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This morning the Home Secretary refused to defend the appointment of Andy Coulson, and today the London mayor refused to defend it. The Home Secretary has been remarkably silent during the crisis despite the serious allegations that phone hacking may have interfered with criminal investigations, the serious questions for policing, and the growing cloud over the national and international reputation of British policing as a result of the crisis. She has said very little in the last two weeks. The judicial inquiry that we have called for is important, but confidence in policing is too important to wait for its results.

Why has it taken the Home Secretary so long to ask Her Majesty's Inspectorate of Constabulary to consider instances of undue influence, inappropriate contractual arrangements and other abuses of power in police relationships with the media and other parties? What are the implications of the Home Secretary's proposals to bring in American-style elected police and crime commissioners? The nearest Britain has to an elected police chief-the London mayor-did not stop these problems at the Met. If anything, he made them worse. Boris Johnson described the phone hacking allegations as "codswallop". He went on to say:

"It looks like a politically motivated put-up job by the Labour party".

What backing does the Minister think that Sir Paul Stephenson and John Yates could have expected from the mayor if they had decided to reopen an investigation that he described as politically motivated? The truth is that the elected mayor made it harder, not easier, for the Met to get to the heart of this issue. The Mayor of London is now looking forward to working with his third police commissioner in his current term. To lose one commissioner is a misfortune; to lose two looks like carelessness. Above all, it shows the risks of the closeness of the relationship between politicians and operational policing.

I come to the implications of all of this on the police Bill, which we are told is based on experience in London. In light of what has happened, I would ask the Minister for a pause in consideration of the Bill, currently due for Third Reading in your Lordships' House on Wednesday. Whatever the ups and downs of the British police force over the decades, its political impartiality has shone out to international acclaim. However, this Bill threatens a disaster. Party political commissioners to be elected in nine months' time risk undermining the very impartiality of which we are so proud. The Bill threatens the politicisation of operational policing; and it threatens a huge loss of public confidence in the untrammelled power given to party political commissioners to appoint or to dismiss chief constables at will.

The London situation is particularly worrying. As Sir Paul said in his statement today, the Met faces extraordinary challenges: the phone hacking investigation, the public inquiries, the inquiries that the Home Secretary announced today; its responsibility in counterterrorism and national security issues; and the Olympics. There is now huge disruption in the senior ranks of the force

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with the resignation of the commissioner and Mr Yates. What are the Government doing to stabilise the situation? They are introducing legislation to scrap the Metropolitan Police Authority, threatening yet more disruption. That is the last thing that the Metropolitan Police force needs now. I believe that Third Reading of the police Bill should be postponed so that the consequences of the proposed legislation can be seen in the context of this week's very disturbing events. Will the Minister agree to that?

5.26 pm

Baroness Browning: My Lords, I thank the noble Lord for his opening remarks, particularly in respect of the Metropolitan Police officers who have announced that they are standing down.

On his final point about the police and crime commissioners, the noble Lord will know only too well, as he and I have debated this in some detail over many weeks now in Committee and on Report, that there has always been a difference of opinion on this matter. The Government believe very firmly that chief officers should be held to account, on behalf of the public, by police and crime commissioners for the way in which they conduct business-not operational business-in their force. The public have been the losers in all this. They have lost confidence, and we believe that the police and crime commissioners, on behalf of the public of their police force area, are the answer to ensuring that the police are held to account both for the way in which they tackle crime and for the way in which they prioritise and carry out what the public want, which is a reduction in crime.

I suspect that there will always be a difference of opinion between this Bench and that Bench, as there was when the Bill came to the Floor of the House, so I am not in a position to say to the noble Lord, Lord Hunt, that we intend to defer Third Reading of the Bill, which has reached its final stages now, having gone through another place and had a great deal of scrutiny in this place.

I have a long list in my folder, as the House may expect, of the details of what has happened in this whole shocking affair that go back long before this year. It is not my intention to read that out, primarily because I believe that Governments of parties on both sides of the House have recognised that these problems have not just occurred in the past few months-recommendations have been made to previous Governments. Frankly, that might be the tone of another place, but I hope that we might rise above that in this House and tackle the underlying problem and the way to take the matter forward to bring back confidence in the police.

The noble Lord mentioned Neil Wallis and the fact that the commissioner has stated that he could not approach the Government with this because of a conflict of interest. That applied as much to his Government as it did to the current Government. The Prime Minister has set out very clearly the terms under which he employed Andy Coulson and has quite rightly made it very clear that if, following police investigations, Andy Coulson is found to be guilty of anything of a criminal nature, he would expect him to

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be charged and brought to justice. However, there was a clear difference between the Prime Minister's employment of Andy Coulson and the fact that the Met was investigating these matters but failed to identify to the Home Secretary, who has made her views very clear, that Neil Wallis was involved with the Met. That was denied to the Home Secretary as late as last week.

5.30 pm

Baroness Hamwee: The House will understand that the Minister cannot say anything other than what she just has about the Third Reading of the police Bill. However, in reflecting on it, as I am sure they will, will the Government reconsider the proposed timing of the introduction of their changes, particularly in London where we have these new unexpected factors in the run-up to the Olympics?

On a more detailed point, does the Minister agree that a mechanism for registering interests and hospitality that is available for inspection by everyone in public life, without investigation by the media, is of great importance? The House will understand the irony of relying on the media in this. What really matters is not what you register but what you do.

Baroness Browning: I quite agree with the principle that my noble friend Lady Hamwee has just espoused. Certainly, the investigations, and the recommendations that will come from them, will, I hope, show us the best way forward for things such as hospitality. Very often, these things come down to personal judgment. All of us in public life have to make a personal judgment about some of these issues, and sometimes we are bound by the spirit of the law as well as what is said in the law. I therefore hope that when we see the final results of the investigations, they will include codes and practices that encapsulate the spirit of the law as well as the law itself.

Lord Blair of Boughton: I declare a rather special interest. Until yesterday I was the last commissioner of the Metropolitan Police. I am now the one before that. That is rather a striking position. The last time commissioners resigned was in the 1880s; these were Sir Edmund Henderson and Sir Charles Warren. The circumstances were somewhat different; Sir Edmund resigned because the club of which he was a member in Pall Mall had its windows broken by rioters.

My question to the Minister is in two succeeding parts. First, does the resignation of two successive Commissioners of the Metropolitan Police in just over two and a half years indicate that something is gravely wrong with the political oversight and governance of that body? Secondly, does the Minister agree that there is a much wider question at hand than the grave matters now entrusted to Lord Justice Leveson? My concern is that we have a police Bill and the Winsor report, and we now have the Filkin and HMIC reports. Why does the Minister not agree that the Home Affairs Select Committee recommendation should now be put into place and a royal commission into the mission, structure and governance of the police be appointed? Every time this has been raised, the coalition Government have said, "We have not got time". I think we should take time now.

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Baroness Browning: While I hear what the noble Lord, Lord Blair, says about a royal commission, we have, since he last raised this, put into place a series of investigations, reviews and reports that I hope will throw light and transparency on to the problems that he has identified as underlying the number of commissioners who have left. We do not know at this stage how deep those investigations will go and what they will show in conclusion, but we want them to be thorough and we believe they are all-embracing.

It may interest the House to know that since the Home Secretary's Statement in another place just an hour ago the Metropolitan Police Authority has referred four cases to the IPCC. The IPCC is now considering the referrals carefully to determine how they should be taken forward. That is perhaps an indication not just of the seriousness of the investigations before us but of the depth to which they need to go, so although I hear what the noble Lord says about a royal commission, people have now been appointed to carry out these investigations and they should be allowed to carry them through to their conclusion.

Lord Harris of Haringey: My Lords, I declare an interest as a current member of the Metropolitan Police Authority and associate myself with the very positive remarks that the Minister has made about Sir Paul Stephenson and John Yates. However, given what she has just said about the referrals to the IPCC, perhaps she could ponder for a moment what the circumstances of today would have been had the Bill currently before this House been passed.

The Metropolitan Police Authority sub-committee on professional standards met this morning to consider complaints against named officers. It considered those complaints and, as the Minister has just reported to the House, it made recommendations in one instance that an officer be suspended and in other instances that matters now be investigated by the IPCC. Under the Bill which she is steering through this House, that would not happen. Any allegations against individuals would be considered by the Commissioner of Police for the Metropolis or the Chief Officer of Police outside-of course the Commissioner of Police for the Metropolis has now resigned-who would then decide whether something should be investigated or another officer suspended. Surely the interests of openness and public support for the process demand that there be some independent structure to handle complaints and consideration of whether an inquiry should be opened. That will disappear under this Bill.

Baroness Browning: Well, my Lords, again, this is a matter that the noble Lord and I have debated at some length during the Committee and Report stages of the Bill. As he will know, we have disagreed over the internal handling of minor complaints within the police force. I have not changed my mind about that, but on more serious matters involving senior officers he will know that it is not simply the case that they will not be investigated independently. Ultimately, there is recourse to the IPCC.

Baroness Harris of Richmond: My Lords, will the Minister undertake to look at the present make-up of the IPCC and ensure that its staff are of the highest

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calibre and integrity and are entirely independent? A number of former police officers are employed by the IPCC at the moment, and I want reassurance that they do not carry any past grudges against a particular officer or force that polices the IPCC.

Baroness Browning: My Lords, I hear what the noble Baroness says. I think we all want transparency and clarity. If she is saying-I am not quite sure whether I have understood this correctly-that there are question marks about the independence of individual members of the IPCC, I will certainly be happy to take that away and to have further discussion with her about how it might be addressed.

Lord Condon: My Lords, as someone who had the honour to serve as commissioner for seven years, I can say with absolute confidence that this is one of the saddest and most disturbing days in the history of the Metropolitan Police Service. While clearly a number of inquiries are in place that will undoubtedly get to the bottom of the allegations and concerns that we are all so troubled by, does the Minister agree with me that perhaps today is an opportunity in your Lordships' House to remember that the vast majority of the men and women who serve in the Metropolitan Police are honest, decent, brave people who deserve our and the public's support as they live through what is a very confusing and disturbing time for them? I in no way prejudge the outcome of any of the allegations or inquiries, but I can say with absolute certainly, and I hope the Minister will agree, that the overwhelming majority of good men and women in the Metropolitan Police are doing an honourable, brave job.

Baroness Browning: I am very happy to support the words of the noble Lord, Lord Condon. Indeed, in her Statement in the other place, the Home Secretary made a point of concluding her remarks on that basis. We are all conscious of the impact that this will have on morale, not just in the Met but rippling out more widely. There are in this House in particular former senior police officers who have served their country with great distinction. I pay tribute to all of them and to the many people of all ranks who voluntarily police their own communities by consent. It is a great strength of British policing that it is by consent. I endorse entirely what the noble Lord, Lord Condon, said. I hope that leadership will be shown in police forces around the country to minimise the damage to morale from what has happened in the capital.

Baroness Smith of Basildon: My Lords, when it became clear that there was no widespread public or professional support for the health Bill, the Prime Minister wisely stepped back and paused the Bill for consideration. What I find incredible in the noble Baroness's answers is that she does not seem to think that the events of the past couple of weeks have had any impact on, or should be considered in any way in connection with, the police Bill. Will she take this away and think about it? People across the country who support the Metropolitan Police will find it incredible if these events do not impact on deliberations on the Bill. The best thing now would be

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for the Bill to be paused for consideration, and for the Government then to come back with more effective and thought-out proposals.

Baroness Browning: My Lords, I hear what the noble Baroness says, but I am well aware, as she is, that right from the start her party has opposed police and crime commissioners. Despite what has happened over the past two weeks, there are those who have now focused on the fact that police and crime commissioners will be there to represent the public, having been elected by them, and to hold chief constables to account. While I hear what she says, many take a view exactly opposite to hers.

