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What is happening now is that the public availability of health care that is funded by the taxpayer is being reduced. An increasing number of people may wish to insure themselves against the possibility that they might need access to such health care in the independent sector. Indeed, one might also mention physiotherapy. Any number of people who suffer sports injuries then
seek to get physiotherapy on the NHS, but they find that if they can get it at all, the wait is likely to be so long that the benefit will be significantly less.
A large number of individuals in this country insure themselves with personal health insurance. If the Government think that that is a good and responsible thing to do-it is one way in which people choose to spend their money, perhaps instead of spending it on expensive holidays abroad or whatever else-we can perhaps hear about that today. However, if the Government's purpose is to encourage people to supplement the health care that is available from the state, why are we proposing to increase the insurance tax on the premiums that they pay?
One might also talk about what happens in dentistry. It is almost impossible now to access free dentistry on the NHS. Indeed, I understand from the British Dental Association that, in terms of value, about half the dentistry in this country is practised in the private sector, and a lot of that is funded through insurance. If we want a nation that prides itself on having about the worst dental care of anywhere in the world, we are heading in the right direction. I am sorry that my hon. Friend the Member for Mole Valley (Sir Paul Beresford) is not here to supplement my points about that, but there is an increasing crisis in dentistry in this country, because of a lack of resources that are funded by the taxpayer. In moving the amendment, I am not asking that those taxpayer resources should be greater; rather, I am trying to ensure that proper incentives are in place to encourage people to take responsibility for such insurance themselves.
Mr John Redwood (Wokingham) (Con): I am delighted by the case that my hon. Friend is making. As he is suggesting, people who insure for their health needs are paying twice, because they are also paying their contribution to the NHS, thereby helping doubly. Does he therefore think that keeping the tax rate at 5% is enough, or would he really rather it were lower?
Mr Chope: My right hon. Friend asks a pertinent question. I would prefer the tax to be much lower-indeed, perhaps there should be no tax at all-for particular insurance premiums. However, in order to try to carry as many people with me as possible in this debate, I thought that I would limit my ambition, by saying, "Why don't we not increase the tax from 5% to 6% for specific types of insurance premiums?"
I have picked out a couple of examples of that, and I will come to another in a minute, but obviously the principles could apply much more widely. For example, many people are now taking out insurance against their long-term care needs. Indeed, the Conservative party said in its manifesto that for an £8,000 premium, a family would be able to secure themselves against the cost of having to fund long-term care. I do not know whether such a premium, if it were paid, would be subject to insurance premium tax, but perhaps my hon. Friend the Minister will be able to tell us about that. At the same time, perhaps he can let us know when he expects that part of the Conservative manifesto to be brought before the House for implementation in legislative form.
The principle of insurance is one that most Conservatives-most of my constituents-applaud. People can either self-insure, which means that they take the
risks themselves, or they can pool that risk by buying an insurance policy, which many people do, by buying life insurance, pension insurance and so on. In the case of pension insurance, we are talking about incentives for saving; in the case of life insurance, we are trying to encourage people to ensure that if they die prematurely, their dependants have some support and are not wholly dependent on the state. Those examples do not fall within the scope of my amendments, but they would be covered by amendment 15, which goes rather wider. However, it is important that we should have this little debate, to try to tease out a bit more from the Government on these important issues.
Turning to my amendment 19, let me say that we have a real problem with motor insurance in this country. For young people, the price of motor insurance is almost prohibitive. Indeed, it is so high that people cannot afford to buy it. Instead, what happens is that young people might get their parents to put them on their policies, if they are lucky enough to have parents who will do so-sometimes in quite dubious circumstances, as we have been reading in the newspapers recently-but quite often they will take a risk and drive uninsured. I regard driving without insurance as an extremely serious motoring offence. It is reckless, and those who do pay for their motor insurance end up having to pick up the bill for those who cause accidents and injuries as a result of not buying insurance.
Lorely Burt (Solihull) (LD): I am following the hon. Gentlemen's argument, but when he says that the cost of insurance for young people is prohibitive, does he honestly believe that 1% either way is going to be a significant factor in a young person's decision on whether to buy motor insurance?
Mr Chope: Well, 1% is 1%. I am sorry that the hon. Lady seems to be rather unsympathetic to the plight of people who are trying to get motor insurance. Lots of young people need a car to get to work. They find the cost of motoring increasing all the time and they find the cost of insurance also increasing, yet the proposal before us is to increase that cost further-not massively further, but to increase it nevertheless.
Chris Leslie (Nottingham East) (Lab/Co-op): As I hope to be able to say in my contribution later, I agree with the hon. Gentleman on this point. I am astonished to hear the comments coming from the Liberal Democrats that they do not care about the costs of motor insurance, which, especially to young people, can be £1,000 or more. Will the hon. Gentleman also note the perverse consequences for those who go uninsured? Yes, they might get six points put on their licence if they are caught, but the fine is often just £300 or £400, so they would almost be better off to take the risk and be fined rather than pay the cost of the insurance. That has to change.
Mr Chope: The hon. Gentleman is absolutely right. What he said is no great revelation for young people when they go out and party or communicate with each other via modern means of communication. They know that the risks of getting caught are not that great, and that if they are caught, the consequence will be penalty points on their licence and a fine. They will often be able to pay off the fine over an extended period.
Young people now face very substantial insurance premiums and those from the most deprived areas are often those with the highest premiums. One factor that is taken into account is the postcode. If the chance of someone's car being stolen is high because of where they live or because they do not have garage, the premium will be higher than for someone who perhaps lives in a rural, perhaps law-abiding community. That is an additional problem that these young people face when it comes to motor insurance.
Mr Greg Knight (East Yorkshire) (Con): This tax will hit not only young people, but people of all ages. Does he agree that those arguing that the motor car is a luxury and that taxes on luxuries are quite acceptable are ignoring the real problems that people in rural areas face? For them the motor car is not a luxury but a necessity.
Mr Chope: My right hon. Friend is absolutely right. What he and others are identifying in this debate is an element of confusion in public policy. Compulsory third-party insurance for people who drive cars is a matter of public policy. If such compulsory insurance is required by the law, we are effectively saying as law-makers that it is a good thing to have it. Are we seriously saying as law-makers, "Well, if you comply with the law, we are also going to charge you extra tax for your compliance"? It seems to me that we need more clarity of thought on the matter. If we do not think that insurance is important and necessary, we should remove the requirement for compulsory insurance. I think that motor insurance, and particularly third-party insurance, is not only desirable but essential. If we are to have it, however, why should we also have insurance premium tax on it? In particular, why do we need to increase the insurance premium tax at this time?
The yield from all the increases in insurance premium tax comes to some £400 million a year, but I suggest that the cost ramifications arising from uninsured driving, and the accident and injuries resulting from it, might be on a scale similar to the total yield of the entire increase in insurance premium tax. Because the current system imposes a flat rate on the level of the premium, the higher the premium, the worse the risk and the greater the penalty incurred.
When the Minister responds, I hope he will let us know whether he has considered alternative ways of raising revenue, if it has to be raised, from insurance premiums. It might be possible to do so by looking at each transaction, or we could have a fixed levy on every annual insurance premium. That would mean that people with the highest premiums would not have to pay the highest amount in tax. I do not know whether those options are being looked at. If the Minister is listening to what I am saying rather than coalescing with the coalition, I hope he will let me know whether any thinking has gone on in this radical Government along the lines that I have suggested-of having a fixed price tax on each insurance transaction rather than relating the tax to the cost of the premium, which, as I have said, militates particularly against the least well-off, living in areas where the premiums are higher because the risks are higher.
Without making a meal of it, I believe that we are debating an important matter of principle, and I am delighted that there are so many right hon. and hon. Members in the Chamber to hear it debated. We look forward to hearing more about amendment 15, which I believe is also a useful one. It is surprising that we do not have such a report as is suggested in the amendment before us now as we consider these issues.
Mr Knight: I do not think my hon. Friend should gloss over this point too quickly. As he has said, this is a percentage tax, so we are effectively saying that a young driver seeking to insure an Escort RS motor vehicle should pay more in tax than a 55-year-old driver of a Bentley.
Mr Chope: My right hon. Friend has particular expertise and knowledge about that particular end of the market. I am sure that the Committee is obliged to him for that information. The point he makes is absolutely correct. If we are thinking in terms of equity and fairness as the guiding words of the day, let us see if we can look again with radical eyes at this whole structure of taxing insurance premiums. Let us see whether the Government accept the amendment today; if they do not, let us see whether they have anything else to put on the table by way of responding positively to the points raised in the debate. We can then decide whether we wish to divide the Committee on this issue or just put down a marker.
Mr Bone: Before my hon. Friend concludes his opening remarks, will he clarify this? I assume that the amendment is not really about whether to have the tax rise or not to have it, because it is very small. Is it more about sending out a signal that the Government want to encourage people to take responsibility and take out insurance?
Mr Chope: Absolutely. I make no apology for declaring my own view, which is that if it could be afforded, it would be sensible to give tax relief on insurance premiums where we think those premiums are for the public good and will result in reducing the burden on the state and the taxpayer. I would like at least to bring in incentives in the form of tax relief, let alone eliminate the insurance premium tax. As I said earlier, I do not think that the latter is affordable in the present crisis. That is why I tabled this very modest proposal in the hope that it will get the Government thinking about alternative means of raising money from insurance policies.
Stewart Hosie (Dundee East) (SNP): I rise to speak to amendment 15 in my name and that of my friends. At face value, the increase in insurance premium tax in the Budget did not cause a huge stir, but as its consequences began to be felt, many representations were made by consumers and the industry. On balance, it is wise that we should have a report on the likely consequences of this tax rise on individuals, families, consumers and the sector. A number of concerns and predictions have been voiced. Eric Galbraith, the chief executive of the British Insurance Brokers Association, said that its research
"demonstrated that businesses and consumers were reducing insurance cover as a result of the recession"
"we are concerned that increases to insurance premiums as a result of IPT could lead to even further underinsurance or even a lack of insurance protection. The last thing people need in a financial crisis is a higher insurance bill".
That makes sense, given that taxes elsewhere, not least VAT, are going up. The insurance industry is worried that increased premiums may tempt people completely to stop insuring their homes, holidays or travel. Already, according to research by moneysupermarket.com, only one in five travellers always cover every trip they take here or abroad.
One consequence of underinsurance or non-insurance is that the number of illegal uninsured drivers is on the rise. According to the Motor Insurers Bureau, they already push up the average car premium for everybody else by £30 a year. If more people are underinsured or have no insurance at all, the premiums of those who pay the minimum third-party insurance will be pushed up even further. That is another burden that people really cannot do with in the middle of this recession, when times are tough. As the right hon. Member for East Yorkshire (Mr Knight) has made clear, in certain parts of the country, where the car is a necessity and people are honest, such premiums will be paid again and again. There will be a lot of hits to the honest insurer as a result of non-insurance elsewhere.
"Raising IPT is a direct tax increase for the vast majority of people who sensibly protect themselves and their families with insurance. This is regrettable and could have serious unintended consequences if it puts off consumers from protecting their homes, cars, holidays and everyday living."
On uninsured trips, apparently some 2.9 million trips are made each year without adequate cover. Peter Hayman, the director of P J Hayman, expects that number to rise as more people opt to economise and use "free" cover as the cost of IPT increases. Perry Wilson, the founder of Insure and Go, has said:
"Our research suggests that the UK travel insurance industry receives over half a million claims for medical problems a year and nearly 400 000 for lost or stolen baggage. This tax rise will only act as a deterrent to those who sensibly want to insure themselves against these risks".
