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In 1997, all the economic indicators were strong and heading in the right direction. Now they are all weak and heading in the wrong direction. Productivity, a vital and often overlooked measure of economic health, is down by 4.7 per cent in the first quarter of this year. In manufacturing, it is down by 8.3 per cent, almost double the fall of the previous quarter. Business investment fell by 7.6 per cent in the first quarter compared with the previous already poor quarter. That is hardly surprising considering the continuing credit famine. Exports of goods fell by £4.1 billion

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in the first quarter and our overall deficit in trade in goods last year was £93 billion-so much for the proclaimed benefit to exporters of a weak pound. GDP in the production industries is down by 12.5 per cent in two years.

As regards employment, in the first quarter of this year public sector employment rose by 15,000, while private sector employment fell by 286,000. I regard both those figures as bad news. Since March the deterioration has accelerated dramatically, with youth unemployment leading the way. One can imagine not only the heartache and misery that that must cause but also the massive and growing cost to the public purse at a time when revenues are drying up. I fear that that trend has much longer to run.

As the Government scrabble around over the next few months trying to find green shoots, they will be clutching not at green shoots but at straws. All they will find is a lunar landscape, with mountains of debt stretching to the horizon and a dust cloud of inflation hovering above it. Already soaring upwards, borrowing will be more in the next two years than the entire accumulated debt of all previous Governments since the 17th century added together. It will double the national debt. We will be paying more in interest on those debts than on the whole of the education budget. I believe that the bloated state of our public finances will delay our recovery from recession, not hasten it. Unless we get to grips with it soon, the situation will get even worse.

The Government want to sell £220 billion of gilts this year and they are competing with, among others, the United States, Germany and Japan, which alone are seeking between them to raise £2.7 trillion. Therefore, the possibility of a gilts strike and the collapse of sterling cannot be ruled out and the consequences of that would be calamitous. I have no wish to sound unduly alarmist, but this should come as no surprise, because if we include, as we should, the cost of rescuing the banks, off-balance-sheet PFI liabilities and public sector pension liabilities, the United Kingdom's gross liabilities already exceed 275 per cent of GDP and, while the liabilities and debts are rising, GDP is falling.

On top of public debt, personal debt, with the active encouragement of the Government, has reached the highest levels in the world, at 186 per cent of disposable income-higher than America's 142 per cent and, indeed, the highest that any G7 country has ever seen. We have one of the lowest gross national savings ratios in the world, while house price inflation averaged 9.3 per cent in the decade before the credit crunch, compared with 3.9 per cent in America.

The damage wrought by this "dysfunctional" Government-to quote their colleague in this House, the noble Lord, Lord Sainsbury of Turville-is literally immeasurable. It will take years, indeed decades, to repair and it has been caused not just in the past two years of panic and misjudgement but cumulatively over the past decade. It comes as no surprise to learn only today that for the first time in 350 years the Treasury has had its own accounts qualified by the National Audit Office.

The noble Lord, Lord Myners, says that the Government are not complacent, but it seems to me that they are not in control of events. It is easy to say

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that the crisis is international and that it all began in America. Of course, what happened there partially triggered the denouement, but it also began in the United Kingdom. Northern Rock collapsed before Lehman Brothers. Our banks and building societies were every bit as extended as America's and they were poorly regulated as a result of the Prime Minister's fateful changes of 1997. I warmly welcome my honourable friend George Osborne's clear-sighted proposals to reverse the split-level responsibility that has so damaged banking regulation.

Our housing market was every bit as overheated, overpriced and overborrowed as America's, the result of easy credit fanning the feel-good factor to win votes. With our public spending levels, our high taxation, our deficits and our debt, ours was not an economy whose fundamentals were stronger than others, as the Prime Minister and the Chancellor repeatedly claimed. It was not an economy uniquely well placed to weather the storm, as they also claimed. It was and is the reverse of those things. It is uniquely weak, uniquely overextended and irresponsibly managed. We urgently need an exit strategy. We need firm decisions to tackle public expenditure and borrowing levels before confidence in sterling collapses and inflation engulfs us. Yet the Government prevaricate; they do nothing and say nothing. This year's Finance Bill, like the Budget and recent government behaviour, is largely irrelevant to the truly dreadful problems that the nation's finances face. The day cannot come soon enough when a new Government can come to grips with them and get down to rebuilding our country.