Lord King of Bridgwater: Perhaps I may say to my noble friend how much I appreciate the approach that she has taken to responding to what is clearly a very difficult situation. As the noble Lord, Lord Condon, rightly said, there are deep concerns of vital importance at a very dangerous time in our country, for many reasons, and there should be maximum public confidence and trust in the police. I do not know whether I am the only person in your Lordships' House who does not quite understand what is going on at the moment. Various allegations have been made, including in the Sunday papers, against Sir Paul Stephenson among others, but at the moment I do not know whether any of them are true, and I do not understand why the resignations have happened when they have. Perhaps that will become clearer later on.

I understand that Sir Paul and Assistant Commissioner Yates will give evidence tomorrow to a Select Committee of the House of Commons. I look forward with great interest to what comes out of that. I hope that the wide-ranging investigation that has been announced, along with other commendable actions, will be undertaken with all due dispatch so that people can understand that these matters are now being gripped and we will get some clarity on the situation.

Baroness Browning: I thank my noble friend for that. The inquiry by Lord Justice Leveson will be in two parts, as noble Lords will know. We hope that some aspects of the inquiry will be moved along more quickly than others. We must let the inquiries have enough time to get the outcome of full transparency and disclosure. Therefore, I am tempted not to say that I want them to be hurried up, because we need to get this absolutely right. The Home Secretary announced an HMIC inquiry today, from which she has asked for immediate feedback later in the summer.

Lord Dear: My Lords, I, too, declare an interest. As some noble Lords know, I, too, served at a senior rank in the British police service. I make no apology for revisiting an issue that I raised in your Lordships' House as recently as Wednesday last week in the debate that followed the Statement on phone hacking. My contribution can be found in the Official Report of 13 July, in column 732.

I do not believe that it is unduly repetitious to remind ourselves that leadership is important in any organisation and that in the police service it is absolutely essential. Today, even more than last week, the issue is paramount. For years, successive Governments have

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failed to address adequately the problem of providing leaders in the police in sufficient numbers to provide a critical mass that can influence events and, in particular, ethics and attitudes in the service. Today we see the Metropolitan Police-a great force, as we all know-in what is colloquially known as "a very bad place". We see that there is no clear succession plan in place for the commissioner and, worse, that there is a marked shortage of suitable candidates.

In the light of recent events, will the Minister go further today than the Leader of the House was able to go last week when he replied to me and give your Lordships' House a firm reassurance that, after the publication of the Winsor report at the end of the year, the Government will address the question of recruiting people of the highest quality into the police in sufficient numbers, and of their training and deployment into positions of intermediate and high rank on a structured basis. I venture to suggest that this can be implemented, notwithstanding the several reviews that have been mentioned. Can the Minister therefore indicate any appetite in Her Majesty's Government for such a review of leadership as a matter of urgency?

Baroness Browning: My Lords, I am grateful to the noble Lord, who, in the course of the Bill, has given advice and a very clear steer on the need for a pool of senior officers for whom leadership is a key component in their training and development. The Government take police leadership and issues affecting it very seriously. Police leadership is key to ensuring that officers across England and Wales are able to provide a high-quality service to the public. Peter Neyroud set out his views on the future of police leadership and training in his report of 5 April. The Government are currently considering the responses received during the consultation period on the report. We will set out our position in due course, and we will set out our response to the second part of Tom Winsor's report following its publication next year.

I hope the noble Lord is reassured that we are taking on board the need for leadership to be placed at the heart of policing. I have asked, during the passage of the Bill, for volunteers to come forward and advise on the development of a pool of senior officers so that, for example, when there are vacancies, there will be a good choice from as large a pool as possible of people of the right standard, qualifications and leadership skills.

Lord Clinton-Davis: My Lords, would it not be infinitely preferable for the Government, and particularly the Minister, to consider the events of the past few hours and days with some calm, and therefore to postpone reflection on the Bill until the Government have had a chance to come to a sensible reaction?

Baroness Browning: My Lords, I can only repeat to the noble Lord what I said to others who sought to identify this as a matter that should result in halting legislation on police reform and social responsibility-I believe that around the country police forces and communities are crying out for the sort of reform that the Government are bringing forward. I have not changed my mind since I made that point five minutes ago.

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Lord Prescott: My Lords, the whole House recognises the importance of the Metropolitan Police's contribution to safety and security in London and elsewhere. However, I must say that I welcome the resignation of Sir Paul Stephenson and John Yates. Both had a long and unhealthy relationship with the Murdoch press over a good period of time. Is the Minister aware of Sir Paul's statement that he did not know anything about phone hacking? Does she accept it, and is she also aware that Sir Paul visited the Guardian in December 2009 and February 2010 and asked the paper to desist in its investigations, because the explanation of one rogue reporter had been accepted by the police and presumably by him?

Does the Minister also accept, with Sir Paul complaining that officers had not supported him, that Mr Yates has admitted that there were sacks of evidence that he was not prepared to open to see whether there were other cases of phone hacking? Did he then tell the commissioner, "Don't worry, this one story is all right."? Did he tell the commissioner that the bags of evidence were available but that he had decided not to open them? Frankly, considering Mr Yates's resignation, the fact that he misled the House, the actions that he has been involved in and the fact that Sir Paul thought this man should not have resigned, did the Minister think of sacking him, because that would have been sufficient evidence to have anyone moved out of that kind of position of trust?

Baroness Browning: My Lords, the noble Lord, I know, has been a victim of phone hacking and raises important issues. That is why the judicial inquiry and the two inquiries that are being overseen by Sue Akers in the Metropolitan Police have been set up. I have every confidence in the Sue Akers inquiries. It is not for me as a Home Office Minister to intervene in police operational matters, but I hope that the noble Lord's points, which are very important, will be dealt with by the inquiries.

Baroness O'Loan: My Lords-

Defence Transformation


5.51 pm

The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever): My Lords, I would like to repeat a Statement that was made earlier by my right honourable friend the Secretary of State for Defence.

"Mr Speaker, I wish to express my condolences to the family and friends of Lance-Corporal Paul Watkins of the 9th/12th Royal Lancers, who was killed in Afghanistan on Sunday. My thoughts and prayers are with them at this very difficult time.

I wish to make a Statement on the next steps in implementing the strategic defence and security review (SDSR). This Government inherited both a national economic disaster that represented a strategic threat and a defence programme undermined by a £38 billion black hole. Without a fundamental review for 12 years,

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our Armed Forces were still largely configured for the 20th century, despite a decade of sustained operations in Afghanistan and Iraq. This failure to set out a coherent, long-term strategy for defence and to match commitments to resources effectively is one of Labour's worst legacies. However, it is not enough to deal with the mess we inherited. We need to build something better for the future.

So right from the start, this Government have been determined not to repeat the mistakes of the past and to make the difficult decisions that were ducked by the previous Government. We are determined to be bold and ambitious and build formidable, well managed Armed Forces, structured for the rigours of future conflict and supported by an affordable defence programme. The SDSR has mapped out our long-term goal for Future Force 2020. The report of the Defence Reform Unit announced to the House on 27 June was part of this process.

Today I want to set out the next phase of defence transformation: bringing the Army back from Germany, creating a better future for our Reserve Forces and delivering on our commitment to agree a 10-year defence equipment budget. I have written to Members of both Houses and the devolved Administrations whose constituencies and interests are affected by the decisions we have taken.

Commitments must match resources in order to achieve a balanced budget. As part of the preparation for this year's planning round, we have identified a number of adjustments to the defence programme. This includes rationalising vehicle acquisition to make the best use of those we have procured to support operations in Afghanistan and continuing to bear down on non-front-line costs, where we will aim to deliver further substantial efficiencies in support, estate spending and IT provision.

Against this background and as part of this overall approach to balancing the programme, I have agreed with the Treasury that the MoD can now plan on the defence equipment and equipment support budget increasing by 1 per cent a year in real terms between 2015 and 2016, and 2020 and 2021. I am grateful to colleagues, particularly the Prime Minister, for their support in this process. These and other changes will enable us to proceed with a range of high-priority programmes set out in the SDSR.

I can now give the go-ahead for the procurement of 14 additional Chinook helicopters, the upgrade of the Army's Warrior vehicles, spending on the Joint Strike Fighter, the procurement of the Rivet Joint intelligence and surveillance aircraft, the cat and traps for the Queen Elizabeth class carriers, and the development of the global combat ship. This equipment can now be bought with confidence, ending a decade of uncertainty for our Armed Forces and for industry. But similar discipline will be applied in future- we will only order what we can afford to buy.

Today I am placing in the Library the report of the review into the Reserve Forces, Future Reserves 2020. I would like to thank General Sir Nick Houghton, Lieutenant-General Graeme Lamb and the honourable Member for Canterbury and Whitstable for their excellent report. The report makes it clear that our Reserve

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Forces make an outstanding contribution to operations but have been shamefully neglected in recent years. For example, by some estimates the Territorial Army has a trained and active strength as low as 14,000. So I am pleased to announce that the Government will proceed with a £1.5 billion investment package over the next 10 years-£400 million in this Parliament-to enhance the capability of the reserves and consequently increase their trained strength.

The Government will work with employers and legislate if necessary to ensure that the reserves are more readily usable on operations. This significant investment will also build up the capacity of the reserves to contribute to homeland security, consistent with the adaptive posture set out in the SDSR. As the capability of the Territorial Army improves, this will allow a progressive adjustment of the regular/reserve balance of the Army while maintaining the land forces' capability set out in the SDSR. This will include the delivery of the multi-role brigade (MRB) structure of Future Force 2020. By 2020, if the Territorial Army develops in the way that we hope, we envisage a total force of around 120,000 broadly in the ratio of 70:30, regular to reserve. This will be more in line with comparable countries such as the United States, Canada and Australia.

Let me turn to basing. The decisions we have taken in the SDSR to reduce aircraft types, bring the Army back from Germany and form the Army into five multi-role brigades enable us to rationalise the defence estate and dispose of high-value sites no longer needed. The security of the nation and the requirements of defence were paramount in our analysis but we have also considered the impact of changes on local communities, the impact on service personnel and their families, and the current pattern of the Armed Forces in Britain. Army brigades currently stationed around Catterick and Salisbury will make up three of the five MRBs. The other two MRBs will be based on the east coast of England, centred on Cottesmore, and in Scotland, centred on Kirknewton, south of Edinburgh.

The MRB centred in Scotland will require a new training area, and positive discussions are being taken forward with the Scottish Executive. Two major units and a formation headquarters will be based at Leuchars. Consequently, the Typhoon force due to be built up there will instead be built up at RAF Lossiemouth. Other MRB units will be moved into Glencorse, Caledonia, Albemarle Barracks and eventually Arbroath, since over time we intend to bring the bulk of the Royal Marines together in the south-west. We are also planning to place Army units in Kinloss in around 2014-15. Taken together, this represents a significant increase in the defence footprint in Scotland of well over 2,000 posts. This is in line with the Scottish tradition of supporting our Armed Forces and a recognition that these are United Kingdom forces under the Crown, protecting the citizens and interests of this United Kingdom.

With the move to five multi-role brigades, we have concluded that 19 Light Brigade in Northern Ireland will be disbanded. Other units returning from Germany will move into those bases vacated. We remain committed to maintaining a permanent military garrison in Northern

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Ireland, and 160 Wales Brigade will remain in Brecon. We will retain St Athan at its current size and intend to increase its usage. RAF Marham will remain as a base for Tornado GR4. More details of these and other estate-related decisions are in the Written Statement I have laid today.

The planning work, including the investment required to adapt sites, will now get under way based on this strategic direction. It will involve consultations as appropriate with local communities and other statutory obligations we will need to fulfil. I am very conscious of the uncertainties that these changes will cause for service personnel and their families. Let me reassure them that the majority of the moves I have announced today will take place after 2015. In both basing and reserves, we have sought wherever possible to strengthen the strong and natural links between local communities and the Armed Forces. I do not underestimate the importance of these ties in underpinning the military covenant.

The overall package I have announced today is good news for our Armed Forces and means that they can look forward to the future with renewed confidence because the defence programme I have announced is underpinned with real resources. This investment in people and equipment is not the wish list of the past but is certainty for the future. I commend these decisions to the House".