David Rutley (Macclesfield) (Con): The hon. Gentleman makes an important point about underinsurance, as have other Members. Does he agree that this should not be just about the potential increase in IPT, but should also be about what we can do in terms of product design? Surely the onus should be on insurers to come up with products that help people, particularly younger drivers, to avoid this challenge. For example, they should look at opportunities for pay-as-you-go insurance and other possibilities. The argument is not just about IPT, but is about other product-related challenges and what can be put forward to mitigate the problems of underinsurance.
Stewart Hosie: I am a great supporter of innovative product design, marketing and pricing strategies, and I hope that all those things happen, but we are debating an amendment to the Finance Bill in which the Government are putting up IPT. I shall not strain the limits allowed by the Chair, but shall stick to the amendment and what is in the Bill, while supporting any innovation that the insurance sector, which is massively important in Scotland, might bring forward.
There is a deterrent effect on those who wish sensibly to insure themselves against many risks, and that effect will be enhanced as the cost of insurance rises. There are also specific consequences for individuals. Some 1.2 million people-about one in 20 motorists-regularly drive uninsured, and honest motorists pay the £30 premium I have mentioned, which is likely to go up. If someone is caught driving without insurance, the police are entitled to remove their vehicle from the road and charge them for the cost of transporting, storing or scrapping it. However, some cars may be worth less than the cost of insurance and there will be a burden on the public purse as a result of that removal, storage and scrapping of vehicles if people choose simply to abandon them.
People might also cut corners and opt for the "free" travel insurance offered by credit card companies, which might leave some travellers without the necessary levels of cover and might be costly in the long term. I do not intend to take up much of the Committee's time on this issue, as this is a probing amendment, but this issue is more serious than I had initially imagined. I look forward to hearing the Minister's comments on that last point in particular, because if people decide not to pay insurance premiums and instead settle for the "free" cover offered by their credit cards, they might be underinsured in certain circumstances. Also, business might be driven from the traditional, successful, good insurance companies, and I am conscious of what the net loss of jobs, revenue and profitability in that sector might be. So, putting up IPT will have consequences for the sector, for individuals and for jobs. All these points need to be answered properly and considerable comfort needs to be given that we are not going to turn into a nation that says, "We can't afford insurance; we'll do without it and let other people pick up the tab." I shall listen very carefully to the Minister's reply.
Mr Redwood: My hon. Friend the Member for Christchurch (Mr Chope) has highlighted the two very important and different issues of health insurance and motor insurance. Let me start with motor insurance, which is a legal obligation that is imposed on everyone who wishes to own and drive a car.
Like my hon. Friend, and, I suspect, everyone else in the House, I think it quite right that there should be that obligation. It reminds people that driving a car is a serious business and that they could do considerable damage to others or themselves if they do it badly. It also means that, were someone to drive badly or to be involved in an accident that was not their fault, there would be redress and injured third parties who might need substantial compensation would not be left without it. For all those reasons, we think that car insurance is a very good idea and we accept that it should be a legal obligation.
The coalition Government think that one way of raising more revenue is to increase the tax on that compulsory purchase, but quite a lot of people in the House think it would be better to raise more revenue from the existing level of insurance tax on motor insurance by getting more people to be insured. We are rightly very concerned that, because of the way in which the insurance market works, a significant number of people, particularly younger people, may not be taking out any insurance or may not be taking out proper insurance for
their circumstances, and that that places other people at risk and could mean losses that those young people could not afford to pay if they had an accident. That clearly means a loss of revenue for the Exchequer, because those people are not making their contribution by paying their share of insurance tax. We would like the Minister to consider whether better enforcement of the insurance rules could help with his task of filling the coffers and narrowing the deficit. That might be a better route than increasing the tax.
I am sure that the Minister will remind us that we are talking about a 1% increase and that it is quite a modest sum of money. We have been reminded a few times that young people with certain kinds of vehicles, or some young people with any kind of vehicle, can be required to pay a four-figure sum each year for their motor insurance, so we could be talking about £10 or more. The additional increase would not be welcome, because most young people find such sums of money quite large in the first place, and a further 1% would not be helpful.
The increase might only be a straw, but the camel's back is already well and truly loaded. The poor old motorist is always at the top of any Government's list when they are rattling the collecting tin and trying to raise more money for a variety of state purposes. I just hope that the Government will reflect on this matter. They will have other opportunities to look at the total burden on the motorist, and they might not wish to consider this particular burden today and therefore immediately grant my hon. Friend the Member for Christchurch's request. I see no sign of the Minister leaping to his feet to welcome the proposal, just and fair though it might be. We know, for example, that the coalition Government are going to look at a fair fuel levy-an escalator that comes down when the price goes up and goes up when the price comes down, to keep fuel prices at a more realistic level.
Claire Perry (Devizes) (Con): In trying to square the circle of how we can raise taxes when there is no money, it is interesting to note that we have not committed to Labour's rise in fuel tax, which was going to add a further £425 million- [ Interruption. ] If you read the small print in Labour's last Budget, you will see that there was a plan to raise an additional £425 million-
I was making the point that the Minister, in responding to this debate on the insurance premium tax, might assuage some of our grief if he were to say that the Government had looked at the total package of taxes on the motorist and that they were aware that this was yet another example of the piling high of taxes on the motorist. Although this individual tax increase will not be large for many motorists-it will be more penal for young drivers and high-risk drivers-it is none the less an additional burden. Even if the Minister cannot accept the amendment, I hope that he will look at other ways of dealing with the problem of fair motoring taxes.
Every time something like this happens to motorists-this time, it is the insurance tax levy-they say, "We are being sandbagged again. Where are those better roads? Where is that safer junction? Where is the wish to spend money on improving the flows on the roads so that we can travel in a more fuel-efficient, green manner of which the Environment Secretary would approve?" There never seems to be the money to do that. We know that this bit of taxation on the motorist, like most others, primarily goes not to making better roads but to a wide range of other purposes; it gets lost in the general coffers.
Lorely Burt: A number of speakers today have singled out specific kinds of insurance, but as I understand it, the Bill proposes to increase insurance premium tax on a whole range of insurance products, which we would encourage people to take in a responsible manner. I have every sympathy for young drivers and for other motorists, but why does the right hon. Gentleman feel that we should specifically single out motorists or people who take out private health insurance? Why should those people be specifically excluded?
Mr Redwood: That is what I am trying to explain, while remaining in order on this narrow amendment. The bottom line of my case is that motorists comprise a large category and, when polled, they say that they feel badly done by because they pay a disproportionate amount of tax and do not get much back. It is argued that motorists ought to pay more because they get the use of the roads, which are provided free at the point of use in most cases. It is not like that, however, because the bulk of the taxes levied on the motorist, including this insurance premium tax, are used for purposes other than roads and motoring. That is why motorists feel hard done by.
I hope that the Minister and his colleagues will consider carefully the general category of the motorist. I would love it if he could make a concession to my hon. Friend the Member for Christchurch, but if he cannot, it would help us and the people we represent if he could say that the Government were at least aware of the bad deal that the motorist has been getting in recent years, and that, where possible, they will do something about that. As we have heard, people in rural areas have no choice; they have to use their cars. People in urban and suburban areas also have no choice at certain times of the day or at weekends. People who work antisocial hours clearly need a car. Most MPs need a car, for example, because we still work antisocial hours.
Mr Liam Byrne (Birmingham, Hodge Hill) (Lab): I am following the right hon. Gentleman's argument with some care. He said that motorists get only a limited amount back from the taxes that they put in. Does he therefore support arguments in favour of the greater hypothecation of taxes such as the insurance premium tax, to help to resolve that problem?
No, I do not. I am sufficiently in tune with Treasury thinking to know that all Treasuries under any Government hate hypothecation, and I understand the complication. Critics of motoring and cars often argue that motorists are walking off with all
these free goods, but people have come up with lots of figures that show conclusively that, in a hypothecated way, motorists get a particularly poor deal. People now look at these issues in such a way partly because the green movement has made them do so. It has now been demonstrated that, calculated in a hypothecated way, motorists put in a lot more than they get back. I do not think that the Treasury should operate all its taxation on that basis, but it does need to take account of the mood and the politics surrounding this question, which we are here to represent.
The feeling of unfairness is now quite extreme among the motoring community, and motorists want to communicate through us the fact that they are often motorists because they have to be. There is no train to take them to the shops, for example. The train might be 2 miles away from their home so, unless they have plenty of time to walk to the station, they need to start their journey in the car and sometimes they might as well finish it in the car as well. There is often no alternative, which is why some 86% of our journey miles are carried out by car, and only some 6% by train. There is a basic necessity, which is why we need to be fair when making any tax proposals affecting motorists.
The case of private health insurance is somewhat different, as I am sure my hon. Friend the Member for Christchurch would agree. I make my declaration: I have no private health insurance, so I am not arguing my own case. I rely on the NHS, should ill health befall me, as I am sure do many other Members. However, I am not saying that some of my constituents are wrong to take out private health insurance. It is still a legal thing to do. Indeed, in a way, I feel that I am cheap-skating at their expense, because they are paying twice and I am paying only once. I pay my taxes, and if something happens to me, I hope to receive NHS care, whereas they contribute to everyone else's NHS care through their taxes-they have no choice, of course, but some of them do it graciously-and then make the additional choice to pay for their own insurance. There is a double advantage: more money comes into the health sector, but when those people become ill they make no claim on the health service, even though they contribute to it.
My hon. Friend the Member for Christchurch is making a reasonable point. Given that it is not illegal to have private insurance, and that those who have it help to eke out NHS funds, should we be taxing it more? That is a very good question to raise. I shall make no stronger statement than that, but it will be interesting to see how the Treasury responds. After all, on this side of the House, we are all now big society fans and advocates- [ Interruption. ] Well, practically all of us, perhaps. There might be one or two of my right hon. and hon. Friends who are not so enthusiastic about it, but I am; I think it is a great idea. The essence of the big society idea is to harness private money, voluntary effort and charitable activity, and to understand that the state cannot solve all the problems. In a complex, difficult and expensive area such as health care and related social care, we need voluntary and private contributions as top-ups, or in addition to public sector care.
This issue poses a particularly interesting question for Ministers. If they are really serious about the big society idea, do they want to increase the taxes on people who make voluntary contributions and take some of the demand away from public services? Ought
they not to be encouraging people to do such things? I look forward to hearing my hon. Friend the Minister's reply to these nice philosophical questions in this wonderful caring, sharing age of coalition government, in which the big society will require some erosion of the old boundaries between public and private.
Mr Byrne: It is an enormous pleasure to follow the hon. Members for Christchurch (Mr Chope) and for Dundee East (Stewart Hosie) and the right hon. Member for Wokingham (Mr Redwood). The strength of their contributions was in illustrating that the proposals in clause 4 raise a wide range of policy concerns and debates. Hitherto, the House has not had much explanation of the logic or rationale of all the changes set out in the clause. The arguments for some of the proposals are fairly easy to deduce, but the core of the clause is the increase in the standard rate of insurance premium tax, which has not been explained.
The lack of explanation underlines the fact that the Bill is somewhat piecemeal. It is fragmented. It is not a whole Bill; it is not even a half Bill; it is a bit of a Bill. We were told with great fanfare a few weeks ago that the Government were introducing an emergency Budget. The Bill and the clause illustrate in our debate this afternoon that the only emergency was the need to get some pretty difficult changes on to the statute book by the summer, before Liberal Democrat members on the Treasury Bench got cold feet or had, dare I suggest, too many conversations with their constituents.
