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On the economy, I very much agree with what the Government are trying to do. They have not, during the course of a recession, started to cut public expenditure and perhaps increase taxes. That would not reduce debt; it would be more likely to increase it. I very much agree with the Government, but that is about the only thing on which I will agree with them tonight. Precisely what do they propose to do-I know that my noble friend likes to be precise on these occasions-when the recession comes to an end? Incidentally, I was pleased to hear him say that-he told us about a sort of preview of the Pre-Budget Report-we are at the bottom now. I have forgotten his exact words, but he certainly implied that we were out of the recession. Perhaps I may add that he did not refer to green shoots. Outside the Government, economists almost across the board have come to the conclusion in their guesses-we all know that they are guesses-about the future of the economy that the recession is largely coming to an end. Unlike my noble friend, they seem to feel that when the upturn comes it will be rather slower than seemed likely even in the last Budget. Perhaps my noble friend would comment on that too.

When the recession comes to an end and we are in a reasonable upturn, the important question that faces any Government is how they will balance the books-except no one balances the books-and bring them more closely into line and make them sustainable. I should like to know whether my noble friend has seen the report-I have not-which was referred to in the press this morning, about the study on public expenditure by the King's Fund and the Institute for Fiscal Studies. The Guardian had a headline, "'Tax or axe' warning on future NHS spending". It is clear that with an ageing population-I am happy to say especially for Members of your Lordships' House-the National Health Service-whoever is in charge, private or public-will need to spend rather more than less in the years to come. In many areas of National Health Service spending

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more will need to be spent. The article quoted the study as saying that "across-the-board" there would need to be a,

which did not exclude the National Health Service.

With £700 billion of public expenditure of course there is waste. Everyone talks about cutting waste. When I had some slight responsibility as Chief Secretary to the Treasury, public expenditure was a much lower figure and I had to cut it for five years almost, but there was waste. There is always waste. When £700 billion is being spent, there is bound to be waste even when it is being spent by the private sector, let alone by the Government. Everyone is in favour of cutting waste, but how it is done, and where and when, we have yet to hear from any of the major political parties.

We are told that all parties are telling us the truth about the fact that there will be a need for cuts after 2011. On the surface that is being honest and telling the public the truth, but just saying it does not tell us where people are going to be hurt, and when. Speaking for myself as a former, retired politician-an emeritus politician, unlike the Cross-Benchers in your Lordships' House-I do not expect either of the major parties to tell us, before the election, where it will hurt. We will not hear the truth, but we will hear talk of honesty. But we will not hear anyone say precisely where the cuts are going to fall, on whom and when.

However, major cuts will have to be made when the recession is over, and very likely tax increases as well. I would be surprised if VAT does not go up substantially. VAT has been mentioned in this context, and if the recession is not really over, I do not know if the Government will seek to extend the cut for another year; it may be sensible to do so. Again, I wait to hear what my noble friend has to say. However, on public expenditure, on the tax front and on balancing the Budget, will my noble friend tell us whether it is the Government's clear intention when we see a reasonable upturn in the economy-not a huge rise but perhaps 2 or 3 per cent, which were the average levels of the past-to make those precise cuts after the recession is over?

8.12 pm

Lord MacGregor of Pulham Market: My Lords, as a member of the Finance Bill Sub-Committee of the Economic Affairs Committee, I pay tribute to our Chairman for the excellent way in which he chaired our meetings. I am also the chairman of several pension trustee funds, one of which is in a company which is a REIT. I want mainly to talk about pensions tonight, but will first say a brief word about the other two matters. The impression I gained from our witnesses is that there is clearly favourable progress on consultation, although an exception should be made for the measure on the duties of the accounting officers of large companies and the naming and shaming of serious tax defaulters. The first, especially, would have benefited from public consultation and I can see no reason why they could not have been subjected to that.

On the measures related to foreign profits and REITs, about which the noble Lord, Lord Best, has talked so eloquently-at least those in the Budget as

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distinct from those that were not-the comments were more favourable than unfavourable. With the pension proposals, it was an entirely different matter. I accept that this was not an issue for prior consultation. Had the Government done so, they would have received devastating criticisms of the sort we heard from all our witnesses except HMRC. It was not a lack of consultation that concerned the committee, but the substance. I have to say that I have rarely heard such unanimous, persistent and outspoken criticism. I have sympathy with HMRC which had difficulty in dealing with the criticisms because this was clearly a politically motivated decision driven by the need in the current economic and fiscal circumstances for whatever tax revenue the Chancellor can find. He identified this one as an easy political target that would not attract widespread criticism in most constituencies. After all, it is about people with incomes of £150,000 or over, and most constituencies have comparatively few of those.