My Lords, that concludes the Statement.

6.03 pm

Lord Rosser: My Lords, on this side, we, too, wish to express our sincere condolences at this very difficult time for them to the family and friends of Lance Corporal Paul Watkins who was killed in Afghanistan the other day.

I thank the Minister for repeating the Statement made a few minutes ago in the other place by the Secretary of State for Defence. It covers a number of big policy areas: the RAF basing review, Reserve Forces, the financial settlement and cuts to the Regular Army. The Statement, as did the strategic defence and security review, repeats the Government's line about the financial position they inherited, which arose as a result of a global economic recession which was not sparked off in this country. The Statement refers to a £38 billion black hole, but that figure assumes a flat line in cash terms in the defence budget over the coming years; in other words, a decline in real terms, which is unlikely. It also assumes that every commitment, including equipment, will be adhered to.

The National Audit Office 2009 report into major projects at the Ministry of Defence stated:

"If the Defence budget remained constant in real terms, and using the Department's forecast for defence inflation of 2.7 per cent the gap would now be £6 billion over the next ten years. If ... there was no increase in the defence budget in cash terms over the same ten year period, the gap would rise to £36 billion".

I appreciate that this Government have managed to reduce the rate of growth during their period in office, but presumably even this Government intend to ensure that growth in the economy, from which additional resource can be provided, returns at some stage in the not-too-distant future.

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The recent strategic defence and security review, which seems, with every MoD Statement, to be becoming less related to reality and expected reality, stated:

"Further work is required to determine the numbers of personnel that will be required to man the 2020 Force Structure. The Defence Reform Review, the review of Reserve Forces, further efficiency measures and changes in the policy context will all need to be taken into account at the next Strategic Defence and Security Review, which will set out detailed plans for the five years beyond 2015 ... We will also, for now, assume that by 2020 we will require a Royal Navy of 29,000 personnel, an Army of 94,000 and an RAF of 31,500".

Yet the Government have announced cuts to the Army of 17,000-a sixth of the entire force-in just 10 months. However, in opposition, the Government said:

"In the real world the only logical conclusion you can come to is that the army is already too small".

The SDSR referred to members of the Reserve Forces performing outstandingly well in Afghanistan, and we share that view and pay tribute to the commitment and dedication of our Reserve Forces and to the real contribution they play in protecting our own citizens and the lives of others in operations abroad. The SDSR also referred to the six-month study being undertaken into the future role and structure of the Reserve Forces and the Statement today includes the Government's response to that review. We, too, would wish to place on record our thanks to General Sir Nicholas Houghton, the Vice-Chief of the Defence Staff, and his two colleagues who undertook the review. Will the Minister say whether the review suggested that the reductions in the Regular Forces should be made in the light of their recommendations on the Reserve Forces?

The Government have said that they will be undertaking a strategic defence and security review every five years. They now appear already to be making policy decisions on the structure and composition of our Armed Forces for the five years between 2015 and 2020, the period to be covered by the next defence review. What then are the strategic decisions and goals that have been made and determined for the five years from 2015 to 2020 which the decisions announced in the Statement today are presumably intended to deliver? Is it the Government's approach that our strategy for the five years from 2015 to 2020 will be determined by the Armed Forces that we have decided we will have rather than our required defence strategy for those years being determined first and then consideration being given to how to provide the Armed Forces needed to support and deliver that strategy?

If the Reserve Forces are to constitute some 30 per cent of our forces, rather than less than 20 per cent, to what extent will they become stand-alone units? There will be concerns if bespoke standing units of reservists were to become the norm since this could increase the commitment required from civilians and therefore potentially hinder recruitment. Will this approach not also undermine the one army concept? It appears as though the review highlighted the cost of Reserve Forces compared with the cost of Regular Forces. In view of the proposed increase in the percentage of our Armed Forces who will be reserves and the significant reduction in regulars, how do the Government evaluate the abilities, experience and expertise of our Reserve Forces against those of the Regular Army personnel?

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Do the Government consider them less effective, more effective or of equal worth and value person for person? How is such an assessment made and by whom? The boost to our Reserve Forces is, it would seem, intended to make up for the fact that our Regular Forces are being reduced.

The Statement, referring to the Army, indicated that two major units and a formation headquarters will be based at Leuchars. Does this mean that RAF Leuchars will close? Will the Minister for clarity say how many personnel and what personnel are currently based at Leuchars and how many personnel and what personnel will be based at Leuchars once these changes have been implemented? What will be the cost of that change, who will be paying for it, and how long will the time lag be between the moving out of present personnel from Leuchars and the moving in of the new personnel? What is the Government's assessment of this change on the local economy?

The Statement referred to the savings that would be realised by the reduction in regular personnel. It stated that money would therefore become available for reinvestment in our Reserve Forces and also for the construction of additional Chinook helicopters, which was an undertaking the Prime Minister gave. We welcome any additional investment in our Armed Forces, and not least the £1.5 billion investment package over the next 10 years to enhance the capability of the reserves, and the increase in the defence equipment and equipment support budget by 1 per cent a year in real terms-though we note that that is not until 2015-16. Can the Minister confirm, though, that this means there will be no increase in real terms in the rest of the core defence budget from 2015-16 to 2020-21?

We are seeing additional resources having to be devoted to our operations over Libya, which is being paid for from the general reserve, and also the need to finance the additional Chinooks promised by the Prime Minister. To conclude, what meaningful assurances can the Minister give that today's further announcements, which we will certainly wish to study in far more detail than we have been able to so far, have not been influenced by financial considerations, but purely by military considerations?

Lord Astor of Hever: My Lords, I am very grateful to the noble Lord. He asked me lots of questions which I was writing down as fast as I could. I will do my best to answer as many as I can, and if I do not answer them all, I undertake to write to him.

The noble Lord first asked about the SDSR. In announcing the SDSR, the Prime Minister was clear that in his view the Future Force 2020 structure would require real year-on-year growth in the defence budget beyond 2015. The announcement today that the MoD can plan on an increase in equipment and an equipment support programme in the years before the spending review settlement means that the department has a firm base for its longer term plans. This will enable the department to make better value-for-money decisions, and makes clear this Government's commitment to deliver the forces necessary to meet our future commitments.

The noble Lord then asked if there are going to be reductions in the regular Armed Forces because of

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cuts in reserves. We are confident that with the additional investment, the reprioritisation and efficiency improvement and the planned withdrawal from combat operations in Afghanistan we can rebalance the Army in particular, so that we can have a whole force of around 120,000 with a ratio of about 70 per cent regulars to 30 per cent Territorial Army. This will allow us to maintain an enduring commitment at brigade level as described in the SDSR. As the Secretary of State has said, the role of the Territorial Army has been greatly undervalued too often in the past. It will continue to have an important role in the Army.

The noble Lord then asked about strategic decisions and the Future Force 2020. We are confident that with the additional investment, the reprioritisation and efficiency improvements and the planned withdrawal from combat operations in Afghanistan, together with a rebalancing of Regular and Reserve Forces, we can generate the forces required to achieve the objectives in the SDSR, including the ability to maintain an enduring commitment at brigade level as described in the SDSR.

The noble Lord asked about the expertise of reservists. I have some personal experience: I was for a number of years colonel of a Sapper TA regiment. They had expertise of a very high order, they were very highly trained, and whenever they went out to Afghanistan they were very much respected by the Regular Forces with which they trained. This is an issue that we will be working on. Clearly, recruiting, which the noble Lord mentioned, is vital. A recruiting and training surge will be needed to meet the demands of the revised reservist roles, and to provide for more viable unit strength. The establishment of an effective recruiting and training mechanism to handle the potential surge requirement will be an essential precondition of success if reserve manpower decline is to be arrested, initially, and then increased. This should include rapid changes to existing processes and regulations to make it more attractive for ex-regulars to join the reserves on leaving.

The noble Lord then asked whether RAF Leuchars is closing. Leuchars is not being closed. It will become a major Army base. Following the SDSR, the Royal Air Force needed three, not four, RAF fast-jet bases. It could not make military sense, and would be uneconomic, to close RAF Marham or RAF Coningsby. A decision had to be taken that was best for defence as a whole. With the Tornado force drawing down at Lossiemouth, we concluded that we could build up the Typhoon force there rather than continuing at RAF Leuchars, enabling Leuchars to be utilised for the MRB to be based in Scotland.

The noble Lord mentioned the Chinooks, and I can confirm that we will be ordering the 12 plus the two very early on in the autumn. He welcomed the 1 per cent increase and asked if would it affect the rest of the defence budget. Her Majesty's Treasury has agreed that we may plan on the basis of an uplift of equipment expenditure, and equipment support year-on-year of 1 per cent above inflation in the years beyond the current spending period. Finally, all these decisions were taken solely on military considerations.

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6.17 pm

Lord Lee of Trafford: My Lords, first, I join these Benches in the earlier tribute. Very recently, the Leader of the Opposition offered talks with the coalition Government on the future of financing long-term care in this country. I suggest that, important as long-term care is, defence is of equal importance. Would it not make sense for the coalition Government to attempt to talk to the Opposition about getting a unified approach to defence spend? That is my main point.

I would like to put two smaller points to my noble friend. First, will he confirm that the proceeds of the sale of valuable defence sites and buildings will be retained within the defence budget? Secondly, can he indicate the total costs of withdrawal from Germany and the necessary rehousing of those units in this country?

Lord Astor of Hever: My Lords, I am grateful to my noble friend for his tribute. As for as his question about opening discussions with Her Majesty's Opposition, he has raised this before; I am very happy to take it back to my department and come back, and I will let my noble friend know what the answer is. As far as proceeds of defence sales are concerned, the answer is yes: they will remain in the MoD budget. As far as the total cost of withdrawal from Germany is concerned, I do not have any figures on this at the moment. We are working on it, and as soon as I have some figures I will let my noble friend know.

Lord Stirrup: My Lords, having served as honorary colonel of a TA Royal Engineer regiment I confirm what the Minister has said about the TA's expertise and utility. However, in repeating the Statement made in another place the Minister referred to models from other countries: Canada and the United States. Part of the reason for the success of the reservist element of their forces has very much to do with the culture of those countries and the background from which those people come. It has to do with the way that reservists are honoured and celebrated within society; the view that ordinary citizens and employers across the board take of their service.

I do not for one moment suggest that we could not have a similar culture in this country but it would be a change from that which we currently have. As we recognise, change in culture is a difficult thing to do. It takes time, commitment and a sustained effort across that period of time, and it has to be led from the top. What strategy does the Minister have? What strategy do the Government have for this transformation of culture, which will be essential if the very demanding recruitment targets he has outlined today for the TA have any hope of being met in the future?

Lord Astor of Hever: My Lords, the noble and gallant Lord makes an excellent point about the culture of the reserves in the United States, Canada and other countries. We are aware that this area will need a lot of work and we are determined to make this whole issue of the reserves successful. We will work on it. Part of this issue is mentioned in the booklet. I very much look forward to discussions with the noble and gallant Lord about any further ideas on how we can take this forward.

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Lord Davies of Stamford: My Lords, given the shortage of time, let me focus on just the procurement issues. My noble friend has dealt with the £38 billion myth. I am very sorry that the Government are still descending to using it. It is of course a completely bogus figure based on, as he said, quite unreasonable assumptions. It is really a very silly, as well as a very disingenuous, piece of propaganda.

Apart from that, perhaps I may surprise the noble Lord-because I believe in giving credit where credit is due-by congratulating him. I do not think that 1 per cent in real terms is enough. I would rather have 1.5 per cent, which is what we had when we were in Government. Of course, the sustainable long-term growth rate of the economy is generally reckoned at being 2.25 per cent. Nevertheless, 1 per cent is considerably better than what we have now got. The noble Lord and his ministerial colleagues are to be congratulated on a reasonably successful outcome on what must have been a very difficult negotiation with the Treasury and, no doubt, with No. 10 Downing Street, but I do not think that they understand much about military matters these days.