So the result of that emergency-something that some would uncharitably call a panic-is a Finance Bill with measures such as clause 4 that so far are bereft of logical explanation. The strategy has also produced clause 5, which we shall debate later this afternoon, which withdraws tax legislation without putting anything back in its place. Where there is certainty, the Government in their panic have decided to substitute mystery. So much for the simplification credentials.
The effect of clause 4 on one level, as I have said, is reasonably straightforward. It raises the higher rate of insurance premium tax from 17.5% to 20%. That would appear to be a fairly automatic consequence of the decision to raise VAT to 20%. The higher rate of IPT was introduced in 1999 to prevent a problem called value shifting, whereby some retailers and other producers tried to lower prices of goods and bundle them with insurance policies, for which they redeemed some of the value. I was not sure whether that was some of the financial innovation that the hon. Member for Dundee East was beginning to welcome in his remarks. Perhaps he will say more about that a little later.
Mr Chope: Does the right hon. Gentleman know what proportion of the £400 million yield from IPT proposals is attributable to the increase from 17.5% to 20% and what proportion is attributable to the increase from 5% to 6%?
Mr Byrne: The hon. Gentleman raises an important question. The answer is that I do not know. It is a mystery. The Budget scorecard has a certain number, but of course it has bundled together the revenue that is to be raised from the increase in the higher rate and the increase in the standard rate. I hope that the Minister will be able to enlighten us.
It is possible to deduce why the higher rate has gone up, but it is curious that the Government have chosen to increase the standard rate. We have to assess that decision alongside the decision to preserve exemptions and zero-rating from VAT on a range of goods and services. We were told on Tuesday night by the Economic Secretary that the existing zero ratings and exemptions would be kept in place for the course of this Parliament. That commitment was given to the House on Tuesday night, and we will all watch the Government's adherence to it with a great deal of attention over the next few years. That decision to keep in place a series of zero ratings and exemptions just adds to the mystery of why this standard rate has been singled out for such an enormous rise.
The hon. Member for Christchurch raised an important point. The Budget scorecard shows that the overall increase in VAT brings about £54 billion into the Exchequer over the course of this Parliament. That is an extraordinary amount of money. Eight billion pounds of that will be paid for by our country's pensioners. The scorecard also shows that a further £2 billion is brought in over the Parliament by the increase in IPT, but we are not told how much will come in from the respective increases in the standard and higher rates. True to form, the Government certainly have not told us what the impact of the IPT increase will be. I would therefore like to say a little about what the House of Commons Library and other sources are able to tell us about the impact of the increase.
I am afraid that one of the groups that will be hit hardest by the increase is, once again, our country's pensioners. That was the group that Liberal Democrat and Conservative Members refused to protect when given the chance by Labour amendments on Tuesday night. We established in Tuesday's debates that pensioners would pay £8 billion in extra VAT. The figure was not challenged by the Government. Today I can tell the Committee that it appears that pensioners will be hit by a further £355 million over the course of the Parliament. The House of Commons Library note-I am happy to release it more widely-allocates the revenue raised from the IPT increase between pensioner and non-pensioner households. I am grateful to the Library for this excellent work. It says that, according to Office for National Statistics figures, pensioners account for about 18% of spending on insurance in this country. The scorecard scores 115, 455, 445, 455 and 455 in increased revenue over this Parliament from the increase in IPT, so the Library estimates that £21 million will be raised from pensioners in 2010-11. Pensioners will pay that without any recompense in the form of extra pension credit or increased basic state pension; those increases do not kick in until a little later in the year.
My right hon. Friend is making an incredibly important point. Many pensioners in my constituency will be oblivious to the impact that this stealthy tax rise from the Government will have on them, especially as they are diligent in keeping up with
their contents insurance, buildings insurance and motor insurance. In many ways, the Government are grinding the burden of taxation on their shoulders. My amendment on advertising the increase in IPT was not selected. Does my right hon. Friend agree that the cost of the Treasury's imposition should be more prominently displayed on policy documents so that at least pensioners are aware of what the Government are doing?
Mr Byrne: My hon. Friend raises an extremely significant point. I am sorry that his amendment was not selected. The insurance industry will almost certainly pass on the increased taxes directly to consumers. That has been the history of increases in this kind of tax. So there is a strong case for advertising the increase more widely. I am sure that all of us as politicians will do our level best to make the news known in our constituencies.
Mr Bone: Is the shadow Minister saying now that he would support the private Member's Transparent Taxation (Receipts) Bill-something in which the First Deputy Chairman of Ways and Means had a slight interest in a previous life-which required that receipts showed how much tax and duty had been paid so that they were better advertised?
Mr Byrne: I have not studied the Bill, so I am grateful to the hon. Gentleman for drawing it to my attention. We have had good debates over the past two or three weeks about the need for greater transparency both in economic policy making and in tax policy. The Bill certainly sounds as though it would contribute to that agenda.
The hon. Member for Christchurch raised a number of public policy points. He did not dwell much on the impact of the new charges on low income groups, and I should like to touch on that different policy question. It is important that we debate it this afternoon. The Association of British Insurers has argued for a long time that the tax is regressive. IPT has been raised in the past by Conservative and Labour Governments, and the ABI has been consistent:
"IPT is a regressive tax. It imposes a disproportionate burden on the less well off individuals and the smallest businesses. These are most likely to need the protection of insurance."
We have heard about the impact that the tax will have on consumers. The hon. Member for Christchurch did not remind us of his distinguished career as a Transport Minister, but he understands well the impact of higher rates on, for example, car insurance. In the days shortly after the Budget, The Guardian told us that the average car insurance buyer would pay about £18 a year more in tax. The AA said that the bill would be slightly higher-at least another 35 quid on an average insurance policy. The right hon. Member for Wokingham spoke eloquently about the impact that the increase will have on young drivers. Some press reports estimated that the bill would rise by only £15, but the intimation in the right hon. Gentleman's remarks, and those of the hon. Member for Christchurch, was that it might be a little higher. Of course the increase comes at a time when car insurance premiums have been rising consistently for the last 12 months.
There will be an impact on travel insurance, to which Members have alluded, but many Opposition Members are particularly worried about increases in the cost of general household insurance. Many of us serve constituencies with high rates of poverty and worklessness and many areas, including some in my constituency, are also troubled by relatively high rates of crime, with drug use fuelling burglary. Over the short number of years that I have served in the House, I have seen many constituents who did not have insurance and lost everything in burglaries and had to rebuild their lives, sometimes from scratch. The ABI has told us that for the average household a 1% increase in IPT will put at least another £8 a year on the general cost of household insurance, taking it up to £850. For many of my constituents, £850 is unaffordable, particularly if they live in areas that attract premiums.
For those reasons, the director general of the ABI has described the move announced by the Chancellor as "regrettable". Kerrie Kelly, in remarks to which the hon. Member for Dundee East alluded, was clear, saying that the change
"is a direct tax increase for the vast majority of people who sensibly protect themselves."
"This is a tax on protection."
We do not have a theoretical objection to insurance premium tax and, subject to a decent explanation from Treasury Ministers, I do not plan to put our amendment to a vote. The history of IPT is one of consensus. It was introduced by the right hon. and learned Member for Rushcliffe-now the Lord Chancellor-and increased in 1999 by my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown). None the less, there are some important questions that it is important for the Government to answer this afternoon.
What assessment has been made of the increase in insurance premium tax? I should be grateful if the Exchequer Secretary would set out his assessment of the impact of that hike on Britain's pensioners? What will be the impact of the increase on the availability of general household insurance for people on low wages? Why is he raising the rate from 17.5% to 20%? Is it to preclude the value shifting that was the inspiration for the rate change in 1996? Most important, why is he raising the standard rate from 5% to 10%? Can he confirm that it is not the Government's policy to harmonise the standard rate with levels across Europe?
"Rates vary tremendously across Europe, but they are significantly higher than in the UK, which has one of the lowest rates."
"The increase does not signal a future change."-[ Official Report, Standing Committee B, 15 June 1999; c. 642.]
I should like the same assurance from Ministers on the Treasury Bench this afternoon. Can the Exchequer Secretary confirm that the change is not part of a plan
successively to increase rates of insurance premium tax to levels across Europe, which amount to 11% at the low end of the range in countries such as Austria and 22% at the higher end in countries such as Italy.
It is important that we have some assurances this afternoon that there will be no further rises in IPT in this Parliament. Subject to satisfactory assurances and explanations of the points I have raised, I would see no need to put the amendment to a vote. I very much look forward to hearing what the Minister has to say in reply.
Mr Bone: Thank you, Mr Evans. I am very grateful to have been called. It is a great pleasure to serve under your chairmanship for the first time since you have been elevated to your new role. I refer Members to my entry in the Register of Members' Financial Interests.
The right hon. Member for Birmingham, Hodge Hill (Mr Byrne) made an interesting and measured speech, which I hope my hon. Friend the Exchequer Secretary will respond to in due course. I could not agree more with the right hon. Gentleman's last point. We should not be increasing insurance premium tax to anything like European levels. That is one thing we do not need to learn from Europe.
I support the two amendments tabled by my hon. Friend the Member for Christchurch (Mr Chope) and I warmly support the comments made by my right hon. Friend the Member for Wokingham (Mr Redwood). My remarks about relief on motor insurance will be brief. The arguments have been made powerfully and I entirely support them. The amendment about health insurance concerns me the most.
The coalition Government have three areas of protected spending, where public spending is guaranteed to rise: the health service, overseas aid and the European Union. I want to deal with the relationship of the proposals to the health budget. Each year, £100 billion is spent on the NHS and the Government rightly recognise that spending will have to increase. There is no way round it. Demand on the health service will grow and grow, so there will have to be a real-terms increase. Even allowing for that, however, there will not be enough money to do everything in the health service.
One of my constituents is suffering from cancer and needs cancer drugs. She has to sell her house to pay for those drugs. If she had been insured, that would not have been the case. I am convinced that that lady uses the NHS most of the time, so she has not chosen to opt out by insuring herself against everything, but there will always be aspects of health provision that the NHS cannot cover because of their cost. That will mean that people have to pay extra, as this lady is doing for her cancer drugs. If we are to encourage people to insure themselves against such risk, we need to send the right signal.
Amendment 18 does not address cost because the difference between rates of 5% and 6% does not represent a huge amount. However, if the amendment was accepted,
it would send the country the remarkable signal that the coalition Government and the Prime Minister want people to stand up for themselves and take responsibility, as part of the big society, by insuring themselves.
I am in the wonderful position of being a Conservative Back Bencher who does not have to worry about the Whip in Committee. The Prime Minister has already said that he wants the Government to be held to account- [ Laughter. ] I know that this will be a shock to Labour Members, given that they are always whipped and centrally controlled, but Conservative Back Benchers have the right to hold the Executive to account. When we are in Committee, as is the case today, we are not subject to a Whip. We can vote whichever way we like in this Committee as long as the overall Budget gets through. Amendment 18 is such a small amendment that if it is pressed to a Division, I will support it, which is the sort of thing that the Prime Minister would welcome.
I have set out my basic argument about the tax increase on medical insurance, but perhaps I should draw the Committee's attention to a private Member's Bill that will be debated on 4 February 2011. That Bill would give tax relief to private medical premiums, but that wider debate is for another day. There is a question of whether such an approach would lead to more people insuring themselves, which would generate a saving because they would be less of a concern for the NHS, but today we are discussing only whether to impose a 1% tax increase. I hope that the Exchequer Secretary will be able to tell us how much revenue the Treasury would lose if the amendment were accepted and we did not have that 1% rise. If the increase discourages individuals from taking out medical insurance, more people will have to be treated by the state, which is why I argue that the tax increase from 5% to 6% on medical insurance premiums will cost the state more money.
