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I have to say to him that people want stability; they do not want uncertainty and they want the Government off their back. If the noble Lord is concerned about

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the Gospel, he might turn to Matthew on the subject of Judgment Day where it is said that Jesus tells us that the sheep will be separated from the goats. The goats are deserting this Government in droves. I suggest to the Minister that this might be time for a sharp exit. Presiding over legislation like this does no end of harm to his reputation. At least some members of the Government will be able to plead that they did not understand what they were doing. He has no such excuse. He says that we must live within our means and yet in a reply to me on 17 June at Question Time he assured me that now that he was in charge of the Government debt office there was no need to worry about raising the £900 billion extra in debt without there being a substantial increase in interest rates. I am with my noble friend; I think there is considerable cause for concern.

Last week the IMF said:

"The United Kingdom has been getting the benefit of the doubt both in the government bond market and also the foreign exchange market. The benefit of the doubt is not going to last for ever".

The United Kingdom may have the benefit of the doubt but the Minister has lost it.

8.39 pm

Baroness O'Cathain: My Lords, as we have heard, each year since 2003 the finance sub-committee of the Economic Affairs Committee has inquired into selected aspects of that year's Finance Bill. The resulting reports are always of a very high standard and do much to increase understanding of the rather arcane nature of the Finance Bill. I suspect that the sub-committee is not greatly loved by the Government. In passing, I make the observation that, if the sub-committee's work were to be extended to inquire into more than three aspects of the Bill, there would be a commensurate increase in understanding and almost certainly a similar increase in government irritation. The chairman and members of the sub-committee are to be congratulated on giving great service to this House and contributing to the general awareness of issues that are normally put into the "too difficult to understand" box.

In my few words this evening, I intend to concentrate, like several previous speakers, on pensions. I declare an interest as a pensioner, although I say in my defence that I have been concerned about pensions long before I became a pensioner. Pensions have always-at least until recently-been a most successful way of saving. Savings are one way in which an individual who is capable of working hard and who has been blessed with talents, education, opportunities and health should be responsible and not rely on the state to support them in their old age. My noble friend Lord Lang of Monkton was strongly critical of the likely effect on the attitude of people to savings of the taxation of pensions suggested in the Finance Bill.

The 17 pages in the sub-committee's report, in chapter 3, on the taxation of pensions should be required reading for those who have a suspicion that the Government rate pensions as an easy target-a gold mine that yields untold riches for the Government without too much digging and mining. Why? Because each raid on pension schemes and each change of the

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rules is couched in massively opaque terms and is virtually incomprehensible to all but the ever mushrooming group of pension consultants.

The pension section of the Finance Bill 2009 is no exception. It truly is par for the course and the sub-committee has done a great service in throwing some light on it. We have been reminded several times this evening that, when the overhauled regime of the taxation of pensions came into effect in 2006, the Government maintained that the reform would,

Three years later, the new system that was designed, I repeat, to "bring simplification", be "readily understood" and make it,

was shunted aside and a punitive disincentive that threw people into confusion was introduced.

The greatest casualty in the recent financial meltdown has been trust. The latest pension proposals-this action by this Government-further erodes trust, or is there any trust left? The witnesses from the private sector who appeared before the sub-committee expressed concern that the measures introduced would have a significant impact on the scheme introduced just three years earlier; my noble friend Lord Forsyth clearly and cogently made that point. The 2006 changes were made after much consultation, which was acknowledged by all as a very good thing. What consultation was undertaken on this change, or is consultation another casualty of the financial meltdown? I heard what the noble Lord, Lord Vallance, said in acknowledging that it would have been difficult. I am sure that that is correct, but should that absolve the Government from undertaking a thorough analysis of the likely impact of the changes, or are they just dismissive of the essential contribution of those most likely to be affected?

The Government will state that the changes apply to only 2 per cent of the workforce, so is that all right? No, it is not. Do the Government not realise that in any organisation the introduction of different levels of incentive-or disincentive in this case-will have a destabilising effect? Those down the line will look at what is now being seen as a target group ripe for government penalty. How will that encourage others-the younger, ambitious staff who willingly contribute to pension schemes-to act in a responsible manner and hope not to have to rely on the state during their old age? I am not so sure that, along with the effect on trust and on the concept of consultation, this action will not have a deleterious effect on the savings inclination of further generations.

Much has been made of the effect of this move on people who can and may move overseas. But gone are the days when graduates entering the workforce joined a company and stayed there for life. Mobility is an ever present reality and many young, ambitious professionals have almost complete flexibility to move overseas. The sub-committee's comment, repeated by the noble Lord, Lord Vallance, that the,

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and could risk,

is surely a valid one. I wonder what the Minister feels about that. There is hardly anyone better placed to have firm views on it.