I do not resile at all from the critiques I have made in the past, particularly about the disappearance of carrier strike capability, but the announcements that the Minister has made today on procurement are extremely important. I am delighted about the Warrior upgrade. That was the only project, which was a priority of mine, that I failed to get through in my time of office and would have been my first priority after the election if we had won it. The Rivet Joints are an enormously important intelligence asset and it is great news that that is going through.

Fourteen Chinooks is not as good as the 22 which we were going to order but, again, it is a good deal better than nothing, which has been happening up until now. Will the noble Lord say the projected in-service dates for these Chinooks? Obviously, there will be different dates. What are the in-service dates for the Rivet Joint aircraft? What are the expected in-service dates for the new upgraded Warriors with the 45 millimetre cannon and so forth? Will he say how many of the Rivet Joint aircraft and how many of the upgraded Warriors the Government intend to procure?

Lord Astor of Hever: My Lords, I am very grateful to the noble Lord for his support. Perhaps I may correct him on what he said about the Prime Minister. I have had a meeting on defence issues with him and I can assure the noble Lord that he takes the whole issue of the Armed Forces and equipment very seriously. Defence of the realm is the first duty of a Government, which he takes very seriously. I am sorry to disappoint the noble Lord there.

The noble Lord welcomed the Warrior upgrade and the Rivet Joint. I can confirm that we will order three Rivet Joints. I do not have the in-service date for the Chinooks. We are very near a point where we can go ahead with the ordering and as soon as I have the in-service date I will make a point of writing to the noble Lord to let him know the answer to that.

Lord Freeman: My Lords, my noble friend the Minister, I am sure, will realise that this Statement will be warmly welcomed by the Reserve Forces, in particular

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by the Territorial Army, which over the past decade has seen a dramatic reduction in their numbers and their utility in the field of conflict. Will my noble friend convey to the Ministry of Defence and General Houghton-I, together with my colleagues pay tribute to the diligence of his work over the past two years in this regard-to please look at the skills required by the Reserve Forces in conjunction with the demands not only of employers but also their willingness to identify the skills that could be available? I see the Reserve Forces as playing a crucial role not only in homeland security but abroad within specific skill sets.

Lord Astor of Hever: My Lords, I am very grateful to my noble friend for his question. I agree that we have seen major reductions in the TA recently. I will convey his congratulations to my department and to General Sir Nick Houghton and his co-members for their excellent work on Future Reserves 2020. I know that they spent hours and hours agonising about this review. I will also ask my department to look at the issue that he raised about the skills required and how we can work on that with employers.

Lord Maginnis of Drumglass: My Lords, while welcoming the general trend of this Statement-it is 30 years since I was involved actively in military matters-will the Minister clarify exactly what he is saying in terms of Northern Ireland? As regards recruitment in Scotland, I read that certain things will happen,

At the same time, I think I read that there will be a virtual disconnection between the military in Northern Ireland and pertaining to Northern Ireland in the future. That is totally unacceptable. There is a tradition-I am proud to say that I was part of that tradition for a number of years-in Northern Ireland, which was highlighted during the Troubles and during the invasion of Normandy. Most recently, when I visited troops in Afghanistan, the commander in charge of Camp Bastion said of the 2nd Battalion Royal Irish that they have achieved more in four months than would have been expected of them in a full tour. Is that going to be sacrificed? Are we going to have another instalment of what I would call "Heathism"; that is, detaching Northern Ireland from the rest of the United Kingdom? If that were to happen, the resentment in Northern Ireland among those who have served faithfully for so many years and at such a cost would be deeply felt.

Lord Astor of Hever: My Lords, I am well aware of the tradition in Northern Ireland of support for our Armed Forces. I served in Northern Ireland as a soldier and I am well aware of that. Indeed, my driver came from Northern Ireland. I can confirm that we have no wish whatever to detach Northern Ireland from the rest of Britain. The Statement makes clear that other Army units returning from Germany will move into those bases that were vacated, and we remain committed to maintaining a permanent military garrison in Northern Ireland.

Lord Burnett: My Lords, I apologise to the House for missing the very earliest part of the Statement, which I welcome. Our reservists do outstanding work.

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Will my noble friend confirm that the reserves will continue to welcome retired servicemen into the reserve service? Will the outcome of this Statement make the reserve service more attractive to former servicemen? I would remind the House that Corporal Croucher, George Cross, a Royal Marines reservist, was a regular Royal Marine, as was Corporal Seth Stephens, Conspicuous Gallantry Cross, a special boat service reservist who was killed in action in Afghanistan last year.

Lord Astor of Hever: My Lords, I am very grateful to my noble friend for his support. Service personnel, the Veterans Agency and the single services are working together to simplify their business processes and ensure that their advice and guidance help to improve transfer between commitments; that is, to make it easier for transfer between the regulars and the reserves. A service-terms and conditions-of-service subject-matter expert has been appointed for each service to advise and educate those involved. Work continues to look at ways of streamlining the processes. My noble friend makes a very important point: we want to get as many former regulars into the reserves as possible.

Lord Bilimoria: My Lords, the Minister has outlined some very welcome news about the reserves in particular and the increase in spending by 1 per cent in real terms. When I speak to senior people in government, the answer to my first question about defence is, "There's no money". When I speak to senior service officers, they talk about "mitigating" and "removing capability". This Statement shows that the Government are willing to listen. With Libya, we have seen that we could have done with an aircraft carrier, that we could have done with Harriers and that we could have done with the Nimrod, yet the Nimrod was just dismantled. Was it really worth doing that? Was it not short-sighted? What if something happens in the Falklands? What about our nuclear submarines having AWACS cover? Have we not learnt? Have we been penny-wise and pound-foolish? Have we put means before ends?

Lord Astor of Hever: My Lords, I am very grateful to the noble Lord for his support. We inherited a very difficult situation; it was not perfect. We tried to do the very best we could under the circumstances. I did not feel comfortable with a lot of the cuts, but under the financial circumstances, we had no alternative.

Lord West of Spithead: My Lords, I thank the Minister for the Statement. It is highly complicated and will take a lot of study before one can give very sensible comments on it. In general terms, I have no doubt that we need a greater increase in defence spending and I would hope that both sides of the House felt that was appropriate in the future. I am very supportive of the withdrawal from Germany-it should have happened previously; it has cost us a huge amount of money having those forces there. I like the basing of the marines down in the south-west. My question is brief, just for clarity. The Statement said:

"I can now give the go ahead for ... the cat and traps for the Queen Elizabeth class carriers".

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Cats and traps is shorthand for catapults and arrester wires. Do I assume, because the Statement seems to say it, that we are intending to put catapults and arrester wires on the "Queen Elizabeth" and the "Prince of Wales"?

Lord Astor of Hever: My Lords, I agree with the noble Lord that this is a very complicated issue which will take a lot of study. I am very happy to organise further briefings for noble Lords if they would like on any particular issue, be it on the reserves or basing or anything else. I am grateful that the noble Lord supports the increase in spending, albeit of 1 per cent, which will enable us to do quite a lot. I can confirm that the cats and traps will be for one carrier-at the moment, we do not know which one it is. Whether to equip the other carrier with them will be a decision for the 2015 SDSR.

Lord Grenfell: My Lords, perhaps I may put a question to the Minister on reserves. Any declaration of interest that I might make would probably be otiose in light of the statute of limitations, since it is 55 years since I joined the Territorial Army. I joined the very happily named Queen's Westminsters and spent nine years feeling that we were doing something useful. Of course, in those days, we had already done two years' service, which meant that, when we arrived in the territorial battalions, we knew a little bit about what we were expected to do having had some training and felt that we were ready for anything. That may partly answer the very good point made by the noble and gallant Lord that the culture has changed. In those days, the culture in the country was much more receptive to the idea of territorial service.

I welcome what was in the Statement that the Minister has repeated to us. It is true that, as the decades have passed, as the noble Lord, Lord Freeman, pointed out, the Territorial Army has suffered from the depredations of the Treasury. Therefore, I welcome what the Statement says about its strengthening. It is right that we should try to bring the regular-to-reserve ratio further into balance; I think 70:30 is right. I spent many years in the United States and was very impressed by the fact that there was a culture there which made that ratio possible. It is possible to recreate it. Are the Government fully aware of the enormous value of service in the reserves, not just for an increase in military capacity but also because of the social and community value that it represents? It provides young people of both sexes with experience that enhances their working-life prospects. Will the Minister assure us that, in the important recruitment that will have to take place if we are to achieve that balance, sufficient resources will be devoted to the recruitment programme? Our ability to reach 70:30 will depend on us being able to convince a sceptical public that service in the reserves is worth while. Her Majesty's Government would gain greatly from paying attention to the social and community value of the reserves and from making sure that the regular forces are fully engaged in helping in that recruitment drive.

Lord Astor of Hever: My Lords, I am grateful to the noble Lord for his contribution. I know what a distinguished officer he was, both in the regular Army

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and the reserves. Indeed, the noble Lord looked very military in his regimental tie laying a wreath at the Cenotaph yesterday.

I am grateful for the noble Lord's welcome of the 70:30 ratio from his experience of living in the United States. Of course, we understand the value of service in the reserves and will do our very best to ensure that sufficient resources are given to the reserves to make this all possible.

Lord Mayhew of Twysden: My Lords, in the rebalancing of the Army into multi-role brigades, is any role to be retained for the main battle tank? If there is, where will the training for it be able to be done, one wonders, with the loss of the training grounds in Germany. If there is not to be any role for it, what consequential plans are there for those regiments at present equipped with or trained for the use of Challenger?

Lord Astor of Hever: My Lords, I can confirm that we will have fewer numbers of Challenger 2 tanks, but we very much value their use. There is of course the training area on Salisbury Plain-where I spent many happy hours. We are also in discussions with the Scottish Executive about the use of some land in Scotland for training.

Local Government Finance


6.38 pm

The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham): My Lords, with the permission of the House, I shall now repeat a Statement made by my right honourable friend the Secretary of State for Communities and Local Government. The Statement is as follows.

"I would like to update the House on the Government's review of local government finance. The past year has seen the beginnings of a long-awaited and much-needed shift in power: from national to local; from Whitehall to the town hall. But if localism is to reach its potential, the new legal freedoms must be matched by freedom over finance. This is not a new idea. Reviews from Layfield in the 1970s onwards have emphasised that increasing local financial control is key to strengthening local democracy.

Strangely, the previous Government did nothing to reform the system, despite a local government finance Green Paper, a local government White Paper, the balance of funding report and the Lyons inquiry. They did not even bother to issue a formal response to Lyons' 400-page report.

By contrast, the coalition Government are delivering radical change. During the past year, we have begun the phasing-out of ring-fencing, freed up £2.1 billion from restrictions and simplified more than 90 separate funding streams to fewer than 10. This is real progress. But today we are committed to going further still: to restoring our councils' financial autonomy, while ensuring a fair deal for all communities whether in the north or the south.

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In the first phase of our review of local government resources, we have focused on local retention of business rates. As the House will know, the Government have already taken action on business rates. We have introduced a more generous small business rate relief scheme; we are making it easier to get that relief without filling in paperwork; and we have scrapped the unfair and regressive ports tax. Now we are looking at what business rates mean for councils themselves.

Councils in England collect some £19 billion of business rates each year. No sooner has the cash come in than it is gathered up by the Treasury, and then redistributed to councils according to a complex formula. This approach has major shortcomings: it denies councils control over locally raised resources; it deprives them of the certainty they need to plan their finances for the longer term; and it creates a disconnection between the success of local businesses and the state of their own finances. Surely it is common sense for the system to encourage councils to boost local jobs and growth. Radical change is needed, and councils themselves agree.

In a major step for transparency, my department is publishing today every representation made to the recent local government finance settlement. There is a common theme. Councils believe the current system is complex and opaque. They have to talk down their successes, and talk up their difficulties, in order to secure the best possible deal from Whitehall. To address this, mere tinkering-adjusting the formula here, amending the area cost adjustment there-will not be enough.