Mr Bone: I agree entirely with my right hon. Friend's point, but I want to draw a distinction between amendments 18 and 19. Amendment 18 addresses health insurance premiums, and the fact is that if someone does not take out health insurance, the state picks up the bill, because they will go to the NHS. When someone does not take out motor insurance, the responsible citizen picks up the bill through the Motor Insurers Bureau, but that is not quite the same as the position for health. It is clear that if someone might have paid for insurance so that they could go to an independent sector hospital but does not do so, they will be in the NHS and the state will have to pay. I argue that we could send a signal today to the citizens of this country, as part of the big society, that we want them to be responsible and to take out insurance, especially health insurance, which would save the Government money.
Thomas Docherty (Dunfermline and West Fife) (Lab): Labour Members do not have a philosophical objection to private health care, but does the hon. Gentleman accept that many people cannot afford such coverage? It is wrong to say that taking out private health care is a responsible option because that portrays those who cannot afford it as somehow irresponsible.
Mr Bone: I am grateful for the hon. Gentleman's intervention, but I know that I will get into trouble if I respond to it in detail. I suggest that he turns up in the Chamber when my private Member's Bill is considered on 4 February 2011, so that we can have that debate.
Chris Leslie: I am glad that we have had the opportunity to debate these important tax changes. I have the greatest respect for all my constituents and the British public generally, but when we talk about financial matters such as pensions, savings and insurance, there is a tendency in the British culture for the fog to descend and for people to say, "Well, these things are very complicated and I don't quite understand them." A lot of people therefore get trapped by their own inertia in certain policies, bank accounts or pensions, and they do not necessarily shop around to get the best deal. I am afraid that insurance products are in the group of services to which our constituents sometimes do not pay attention. I urge members of the public to examine their policy documents and payments closely because insurance can represent a significant cost, although it is a merit good and something that we should encourage people to take out.
Gordon Banks (Ochil and South Perthshire) (Lab): Some areas of the country, including part of my constituency, face significant flood risk. Does my hon. Friend agree that such a tax increase on insurance will mean that people who are already paying significant amounts to protect their homes and lives will face an even greater cost? If those people do not continue to insure themselves, however, it will wreak havoc on lives throughout the country.
Chris Leslie: My hon. Friend is entirely correct. It is important that we ensure that all our liabilities are properly covered, so that the cost of our individual failings or mishaps does not fall on the general taxpayer. Responsible individuals have to insure themselves.
Mr George Mudie (Leeds East) (Lab): My hon. Friend says that people do not shop around. Does he agree that any process of shopping around is not helped by the way in which insurance companies sign people up to policies on standing orders with small print that allows that policy to be renewed without consulting the customer? Even if the customer wishes to change their policy because of a large increase in their premiums, they can discover that the small print means that they have to let the policy run because they are required to give notice.
Chris Leslie: That particularly pernicious practice merits much closer scrutiny. I do not know whether it is allowed to happen because of a legal loophole. People face dangers when they sign up to unending direct debits, especially if they have been attracted to an insurance policy because of a discounted initial arrangement but then discover that the payments have been ramped up. By the time they realise, from their bank statement or whatever, that the cost is so much more, it is too late to exit from the policy. I hope that any practices that tie customers in to such policies unnecessarily can be stopped.
Insurance premium tax was, of course, a Conservative initiative, introduced back in 1993, I think. We are all concerned about the deficit and revenues, so reluctantly we all have to accept the tax as part and parcel of our general revenue stream, but it is worth pausing to reflect on the impact of the charge on the behaviour of customers who want to take out insurance. Of course, there are different effects for different types of insurance. The amendments highlight both ends of the scale.
I am not sure that I share the sympathy for amendment 18 on private health insurance, because the general public already effectively pay for health cover through the tax that they pay towards the NHS; that is far and away the best health insurance that all of us could want. If we are all part of that, and pool our resources effectively, we ensure a better quality of health care for ourselves. I hear the points made by Government Members, who say that private health insurance removes the burden from the NHS, but if we are all part of the system together, and make sure that we all take part in it, we have a better collective service.
Chris Leslie: Thankfully, Labour has shifted the terms of reference for this debate, and not just in this country, where the Liberals and the Conservatives-the Conservatives in particular, to be fair to the Liberals-have now accepted that the NHS is one of the jewels in the crown of our welfare system. It is respected worldwide, and there is no longer any attempt, or at least no overt attempt, by the Conservative party to unwind the change that has been made, although having listened to Government Back Benchers, there may be some straws in the wind. I agree more with the hon. Member for Christchurch (Mr Chope) on amendment 19 on motor insurance.
Chris Leslie: I have absolutely no idea. As a humble Back Bencher, I simply make my comments and observations. Clearly, I will happily take a lead from our Front Benchers; they are immensely sensible individuals, and will make their arguments. But I have my own observations to make about the changes.
One of those observations is that there is a level of compulsion that distinguishes motor insurance. In a way, private health insurance is an entirely discretionary commodity, so I suppose one could argue that paying tax on it is a matter of choice, but that is not the case for drivers and for motor insurance. As the right hon. Member for East Yorkshire (Mr Knight) said, in the case of third-party car insurance we are talking about adding a tax on top of a charge that is effectively a requirement in law. That raises the hackles. It makes me feel aggrieved that there is a bit of opportunism on the part of the Treasury. It is a parasitical choice effectively to cream off more money from something that the general public have no choice but to get.
I suppose that those on the Treasury Bench might say that members of the public could give up driving and stop purchasing cars. Perhaps that would be good for the environment more widely, but in the real world, people have to get around, have to get to the shops and to school, and have to commute. It is part and parcel of ordinary life. I am very worried-genuinely worried-that ratcheting up insurance premium tax on motor insurance will create a disincentive for people to comply with the law, take out insurance, and ensure that the cost is covered if any accidents occur or harm is caused to other members of society and the wider public.
In my constituency in Nottingham, the road safety and casualty reduction budget has taken a hit as a result of the cuts announced by the Government parties. Something in the order of £350 million is being taken out of that budget in this financial year alone. Clearly, it would not be in order for me to refer to an amendment that I have tabled that would hypothecate the revenues from the motor insurance IPT increase and put that money towards road safety and casualty reduction. All that I would say is that there are concerns in my constituency and elsewhere that not only are we losing money for road safety, but if we discourage people from taking out motor insurance, and encourage them to go down the illegal route and to drive without car insurance, when there are problems and accidents, and individuals suffer trauma or are caused harm, they will struggle to recoup any compensation. That is especially regrettable.
As I said in an intervention on the hon. Member for Christchurch, some young people, who may pay £1,000 or even more for their insurance, may come to a rational yet entirely perverse judgment and say, "I'll risk not getting that car insurance. I'll drive uninsured." They will risk getting six points on their licence, and a £300 or £400 fine-that is the typical amount that magistrates will impose-if they are caught driving without insurance.
Members on the Treasury Bench really ought to speak to the Justice Secretary, who introduced insurance premium tax in the first place, and make representations that fines for driving without car insurance should be at least commensurate with the cost of car insurance. That is an extremely serious point. I understand that in a magistrates court, if an individual is fined for driving without proper motor insurance and they are not earning and have a very low income, the fine can be as low as £80 or £90. That gives them an even greater incentive to chance their arm and to go without car insurance. There are some extremely serious points here.
Let me come on to the effects of insurance premium tax on buildings insurance and contents insurance. When times are tough, many of my constituents may well look at their outgoings and think: "What could I do without? What will go first?" Clearly, they know that there are legal obligations to pay council tax, utility bills and so forth. Those things that are on the margins, such as home insurance and contents insurance, tend to go first, and that is extremely regrettable. Of course, adding further tax to those items will speed up the decision for many of my constituents, who will say, "This is becoming unaffordable."
Chris Leslie: Absolutely. A lot of people, when they apply for insurance, will be asked what amount they wish to have-I am trying to recall the phrase-as the amount that one ends up paying before one can claim.
Chris Leslie: I thank my hon. Friend for his assistance. On home insurance, the excess is typically £100 or £200. Those hon. Members who are IT-literate, and who use the interweb to purchase their insurance, will realise that on many sites there is a little bar that one can shift across the page to increase the excess to £400, £500 or more. It effectively means that people will rarely, if ever, claim against that insurance, and it thereby removes not only much of the cost of the initial premium, but the chances that they will ever use that product. Again, that will leave people under-insured, with poor cover, and with a poor product for what could be a great expense if they are broken into or have problems with internal flooding or other damage to their property.
In some parts of the country, particularly where there is a flood risk, far too many people are still uninsured, and the pressure that they put on the taxpayer more generally to pick up the tab will be great. In some ways, the measure is a false economy by the Treasury: it discourages people from taking out insurance, yet they will undoubtedly be under pressure to pick up the tab in flood-risk areas.
There is a rumour going around that the Treasury might also impose an extra tax on those who live in flood-risk areas in order to cover the extra costs to the taxpayer of flood-prevention work-yet another example of a crude and unfair measure. I am sure that the Minister will be happy to tell the House that that is not the case and to put our minds at rest, because it would be a shame if such a measure were to come forward.
Geraint Davies: I shall bear that in mind. My hon. Friend will know that I had a previous responsibility for adapting Wales to climate change in terms of flood defences, and he will be interested to know that there are literally-
Chris Leslie: Those who require insurance, on which the amendments would seek a report from the Treasury in order to reveal the impact not just on the Exchequer, but on individuals, will also be concerned about their contents insurance and buildings insurance, which are often where the cost of picking up reparations after flooding occur. It would be wrong of me not to pay tribute to my hon. Friend for his work before he entered Parliament.
Geraint Davies: On that specific point about the incidence of such insurance deals, the reality is that, as climate change progresses, the people who are caught by such costs will often be the poorest, who are closer to high flood-risk areas because of bad planning and the like. Does my hon. Friend agree that the impact of the measure will be increasingly regressive?
Chris Leslie: Absolutely. My right hon. Friend the shadow Chief Secretary to the Treasury made that point very forcefully earlier. The regressive impact of insurance premium tax is not widely understood, but, when our poorest constituents take out insurance, they are hit disproportionately hard, and unfortunately many of them will decide to go without that insurance altogether.
Sammy Wilson (East Antrim) (DUP): I appreciate the hon. Gentleman's point about a 1% rise being regressive, but, on his earlier point about it putting people off buying insurance, the average household insurance policy is £400 and a 1% increase will add £4 to the total cost. If someone who seriously wishes to insure their home is prepared to pay £400, is he really suggesting that an extra £4 will produce the result to which he referred, namely that many people will no longer purchase insurance?
Chris Leslie: The hon. Gentleman makes a reasonable point, and he is right that at that level the disincentive might well be marginal. However, my point is that there is a slippery slope, and, with 1% here and 1% there, before we know it we have 2% or more-3%, or even 4%. My right hon. Friend the shadow Chief Secretary asked about the potential risk of aligning our insurance premium tax arrangements with those of the wider European Union, and, if they are at 22% in Italy or wherever, there is a risk of a serious disincentive.
So, I regard this debate as a stitch in time to put down a marker and say to the Government, "Don't chance it too far. This may well feel like a small amount of money. but £10 on a motor insurance policy of £1,000 is quite an additional burden and not to be sniffed at." If the Government continued to ratchet up the costs in that way, that would be regrettable. Some of the amendments before us are very sensible, and, in asking for a report from the Treasury, I also urge it to consider in that document the merits of a requirement on insurers to advertise more prominently the yield from insurance premium tax and the rate of tax that customers pay, because it is exceptionally important that our constituents understand why they are asked to pay so much.
