon. Members who participated in the debate, let me say that the Financial Services Authority, through its money made clear website, provides impartial, jargon-free advice. Many savings products on the market offer competitive rates and good deals.
It took the hon. Member for Runnymede and Weybridge 25 minutes to get on to the subject of saving. He started with a number of assertions, the most outstanding of which I found to be the assertion that there was an emerging consensus that a fiscal stimulus was not appropriate. I do not know who the hon. Gentleman has been talking to, but I do not believe that there is even a consensus on the subject in the new shadow Cabinet. The Conservatives are isolated in Europe, the United States is looking to introduce a further fiscal stimulus under its new President, the Germans recently announced a fiscal stimulus, and other countries are doing so.
Let us talk about VAT. The hon. Member for Runnymede and Weybridge says that the measure is not working, but I think he is wrong. He knows that it is boosting demand to the tune of £12.5 billion into the UK economy. Even the right hon. and learned Member for Rushcliffe (Mr. Clarke) said that it was the right policy. If it is good enough for the shadow shadow Chancellor, it ought to be good enough for the hon. Member for Runnymede and Weybridge.
Mr. Philip Hammond: The Minister will know that on the day of pre-Budget report the shadow Secretary of State for Business, Enterprise and Regulatory Reform made it clear that, having heard the Chancellors catastrophic projections of the level of deficit that he would be running, the VAT cut was simply not affordable, and he urged him to convey that message back to the Prime Minister.
Ian Pearson: I did not say that I agreed with the shadow shadow Chancellor on everything. He was right to say that the VAT cut is a most effective policy instrument, and we believe that this is making a difference. This is pounds in peoples pockets now. The average family will save something in the region of £275 a year as a result of the Governments VAT cut, and that stands in stark contrast to the Tory tax proposals on savings, which will save the average family £5 a year.