7.41 pm

Lord Vallance of Tummel: My Lords, I am very pleased to introduce the report of the Economic Affairs Committee on the Finance Bill 2009. It is the seventh annual report in a series that has now become well established and confirms the role of this House in the parliamentary scrutiny of finance Bills. Our sub-committee on the Finance Bill provides a forum, not available in the other place, for taxpayers and their advisers to express their concerns and for officials to respond. I should like to thank my fellow members of the sub-committee for their wise contributions, their non-partisan approach and their necessarily speedy and intensive work. I am also grateful to our witnesses, professional and official, our specialist advisers, the clerk and our secretary-administrator.

The sub-committee has to focus, and this year it examined three topics: tax relief for pensions contributions; the taxation of foreign profits; and real estate investment trusts, or REITs for short. We also followed up our examination last year of two cross-cutting issues: consultation and international competitiveness.

First, on pensions, we accept that the Government have to be free to make such changes as they think fit, but we were concerned that the proposed restrictions to relief for pension contributions, limiting them to the basic rate of tax for high income individuals, risk damaging pensions savings. New rules for pensions came into effect only three years ago. It is very early to make a highly significant change. Although its scope is limited to high-income earners, it may be seen as the

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thin end of the wedge. A good tax system needs simplicity, consistency and certainty, especially in a long-term business such as pensions. The changes have an adverse effect on each of these qualities. Only a comparatively small number of taxpayers are directly affected, but they set the policy of their companies' pension schemes and their approach may be coloured,especially as employers' contributions are also affected. We think there is a real risk that savings will switch away from pensions.

We accept that the Government's aim is a level playing field between defined-benefit and defined-contribution schemes, but in practice that may be difficult to achieve. It is not easy to assess the value of contributions to a defined-benefit scheme. We are also concerned that the scheme may lead to exceptionally high marginal rates of tax. The CBI gave an example where the marginal rate was 145 per cent. More consideration is needed on both these areas in the consultation on the substantive scheme.

Given the potential benefit of simplification, we were attracted by an alternative approach of simply restricting the annual and/or the lifetime allowance. By contrast with the Government's proposed changes, this would have been consistent with the present scheme of relief. However, the incidence and impact of a change of this nature would have been very different from those of the Government's proposals and, with considerable regret, we concluded that this was not a line we could pursue.

We questioned the need for antiforestalling measures. There was a legitimate expectation that relief would continue at the taxpayer's marginal rate. It would not have been unreasonable to allow people time to adjust their affairs. In any case, additional contributions would have been limited by the annual and lifetime allowances as well as by what people could afford. In our report, we said that solutions would need to be found for all those individuals who have good reason for not making their pension savings regularly or frequently, who include the self-employed and those retiring or made redundant. As the noble Lord, Lord Myners, outlined, subsequent changes to the Bill have met some concerns, certainly those of the self-employed, and that is welcome, but it is disappointing that, as we understand it, there has been no real recognition of the impact on those who retire or are-made redundant.

The taxation of foreign profits was our second chosen topic. The foreign profits package was introduced after much consultation. It encompasses the exemption of foreign dividends, a cap on allowable finance expenses and the replacement of the Treasury consent rules by a post-transaction reporting requirement. It was very difficult for our witnesses to assess the overall package while there were still gaps in the Finance Bill proposals. Many government amendments were made in the Commons Public Bill Committee. This is the second year in succession that we have had to comment on this aspect, which is very disappointing. The sub-committee was also disappointed that dividend exemption, which was universally welcomed in principle, had been marred by complicated and controversial drafting. We recommended that wherever possible in future, there should also be consultation on drafting.

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The restriction of interest relief via the debt cap was least welcomed, and we were not greatly reassured by the responses of officials. We were concerned that a long period of consultation had left some important issues unresolved. We were also very concerned about the complexityof the debt cap provisions, and we recommended further dialogue with the representative bodies, either to discuss changes or to persuade them that further changes were not appropriate. We recommended that in view of the problems with the debt cap provisions, their implementation should be further delayed unless those problems could be resolved during the passage of the Bill. The private sector will still be considering the amendments made in the Commons Committee. If it is content, that is a welcome outcome; if it is not, we urge the Government to consider holding off until there is resolution.

We had few comments on the changes to the rules on controlled foreign companies. We welcomed the changes concerning the rules for Treasury consents and for putting their substance into regulations.