When I consulted the Association of British Insurers about that, its representatives said that they would welcome more information on policy documentation and be more than happy to work with the Treasury on those matters. If the amendment is carried, and there are good arguments for doing so, I hope that the Minister will consider that point seriously.
The impact on travel insurance will be even greater, given the costs for many people who travel abroad on, perhaps, their holidays. If those people are my constituents, they will often do so for one week a year, if that. However, all travellers are encouraged to take out travel insurance for such trips, and the rate is currently 17.5%, but it will go up by 2.5 percentage points to 20%, which is a significant amount of money, so, if we discourage our constituents from taking out insurance on their holidays or travel, there will again be consequences.
Mr Kevan Jones (North Durham) (Lab): Does my hon. Friend agree that the measure will also have an effect on the wider economy? For example, Newcastle airport in the north-east is a huge economic driver, and East Midlands airport, near my hon. Friend's constituency, is a huge employer. The measure could have an impact on the business of those two airports-and many others.
Chris Leslie: There will be consequences if, because of the extra cost of a family holiday, our constituents are disincentivised from going abroad or travelling. The Chancellor of the Exchequer's imposition of a holiday tax is something that I hope many travel pages in the Sunday newspapers and supplements will focus on, perhaps by modelling the costs for a typical family. About £400 million of travel insurance business is carried out in this country each year, and that accounts for a significant part of not only the insurance industry, but the economy more generally.
Mr Bone: I am being won over by the hon. Gentleman's speech. He argues very strongly against tax rises, and he has won me over on that. Indeed, I should be happy to vote against those increases, but, given the problem with the deficit, can he suggest some other public expenditure savings to make up for them?
Chris Leslie: That is a reasonable point, but I should not want to stray beyond the terms of the amendment, suffice it to say that the hon. Gentleman asks a reasonable question, because if we agree to the amendments we might be forgoing revenue to the Exchequer. My view, which he may have heard before but I am happy to share with him, is that the banks should not gain £400 million cash-back from the corporation tax reduction that they will enjoy.
To return to my general point, insurance is not only a public good, but a necessity for many of our constituents. Our constituents also often make the choice to take out insurance. Although I would not say that all insurance policies are good value for money and although we want to see more competition, I feel uncomfortable about the constant ratcheting up of the costs to our constituents of compulsory insurance, particularly motor insurance.
We could see some policy initiatives on this issue. Why does the Post Office not consider advertising its car insurance offer more widely, given that the state and the Government play a part in that offer in some ways? It would be healthier for there to be greater competition. The Government-indirectly, through Post Office services-could create cheaper car insurance. Treasury Ministers could talk to their colleagues at the Department for Business, Innovation and Skills about that, to ensure that the insurance industry does not unnecessarily inflate the cost of insurance.
Geraint Davies: My hon. Friend mentioned the issue of compulsion and rates. Does he agree that there is a case to be made for keeping the "holiday tax", as he put it, lower, and paying for that by making it compulsory? One could argue that it is irresponsible for people to go on holiday without insurance and end up with all sorts of problems.
Chris Leslie: I hear what my hon. Friend says, but I am reluctant to extend compulsion in that regard. We should certainly encourage people to take out travel insurance and inform them of what might befall them should they not do so-they could be stranded abroad or find themselves without adequate medical or health cover, for example. I do not know whether hon. Members always remember to fill in their E111 forms when they travel to other countries in the European Union, but our constituents often do not. They can find themselves in significant jeopardy. In those circumstances, travel insurance is very useful.
Many people are employed in the insurance industry, and if there are disincentives against our constituents' taking out decent, high-quality policies there will be an impact on the insurance sector and the financial services sector more widely. The financial services sector, including insurance, is one of the great industries of our country. It has been subject to a lot of criticism, and we can talk about that on another occasion, but it is important that we should not take steps that harm the products that we consume in this country and sell worldwide.
I conclude by reiterating to the Treasury the importance of assessing the impact of the insurance premium tax increase on our constituents and the Revenue. We do not know from the Red Book how the £455 million annual yield precisely breaks down between pensioners, young people and beyond. My right hon. Friend the shadow Chief Secretary says that the impact on pensioners will be significant and I take his word for that. That issue is a great worry. These are serious matters and I hope that the Treasury and other hon. Members will hear some of the points shared across both sides of the Chamber today.
The Exchequer Secretary to the Treasury (Mr David Gauke): We have had a wide-ranging debate on clause 4 and the amendments tabled to it; I am sure, Mr Evans, that you want to hear its conclusion. I was grateful to hear the contribution made by my hon. Friend the Member for Wellingborough (Mr Bone), who highlighted the freedom given to Government Back Benchers in Committee debates. I hope that my remarks will persuade my hon. Friends not to make full use of that latitude. We shall see.
The amendments are concerned with the general impact of the rise in the standard rate of insurance premium tax, particularly in respect of its impact on personal health insurance and the motor industry. I will come to those issues in detail in due course. Before I do so, I propose to set before the Committee the reasons behind the course that we have chosen.
Reducing the deficit and ensuring economic recovery are the most urgent issues facing the UK and they are the Government's top priority. In the words of the shadow Business Secretary, it is no good wishing the deficit away; it is only by acting quickly to tackle the deficit and restore confidence in the public finances that we
will achieve economic growth. That has meant that we have had to take many tough decisions to ensure that everybody makes a fair contribution. Part of that contribution will come from increases to the standard and higher rates of IPT.
Clause 4 legislates for that by increasing the standard rate of IPT from 5% to 6% and the higher rate of IPT from 17.5% to 20%, both with effect from 4 January 2011. IPT is, of course, a tax on insurers, not on their customers; 80% of all the insurance sold in the UK is exempt from IPT. All long-term insurance, such as life insurance and pensions, is exempt from IPT. My hon. Friend the Member for Christchurch (Mr Chope) mentioned Conservative party policy on long-term insurance. If he is a little patient, I am sure that my right hon. and hon. Friends at the Department of Health will say more on the subject. I just underline the point that IPT is not levied on long-term insurance.
Mr Chope: Does my hon. Friend mean that if there was an opportunity for somebody to pay £8,000 for long-term insurance, that would not be subject to IPT in the circumstances set out in the original Conservative party manifesto?
Mr Gauke: What I can say is that given how IPT is currently structured and where it is levied, it does not apply to long-term insurance; the conclusion to be drawn about something that falls within the definition of long-term insurance is fairly logical.
However, in respect of the types of insurance that are affected, insurers have the right to respond to the tax as they see fit. They are not obliged to pass on IPT through higher premiums. [Interruption.] We recognise that many insurers will pass it on to their customers through higher premiums, but I will not be dragged into the detail of the amendment tabled by the hon. Member for Nottingham East (Chris Leslie).
The question was asked whether further regulation should be imposed on insurers, making them display prominently how much is being paid in IPT. Unlike VAT, IPT is a tax on insurance, so there is no obligation to pass it on or to recover it for businesses. We do not think that that would be appropriate. Insurers are, of course, perfectly free to display the IPT rate on documentation, and many do so. Requiring them to do so, however, would be burdensome and unnecessary.
Mr Gauke: I am not denying that we expect the increase to be passed on predominantly to consumers; we expect that the bulk of it will be. The analysis of VAT, another indirect tax, shows that two thirds tends to be passed on straight away and that much of the rest is passed on over the following 12 months. However, it is not always possible to predict and it partly depends on the level of competition.
Gordon Banks: I just want to make a simple point. The Minister is saying that he expects consumers to pay twice-once through increased premiums and once through increased IPT. Does he find that acceptable?
Mr Gauke: That is not what I am saying. I am saying that the increase in insurance premium tax, which is payable by insurers, is likely to be passed on to consumers. We are not denying that; in simple terms, we need the money.
Even if the increases to the standard and higher rates of IPT are passed on in full, the impacts will be very modest, costing households less than 20p a week on average and businesses an average of less than 0.01% of annual turnover, even for smaller businesses.
Mr Kevan Jones: I am not sure whether the hon. Gentleman has renewed his car insurance or household policy recently, but he will find that most insurance policies make it clear exactly how much tax is paid, so I do not think it is the case that they will withhold the increase and not pass it on to the consumer.
Mr Gauke: I am grateful to the hon. Gentleman for underlining an earlier point that I made-that it is not necessary to introduce regulation in this area. As I say, we anticipate that it will be passed on, but it is not mandatory. I am not denying that position.
Despite these modest impacts, the IPT rate increases will contribute more than £450 million a year to reducing the deficit. As I said, such decisions have been forced on us by the economic circumstances that the UK finds itself in, and they have not been taken lightly. We are confident, however, that this modest rise in IPT, which leaves the main rate of the tax significantly lower than that of many of our European competitors, is a means of raising much-needed revenue that will not have a significant impact on households, businesses or the insurance industry.
Mr Byrne: The Minister is making an argument about choices that are made in order to increase revenue, but I think the Committee is struggling to understand the reason for the increase in the standard rate of IPT. Other choices were available. Why have increases in cider duty been withdrawn, for example, while new taxes are being introduced on insurance?
Mr Gauke: The central point is that the country is in a very difficult position as regards the public finances. I hope that the shadow Chief Secretary is grateful for the fact that I have got this far through a speech without once referring to his letter. With another intervention, I may be tempted to do so. We have made a series of judgments. If he thinks that cider duty is the way to reduce the deficit, I suggest that he is somewhat mistaken.
Amendment 18 would exempt personal health insurance from the increase in the standard rate of IPT, and amendment 19 would do the same in relation to motor insurance. In effect, that would mean creating a new reduced rate of IPT that applied only to private medical insurance and motor insurance. Of course, the Government recognise the value of these types of insurance and, indeed, of insurance more generally.
I assure my hon. Friend the Member for Christchurch that we do not disapprove of people taking out private medical insurance-that is not something we wish to prohibit, either in law or by imposing enormous costs on it. In health policy, our focus is of course on improving the national health service, and we have this week set out important proposals on improving the quality of
the health service and reducing expenditure on bureaucracy. We are also, as a Government, protecting the NHS from spending cuts, which is not, as I understand it, a policy endorsed by Labour. The purpose behind this tax increase is clearly to raise more revenue-it is not an attempt to try to dissuade people from taking out private health insurance.
Thomas Docherty: The Minister claims that the Government are protecting the NHS. Is he aware that all the health boards in Scotland have written to their employees to inform them that following the cuts that his Government are making, the NHS in Scotland will have significant job losses?
Mr Gauke: Of course health care in Scotland is a devolved matter, and you will not want me to digress on that, Mr Hoyle, but the fact is that health care spending will go up in real terms under this Government. That is not, as I understand it, a policy that is supported by the official Opposition.
Mr Chope: My hon. Friend framed his policy in rather negative terms by saying that the Government did not disapprove of health insurance and did not want to prohibit or deter it. Can he be a bit more positive and say that it is their policy to try to encourage people to take responsibility for their own insurance, on similar lines to the Secretary of State for Transport saying that he wishes people to take responsibility for paying their own bus fares, despite their having bus passes, if they can afford so to do?
Mr Gauke: As a Government-I am sure that this is a principle that my hon. Friend would support-we believe in giving people choice, and that is what we will do. We have set out our policies in that context, and I am merely underlining this Government's commitment to the national health service.