This Government are determined to repatriate business rates. Today, I am publishing a consultation outlining our proposals. No more will proud cities or historic counties be forced to come to national government with a begging bowl. Councils will have greater control over cash, helping them plan for the longer term. Tax increment financing will let them borrow against anticipated increases in rates, giving them a new way to invest in infrastructure, from transport projects to regenerated town centres. Councils should see a direct link between the success of local businesses and their own cash flow. This will create the right incentives for them to work closely with local businesses.

I am determined that the transition to a new scheme must be both responsible and fair. The Government's overriding priority continues to be deficit reduction. In the spending review, we have set out the level of resources available for local government for the next four years. In the interests of financial stability, for the first two years of the retention scheme we intend to stick to these spending plans, but we will allow authorities to benefit from any growth in business rates above forecast levels. Beyond this spending review period, we will look to align more closely local authority functions and total business rate income.

It is also of paramount importance to ensure our proposals on local government finance are balanced, fair and equitable, creating the right incentives for all areas to grow while protecting the most vulnerable. We propose a number a measures and safeguards to achieve this.

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First, poorer places will share in the increase of growth with more prosperous areas. Those places with greatest dependency should, and will, continue to receive support while being allowed to keep the products of enterprise, and those places which raise the greatest sums through business rates should expect to make a contribution. A system of tariffs and top-ups will make sure that we start from a fair base. As the Deputy Prime Minister told the Local Government Association last month, we will ensure that no one will be worse off when the new system is introduced than they would have been under the old system.

Secondly, as the House will well know, some areas have strong natural economic advantages such as high-value industries or concentrations of skilled workers. There will be no cap on the amount of business growth councils can benefit from. A council will always be better off as a result of growth. But if an area benefits disproportionately from growth in business rates, we propose to introduce a special local levy to capture a share of that benefit. The money raised would be used, in the first instance, to fund a safety net, and this safety net would protect authorities experiencing exceptional shocks to their business rate take.

Thirdly, our proposals include the option of resetting the whole system. If councils no longer had enough resources to meet local needs, the Government would be able to recalculate the level of tariffs and top-ups across the whole system.

Fourthly, support for mandatory and discretionary rate relief will continue. Rate relief to the needy will be unaffected. National discounts and rate relief will continue to be supported, meaning no adverse change to such groups as charities, amateur sports clubs, voluntary groups, those in hardship and eligible rural or small firms.

Finally, we have reflected carefully on what our new system means for business. Businesses-the creators of local jobs and wealth-need stability in this process. They need certainty to plan for the long term. So let me spell out in no uncertain terms that local firms will see no difference in the way they pay tax or the way the tax is set as a result of these changes.

I am placing in the Library a plain English guide so that honourable Members' constituents can understand what our proposals would mean for them. We intend that business rates should be repatriated in 2013. We will bring forward a Local Government Finance Bill to give our proposals legal effect.

The publication of this consultation begins a debate that I hope will be wide-ranging and constructive. I want to work with all local authorities, representative groups and political parties and build a consensus for lasting change. That consensus will be built on, putting power back in the hands of local councils and communities; supporting local jobs and local firms; and creating the conditions for renewed, sustainable economic growth".

My Lords, that concludes the Statement.

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6.47 pm

Lord McKenzie of Luton: My Lords, I thank the noble Baroness, Lady Hanham, for repeating the Statement on local government finance and for the offer of a plain English guide to be placed in the Library. I also thank her for the prospect of another local government Bill which might keep us busy for a few days.

In a recent publication on local government finance, the Smith Institute observed that local government finance has been a backwater for most national politicians. Since the poll tax debacle, Ministers have been cautious about reforming local taxation, not least because the issue is seen as divisive and complex. The challenge is to seek a lasting consensus on how to change the system in a way which satisfies councils which are rich as well as those which are poor. Indeed, that is the test for these proposals.

That is why we will look closely at the Government's announcement because the devil is, of course, in the detail. We should make it clear, as we did in another place, that we back a funding system for local authorities which supports jobs and growth and encourages enterprise. We support the taking forward of tax increment financing and the continuation of small business rate relief, and we welcome the publication of the responses to the consultation. Yes, we support localism-but true localism, which is why we have opposed the raft of centralising powers that the Secretary of State has taken to himself in the Localism Bill. We also support localism in matters of finance.

We hear today that the proposals on local government finance are balanced, fair and equitable, I think was the term, but the precedents are not good. Where, for example, is the fairness in the cuts we are seeing right across the country to home helps and care services, to street cleaning and bin collections? The Statement reiterates what the Deputy Prime Minister told the LGA last month: no one will be worse off when the new system is introduced. Even if that is the case at the point of introduction-and we are not all reassured by cast iron promises from the Deputy Prime Minister-what will the position be at the end of year one, year two or year three? Perhaps the Minister can tell us.

The Minister tells us that the spending review totals are to remain unchanged. Therefore, if there is a fixed pot of money for any council to gain, logically others must be losing out. Can the Minister say what assessment has been made of winners and losers, and how this squares with the assurances of the Deputy Prime Minister?

We recognise some of the weaknesses in the current system. However, a local government finance system that does not reflect needs and available resources could have disastrous consequences for some councils, while others would enjoy large surpluses compared to existing budgeted expenditure. It remains to be seen whether the proposed detailed system of tariffs and top-ups is a fair mechanism to ensure that all local authorities have resources that are adequate to deliver services that are needed and that will allow all communities a chance to prosper. Our fear is that the poorest areas, with the most deprived communities and the smallest business base, will again miss out. Those very communities

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that saw their area-based grant cut, putting services like children's centres at risk, through a finance settlement that singled them out for the heaviest cuts, will now lose out on the localising of the business rates.

We know that currently the formula grant is financed significantly by local business rate income, and the latter is forecast to grow as the grant is forecast to fall. The Government are planning to hold back something like £2 billion in local business rate income to give effect to these cuts. Business rate localisation would clearly be one way of stopping this. However, what will happen to the surplus business rate, amounting to some £2.2 billion in 2014-15? Will it now be available to local authorities or will it be retained centrally? Can the Minister tell us the forecast baseline above which local authorities will be able to benefit from growth in business rates? The Statement refers to an area benefiting disproportionately from growth in business rates, which will be subject to a special local levy to capture a share of the benefit. How will it be determined that an area is benefiting disproportionately from growth in business rates?

Cutting funding to areas with the highest need does not free councils from central control or empower them. It stops them from doing the things that their communities need of them. If people do not believe that their council can make a difference, it does not encourage civic activism; it undermines it and fuels a sense of disengagement from the political process. We want a funding system that supports jobs and encourages enterprise. However, as the Minister recognised, not every area has the same ability to attract investment and new businesses. Not everywhere can be like Westminster or the City of London. Areas with the highest levels of deprivation and the weakest business base need the most support; they do not need funding cuts. We will support incentives to boost enterprise and put councils and communities in control, but fairness must be at the heart of the system.

Baroness Hanham: My Lords, I thank the noble Lord for his comments and contributions. From the outset, I remind noble Lords that this is a consultation. Therefore definitive answers may not be pouring out of my mouth, although I will do my best to answer as much as I can about the consultation. However, technical documents will be ready by August to back up the consultation, so some of the points will be considered there.

I am grateful to the noble Lord for his indication that he supports funding for jobs and enterprise. Naturally that is what we are trying to achieve. I am also glad that he supports the tax incentive finance, which will come about as a result of business growth and will be a useful area for borrowing.

The noble Lord referred to the fairness in cuts. The whole process will start in 2012. At the start of this spending review, for the first two years there will be no change at all. Only in year 3 will we begin to see the changes with the business rate being kept within the local community. We are proposing that in years 1 and 2 it will stay as it is, and in year 3, instead of the local authorities collecting the business rates and passing them on to the Treasury, they will collect the business rates and, under an

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arrangement, pass some of them on to the Treasury. The rest will be held by local government in year 3 and subsequent years.

With regard to the tariffs and top-ups, the control totals will not change within the four-year spending review. However, in areas where we believe the business rate is in excess of those totals, a tariff will be levied that will help poorer areas, about which the noble Lord spoke in terms of top-ups. There will be a swing of money between one and the others, so the poorest areas will be given the help that they need.

The £2.5 billion that will be held by local authorities will be directed to other local grants. It is suggested that the levy, which again is a matter for consultation, will be on top of the business rates, from which local authorities make what is called in the consultation paper a disproportionate amount. They will then share that through a top slice with other authorities.

Lord McKenzie of Luton: The Minister answered a number of the questions I raised. Could she tell us how the test of disproportionately benefiting from business rates is going to be set?

Baroness Hanham: My Lords, I think I am going to direct the noble Lord to the consultation, because this is one of the areas where we want to talk to local authorities to understand the nature and impact of that issue. At the moment, I do not think I can give a substantive answer, but it will be in an authority that has access to far more business rates than perhaps other local authorities comparably.

Lord Tope: My Lords, I thank the Minister for repeating the Statement in this House, and also for the plain English guide being put in the House of Lords Library, which I am sure will sell like hot cakes before the summer holidays. I also congratulate the Minister on resisting the temptation to start answering the questions posed in the consultation document before that document has actually been seen by those being consulted.

I warmly welcome the commitment of the coalition Government to start delivering on a promise that I think has been made by every opposition party since the Conservative Government first nationalised business rates over 20 years ago. It is understandable that local authorities will want to look at the detail and consider particularly the proposed equalisation scheme. Does the Minister agree that, when they have done so, this proposal is likely to receive a warm welcome throughout the country by councils under any political control? Does she agree that probably the repatriation of business rates is arguably the best boost to business regeneration that this Government-certainly her department-can provide? Finally, will she confirm that the setting of the tax rate will continue to be done centrally in line with the retail prices index; and can she say whether, at any stage in the future, the Government propose to introduce an element of localisation into the setting of the tax rate?

Baroness Hanham: My Lords, I thank my noble friend Lord Tope for his kindly and warm welcome for this consultation document. I agree with him that local government will be content with this proposal;

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whether it is content with all the details will come out in the consultation. As long as I have been involved in local government, and since the rate began to be set centrally, local government has looked to having the business rate repatriated-in that it does not go out and come back in again but is contained within local authorities. The repatriation of the business rate is a good thing. The setting of the rate for the grant will continue to be set centrally, for the time being at least. As far as I know at the moment, that will continue to be the situation.

Lord Beecham: My Lords, to follow the pointed last question of the noble Lord, Lord Tope, does it not make rather a nonsense of the fine phrase about "freedom over finance" when all that is being restored is the right to retain business rates at a level decreed by the Government, with no capacity to vary it one way or the other at the local level? Is it not also the case that the vaunted reduction in ring-fencing, which in principle is to be welcomed, really amounts at present simply to more freedom to spend less and to incur the odium of taking the decisions over cuts in services that the Government are imposing on authorities through the significant, massive and unprecedented reduction in the government grant?

There is a sentence in the Statement that says:

"Beyond this spending review period, we will look to align more closely local authority functions and total business rate income".

What does that mean? What are the implications of that sentence?

As for the fairness between authorities, is it not striking that the City of London stands to gain £545 million a year in increased business rate income and the entire authorities in the north-east of England stand to lose £544 million a year? For how long and to what extent will losses in authorities such as those in the north-east be compensated? There are many others; Birmingham, for example, will lose £300 million. Will the losses be fully met and, if so, for how long? Is the Minister aware that in a debate in Westminster Hall, Andrew Stunell, who is a Minister in the department, seemed to indicate that it would be for a year? Is that the position?

Finally, how will this compensation adjustment be made? Is there any detail in the consultation paper about how these huge imbalances are to be addressed, or is it another case of politics in the style of the late lamented Tommy Cooper, whereby things will happen "just like that"?

Baroness Hanham: The noble Lord said it so nicely, he will almost be able to go on the stage and do Tommy Cooper, but I am sure he does not really want to do that.