Our third chosen topic was real estate investment trusts or REITs. The sub-committee was concerned that REITs had not lived up to expectations. Although they were introduced to promote greater efficiency and flexibility in the property market and to counter shortages in the housing market, there are no residential REITs or new commercial ones. Obviously, market conditions have been a major factor, but that was not the whole answer. There are also structural weaknesses in the legal framework for REITs, and the Finance Bill, as published, did not tackle those issues. We proposed that a variety of measures should be considered. Some were comparatively minor, such as looking again at the industry's "snagging list", and others could be tailored to meet the current economic circumstances, such as allowing the payment of scrip dividends. Others could be more significant, such as reducing the entry charge, which might enable the original purposes of the scheme to be met just as the market may be turning. At the Commons Report stage, the Government went some way towards meeting our concerns by introducing a provision to cater for REITs in severe financial difficulties and promised further discussion on scrip dividends. These are welcome responses, if far from addressing all the issues we raised.

More generally, REITs were introducedfollowing well handled consultations, but since then, officials have appeared complacent and unduly cautious, with perhaps too much emphasis on issues such as cost without looking at the broader picture. We suggest that much could be learnt from international experience, particularly that of France.

I now return to the two cross-cutting issues that I mentioned earlier, the first of which is consultation. Given our sharp criticism of the consultation before last year's Finance Bill, we were keen to see how good it had been this year. We were left with a favourable impression across the board of how the consultation on foreign profits had been handled. The one aspect that concerned us, as I mentioned earlier, was that when it was published, the Finance Bill was incomplete. We recommended that HMRC considers very carefully why it did not allow itself sufficient time to complete the consultation and the subsequent drafting process.

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We concluded that, given the nature of the changes, it would have been very difficult for the Government to consult on pensions, even informally. However, we thought that Her Majesty's Treasury and HMRC were at fault in failing to consult on the novel and contentious measures on the duties of accounting officers of the largest companies and on naming and shaming serious tax defaulters. We were not persuaded by the reasons given by officials for this lack of consultation. Some changes to the accounting officers' provision have been made in consultations since the Budget, but it would have been much better if they had been made earlier. We recommended that in future there should be consultation on all such issues, and we hope that it will not be necessary to revert to this aspect in a future report.

The second cross-cutting issue is the effect of the measures that we examined on the international competitive position of the United Kingdom. There was general agreement that some parts of the foreign profits package were positive but others much less so. The outstanding issues clearly need to be resolved before the full impact on competitiveness can be determined. We thought that the opinion of officials that the pension changes would have little effect on competitiveness was likely to be overoptimistic, and we recommended that the effect of the changes should be monitored carefully. The likely impact on the UK's competitiveness of the Finance Bill provisions as a whole is difficult to assess; it might be narrowly positive if the concerns about the debt cap rules can be resolved.

In summary, our report was less critical than last year, with more things to welcome to balance our criticisms. Our main concern was that the Government have underestimated the risk of damaging pension savings by changing the long-standing rule that relief for pension contributions should be given at an individual's marginal rate. Although only some of our concerns about this year's Finance Bill have been met during its passage, I hope the House will agree that our reports are valuable in strengthening parliamentary scrutiny and drawing attention to the concerns of taxpayers and their representative bodies.

7.52 pm

Lord Best:My Lords, as a member of the Economic Affairs Committee and the Finance Bill sub-committee, I will take up the third of the three topics on which our report concentrates: the real estate investment trusts, or REITs, which the noble Lord, Lord Vallance, mentioned. The sub-committee took the opportunity to review their progress since the introduction of the REITs regime in January 2007.

The REITs concept was introduced into the UK by the Finance Act 2006. Its aim was to improve the quantity and quality of finance for investment in property and remove tax distortions, in particular the hazards of double taxation, for property investment companies. Minor technical changes have been made to the REITs regime in every Finance Bill since 2006, and the measures in this Bill are modest but useful and welcome.

In considering whether the arrangements have worked satisfactorily overall, the committee concludes that the regime was successfully launched, has been well handled

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and has operated well for large existing commercial property investments groups that have converted into REITs, of which there are now 21, with assets of some £30 billion. However, the Government made it clear when they introduced the REITs model that they hoped this would attract investment into the residential rented property world as well as into the commercial sector, thereby helping to meet the acute shortages of homes that are needed in this country, as identified by the review by Kate Barker at the Bank of England.

On this score, we must conclude-and the committee did-that the REITs regime has failed us. No new REITs of any kind have been formed. In particular, no new REITs have been formed to invest in residential property. This failure of successive Finance Acts means that the opportunity to draw in large-scale institutional investment into the private rented sector has so far been lost. REITs are of considerable importance in the USA and, with the unwinding of the buy-to-let market in the UK, there has never been a time in which investment in the private rented sector has been more needed.