The combined effect of the amendments tabled by my hon. Friend the Member for Christchurch would be to slow down fiscal consolidation. Through the Budget and this particular measure, the Government are trying to get our deficit under control, and slowing it down would not be an appropriate step.
Exempting motor insurance from the IPT rise would reduce revenue by £160 million a year, and exempting medical insurance would reduce it by a further £40 million. Taken together, those figures total £200 million-nearly £1 billion over the lifetime of the Parliament. That would leave us with quite a shortfall, and a couple of options. First, we could raise £1 billion from elsewhere. We have to be open about the fact that the purpose of the IPT rise is to raise revenue, and if we were to look to raise the outstanding £1 billion through IPT, that would
mean increasing very considerably the rate of tax on the remaining classes of insurance. For reasons that I will set out, we do not think that that is the right way to go. The second option is to leave ourselves with £1 billion outstanding, which would leave us further away from plugging the deficit, with all the risks that that entails. We are certain that that is not the right way to go.
It has always been a principle of IPT that the tax applies to a relatively broad base of general insurance, with few exceptions. That broad base allows us to keep the standard rate of the tax low by international standards. Even at the new rate of 6%, the UK's standard rate of IPT is far lower than in, say, Germany, where it is 18% for property and 19% for motor insurance, or France, where it is 9% for property and 18% for motor insurance. Narrowing the base of the tax through specific exemptions of the type that my hon. Friend the Member for Christchurch suggests would put that low rate at risk.
To respond to the perfectly fair question of the shadow Chief Secretary, the fact that we have announced the increase should not be taken as a signal that we intend to harmonise tax levels with those elsewhere. To quote what the shadow Chancellor used to say, we always keep taxes under review and it would be daft to rule things out, but this increase should not be taken as a signal of an ongoing programme of further increases.
We do not take any pleasure in introducing this tax rise, even though the reasons for it are clear. However, by keeping a broad base of tax within general insurance, we are able to raise revenue so as to cut the deficit, while keeping the increases at a level that will not have any significant impact on the number of people buying insurance.
Mr Gauke: We do not believe the rise will have a noticeable effect on the number of people taking out insurance, but I know that hon. Members are concerned about the impact of the IPT rises on households. I have already set out the average impact on households. Specifically in the case of the insurance covered by amendments 18 and 19, the IPT rate increase will add only about £6 a year to the average motor insurance premium, and for those who buy private medical insurance the rise will cost less than £10 a year on average. Consequently, it is difficult to make the case that the increase will prove much of a deterrent to people taking out motor insurance or private medical insurance. Consumers are well used to insurance premiums fluctuating, and the modest effects of the rise will not act as any significant deterrent.
Mark Hendrick (Preston) (Lab/Co-op): The Exchequer Secretary says that the rise will not be a deterrent, but it will certainly provide an incentive to people who pass the tax on to the consumer to increase charges over and above the amount in question and then blame the Government for it, as we have seen with so many other taxes.
Let us see what happens. I am not sure that the evidence necessarily supports that concern, but
I am sure that if it happens the hon. Gentleman will come back to the House to highlight it. Many within the insurance industry have themselves acknowledged that the rises are very modest and will not have a significant impact on households or on the take-up of insurance.
Amendment 15 would make the IPT rise announced in Budget contingent on the publication of an assessment of the effect of the rate rise on consumers and the insurance industry. We believe it is unnecessary. I have set out fairly comprehensively in this debate the expected impact on households and businesses-in broad terms, that impact will be minimal.
I should also point out to hon. Members the considerable amount of information on the impact of the Budget that we have already put in the public domain. In particular, for the first time the Government have set out their analysis of the distributional impact on households of the Budget measures, including the IPT rate changes, in annex A of the Red Book. Separately, other organisations such as the Association of British Insurers have given estimates of the impact of the rise on households, which are very much in line with our own estimates. Naturally, the industry and consumers do not like the rises, and we do not like having to introduce them, but the industry accepts that they are going to happen and is preparing accordingly.
Finally, I wish to address amendment 48 which, as the shadow Chief Secretary said, is a probing amendment aimed at exploring the reasons for the rise and its impacts. He asked a specific question about the balance between the standard and higher rates. For 2010-11-Members should remember that the rate increases will occur in January 2011-the revenue raised will be £110 million from the standard rate and £5 million from the higher rate. For the following years, the higher rate will raise £25 million each year, with the balance made up from the standard rate, which in most years raises £450 million.
The shadow Chief Secretary also asked about the reason for the increase in the higher rate from 17.5% to 20%. As he correctly surmised, it is to do with value shifting and the fact that travel insurance is often sold with other products on which VAT is payable. A discrepancy between the IPT on travel insurance and other rates may create dangers of value shifting, and that is the reason for the proposal.
Mr Gauke: As I said earlier, the cost of my hon. Friend's amendment to exempt motor insurance from the IPT rise would reduce revenue by £160 million a year, and exempting medical insurance would decrease revenue by a further £40 million a year. I hope that that is helpful.
Mr Chope: It is my pleasure to respond to an excellent debate and I thank everybody who has participated in it. At the beginning, other hon. Members and I conceded that the sums of money involved were relatively small, but we were concerned about the messages that were being sent. I am rather disappointed by the Exchequer Secretary's failure to engage with that part of the argument. It is one thing to say that the Government do not disapprove of health insurance, will not prohibit it and do not wish to deter people from taking it out, but all those who take out private health insurance help not only themselves but the country.
My hon. Friend kept saying that our commitment-meaning the coalition Government's commitment-is to the NHS, but surely it should be to the health of the nation. That depends on money going into health care and health protection from a mixture of sources. Some will come from taxpayers, and an increasing proportion in my view should come from private individuals and companies-we are also talking about company health insurance schemes. My hon. Friend had the opportunity to say to companies that have health insurance schemes for their employees, "Thanks very much indeed for your contribution; that takes a burden off the NHS." He had the opportunity to tell those who take out private health insurance or self-insure and pay for their health care, "Thanks very much; you are relieving the state of a burden." He did not. I do not know whether that was a deliberate omission or unintentional.
I am concerned about the messages that are being conveyed about the direction of travel and I am slightly bewildered about whether the coalition Government are wholeheartedly enthusiastic about people taking responsibility for as much of their own lives as they can, depending on their financial ability. If we are trying to build a responsible society, we should encourage people to take responsibility for all aspects of their lives and should not force them to feel that they should depend on the state.
We should certainly not encourage a state of mind whereby people think that they are being antisocial by not depending on the state. We have almost reached a stage when, if somebody says that they have private health insurance or that they send their children to independent schools, while paying through their taxes for state education for everybody else, the Government frown on them. It is too late in this debate, but I hope that the coalition Government will send out a much more positive message about the virtues of self-help and responsibility and of people not being dependent on the state. There are many definitions of what may or may not amount to the big society, but if it means anything to me, it is encouraging people to do their own thing and having much smaller state involvement and, ultimately, lower taxes.
I am listening intently to the hon. Gentleman. Would he extend his argument to, for example, household insurance and the whole range of insurance premium tax? As was pointed out earlier in the debate, people insure their houses against flooding and fire, for example. There is therefore no burden on the state in the event of flooding, because the insurance companies carry it, and if a house catches fire, people do not have to look for a loan
from social security, because they are covered by the insurance. Does he accept that the amount of money involved is hardly likely to act as a disincentive?
Mr Chope: The answer is yes; I would wish to extend my argument. However, I tabled two specific amendments so that we could have a focused debate. It has become apparent in the course of the debate-I did not know this before-that about half the yield from the IPT increase will be from motor and health insurance premiums, and about half from other insurance, such as household insurance.
I am concerned that in my constituency, particularly as a result of the rather reckless behaviour of the Environment Agency, there is a blight on a number of houses, whose owners find either that they cannot access flood risk insurance or that that insurance is much more expensive than it used to be. Because of how IPT works, the state benefits from the latter outcome through extra income, and there is an extra burden on householders. Some very important points were made by Members who are concerned about household insurance. It was open to anybody to table similar amendments, but I tabled two to focus the debate. The hon. Member for Dundee East (Stewart Hosie) did the House a service by tabling an amendment that calls for a proper analysis so that the House can know the full implications of the proposals before we are asked whether we support them.
We have spent two hours discussing this matter, but we have still not really heard from the Government about the direction of travel. We certainly have not heard whether the principles so articulately described by my right hon. Friend the Transport Secretary-he spoke of people who can afford to pay their fare using free bus passes-apply throughout the coalition Government, and to those who take responsibility for their health care, education or other aspects of their lives.
Thomas Docherty: On private health care, does the hon. Gentleman accept that people receive a premium service, and that it is therefore only right that they pay a premium tax? Does he also accept that health care provides only 10% of the total IPT raised?
Mr Chope: People take out private health insurance, which might be through a scheme in their firm, because they want access to health care that is currently not available. I gave some examples in my opening remarks of people in my constituency choosing to take out health insurance. A very large number of my constituents pay for various procedures and operations. They insure themselves because they believe that they can access those procedures when they need them rather than when the state tells them they can have them.
The essence of the argument is that countries with the highest standards of health care are the ones that encourage higher non-taxpayer funded input into health care. That is what I am trying to get across. I might be unable to persuade the hon. Gentleman, but I hope that I might start to persuade members of the coalition Government on the virtues of people taking responsibility for their health care, thereby relieving the burden on the NHS.
Mark Hendrick: Does the hon. Gentleman accept that the private health system is not independent? It is actually dependent on the national health service, and the vast majority of private health staff were trained and qualified in the NHS. The 6% we are talking about is quite small when it comes to disincentives for people to use the private health system.
Mr Chope: The hon. Gentleman demonstrates his old socialist credentials and his prejudice. I shall not get into a full debate about the NHS, as I hope that we will have an opportunity to do so when the private Member's Bill tabled by my hon. Friend the Member for Wellingborough (Mr Bone)-which I support-is debated on a Friday in February. Let us not forget that many of our top clinicians stay in this country because they can supply their services to the NHS- [ Interruption. ] Yes, they do so for money, but they can also top up their income by getting money for providing their services to private patients. That mixed market in health care provision, including the providers of health care, is healthy for our country and I am sorry that the hon. Gentleman does not support it. That is a philosophical divide, but I think that we need the best health practitioners in this country. The private health insurance companies make a significant contribution to the health of the nation.
I shall not go through all the contributions that were made in this debate, but I wish to touch on the motor insurance issue, which found most common cause across the Committee. Because the right hon. Member for Birmingham, Hodge Hill (Mr Byrne) did not seem to be committed to the idea of protecting motorists-especially young motorists and those from areas with high insurance premiums-and did not say that he would support my amendment, he has created a slight difficulty for me.
Mr Byrne: My ambition this afternoon was simply to tease out from the Government the principle behind the increase in IPT. The hon. Gentleman may be able to help me with this, but I think that I detected that the ambition was simply revenue raising. Was that his interpretation too?
Mr Chope: The right hon. Gentleman has deployed an old trick. Instead of responding to my challenge, he has put a challenge back to me. He has listened to the same debate as I have, and the Government need to raise money because-as he so candidly recognised-there is no money left. That is one of the reasons behind the insurance premium tax.
Mr Byrne: The hon. Gentleman is being slightly unfair. We had a very different approach to introducing £19 billion of new taxes. The Government have chosen a different course, but they have had to raise so much in VAT and IPT because the Budget so slows down the recovery that £9 billion in extra taxes will have to be raised to make up for the lost growth.