That may explain why there has not been a major public fuss about it, except as expressed by the witnesses to our committee. It is a bit like the notorious ACT measure of 1997 in that its damage was not recognised by the wider public at the time, despite the efforts of many of us to draw attention to the consequences. Later, however, its devastating impact on pensions has become all too apparent. I agree that this particular set of measures is not on the same scale, but it will have something of the same impact. Many people with incomes much lower than £150,000 will feel the effects. As I listened to the litany of criticisms in our witness sessions, it became clear that this is likely to be a major mistake. The issues are summarised in paragraph 144 of our report, which states,

I want to single out just four of the criticisms, the first of which relates to forestalling.

I recognise that the Government made some changes at the Committee stage in the other place, particularly on irregular payments, but we heard a good deal of evidence about the effect on those who have been made redundant and in many cases are in receipt of a pension contribution over the figure envisaged in the Bill, in particular those who had been planning for retirement. People were expecting to make a major contribution to their pension contributions to achieve a higher figure just prior to retirement, but had not made the same level of contributions in earlier years. With great respect, I thought that the Minister was floundering in answer to my noble friend Lord Forsyth when he said-I think I have it right-"Nobody was given an assurance that those rates will remain in perpetuity". He certainly said the words "in perpetuity". I have to say to him that there was certainly no expectation that there would be change so soon and so quickly, and many people were planning for retirement not very far ahead on the assumption that they would remain. I would be grateful if the Minister would comment on that because there are areas of forestalling that have not been tackled and are still unfair.



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The second point is that I just do not believe that this measure will raise the tax revenue predicted by the Government for it. A very high tax rate is now applied to those who have been affected by the changes, and there is no doubt that among many companies and advisers a great deal of discussion is going on to bring forward proposals on substitute schemes for compensation packages. In other words, people will not be making maximum contributions to pensions; they will be putting the money elsewhere where it will have a better overall effect. HMRC has substantially underestimated the range of alternatives for many who are affected and therefore overestimated the revenue.

Thirdly, as we all know, defined benefit schemes are already in a fragile state. It sometimes seems that companies, including major companies, are closing them down not only to new employees but to existing employees almost every month, if not every week. Time after time we hear of major companies that are making major changes to their defined benefit opportunities. This is just another nail in the coffin. The effect of the key decision-makers in companies disengaging themselves from company schemes and finding them less attractive can only accelerate that process. As we put in our report, while the numbers directly affected may be small, among them will be individuals who are influential in determining the pensions policies of many companies.

The most worrying of all, and by far the most important, is my fourth criticism. After long consultation, the new regime, commencing with the A-day measures in April 2006 following the Finance Act 2004, was widely welcomed and hailed for its simplicity and flexibility. The Government hailed it as a transparent, consistent system, giving everyone for the first time-I challenge the "everyone"-the same opportunity to make tax-relieved pension savings over a lifetime. Above all, it was put over and accepted by everyone in the pension industry-companies, pension advisers, potential pensioners and pensioners-that there was a guarantee and an assurance of certainty in this new regime and an end to the chopping and changing of pension tax regimes. Now, after only three years, this has been broken and, combined with all the other non-tax issues that are currently adversely affecting pensions, even this assurance of continuity in the scheme has gone. A precedent has been established that the A-day tax regime is not certain; that if it can be attacked by a desperate Chancellor so soon, will there not be other changes year after year? In particular, a precedent has now been set for taxing employer contributions. Even the long-established fiscal rule that pension contributions are tax free because pension payments are taxed at one's marginal rate when one becomes a pensioner has been undermined.

I shall quote from three witnesses who appeared in front of us. The CBI said that the net effect will be to disincentivise pension savings completely. The Chartered Institute of Taxation expressed a worry that it will mean a complete reappraisal as to the value of pensions provision. The National Association of Pension Funds said that it will be a disincentive for employers to contribute, particularly to defined benefit schemes but to defined contribution schemes as well.



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In justifying the introduction of this measure, the Chancellor said that it was difficult to justify how a quarter of the cost of pensions tax relief went to the top 1.5 per cent of earners. But surely, after such a long period of consultation and gestation before the introduction of the regime, the Government had worked that out and knew what they were doing when they introduced the new regime. I do not think that that is in any way a proper justification of what has been done.