The sub-committee's report highlights the risk that the highly paid may look for other means of saving instead. Some of those means have been mentioned here this evening, but it could also take the form of payment in kind rather than an increase in salary. Do we want to return to the days when the higher-paid executive spent an inordinate amount of time devising ways of circumventing pay restrictions? The most farcical one that I encountered was the collection on a weekly basis of suits-yes, suits, but gentlemen's suits-for dry-cleaning. The most politically incorrect one was the payment of public school fees, but that was in the days before political correctness. What is sure is that there is an army of compensation consultants ready to give advice on how compensation should be fixed to avoid being penalised by reaching the point at which taxation on pensions kicks in. Will that help the country pull itself out of the deepest recession for decades? I think not.

8.46 pm

Lord Sheldon: My Lords, the noble Baroness, Lady O'Cathain, was quite right in pointing out the way in which the Government have tried to simplify the pension scheme. It is very difficult to do. It is such a complicated area and there are so many ways in which people earn their money and put their money in. I am afraid that this is one of those things that we will have to live with for many years to come and look at these points again and again. My noble friend Lord Myners pointed out the situation in the other G7 countries-3.8 per cent in Germany, 2.2 per cent in Italy and 1.4 per cent in the United States-and the unexpected decline in the United Kingdom. Of course we have had it even worse in some ways. So this will be a problem that we will live with for a very long time.

In the Second Reading debate on the Finance Bill in the House of Commons, there was a defence of the Government's measures for guiding Britain out of the recession. It was said that a failure to act would cost us more in the long run and that these were vital measures to help the economy now and to support Britain's long-term prosperity. It was also said that the world's economy was shrinking for the first time in peacetime since 1932. This is one of the great changes that we have seen. It was a financial change and nobody could expect that the decline in the world's economy would go in that kind of way. It is the first time that five major banks were, as we saw in some astonishment, rescued by their national Governments, demonstrating the scale of the international challenge that we are facing. We did not expect anything like that-to see such a decline in banks which had such a very high reputation but which went very rapidly into some decline. Investment in manufacturing industry has been waning, but we hope to see it increase.

One important part of the Bill is the introduction of the new 50p rate. It will be introduced in 2010 as one of the measures in the Bill and will bring borrowing

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back down once the economy is growing again. I myself have been uneasy about the 40 per cent level for the extremely large capital and income coming from people with considerable wealth. Keeping 40 per cent over such a long period was quite unjustifiable. I hoped to see an increase. We had to wait a long time to see it and we will have to wait a little while yet.

There is also a gradual reduction in the personal allowance for those earning more than £100,000 and a reduction in pension tax relief for those on more than £150,000. This is another thing that we will see. It will echo the kind of requirements that people feel are justifiable. It is right that those on the highest incomes should pay more because, over the past 10 years, we saw the earnings of those on the very highest incomes increase by an average of much more than we might have expected over the period.

The detailed legislation on tax avoidance and evasion will bring in some valuable revenue. A number of comments have been made that dealing with tax avoidance and evasion takes an awful lot of legislation. Of course, it does not last all that long because things change, so you have to make changes and get further legislation, which is more complicated and less reliable. That is a consequence of how these things operate. It is right that those concerned must take these matters into account.

The important point of our April Budget is that there has been a greater instability than at any time for generations. The real problem is that investors assumed that the considerable and long-term growth rate would continue indefinitely, as did the banks. In their efforts to win much of the business from investors, the banks provided loans at exceptionally low rates of interest. As a result, there were many who invested much more than they would otherwise have undertaken. The big rise in unemployment meant that those who had invested at the top of the market lost a substantial amount. A major consequence has been a strong downturn in the housing market.

What is not clear is how long the downturn is going to last. One important Minister said that the downturn will not conclude until 2017. That may be the kind of result to expect, but it is much worse than we had ever anticipated.

The Bill deals with evasion and avoidance in great detail and we have heard the consequences of, and some of the problems that arise from, that. My noble friend Lord Myners pointed out that the £11 billion VAT cut would be over at the end of this year. That is a substantial amount. There has been too much criticism of it. I think that it is going to be rather valuable by the end of the year. The introduction of 15 per cent VAT for the current year was an important step in countering the economic downturn. The advantage of this move was its quick injection into spending by consumers. It may not have been seen as an important step but it was a change in the economic situation that would be difficult to effect quite so rapidly in other ways. Other methods can be introduced, but the delay in their effect on the economy means that there would be little consequence on the situation. At the end of the year, we will see a big spending increase as we

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approach Christmas. I expect that a combination of Christmas, the end of the year and the expectation that prices will rise in 2010 will see a considerable increase in expenditure. That will have some effects on the markets as well.