I shall not get involved in that debate now, because I want to keep the focus on the narrow issues in my amendments. I am disappointed that the Minister did not respond to my concern-echoed by the hon. Member for Nottingham East (Chris Leslie) and others-about the regressive nature of the insurance premium tax, especially on the motoring public. One suggestion I made was that instead of having a standard tax on insurance premiums, we could have an individual
transaction tax so that every motorist would pay the same tax for his annual insurance premium.
Mr Gauke: My hon. Friend is right to return to this point, and I apologise for not responding to it in my earlier remarks. If we took that approach on a revenue-neutral basis, we would end up essentially with the same transaction tax level on a big and small car-whether a Bentley or a Skoda, we would have the same transaction tax. Is that what he is advocating? That itself would be regressive.
Mr Chope: I was not thinking about Bentleys versus Skodas; I was thinking about the student living in Liverpool trying to run a vehicle that is perhaps 10 or 15 years old and finding it hard to make ends meet, and about the person who might have several Bentleys in the garage covered under some collective insurance. I am concerned about those living in high-risk areas or who are in high-risk groups-because they are young drivers, for example-whose insurance premiums are significantly higher than those of, for example, the person whom my right hon. Friend the Member for East Yorkshire (Mr Knight) mentioned who is in their mid-50s and happens to own a Bentley. I do not think that, prima facie, that is fair. I was throwing out a challenge to my hon. Friend the Exchequer Secretary to see whether an individual transaction tax that is not related to the size of the premium might produce a fairer result. It seems as though it might not, but perhaps we can correspond on that so that we can take the matter forward.
We have covered a lot of ground in this debate, and I have already expressed my disappointment. The question now arises of whether we should seek to divide the Committee on the proposals. I live in hope-perhaps I am naive-that in due course we will get a better and more positive response from the coalition to questions of responsibility and encouraging people to do the right thing, and that it will send out those positive measures. To seek a Division would probably be counter-productive because, apart from anything else, I would have to pick one, rather than both, of my amendments, which would mean picking on one particular type of insurance premium tax as against another. I am not sure that that is necessarily in accordance with the will of the Committee, so I beg to ask leave to withdraw the amendment.
Mr Chope: On a point of order, Mr Hoyle. It seems as though right hon. and hon. Members in the Opposition did not realise that it was open to them to object to the withdrawal of an amendment if they wished to vote on it.
Ms Eagle: The amendment seeks to delay the making of any order under clause 5 until the Treasury has published a report that outlines the proposed replacement for the provisions in section 23 of, and schedule 2 to, the Finance Act 2010, a distributional analysis of the impact of the proposed arrangement and the revenue implications of the replacement provisions themselves. Clause 5 creates a power to remove the paving legislation that would have enabled the so-called high income excess relief charge to be levied in time to be collected in April 2011. That was legislated for in section 23 of, and schedule 2 to, what I suppose we must now call the first Finance Act of 2010, given that we look to be on course to pass three of them this year. I never thought that I would be comparing Finance Acts to buses-none come along for ages and then three come along at once-but it looks like 2010 is going to demonstrate the similarity. We are only in the middle of discussing Finance Bill issues in this Session, and obviously we will resume with part two later in the year.
However, back to the provisions before us. The original legislation, which was passed by the previous, Labour Government, was announced in the 2009 Budget and slightly extended in scope in the 2009 pre-Budget report. The idea was to have restricted tax relief on pension contributions for those earning £150,000 or over, who are the top 2% of earners in the country. The policy would have tapered that relief as earnings rose, so that by the time earnings were at £180,000, the relief on pension savings would be the same as that for a basic rate taxpayer, which is currently 20%. The measure was scored in the 2009 pre-Budget report as creating a total yield of £3.6 billion in 2012-13. It was calculated that it would affect 300,000 people at the very top of the income scale, leaving 98% of taxpayers unaffected.
In order to understand the effect of changes to pension tax relief, we need to understand how it has developed and how it is distributed. I propose to spend a little time outlining that, so that we can explore the precise effect of clause 5 as drafted, which completely takes away the previous policy. The tax relief available on pension saving in the UK is generous. As many hon. Members will know, it was originally introduced to support people seeking to produce an income for their retirement, in the recognition that these people are locking away resources in an inflexible way, which is obviously what pensions do. People cannot easily access those resources earlier than the retirement age, which is usually not for many years.
The tax treatment allows tax-free saving and tax-free investment growth, as well as the taking of a tax-free lump sum on retirement of up to 25% of the fund. There are also valuable tax incentives for employer contributions to pension saving, which is a recognition-long supported by Members in all parts of the House-that it is more efficient for pensions to be provided on a collective rather than an individual basis. The favourable tax treatment is also a recognition in wider society that pension saving involves a deferral of current income, which is always difficult to maintain in what is a consumer-oriented society, where all the temptations tend towards instant rather than delayed gratification.
Ms Eagle: My hon. Friend responds to my mention of instant gratification, but obviously it is in all our interests as a society to recognise that there is merit in assisting people to save for their retirement, so that they can avoid being reliant on benefits in their old age. As a result of the welcome increases in longevity, which have been a feature of our success as a society since the war, the average period of retirement is becoming longer and longer. Indeed, history recalls that when old-age pensions were first created 100 years ago, the life expectancy of those due to access them was a mere one year after they had been lucky enough to qualify. Clearly, by the time pension saving and old-age pensions became more widespread after the second world war, the time had gone up considerably to seven or eight years. It is now 20-odd years for men and-gratifyingly for females-even longer for women.
That shows that there are issues about longevity in society and about how to adapt our pensions arrangements to recognise that we live in what is often referred to as "an ageing society". I believe that it is a great triumph of our organisation of society. Although it presents us with some difficult issues of policy and affordability, it should not be seen or ever portrayed as a problem; nor should the fact that these days many more pensioners reach retirement age and live longer be seen as representing some kind of burden on our society. After all, we all aspire-as I am sure you do, Mr Hoyle-to reaching retirement age and enjoying an extremely happy, long and hopefully prosperous retirement. That is what we are dealing with when we tackle the issue of pension tax relief.
I was pointing out that pension tax relief is more generous than the relief in many other areas of saving. That is because there are great benefits in encouraging people to save for their own pension, despite the fact that they are putting money away to which they often cannot gain access for many years; and also because it is more effectively and efficiently done if it can be done collectively. That is why Government incentives, in the form of tax reliefs, have always featured in the system.
This form of tax relief is often referred to as EET. This is not a stuttering, Steven Spielberg sci-fi film; it stands for exempt, exempt, taxed. That means that as savings are put away from income, they are exempt from tax. Any investment growth that comes from investment in those funds is also exempt from tax-that is the second E. The T, of course, is the thing that many people worry about-the fact that as these savings are taken as an income stream when retirement happens, taxation applies again at that stage.
I doubt whether any Member on either side of the House would quibble with the very generous tax incentives put in place over many years by Governments of all hues, colours and sorts-whether they be coalitions or otherwise-to privilege such tax savings. However, as that has developed, certain features have brought about unforeseen consequences and have not proved to be in the best interests of fairness or equity.
To establish the size of the issue and to put into perspective the amounts of money that we are dealing with under this clause, let me reveal-although I am sure that many Members will already know-that the gross annual cost of pension tax relief for the financial year 2008-09 was £28.4 billion, which at a full 2% of gross domestic product is a not insubstantial amount. Net of the tax on pension income-the T part of EET-and also of the national insurance contribution relief for employers, which are also granted by the Treasury, the figure was £18.9 billion. Therefore, the net cost of that tax relief for pension savings is close to £19 billion. Again, that is not an insubstantial amount of money or revenue forgone by the Treasury.
Another feature of the net figure is how it has been growing in the past few years, having doubled since 1998-99. From being reasonably stable, it has gone up very quickly in a relatively short space of time when we think about life spans and the development of pensions policy in this area. That change has been accompanied by a change in the distribution of the beneficiaries of the tax relief, so there was a very strong case for taking action to put it on a more sustainable and fairer footing, and that is what we were doing with the tax law that clause 5 seeks to repeal by order.
It is a feature of the system, which I am not sure could be avoided without putting huge restrictions on it, that tax relief for pension savings is granted at a marginal rate. By definition, that means that it is more valuable for higher rate taxpayers than for basic rate taxpayers. Analysis has shown that the relief was increasingly benefiting those on the very highest incomes rather than just those on higher rates. So, paradoxically, over time, the very reasonable and logical policy of granting tax exemptions on savings for pensions meant that the incentive to save for a pension was being provided, at a cost to all taxpayers, to those who needed it the least because they were the most well-off. That is the definition of "regressive" in terms of how tax relief might hit. The fact that the system was becoming even more distorted, benefiting those in the very top income brackets, was illustrated by a distributional analysis of the benefits, which revealed that higher rate taxpayers received 65% of the relief but constituted only 19% of pensions savers.
The real distortions were at the very, very top, as those on the very highest incomes were benefiting even more disproportionately. Analysis shows that about 2% of savers currently receive a quarter-25%-of all the tax relief available. I hope that the Minister will agree that that is unjustifiable. It means that if a person is privileged enough to be in the top 2% of earners by income, they are entitled to an average of £20,000 of tax relief per year per person on their pension savings, whereas the average relief available for those who are on the basic rate of tax is just £1,000.
The way in which the relief is granted, its connection to the income tax system-the fact that it is at the marginal rate-and the introduction of the 50p rate for
income tax mean that if action were not taken, this massively and already grossly regressive relief would become even more distorted. That is why my right hon. Friend the shadow Chancellor, in the pre-Budget report 2009 and the Budget 2009, decided that action had to be taken to deal with the relief, which had become unsustainable and extremely unfair. It was therefore necessary to have a policy response at the medium and low-earning end of the income scale as well as a policy for the very high end. It is the policy for the very high end that is being repealed in clause 5, but I want to spend a tiny amount of time dealing with the policy at the low and medium end.
The decision to create the national employment savings trust was an essential part of the rebalancing of pension tax reliefs to ensure that they could effectively stretch further down the income distribution. Members will recall that the creation of what is now known as NEST was the outcome of a great deal of work across party lines from 2004 to design a system of pension savings that would deal with the obvious market failure in the private sector of the ability to allow low and medium earners to save in a worthwhile way in a low-cost savings vehicle.
NEST was first brought into the structure of pension savings as a result of the work of the Turner commission. The commission sat for two years and produced huge reports. Anyone who wishes to inform themselves about the policy issues surrounding the thorny problems of increased longevity and the ageing of our society, and their implications for our policy approach as an advanced, sophisticated and modern welfare state, should read the evidence and pronouncements of the Turner commission. It is the best available analysis and narrative of those complex issues. It led to two pieces of pension legislation: the Pensions Acts of 2007 and 2008. They put in place a structure that will create automatic enrolment for people, a compulsory employer contribution and-importantly for the subject of pensions tax relief and to this debate-a Government contribution alongside the money that individuals put into the NEST or any other pension structure through which a company chooses to make provision for its workers. This is an essential part of rebalancing the pensions tax reliefs and the extremely regressive skew that I have identified as a feature of the present system.
Automatic enrolment in the scheme is due to begin in 2012, but that is subject to a review that was announced by the new Government. Given the approach to low-cost pension saving, the fact of automatic enrolment, and the creation of a low-cost vehicle that makes saving worth while and does not eat into the savings of people on modest or low incomes through commission and costs, I hope that Members on both sides of the House will still agree that this should go forward. A great deal of work went into creating that consensus, and it is important, given that pension policy has to be developed over many years, that we maintain it across party divides, however much fun they might be at whatever time of the day or night. It is important that we keep the big picture in mind and begin to develop a coherent approach to pension savings.