The decline of defined benefit started in 1997 when another ill thought-out measure removed £5 billion a year from pension funds, now, cumulatively and compound; a huge sum. I accept that some of the reasons for the decline in defined benefit schemes-some of them substantial-are not the consequence of any actions by the Government: on the asset side, the effect of increased longevity in the mortality rates; on the liabilities side, an accounting and actuarial system based on gilt rates so that when they come down the liabilities rise. That can fluctuate widely even over a short period and so one has substantial changes in the apparent deficits.

On top of all that, this is another serious blow to defined benefit schemes. Many people recognise that defined contribution and personal pensions do not offer the same advantages. As a result, we now have two nations-the private sector pension provision and the public sector pension provision. Now is not the time to repeat all the comments about the unfairness and huge future costs of public sector pension schemes. The Government clearly will not tackle this in the remainder of their time and in their enfeebled state. This makes this financial measure, which will not raise the tax revenue the Chancellor predicted and which will add even more to the decline of private sector schemes, even more unbalanced and ill thought through.

8.24 pm

Lord Forsyth of Drumlean: My Lords, I add my congratulations to the noble Lord, Lord Vallance, and the sub-committee Although I serve on the Economic Affairs Committee, I escaped being on the sub-committee because I had been drafted by the noble Lord, Lord Barnett, on to the Barnett Select Committee, which produced an excellent report last week.

So here we go again, with another Finance Bill in two volumes-500 pages of stuff. Despite the Government's commitment to simplify the tax code, having doubled that code, and with us now having the longest tax code in the world-longer even than India's-we get another 500 pages of stuff. It has come to this House having not been scrutinised properly by the other place and, judging by the Minister's speech, has not even been fully understood by those who are responsible for the implementation of the legislation.

And what are we doing? We are debating the Bill at a late hour on the eve of the time when Members of the House of Commons will disappear with their buckets and spades until October. Given the seriousness of the economic crisis, which my noble friend Lord Lang set out in his excellent speech, it is shameful that we should be reduced to doing this at this hour. Given

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the hour, though, the Minister will no doubt be relieved to hear that I will resist the temptation to use this as an opportunity to critique the Government's economic policy. I shall focus on the committee's report and some aspects of the Bill.

The Minister is beginning to get a bit of a reputation for not being completely straightforward in taking criticism. In his speech he was keen to point out the parts of the report that praised the Government's record on consultation, but he neglected to mention the criticism of the consultation process on the shaming of defaulters and on the duties of accounting officers at large corporates. If he is going to raise what the committee had to say about consultation, he should not just pick out the cherries that show the Government in a good light; the point of these debates is to address the criticisms and inform the House what he is going to do to ensure that it does not happen again.

The Minister drew attention to the anti-forestalling measures. I do not know if he has had a chance to read the evidence that was given to the sub-committee. I was particularly struck by the evidence from the Association of Taxation Technicians-not a particularly exciting organisation, I would have thought, nor a particularly partisan one, but the criticisms that my noble friend Lord MacGregor has pointed out are searing and scathing, such as those on anti-forestalling.

Had the Government not had these anti-forestalling measures, we would have saved no fewer than 13 pages of legislation and 52 pages of guidance. That is what the anti-forestalling legislation that the Minister referred to adds to the tax code. In the evidence, the memorandum from the Association of Taxation Technicians says about the Government's anti-forestalling measures:

"The Government's position here is entirely without logic. If they wish to restrict relief to 20 per cent only from 2011, why introduce provisions which in effect apply that restriction immediately? If they truly wish to restrict relief with immediate effect, why not simplify the legislative process by eliminating both the deferral to 2011 and the 'anti forestalling' rules? On grounds of simplification alone, surely the post-A Day pensions regime has already suffered enough from needlessly over-complex legislation?".

What are this Government doing if they are not listening to representations of this kind? We heard nothing-perhaps the Minister will deal with this in his wind-up-that dealt with the considerable concerns that have been expressed.

I should perhaps declare an interest, as I may well be affected by the changes to the pension regime that are contained in the Bill. Does the Minister have any idea how much this has undermined confidence in our pension system throughout business in this country? In every boardroom now, senior executives, particularly if they are still hanging on to a final-salary pension scheme, are considering how they are going to remunerate their senior staff because it no longer makes any sense for them to make a contribution to the pension scheme if this regime goes ahead after 2011. Does he recognise how creating this uncertainty means that people no longer have faith in the system, and will look for other ways where they will have more control over saving their capital?