We know from Kate Barker's analysis that we need to build something like 240,000 new homes every year. Indeed, the independent National Housing and Planning Advice Unit has recently recalculated the figures and come up with a new figure of 257,000 homes that are required each year. Yet house builders building homes for sale are unlikely to do better than about 80,000 homes in the current year. That is far, far below the level that is needed. It seems likely, with house-building in the doldrums and the lack of available mortgage finance stretching into the future, that this low level of house-building for sale will be continued for some years to come. A healthy private rented sector could fill that gap and meet the needs of the growing numbers of people who cannot afford to buy and, for different reasons, do not want to take on mortgage commitments.

At present, we rely on individual small-time investors: the buy-to-let investor. According to a recent report for the Government by Julie Rugg of York University, there are now something like 1.2 million private landlords, very many of whom have a single property in their ownership. This produces considerable disadvantages in the quality of management that one can expect, compared with that of an institutional landlord who can afford the professional skills of proper larger-scale management. It means that a lot of investors are looking to the short term, rather than in the long term in which institutions are more interested. It also means that these small-time investors are not in a position to commission the building of new apartment blocks, as can institutions that are looking for large-scale opportunities in which to invest.

Without the REITs model working, we are missing out on the opportunity to bring in the huge sums of money that are so badly needed in housing and that are not likely to be found from simply building homes for sale, on which we have relied for the past 20 years or more. Moreover, the attractions to institutional investors of a residential investment model that works are considerable. Rents-noble Lords will recall that the Rent Acts were abolished more than 20 years ago-are likely to rise in line with earnings rather than with the RPI. That can match the requirements of

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institutional investors in property. Rents could rise that sensible margin ahead of the RPI in line with incomes each year; yet the institutions are steering clear of those investment opportunities because we do not have a real estate investment trust model that works for us. Market conditions have been blamed for any of the REITs failing to materialise for residential property investment. They were also blamed when property prices were rising rapidly and yields were falling correspondingly. Now, market conditions are again blamed for the absence of REITs when property prices are falling. This suggests that, as the committee concluded, it is the system itself that is not what it should be and not simply a matter of market failure.

The committee concluded that the modest measures on REITs in the Finance Bill are useful and welcome, but, as it says,

Further changes, like the treatment of cash under the balance-of-business test and the payment of dividends other than in cash, are well worth further consideration, but the chief concern of the committee was the policy failure to see any residential REITs established. The committee's report commented that,

Will the Minister take forward the committee's firm recommendation that advantage be taken of the excellent consultative machinery that now exists between the Treasury, the British Property Federation and the Royal Institution of Chartered Surveyors to review the workings of the REITs system and see whether the huge potential for investment in residential property cannot now be unleashed?

8.01 pm

Lord Barnett: My Lords, I thank the noble Lord, Lord Vallance, for what he has said and how fairly he has summed up the unanimous views of the sub-committee, on which I was happy to be able to participate. I will not deal with all four of the issues with which we dealt; I will deal just with pensions. As always, we did not look at these matters from a political standpoint. We did not have a Minister before us. We had only officials. I say "only", but we had the people who matter on these occasions. HMRC was unable to answer for us what is happening, for example, on the effects of the policy-although we were not looking at the policy- on savings, on pensions and on the future of people who save. I declare a past interest as a substantial beneficiary, like many in professional activities, who invested through annuities, and received tax relief and benefits from it. I thank whoever was in charge at that stage.

After our committee had met, I put down a Written Question on whether the Government agreed with the CBI, which said that there was an effective tax rate of 150 per cent in some circumstances. The answer from my noble friend was that they did not agree, but it was a somewhat less than absolutely clear reply. He tried again this evening, but he did not altogether convince

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me then either. When he winds up, I should like him to have another go at perhaps 149 per cent or 100 per cent. What is likely to be the effect on, possibly, a small number? That small number is not unimportant because professional men and women prepare for their retirement in a variety of ways. This way is very important both personally and, from the point of view of the country as a whole, it is beneficial. I hope that my noble friend will give us a clearer reply.

However, I mainly want to say a few words about the economy. As one recognises on these occasions, the noble Lord, Lord Lang, made a great deal of his criticism of the present economic position of the country. I listened carefully to what he had to say-but unlike the unanimous views of the Select Committee, for which I thank him, on the Barnett formula where I absolutely agree with what it said-but tonight I found him less than constructive in his alternative proposals to what the Government are doing. No doubt, future speakers-there seem to be a great number of them on the Opposition Benches-will give us the benefit of those constructive proposals. The noble Baroness, Lady O'Cathain, is pointing to this side of the House, which I appreciate, but the Government have got my noble friend Lord Sheldon and me, and they are more than happy with the two of us.

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