My firm belief is that the creation of the low-cost vehicle, the NEST, will go ahead, and I hope that this landmark reform will ensure that, from 2012 onwards,
up to 10 million people will get the chance to save into a pension with a guaranteed employer contribution and Government tax relief available for the first time ever. By definition, that will begin to reduce some of the skewed and regressive distribution of pension tax relief that is a feature of our system at the moment.
The measure will also begin to build a robust savings vehicle, which will finally guarantee the end of the current market failure that locks those on moderate earnings out of viable opportunities to save in a pension. It will also ensure that access to appropriate tax relief can be more evenly spread. There remains an issue, however, over the distorted distribution of pension tax relief towards those at the very top of the income scale. That is what section 23 and schedule 2 to the Finance Act 2010 were designed to deal with. Those provisions were specifically targeted at those on the highest incomes who had done so well in the good years. We felt it right that those people should contribute most to the fiscal consolidation that we all knew had to happen in the aftermath of the credit crunch. This was a progressive measure that began to address the distortions that had developed in the system. It also explicitly and deliberately targeted the very richest to bear most of the burden of the redistribution of pension saving tax relief. That gives the lie to the propaganda and constant refrain from Government Members that the Labour Government had no plans for a fiscal consolidation. The measure was an important part of our plan to halve the deficit over the lifetime of this Parliament.
Clause 5 creates the power to repeal by order all the paving legislation put in place by the policy approach that I have described. Page 36 of the Red Book hints at the new Government's intention to deal with this matter. It says:
"The Government will continue with plans it inherited to raise revenues from restricting pensions tax relief."
"The Government is committed to protecting the public finances by introducing reforms that raise no less revenue than existing plans."
That amount, as I have already explained, is £3.6 billion by 2012-13. The yield is likely to be maintained at that level or even go higher in the future. From the scoring that we did in government, it had a slow start in the first year-£0.2 billion-while the system was put into place, and went up to £3.5 billion and would remain at that kind of level, but get gradually higher in the future. The Red Book does not feature any scorecard implications, I assume because the Government have said that they will be replacing our yield like for like. They have not predicted what the yield for its replacement policy, whatever that might be, will amount to. One would have thought that it would be at least maintained at £3.6 billion and probably go higher over time.
The sum of £3.6 billion is a significant amount of money to get in by 2012-13. The Red Book goes on to hint at, but gives no firm details of, the approach that might be in the Government's mind as a replacement for the scheme for which we legislated. That approach, according to paragraph 1.118 on page 36 of the Red Book, is to guarantee the same yield by substantial reductions in the annual allowance. The ballpark area that it mentions for those reductions is between £30,000 and £45,000. That is a significant reduction from the current
allowance, which is £225,000. No mention is made of the lifetime allowance. The Minister will be aware that there is the annual allowance but also the lifetime allowance for pension savings. I would be extremely interested in any observations that she may have on the Government's attitude to the lifetime allowance. Is it to be kept the same, increased, or perhaps indexed in a different way to the one that we established?
The lifetime allowance is certainly an important part of any debate about these matters, yet the Government have gone all coy about it. They have mentioned a potential range for huge reductions in the annual allowance, but they have not been forthcoming about their plans to replace the high-income excess relief charges, which we legislated for in paragraph 23 of schedule 2 to the Finance Act 2010. The Government are not at all forthcoming about the lifetime allowance, which is why the amendment is trying to get a bit more information out of them.
Geraint Davies: In terms of the public finances, £3.6 billion is a massive amount to be raised in a very tight period, so given that there is so much uncertainty and change around the Government's proposals, does my hon. Friend accept that they present an enormous risk? From the viewpoint of the industry, it appears that the Government are playing fast and loose and are undermining the confidence of the financial markets and credit rating organisations in their capability to manage our economy or their finances.
Ms Eagle: My hon. Friend raises an extremely important point and I obviously look forward to the contribution that he will make to our debate in due course. If he looks at the amendment he will see that the point of it is to try to get more detail about what is in the Government's mind. The time scale for putting the provisions in place is extremely short in relation to the beginning of the new financial year-a point to which I shall return.
The amendment would provide that an order that completely repealed all the paving legislation and all the work to put into effect the higher earnings charge would not be allowed until Parliament has more idea of at least the outline for the proposed replacement arrangements. There are some coy little hints in the Red Book but not much else to go on-certainly no detail-if we are to repeal an already organised charge that has been well consulted on. The amendment also provides for a distributional analysis to show
"the likely impact of the proposed replacement arrangement; and...the revenue implications of the proposed replacement arrangement."
I accept that the Government have said that they want to replicate the yield, but as my hon. Friend correctly pointed out, the yield is not an insubstantial amount and it rises quickly. In the tax year 2012-13, a yield of fully £3.6 billion for the replacement measure is already on the Budget scorecard.
The planned yield is a considerable sum and the Government need to reassure us that they are not putting it at risk by ripping up all the work that has been done to implement the original policy since it was announced in 2009. There are clear dangers in destroying all that work, wiping it off the statute book and starting again from scratch so close to when the change is meant to come in, not least because of the tight time scales as
we approach the start of the financial year 2011-12, when collection of the revenue is meant to begin. The Red Book states:
"The Government wishes to engage employers, pension schemes, experts and other interested parties to determine the best design of a regime."
That does not fill me with confidence that the Government have the first clue about how their policy intent can be changed into an actual tax change. It is a complex area and they have only a small period to get the measure right.
I assume that the powers will have to be legislated for in the September Finance Bill; perhaps the Economic Secretary can tell me when she replies to the debate. There is not much time-probably only the summer-so I hope she will have a holiday, but I am not sure quite how that will turn out if she is put in charge of sorting out the proposals in an appropriate time. Her officials could get no break at all. To be honest, as they contemplate their second or third Finance Bill of the year, her officials will probably need a break as much as she does. While there is not a lot of time left, there is an awful lot of yield at stake if the Government get this wrong, and that is what we are exploring through amendment 60.
Parliament deserves a much firmer idea of what is in the Government's mind before it jettisons a well-prepared and well-signalled change that has already involved a good deal of consultation, design, and stakeholder and legislative work. The tax regime to collect the suitably named high income excess relief charge is to be abolished although it has already been consulted on and legislated for. There have also been impact assessments, stakeholder engagement and consultation documents, so all people concerned have prepared for the regime.
I am the first to admit that the charge was not universally welcomed or accepted, especially by those who would have to pay it. Many self-interested and somewhat bloodcurdling arguments were advanced about how trying to distribute the relief more fairly would destroy all pension provision in the UK because it was suggested that those who previously received a completely disproportionate amount of relief would close their employee pension provision out of spite if some of that relief was taken away. It was not surprising that there were howls of outrage from certain quarters when the policy was announced, but it is impossible to justify a system of tax relief that delivers a quarter of its £18.9 billion to just the 300,000 richest people by income in the country.
"damage UK business and competitiveness"
is quite worrying because that is usually code for "would hit the very well-off the most". The Government have obviously listened to those with well-oiled lobbying machines who, after all the years of largesse during which the vast majority of the pension tax relief came to them, did not want the party to end.
My hon. Friend is probably aware of many people's anger at the size of the pension pots of bankers such as Sir Fred Goodwin. Does she agree that
when many people are struggling as a result of the bankers' decisions, it is outrageous that the Government wish to reward those very bankers by giving them such big pension breaks?
Ms Eagle: I certainly understand that anger, and I suspect that there will be even more anger if the Government do not address the unfair way in which the distribution of the pension tax relief has developed, especially since the simplification from A-day in 2006. We tried to address the problem by targeting the people at the very top who had benefited the most from the relief in particular.
We received representations from stakeholders who called for a simpler system, and it would be wrong of me to try to claim that the system for which we legislated was simple-it was clearly complex. However, when dealing with people on very high earnings who use complex financial arrangements, we often find that that complexity must be matched to ensure that a fair amount of tax is taken from them. In tax and benefit law, as the Economic Secretary will know-she probably struggles with this every day-there is always a trade-off between simplification and fairness, as well as yield. We took the view that despite the complexities of the system that we were introducing, it was right to target very high earners in particular. I state the distributional analysis again: the top 300,000 people receive 25% of £18.9 billion. No right-thinking person in this country with any kind of understanding of what the term "fairness" means would want us to tolerate that kind of distribution.
Simplification is always a popular cry, but there are trade-offs, and it causes different problems if we create a simpler system. We did consider other options, but the trade-offs are inescapable. We want to explore in debate today how the Government are working their way through the trade-offs, so that we can try to assess whether the solution that the Government have hinted at, but have not put before us, is fair, or whether its outcome is less fair than the outcome of the system that we decided on.
The Economic Secretary to the Treasury (Justine Greening): I can see that the hon. Lady and other Opposition Members are following a particular train of inquiry, and that is perfectly right-it is the purpose of this debate. I just draw her attention to the fact that the clause gives the Government the power to repeal the previous measures if we can find a better alternative. If we cannot, I assure her that we will leave what is in place. However, does she agree with the Institute for Fiscal Studies, which described the measures that the previous Government proposed as unfair?
It is up to the entire electorate to decide what is fair or unfair. I have set out some of the reasons why we approached what is a difficult problem in the way that we did, but I certainly welcome the Minister's comment that if the Government cannot find a different way of doing things, they will leave the current structure in place. I was wondering about the reference in the clause to December this year. I suspected that that might be what we would call a backstop position. It is important that the hon. Lady has put her point on the record. Taking what she says at face value, I assume that the Government will do some work in the next period. I do not know whether a measure will be in the Finance
Bill, or how quickly that work will be done, but certainly there is not very much time for a completely new system to be brought in.
Justine Greening: The hon. Lady is very kind. Given that she raises the issue, perhaps it would be helpful for the rest of the debate if I set matters out. On the timelines, she is right; we clearly need to make progress quickly. The aim is to publish draft clauses in the autumn, and to legislate in the Finance Bill 2011.
Ms Eagle: I certainly appreciate the information that the Minister has put before us, and it helps us to get on with the debate. I suppose it means that she and her officials will have time for at least a little bit of a holiday this August. Under our plans, the yield begins to come in during the next financial year. I was under the impression that she would have had to ensure that she legislated for an entirely new system in the September 2010 Finance Bill. She now tells us that potential measures for an alternative system will be forced into next year's Finance Bill, which means that an extra £0.2 billion of revenue that was scored for the next financial year will have to be raised. I assume that she will take account of that.
Jon Trickett (Hemsworth) (Lab): The new regime comes in in April 2011. If, as the Minister said, the Government will not bring legislation forward until April 2011, does it mean that we will use the system that we introduced? That will be a second system. There is the current system; the one that we introduced, which will apply from April 2011; and a third one, which will be introduced subsequent to the Government's Bill. Or will the Government abandon our system, and will there be a period of time in which we get less revenue as a result of the complex process that has just been announced?
There is also an issue about the backstop position. The hon. Lady says that draft clauses might be brought forward, and, although I am sorry to go on about process, it is important when it comes to tax changes. We gave ourselves close to two years to do all the work to introduce the higher rate relief charge, because it was such a difficult and complex area. We wanted to ensure that those who were liable to pay had plenty of time to plan, understand their liabilities-even if they did not like them, which they rarely do in my experience-and get to know the system, so that there was certainty about it. It now seems clear that there is a degree of uncertainty, which those who would have been particularly badly hit by the high charges, the very richest in our society, might welcome. However, we felt that they should shoulder a fairer burden of the necessary fiscal consolidation, because they had done so well during the good times.
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