I noticed that in his speech the Minister said that the measures were aimed at the wealthiest. Are the people who are immediately about to retire, the

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unemployed, the self-employed and entrepreneurs the wealthiest? All of them, according to the evidence that was given to the committee, will be seriously damaged by these changes.

The most important thing here is the breach of principles. I thought that it was an established and agreed principle across the parties that you did not pay tax when you made a contribution to a pension fund but that you paid the tax when it came out. The Government are breaching that principle. As my noble friend Lord MacGregor pointed out, it has gone almost unnoticed that a new principle is being established, which is to treat employers' contributions as an emolument for the first time. That creates a new seam from which this profligate Government will be able to mine further revenues. The Minister might say that it affects only the very wealthiest, but he has breached principles, which will enable the Government to continue taxation of people on lower incomes, just as they have done with national insurance.

I agree with my noble friend that it is just extraordinary that we could have had a simplification of pensions, for which I praised the Government at the time: I think that eight or nine different schemes were brought together, and we had A-day. I do not know whether the Minister was able to escape the City in time, but, for the rest of us, a cap was put on the amount that we could put into our pension funds, which was accepted. The capped benefit was the Government's attempt to deal with high earners and to ensure that there was balance in the system. Everyone accepted that, and then, three years on, here is the Minister tearing up the plant and changing it. That is deeply disturbing, and would be even if we had a scheme which was workable and not destructive, as this Bill makes it.

The Minister's response to my earlier intervention was completely unsatisfactory. He said that there was never any intention to give people who were making a final contribution in their year of retirement a kind of blank cheque for the future. Why did the 2004 Act make provision to remove the limit entirely for people who were crystallising their benefits in their year of retirement if it was not the Government's intention to encourage it? That legislation was implemented in April 2006. People who were planning their retirement and planning how they would build up that fund-not wealthy people who get big bonuses in the City-now find themselves completely undermined by the Government who brought in the legislation. What are we to make of the thinking that is going on?

As the proposals stood, someone who was made redundant and wanted to invest their £30,000 redundancy cheque in their pension fund could find themselves having to pay tax on it because of the anti-forestalling measures. I do not know whether the change to the £30,000 limit that has been made in the other place would affect that. Perhaps the Minister could reassure me in his reply.

Then there are the self-employed, who have good years and bad years and put money aside as and when they can. How on earth are they supposed to average their contributions, and why is it necessary? The splendid people from the Association of Taxation Technicians set out very clearly in their document-I hope that the

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Minister might find time to read it; I shall not detain the House-why the anti-forestalling measures are entirely unnecessary and counterproductive in their effect.

People who find themselves made redundant and unemployed-they may have been on a high salary and then get a job-will find that, because they had no income in the previous year, the averaging scheme discriminates against them. What an extraordinary thing, to penalise people who have lost their jobs by preventing them making up to their pension scheme what they were unable to contribute because they had been without employment and income.

I have not seen the Minister's answer to which the noble Lord, Lord Barnett, referred-that was remiss of me-but he suggested that it was not entirely clear. The CBI states on page 39 of the evidence that,

It rightly concludes:

"This figure, when combined with a significant tax charge on the employer contribution, will make it sensible for most senior managers in firms with defined benefit schemes to leave the pension schemes, or to seek shorter time working arrangements to avoid triggering a punitive tax regime".

What a terrible condemnation of the Government. What drives this vendetta? People who do not buy annuities at the age of 75 are already subject to an 82 per cent take in tax. The silly regime which the Government are introducing will see people facing tax rates of more than 100 per cent. I do not know how the Minister can assume that is not the case, because on page 65 of the committee's evidence he will see some worked-up examples which show how people end up with a marginal rate of tax of 100 per cent and more.

So what will happen? What will these wealthy people about whom the Minister is concerned do? They will go out and buy buy-to-let properties and their gains will be taxed at 18 per cent and not at high rates of tax because of the stupid capital gains tax regime that the Government have brought in which has created such a huge differential between tax on income and now tax on moneys which are put into savings. All of this is occurring at a time when, according to Deloitte, the FTSE 100 companies have deficits on their pension funds which have doubled to £300 billion since January.

This is the last of these Bills before the Government need to face the judgment of the electorate, and for that we must be thankful. I was quite struck by the front page headline of the Sunday Times this Sunday. It stated:

"Lord Myners attacks bankers' greed and finds God".

It said that the noble Lord,


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