In the Times, my noble friend Lord Myners has said that banks and their "grossly over-rewarded" executives are partly to blame for causing the economic recession. He has said that the,

are over. Executives had,

He said that the bank system came close to collapse last October, before the rescue package:

"There were two or three hours when things felt very bad, nervous and fragile".

We have now seen a move to a more stable situation, but it is not a very happy one. The United Kingdom is now in recession, which has had a considerable effect on the economy. The widely accepted definition of a recession-two consecutive quarters of negative economic growth-was met last year and it was something that we had not expected or seen for nearly 20 years. The worse-than-expected contraction sent sterling to a 24-year low, with the pound buying $1.355. Meanwhile, the FTSE index fell almost 2 per cent to below 4,000 points. We hope that, by the end of 2009, we will have introduced some hopeful expectation. It will not be rapid, but at least it will be an improvement on what we have seen this year.

8.55 pm

Lord Higgins: My Lords, reading the Evening Standard after lunch today, I came across a story which alleges that the Treasury's accounts have been qualified for the first time in 350 years. I view that with some scepticism since I do not think that the National Audit Office has been in existence for that long, but in all events the error appears to be in the area for which the Minister is directly responsible, namely the banks and so on. Perhaps he could clarify the situation for us. In particular, why does some unnamed official say, "Don't worry, it's a technicality. We have"-I was going to say "written off"-I think he said "signed off the accounts"? Perhaps the Minister could clarify that.

To try to find some guidance about what was in the Bill, I looked at the Second Reading debate in the other place. I found an extraordinary situation where the Chief Secretary did not so much make a speech as engage in a conversation. She seemed to have no idea whatever of how to control a debate. She was constantly interrupted and, at the end of the day, clearly had not made the speech that she intended to make. I was rather short on illumination as to what the Chief Secretary thought the important issue was. Be that as it may, the interruptions certainly concentrated very much on the 17.5 per cent rate of VAT. I am very sensitive about VAT. A long while ago, I had the job of steering the whole of the legislation through the other place. At that time we set a rate of 10 per cent, which was sufficient to make up the revenue that was lost from abolishing two very bad taxes-purchase tax and selective employment tax. Alas, successive Chancellors-including, I am bound to say, Conservative Chancellors-

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have put it up to 17.5 per cent, but I think the temporary reduction that the Government have introduced is a serious mistake.

In his opening remarks the Minister quoted an organisation-I forget which one-which said that the temporary cut in the 17.5 per cent rate was "value for money for taxpayers". I have been trying to work out what on earth such an expression might mean. How is a temporary reduction in tax extraordinarily good value for taxpayers? It has meant something like £11 billion or so-mere chicken feed nowadays. None the less, it is completely offset by borrowing, on which the same taxpayers will have to pay interest in due course. More particular concern was expressed in the other place about timing and the fact that, apparently, the rate will go back up to 17.5 per cent at what is likely to be the busiest time of year for the retail trade. No information on this point was given in response to the numerous interruptions. Perhaps the Minister can tell us whether the Government have had any further thoughts on the exact timing.

It will also have a curious effect on the CPI. The CPI has finally reduced to below the Bank of England's target rate of 2 per cent. In his Budget Statement, the Chancellor said that he expected the rate to fall to 1 per cent by the end of the year. At that moment, there will be an increase in value added tax, which will of course increase the rate. Whether this is a conspiracy whereby the Bank of England can get back to its target rate, having finally reduced it far enough, is not entirely clear. However, it seems that this measure is misconceived and has been a mistake, which was recognised as such, particularly against the background of the overall borrowing side of the management of the economy and the Debt Management Office, which the Minister, I am pleased to say, is in charge of. At least, if we cannot give it back to the Bank of England, which we certainly should do, management of the debt is something that he can look after with some expertise.

A number of my noble friends have commented on the size of the Bill. Its size is absolutely appalling. However, we should be glad that the sub-committee in the House of Lords is looking at detailed proposals and can be selective in what it studies. The Select Committee on the conventions between the two Houses came down strongly in favour of the House of Lords having a role in this respect. The fact that we are restrained on financial matters has gone beyond the stage where we should think seriously about it. It is right that we should engage ourselves more-not least because there is vastly more expertise on financial matters in this place than there is in another.