At the outset I remind the noble Lord that local government finance is at the level that it is because of the disastrous deficit that had to be met. Local government has had to take its share of that. The noble Lord knows that if a Labour Government had come into power, they too would have had to make very substantial reductions. Local government would have been left facing very similar problems and decisions to reflect those reductions.

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The compensation system will be the tariffs and the top-ups. The expectation is that the control totals that are in place at the moment for the four-year spending review will stay in place. However, with the retention of the business rate, as the noble Lord has rightly said, some areas will have a far higher business rate than others and will be able to generate more. At the start, the tariff will be set at the level of those that have higher rates; the expectation is that, above that, money will be taken off and passed to those in the poorest areas. There will be a sort of balancing between them.

The noble Lord asked how there would be growth. The rate will encourage local government to talk to businesses and encourage the development of businesses, because they will be able to retain some of the extra rate that comes from that. I hope that that answers the noble Lord's questions.

Lord Jenkin of Roding: My Lords, I, too, like my noble friend Lord Tope, warmly welcome the main thrust of what is proposed in this consultation paper. Like him, I admire my noble friend's refusal to try to answer the questions that are asked in the consultation paper. We are very grateful for the repetition of the Statement; indeed, it reads very well.

I have two points to make. I was the Secretary of State who introduced the nationalisation, as it has been called, of the business rate. One has to remember what lay behind that-namely, that 20 years ago we examined the question of the local authorities and who paid, who benefited and who voted. This was not a coterminous group, although there were some overlaps of course, but businesses, particularly small businesses, felt that they were being overcharged by local authorities fixing the rate to get the benefit of the revenue so that they could provide extra benefits for those who voted but who perhaps did not contribute any rates. That is what my noble friend has to avoid. What has been proposed in this consultation paper goes a long way towards that; it was very reassuring when she said that the business rate would still be set nationally and that it would not be open to local authorities to change that. While one would like to feel that setting the rate could make it more responsive to business requirements, the fact of the matter is that we had many years of experience of that and it did not work.

The one point on which I disagree with my noble friend Lord Tope is that I hope that the Government are not tempted to go down the road of letting local authorities fix the business rate themselves. They do not vote and yet they would be asked to pay what might be quite substantial sums. Indeed, when I had to deal with local authorities, they were asked to raise very substantial sums. I just issue that warning to my noble friend.

I end by saying that I think this is a valuable first step. I am not sure that I will take the Green Paper away with me during the Recess, as I have a number of other papers to read as well, but I look forward to studying the paper, particularly when some of the details, which my noble friend said would be published later, are available.

Baroness Hanham: My Lords, my noble friend was a much respected Secretary of State. I still remember the reasons why business rates were centralised. There

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is no intention of allowing local government to set the business rate; businesses will in effect see no change. The business rate itself will be set nationally, as it is; the discounts, the valuations and the rates that are paid will be the same, so in effect they will be unaffected. However, the area in which we hope and expect to see change is in encouraging local authorities to make sure that they are well in tune with their local businesses, that they try to see their businesses grow and that enterprise and employment follows from that. If business grows, local authorities will be able to benefit from that. I hope my noble friend will understand that the business rate will be as he put it-set nationally.

Baroness Quin: My Lords, given the responsibility of Governments to promote balanced economic growth across the country, will the Government give a commitment that the north-south divide, and indeed the gap between the less well-off and better-off areas, will not be allowed to widen as a result of these measures? Could I tempt the Minister to disagree with the Secretary of State in another place, who is reported as saying that at the moment there is no motivation for councils to support local firms or to create new jobs? Gateshead, the council that I have had the closest involvement with in recent years, has been a splendid public entrepreneur in working with private industry to do precisely that. There is therefore a great motivation simply to promote the economic well-being of the area that local councils represent.

Baroness Hanham: My Lords, with reference to the noble Baroness's last question, of course there are local authorities that have been working assiduously to promote economic growth all over the country. Authorities both north and south have worked very hard. On the other hand, they are not really benefiting from that because they are getting nothing back from the business rate. The spending totals remain the same; the control totals stay the same. If they can encourage more enterprise, or more firms into their areas, they will get some of that growth back above the tariffs. That will be helpful because they will be able to reinvest that and to promote the economy better. There is an advantage, but I would certainly not underestimate the amount of work that local authorities have already done. I have seen quite a lot of it during my year as a Minister, so I am grateful for it.

Within the spending review, the control totals will remain the same, although, as I have explained, between the tariffs and the top-ups there will be a switch of resources from those that have more business rate to those that have less. I do not think anyone will be any worse or better off as a result for the time being.

Baroness Kramer: My Lords, the Minister will not be surprised that as well as welcoming the announcement of this Bill in general I am particularly delighted that tax increment financing is included in the Statement. I have two things to ask her. First, could she ensure that, during the consultation, there will be the widest possible definition of tax increment financing rather than the sometimes very narrow definition that gets touted around, since the purpose of this is to ensure economic growth and maximum advantage for developing business in local communities and regeneration?

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Secondly, I ask her to look favourably at the amendment which the noble Baroness, Lady Valentine, will move on Wednesday that would allow tax increment financing to go ahead much more immediately in London, thereby providing a good pilot for this new approach in the UK to financing and encouraging economic growth at a time when it is so highly valued.

Baroness Hanham: My Lords, I know of the noble Baroness's interest in this. A consultation is a consultation, and if people have ideas about how wide they want the tax increment financing to go they will be able to say so in the consultation. I do not think there is anything in the consultation questions that would prevent that from happening. I am not in a position at the moment to say what my response will be to the amendment tabled by the noble Baroness, Lady Valentine.

Lord Shipley: My Lords, while welcoming the Minister's announcement, it is important not to misinterpret what is being proposed. While this is being billed as being about the repatriation of business rates from 2013, that is strictly speaking not the case because firms will see no difference in the way in which they pay tax, or in the way in which the tax is set, as a result of these changes. In this sense, therefore, this is not about repatriation. However, for all the reasons that my noble friend Lord Jenkin identified, it is very important that the repatriation of business rates is seen to be fair by the firms and businesses that are paying these rates. For this to be maintained at a national level is, at least for the foreseeable future, the right thing to do.

What matters in this proposal is that it encourages growth and enterprise. For this reason, it is important that the deal that has been announced is seen to be fair and does not simply redistribute from poorer areas to richer areas. Setting an insurance scheme against shocks enables poorer areas to do more for themselves and to generate income that will make them richer. In that sense, a virtuous circle can be created.

The consultation is very welcome. I have been a firm advocate of the repatriation of business rates now for many years, so I welcome the direction that the Government are setting.

Finally, I have one question about tax increment financing. There is no date in the Minister's Statement for when tax increment financing will come into play. I assume that it will be in 2013, but it is very important that, as part of the whole package of repatriation of business rates from this date, tax increment financing is part of it.

Baroness Hanham: My Lords, the answer to the noble Lord's final question is that the Government are committed to introducing tax increment financing as soon as possible and will move as quickly as possible to deliver it. It is being introduced through the local government finance Bill alongside the local retention of business rates. Once again, I thank the noble Lord for his support for this.

On the repatriation of tax revenue for business rates, while businesses will not see an immediate change to the way they pay the tax, they will see a greater interest from local authorities in the rates. They are

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important anyway, but I expect and hope that they will be even more important because there are lots of incentives for business not only in the Localism Bill but in the consultation that has been announced today. Yes, this is absolutely all about encouraging growth and enterprise, and the expectation and the ability to keep extra business rates in areas that need to do more to encourage business will do exactly what the noble Lord, Lord Shipley, has said: they will help the poorer areas perhaps to try to generate a little more business activity in the areas they represent.

Supply and Appropriation (Main Estimates) Bill

Second Reading and Remaining Stages

7.17 pm

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.

Finance (No. 3) Bill

Second Reading and Remaining Stages

7.18 pm

Moved By Lord Sassoon

Lord De Mauley: My Lords, 21 speakers have signed up for the debate on the Second Reading of the Finance (No. 3) Bill and the report on the Finance Bill 2011. If Back-Bench contributions to the Bill are kept to seven minutes, the House should be able to rise this evening at around the target rising time of 10 pm.

7.19 pm

The Commercial Secretary to the Treasury (Lord Sassoon): My Lords, as noble Lords are aware, this Government have taken difficult decisions in our two Budgets to tackle an unenviable inheritance-the largest peacetime deficit on record and an economy struggling to recover from the financial crisis. We have taken the necessary decisions to eliminate our structural current deficit over the coming four years and stimulate a private sector recovery. One is the vital precondition of the other, and our approach has been endorsed by the IMF, the OECD, the European Commission, credit-rating agencies and businesses across the UK. This Government have set the agenda on using the tax system to encourage growth.

ThePlan for Growth, published in March, set out a range of supply-side reforms to improve the UK business environment. At the heart of that plan is an ambition to create the most competitive tax system in the G20 through our corporate tax reductions, reform of controlled foreign company rules and simplification of the tax system. We want to make the UK the best place in Europe to start, finance and grow a business by reducing the regulatory burden on business and ensuring that credit flows to businesses. We want to encourage investment and export as a route to a more balanced economy by investing £200 billion over the next five years in UK infrastructure, setting up 21 new enterprise

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zones and entrenching a green recovery. We also want to create a more educated workforce that is the most flexible in Europe by providing 50,000 additional apprenticeships, an additional 80,000 work experience placements and expanding the university technical colleges from 12 to at least 24 new colleges by 2014.

The Bill boosts our international competitiveness by reducing corporation tax by a further 1 per cent this year and to 25 per cent next year, towards a rate of 23 per cent by 2013-the lowest rate in the G7 and the 5th lowest in the G20. It encourages growth by doubling entrepreneurs' relief to £10 million, increasing R&D tax credits for SMEs to 200 per cent and cutting the small profits rate to 20 per cent. The Bill also ensures fairness for all by increasing personal allowances by £1,000. Together with the increase to £8,105 announced at the Budget, this will remove 1.1 million people from income tax altogether. The Bill also introduces a supplementary charge on profits from oil and gas exploration in the North Sea, which allowed us to cut fuel duty by a penny on Budget day, and introduces a bank levy to discourage risky behaviour by banks, the proceeds of which will fund the £250 million investment in the Firstbuy scheme for new homes.

I turn now to the Economic Affairs Committee's report into the 2011 Finance Bill. First, I thank the committee for its comments in recognising the substantive changes that we have made to the way that tax policy is developed, communicated and legislated. The committee considered the Government's new approach to tax policy-making, which sets out the principles that the tax system will be more predictable, more stable and simpler to understand.

Last autumn, we published the majority of the Finance Bill legislation to provide the opportunity to develop and refine our proposals. We received over 200 responses to the consultation and many of the clauses were changed as a result. This is just the first year of this new approach, as the Committee noted. Many interested parties have expressed their pleasure with an approach that puts emphasis on consultation and this process has worked extremely well, as in the cases of corporate tax reform and pensions tax relief changes. Indeed, these specific examples were noted by members of the committee. Of course, we will continue to learn lessons and make improvements for the future and, in doing so, HMRC and the Treasury will take into account the recommendations of the committee.

We have also taken steps to address the web of tax reliefs and exemptions that complicate our tax system. The Office of Tax Simplification, set up last summer, has already provided its first series of recommendations and this Bill takes the first steps towards simplification by removing seven tax reliefs from the system. We will be bringing forward further abolitions next year after a period of consultation. The Government are committed to greater consultation on tax policy changes. However, it will not always be appropriate or proportionate to consult at all five stages for each tax policy change, as set out in the tax consultation framework. The Government will always need to retain some flexibility on tax policy. Generally speaking, the Government cannot and will not consult on rate changes or where consultation would otherwise present a risk to the Exchequer.

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Your Lordships' committee, as well as witnesses and other interested parties, has taken particular interest in the disguised remuneration legislation. I remind noble Lords that this legislation tackles the practice whereby well-paid individuals disguise their remuneration as loans which are never repaid, resulting in a loss to the Exchequer. This is a significant measure, raising over £700 million a year, and was the first substantial piece of anti-avoidance legislation introduced under the new approach to tax policy- making. There are valuable lessons to learn from the experience.

The committee has asked HMRC to look at alternatives to the disguised remuneration legislation. HMRC has already carried out a review of alternative approaches as part of the policy-making process, which concluded that the approach taken is the most effective in the long run. HMRC will, however, continue to review the effectiveness of this legislation as is normal procedure in maintaining tax policy. It should also be noted that HMRC's new anti-avoidance strategy, which was published alongside the Budget, sets out how the department will prioritise and allocate resource to make the right decisions about how to respond to avoidance risk.

In its report, the committee has also highlighted tax evasion. HMRC recognises the significant risk to the Exchequer of tax lost through evasion and already has in place a business strategy allowing it to develop a thorough understanding of its customers. This approach helps HMRC ensure that compliance efforts and interventions are focused where they will have the greatest effect. The Government have underlined their commitment to tackling tax avoidance and evasion with a £900 million reinvestment in HMRC over the spending review period. This will transform HMRC compliance activities and bring in additional revenues of £7 billion a year by 2014-15, on top of the £13 billion additional revenues to which HMRC was already committed.

The third area that the committee considered was the approach to corporate tax reform. As I have already said, a competitive tax system is at the very core of our plan for growth. Last year we published our corporate tax road map, setting out our plans for reform over the next five years and the principles underlying them. This gives businesses the certainty they need and the confidence to invest. This Bill takes the first steps on this road by introducing changes to foreign branches and controlled foreign companies rules. Corporate tax reforms will reduce the cost of new investment and incentivise activity across the economy. I welcome the committee's comments on the corporate tax road map, which noted:

"It should promote the stability, consistency and certainty which many of our witnesses saw as so important".

The committee also expressed some concern around the timing of reviews of tax reforms. I assure the House that we recognise the value of monitoring and evaluating tax policy. HMRC and the Treasury are currently looking at ways in which evaluation can be better embedded in the policy-making cycle.

Regarding policy development within the Treasury and HMRC, we have noted the committee's comments about the policy partnership. I can tell the House that the Treasury and HMRC continue to look at all aspects

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of their work. It is vital that both departments consider how they engage with taxpayers and how their partnership can be strengthened to achieve better engagement. There is a senior governance group in place between the departments to oversee and monitor allocation of resources to policy work in the partnership. This new governance group is also looking at how best to raise the level and effective use of skills and experience across the partnership, another area that was of particular interest to the committee. We fully recognise the importance of incentivising and retaining the best talents in the tax policy field. The establishment of a new tax academy in HMRC will improve the focus on raising skills standards. That academy will engage with stakeholders to identify shortcomings and put in place measures to address them. It will use and build on the existing range of tax training available to improve skills across the board.

This Bill sets out changes to improve our competitiveness, encourage investment and support our businesses through the recovery. Of course, we have always said that recovery would be choppy, but the last year has given us cause for cautious optimism. Output is growing and half a million new private sector jobs have been created, the second-highest rate of net job creation in the entire G7. However, there is no room for complacency, and our plans necessarily incorporate a degree of flexibility. On this point, I would like to confirm that this flexibility refers to the automatic stabilisers that allow government spending to move up and down with the economic cycle. I apologise to the noble Lord, Lord Barnett, for the confusion that arose on this point in response to his Question on 6 July. I can confirm that he correctly quoted my right honourable friend the Chancellor of the Exchequer on this issue.

To conclude, this Bill builds on the progress that the Government have made to date to help families, help business and support economic growth. I look forward to hearing this evening's speeches, particularly the maiden speech of my noble friend Lord Magan of Castletown, and I commend this Bill to the House.

7.31 pm

Lord Myners: My Lords, the Minister has treated us to a rich helping of palilalian piffle when it comes to the performance of the economy. His speech would be a comedy if the underlying story were not a tragedy. At least we know that the Minister is not guilty of being involved in disguised remuneration because, as we well know, he is not being remunerated at all.

Let us remind ourselves of the economic facts. In the period 1997 to 2007-for 10 years-the UK recorded the highest GDP per capita growth in the G7 countries. This was achieved against a background of low inflation and the period described by the governor of the Bank of England as the NICE decade-non-inflationary consistent expansion. Public sector net debt had fallen from 42.5 per cent of GDP in 1997 to 36.5 per cent in 2007-the second lowest level in the G7. The Conservative Opposition had committed to match Labour's expenditure plans.

In 2007 the world was hit by a global financial crisis. The Labour party has expressed its regret that

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financial sector regulation was not as effective as it should have been and that that was a contributory factor to the crisis. Alistair Darling took the right decisions as a consequence of the crisis and he implemented them successfully. The financial system was stabilised under the Chancellor's direction. Appropriate stimulus action was taken. Unemployment was lower than would otherwise have been the case, as were business failures and repossessions. The Chancellor introduced a strong framework for fiscal stabilisation going forward. I pay great tribute to Alistair Darling whom I think history will judge to be one of the great Chancellors, given the extraordinarily difficult global circumstances with which he had to deal. Last spring, after a very tough time for the economy we were turning the corner. The economy was growing. Over the second and third quarters of 2010, growth was 1.8 per cent-ahead of the USA and ahead of the EU average. Inflation remained low and unemployment was steadily coming down.

What has happened since the election? The economy has stopped growing. The Minister refers to growth but the facts are that since the Government came to power the UK's growth record is 21st out of the 24 countries in the EU. The OBR has had to revise down its growth forecast on four separate occasions since it was established. We are the only major economy in the world that is not growing. On 26 July the Office for National Statistics will produce its initial estimates for second quarter GDP. I believe that these may well show that we are back into a recession. Inflation continues to be running at well over double the targeted level. The Minister last week completely failed to answer a question from my noble friend Lord Eatwell to explain why, if inflation was due to global circumstances, the UK was experiencing such a poor inflation record compared with other EU nations and the United States. The OBR is now forecasting that the combined effect of very low growth-if any growth at all-and inflation running well above target is that borrowing will be £46 billion above the level that the OBR expected at the time of last autumn's spending review. I am confident that that figure will increase further when we see the second and third quarter GDP figures for 2011.

This is the context in which this House looks at the Finance Bill, described by the Chancellor of the Exchequer in his Budget speech as the "march of the makers". The march of the myth makers, I would suggest. It is the myth around expansionary fiscal contraction, taking demand out of the economy when the economy is already suffering from underused capacity, particularly in the labour market. In the first quarter of 2011, UK GDP was much the same as it had been in the third quarter of 2010, but worse, it was still 4 per cent below the level before the global financial crisis and 11 per cent below the level that it would have been, had we extrapolated economic performance in 2007 through and beyond the financial crisis.

The Government's response to that horrendous decline in achieved economic output is to announce a succession of policy initiatives that will have the effect of taking demand out of the economy. The Budget had nothing to offer. Growth has been hit and we are now teetering on the verge of recession. We already are in recession in terms of domestic demand. Household

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income is falling. Indeed, it is falling to the lowest levels in relative terms for 20 years. Real incomes fell last year for the first time since 1981. This is the background of economic achievement for which the Minister invites us to express our appreciation. Consumer confidence has slumped-I will revert to the critical issue of confidence in a moment. Business investment and confidence have also collapsed. Insolvencies are increasing. Banks are not lending. The Merlin agreement, which the Minister trumpeted, is a worthless piece of paper, as the noble Lord, Lord Oakeshott, described it. Merlin has no teeth. It does not even require the individual banks that have signed it to commit to individual lending figures. It is an aggregate figure-not an individual bank-by-bank figure. The ICB, so worthily established by this Government, has nothing to say about promoting greater competition in an oligopolistic domestic banking market.

Why is confidence so important? Notwithstanding the Government's remonstrations about a debt-fuelled economy, the OBR assumes that household debt will increase further. At the moment, household debt is 165 per cent of GDP. The OBR assumes that it will rise to 175 per cent by 2015. That compares with 114 per cent 10 years ago. But that will not happen, and Ministers must know that that is the case. Households will not borrow more unless they are compelled by dire financial circumstances to do so involuntarily. We must remember that interest rates have yet to normalise. It is not surprising that the Bank of England warns of the consequences of rising interest rates and points to a very delicate situation for some banks if their customers are obliged to pay the sort of interest rates that would be more consistent with a rate of inflation of 4.2 per cent. Nor will the corporate sector financial surplus reduce, which is another key assumption of the Government and the OBR because why would companies run down their corporate financial surplus when the economy is experiencing such an abundance of unused capacity and declining demand?

Expansionary fiscal contraction assumes that a tight fiscal policy can lead to looser monetary policy and stimulate private investment and consumption. It is a form of the Ricardian equivalence in which almost no one believes. There can be no crowding out of private sector demand by the Government if demand is too low. The Government's Budget strategy is simply not working. The economy is clearly not springing to life on a wave of confidence on the back of the picture painted by the Government. Monetary policy is already too loose and will have to be tightened fairly soon. The economy is stagnating but the Government propose a reduction in real government consumption, at constant market prices, of 10 per cent between now and 2015. This is a dangerous nonsense.

It was for many a forgettable Budget, an exercise in sleight of hand, but it was not forgettable if you are on a low income because you are going to be hit proportionately more than those on higher incomes. It was not a forgettable Budget if you are young and unemployed-a cohort of the economy and society that is increasing dramatically. It was not a forgettable Budget if you are female, experiencing the highest rates of female unemployment for 15 years. It was not

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a forgettable Budget if you are trying to buy a house or even keep your existing one. It was not a forgettable Budget if you are eking out an income from your savings when they are being reduced in real value by loose monetary policy. It was not a forgettable Budget if you are a small company seeking support from the banks. It was not a forgettable Budget if you care about the environment, because everything that was said about a green government policy was reversed in this Budget. It was not a forgettable Budget if you are a charity because of the reduced incentives to which you are now entitled as a result of tax adjustments.

The consequence of this is that we are facing the weakest economic recovery from a recession since the 1920s-the weakest economic recovery from a recession for 90 years. We are the only major economy in the world not experiencing economic growth. Regrettably, the Chancellor of the Exchequer has talked himself into a corner with irresponsible speeches about national bankruptcy and misleading references to "maxing out"-a horrible phrase which I am sure an Old Pauline should not use-the nation's credit card. The Chancellor has talked us into this recession. As John Maynard Keynes wrote in the Times in May 1933, in words that are as apposite now as they were then:

"Unfortunately the more pessimistic the chancellor's policy, the more likely it is that pessimistic anticipations will be realised".

What should be done? First, Labour should acknowledge that its management of the economy during the middle part of the first decade of this millennium was not as good as it should have been. In particular, we ran a deficit while the economy was already running at full capacity and we failed to acknowledge the narrowing of the fiscal base. I have said this before and I will continue to say it because I believe it is important that we admit, with the benefit of hindsight, that mistakes were made. The economy is now in need of acute help. There should be a temporary cut in VAT. We should bring forward capital investment. Now is the right time, when there is excess capacity, to spend on government capital projects, including, in particular, social housing. We should take action to get credit flowing. I notice that the noble Baroness, Lady Noakes, has joined the board of Royal Bank of Scotland. When I sat where the Minister is sitting, I was regularly chastised by the noble Lord, Lord Noakes, who I see in his place, and the noble Baroness, Lady Noakes. I am sorry, I meant the noble Lord, Lord Newby. I made this mistake when I was a Minister and I have now done it again. I apologise to both the noble Lord and the noble Baroness. The noble Lord, Lord Newby, and the noble Baroness, Lady Noakes, both used to chide me about my inability to get the banks to lend. I ask the Minister the same question: what are you doing, Minister, because bank lending to SMEs is declining? Bank lending for housing and domestic mortgages is at a 10-year low. The Minister shakes his head, but I encourage him to become the master of his brief, be on top of the facts and realise that lending to UK SME companies is continuing to decline.

As I said, the Chancellor has left himself with no options. There would be no place to which he could turn in terms of a policy adjustment without damage

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to his reputation and the need to admit that Alistair Darling was correct in his fiscal judgment. The price the nation pays for the Chancellor's and the Minister's pride is that we are pushed back towards recession.