I want to say a word or two about the report of the Joint Committee on Human Rights as regards retrospection. I have always been strongly of the view that one must distinguish between tax avoidance and tax evasion. We have had exchanges across the Floor on this matter. It is clear that tax avoidance is legal and that tax evasion is not; but as a result of sophisticated accountants working on various schemes, from time to time we find ourselves in a situation whereby the Revenue has to catch up with the schemes that have been devised. In that context, the report of the Joint

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Committee is very worrying. It may be felt, in extreme circumstances, that there should be retrospection, because the Revenue did not catch up immediately on particular schemes, even though the Revenue is now informed of them. However, the report points out that it is extraordinary that we are introducing retrospective legislation which involves going back seven years. There might be a case, if a cunning scheme is discovered, that the Revenue could say, "We can't catch this immediately; it is a bad thing and we will go back a year or so"; but to let a matter run for seven years and then clobber people is extraordinary. The Joint Committee points out that people are going bankrupt as a result of this, having operated for seven years on what they believed to be a perfectly legal basis. Perhaps the Minister can give his views on that.

Finally, perhaps I may say a word or two about the general economic situation. One of the features of this year's Budget was the extent to which people-indeed, people almost universally, if there is such a concept-regarded the Chancellor's forecasts as overoptimistic. Noble Lords may recall that he said,

"I am forecasting growth of 1.25 per cent in 2010".

He went on to say:

"From 2011, I am forecasting that the economy will continue to recover, with growth of 3.5 per cent from then on".

He then used an odd expression. He said:

"To account for the impact of the global shock, I have further adjusted trend output-the productive potential of the economy. But in future years, the economy will recover towards a trend rate of growth of 2.75 per cent".-[Official Report, Commons, 22/4/09; cols. 239-240.]

Given that any Budget speech is crawled over in great detail by officials and Ministers, this strikes me as a very odd passage that illustrates serious confusion between growth in aggregate demand and growth in productive potential. The forecast may turn out to be right as regards what happens to aggregate demand, not least because of all the measures that are being taken on quantitative easing.

What will be difficult to deal with in managing the economy now and in the immediate future is what has happened to productive potential. The Government have said that it has been growing steadily at 2.75 per cent to 3 per cent. This is what the Treasury has said for the past 30 to 40 years. However, there has been a very serious, once-and-for-all drop in productive potential, not least of the City of London, on which we are far more dependent than is the case with other countries and their financial sectors. Perhaps the Minister will comment on this. The loss of productive potential as a result of the recession that we face makes it very difficult to balance what ought to be done about the level of aggregate demand in relation to productive potential, and reinforces my view that the action on monetary policy taken by the Government is likely to result in a sudden increase in inflation after a period when it is comparatively quiet. The situation is worrying; we will have to see how it works out. The overall situation seems to be recovering slightly. However, the difficulty of managing the economy in the next couple of years will be very great.

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9.06 pm

Lord Marlesford: My Lords, the Economist this week described what has happened as,

and so it is. At such a time, it is obvious that our country needs real leadership; that is, leadership with strength, competence, integrity and vision. Sadly, since Mr Brown moved into Downing Street, there has been remarkably little of any of those. The Prime Minister needs strength to face the facts. He spent months denying that there was a problem. Fuelled by high-octane hubris, he then claimed that Britain was leading the world. Shortly afterwards, he repeatedly claimed that Britain was saving the world. Until very recently, he insisted that public spending is continuing to rise. It is not; it cannot and it should not.

Funding public spending is one of the great problems that we face. Our present levels of spending are based on massive borrowing, which will amount to more than 100 per cent of GDP over the next four years. Several of my noble friends have mentioned the VAT cuts. What the Government failed to realise when they made their decision to spend £12 billion on cutting VAT was the opportunity cost. You can do different things with the same money. If I had wished to spend the equivalent of that tax reduction, I would have spent the extra money on defence and on the National Health Service. That would have given a much greater stimulus to the economy than merely putting it in the hands of domestic shopkeepers who are selling VAT-taxable goods that are largely imported, particularly in the sectors of electronics, white goods and motor cars, nearly all of which are imported-and, of course, food is not subject to VAT.

Now we are faced, on the latest estimate, with a fall in GDP this year of 4.5 per cent. The noble Lord, Lord Myners, who I am sorry to see is not in his place at the moment, indicated that he thinks that the recession may be coming to an end. My worry is that we may have got to the bottom but we may well spend a long time bumping along the bottom, which is a very uncomfortable place to be.

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