Lord Forsyth of Drumlean: My Lords-

Lord Myners: I had almost finished, but I am very happy to give way.

Lord Forsyth of Drumlean: Before the noble Lord sits down, there have been many glowing references to Alistair Darling and how wonderful he was as Chancellor, but no references at all to Gordon Brown. Was that a coincidence?

Lord Myners: We are time limited in this debate. In closing, I say how much I look forward to hearing the maiden speech of the noble Lord, Lord Magan of Castletown, who will no doubt enrich the House with his knowledge of banking both in the United Kingdom and in Ireland, where the noble Lord had a number of important banking roles. I also look forward to the contribution from the noble Lord, Lord MacGregor of Pulham Market. I congratulate his committee on its extremely good work. Finally, I express my appreciation to the Minister for his apology to my noble friend Lord Barnett.

7.46 pm

Lord Newby: My Lords, it is always a great pleasure to follow the noble Lord, Lord Myners, particularly when he has just misled the House with regard to my surname. I am afraid that the noble Baroness, Lady Noakes, will not speak to me for a month. It is also a great pleasure to hear him speak again so eloquently from the Dispatch Box.

These are clearly extremely nervous times for the economy. Growth is very low at best, business confidence is poor and inflation is relatively high and squeezing real incomes, so it is not surprising that we hear many voices, including that of the noble Lord, Lord Myners, calling on the Government in effect to throw caution to the winds, abandon their deficit reduction plan and stimulate the economy by some combination of tax cuts and greater public expenditure. It is very tempting, but with a couple of relatively minor exceptions to which I shall come later, I think that such a policy would be misguided. There are a number of reasons why growth is disappointing, but the Government's fiscal policy changes are at most only one of many reasons. Imported inflation via commodity and food prices clearly is one, so is a nervousness by the banks and businesses to lend and invest, brought about in considerable measure by international events, particularly in Europe. How can the noble Lord, Lord Myners, even in a time-limited speech of a mere 15 minutes, not mention Europe once? It is as if the Labour Party is unable to see across the channel at what is happening there; namely, the largest financial and fiscal crisis that Europe has seen since the Second World War. Banks here are concerned about what is happening in Europe, members of the eurozone or no, because their direct liabilities are some £20 billion to bonds issued by the weaker, and potentially defaulting, eurozone countries,

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and their broader liabilities, via interlinked banks, are much greater. Therefore, they are extraordinarily worried about what is happening there and that is affecting what they are doing.

Businesses for which Europe is the single biggest export market are also not surprisingly nervous about what they see across the channel. At the same time, consumers who are faced with higher than expected inflation and very tightly constrained income rises are seeing their real income falling, so it is not surprising that there is a tendency on all sides for people to sit on their hands and not make that investment, take on that additional staff member or buy that new car or television.

In this situation, what should the Government do? In an era when credit-rating agencies appear to hold the fate of economies and Governments in their hands, it would surely be foolish to throw away the credibility that the Government currently enjoy by tearing up the deficit reduction plan. It would also be foolish in the light of the recent Office for Budget Responsibility report, which shows that the longer-term prospects for our fiscal position, given an aging population, are extremely challenging. The idea that if we can only deal with the current crisis, we will somehow reach a sunlit upland where funds would flow into the Treasury and all would be well, is belied by last week's report. The truth is that we face a long-term challenge in raising the taxes we require to fund the public services that people want. Spending more now, as the Government plan to do, would make the task of dealing with that longer-term situation even worse. Indeed, although the noble Lord, Lord Myners, does not seem to acknowledge this, in the other place the Opposition seem to recognise, at least in part, that they had better be careful what they do. They had three opportunities to vote against the VAT increase, and three times they sat on their hands. Could it be that despite the rhetoric and all appearances to the contrary, Mr Balls knows the true cost of fiscal recklessness?

If growth comes in lower than the Government have predicted, as seems likely, I do hope that, as the Chancellor has indicated, there will not be further tightening of fiscal policy. A hair-shirt approach, beyond what we already have, would be unnecessary. However, if I am not advocating a plan B, then what do I think might be done to promote confidence and growth? I would like to make three specific suggestions to the Minister.

First, we currently have a national insurance holiday for staff taken on in new businesses. This should be extended to all micro-businesses. The number of new businesses being established is much less than the projections in the Government's plans, and so it would be possible to extend that scheme, and give confidence to small businesses, within the existing planned expenditure envelope. Secondly, the Government should investigate the costs and benefits of reducing VAT on refurbishments, from the current level to 5 per cent. This is a long-standing policy on these Benches, but now, when we have simultaneously a housing crisis and a crisis in the construction industry, it requires further investigation. Finally-a King Charles' head of mine-the Government should bring forward the point at which the green

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investment bank can borrow. In an emergency situation, accounting rules should not stand in the way to prevent that happening.

In the short time available I would like to make two comments on the very impressive report from the Select Committee. First, I am extremely concerned about the ongoing problem between HMRC and HMT on tax policy. The report says:

"There appears to be a severe, and worrying, disconnect between the perceptions of HMT and HMRC and those of their customers about how well the policy partnership between the two departments is working".

We have real cause for concern. I find the arguments made by the Treasury officials completely unconvincing.

Finally, the report talks about enhancing the role of the committee in the scrutiny of tax legislation. With the new approach to tax legislation, under which you have a draft Finance Bill, there is plenty of scope for this committee of your Lordships' House to undertake a serious piece of work, at that point, so that the committee does not have to do all its valuable work in such a short period, as it currently does. It could get started a lot earlier on, and I think its role would be enhanced, which would benefit the administration of our tax system.

7.54 pm

Lord MacGregor of Pulham Market: I am very tempted to range more widely, as the noble Lord, Lord Myners, and my noble friend Lord Newby, have done. However, I think it is my role to introduce and invite the House to take note of the report of the Finance Bill Sub-Committee of the Economic Affairs Committee, of which I am chairman. I think, for once, this is not a Back-Bench contribution. I am grateful to the Minister for already giving some comments on our report; I would like to put on record in Hansard some of our main points, and hope that I may tempt some other answers from him later.

The report of the Economic Affairs Committee on the Finance Bill 2011 is the eighth report in a series which has now become well established and confirms the role of this House in the parliamentary scrutiny of Finance Bills. The report contains 32 conclusions and 15 specific recommendations, so I must be selective. I believe that our sub-committee provides a forum for taxpayers, and many leading experts outside, to express their concerns to Parliament. This includes all the institutes of chartered accountants, the Hundred Group of finance directors, the Chartered Institute of Taxation, the Association of Taxation Technicians, the CBI, the Institute of Directors, the Engineering Employers Federation, and various small business organisations. We also had the valuable session with senior officials from the Treasury and HMRC, which enables them to respond before we draw up our report. I believe this is becoming an increasingly useful forum-more of that in a moment. It means we have to work at speed, as my noble friend Lord Newby recognised, because we cannot begin until the Finance Bill is published, and have to report before the Report stage in the other place.

I would like to thank my fellow members of the sub-committee for their knowledge and wisdom, and their speedy and intensive work. Some who have not been able to be here tonight send their apologies. I am

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also most grateful to our witnesses, professional and official, our specialist advisers, the clerk, and our secretary administrator.

Not least for reasons for reasons of speed, the sub-committee has to focus, and this year it examined three topics: the Government's new approach to tax policy-making; anti-avoidance, with special reference to one of the measures in the Finance Bill-disguised remuneration-on which my noble friend has already commented; and the corporation tax reform package.

The first topic we chose to look at this year was the Government's new approach to tax policy-making. The new approach commits the Government to full and open consultation at each stage in the tax policy development process, except in exceptional circumstances. It alters the policy-making cycle to allow for such consultation, by publishing most of the Finance Bill in draft form some three months before it is published formally. This reflects the recommendations in our earlier reports, for full and effective consultation in developing tax policy, so the sub-committee considered it particularly important to have an early look at this new approach, and how it had worked in its first cycle of operation leading to the present Finance Bill.

We concluded, as did nearly all of our witnesses, that the new approach was a very welcome development. Great credit is due to the Government. Inevitably it was not a perfect operation, and in one point I will refer to more specifically, it was far from perfect. However, a report concentrates on where there are still issues or where improvements can be made, and in so doing I take it as read that the Government have made significant and positive steps forward.

We thought that most of the measures in this Finance Bill had followed the new procedures. They had been consulted on from the outset, and draft legislation had been published in December. As a result, there was little controversy surrounding most measures. But there were exceptions. By far the most important was the consultation on the clauses to tackle disguised remuneration, which began far too late. There was no consultation of any kind before the increase in the supplementary charge on oil and gas profits was announced in the Budget.

As a former Treasury Minister and as Chief Secretary taking Finance Bills through the other place-and there is another former Chief Secretary about to speak in the debate-I recognise that there are exceptional circumstances where the Government cannot follow their new approach to the letter, as did our committee. We do not think either of these cases fit that Bill. Even where open consultation before the Budget was not possible, informal, confidential discussions would have helped reduce the risk of unintended consequences.

Before I come to specific measures, there was a general refrain from many of our witnesses, whom I would describe as old hands in the tax system. They were concerned about the quality of some of the teams working on tax policy in HM Treasury and HMRC, and my noble friend Lord Newby referred to this. They complained of frequent changes of personnel, a general lack of tax and business knowledge, especially in the Treasury, and the difficulties both departments

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had in attracting the best talents to tax policy work. We share these concerns. There appears to be a severe and worrying disconnect between the perceptions of HM Treasury and HMRC, and those of their customers, as to how well the policy partnership between the two departments is working.

Now, HMT and HMRC officials put up a spirited defence and I recognise the difficulties that they have. The culture in the Treasury of moving highflyers on from one department to another to give them much wider experience is very well understood and I am afraid that very often some of HMRC's best tax experts are poached by the private sector. I noticed, when I raised this point with members of the Institute of Chartered Accountants who had raised the matter, that there was a wry smile on their faces. Nevertheless, for the new approach to work, it is vital to have tax policy teams that are knowledgeable, experienced and stable and that they operate effectively across departmental boundaries. That is why our report also recommends a comprehensive skills audit and the publication of the findings of a recent internal review.

There are two other points that are worth stressing. First, although we support the new approach to tax policy, we think it can be improved and strengthened. The track record of consultation with big business is commendable, but there is still a long way to go in building effective arrangements for consulting smaller businesses. As a former Minister for small businesses-or small business Minister, as I was sometimes described-I recognise the difficulties of communicating with small businesses. Many of them do not want to belong to big organisations. Their organisations are not as well manned, financed and established as, say, the CBI, but they are a very important part of the economy and much affected by tax legislation. I believe that more can be done to consult them. I welcome the fact that HMT and HMRC now recognise that.

We also think-here I have in mind a recent debate on the working practices report in this House when there was much emphasis on post-legislative scrutiny-that there should be more emphasis on reviewing and evaluating tax changes after they have been implemented to see how well they have achieved their objectives.

I now turn to a point which my noble friend Lord Newby raised, not for the Minister and not even for our sub-committee. Time and again we were struck by the fact that while all our witnesses welcomed the extra opportunities, time and information for scrutinising tax policy, most also thought that there was scope for more effective parliamentary scrutiny of tax legislation, in particular drawing on the experience and skills of Members of this House and the time that we can give to this onerous work. Indeed, I have noticed that others, like Kitty Ussher, a former Treasury Minister, recommended, in a recent pamphlet, exactly the same points and suggested that it was a role that the House of Lords could perform. One particular suggestion made to us was that the remit of our sub-committee should be adapted to allow it to examine tax proposals that were being consulted on during the autumn, as well as inquiring into the draft Finance Bill when published in December. A more modest suggestion would amend the remit to allow the sub-committee to examine the draft Bill only from December onwards.

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Of course, these are not matters for the Economic Affairs Committee, but for the whole House to consider. We refer to them in our report because the need for greater parliamentary scrutiny of tax legislation, particularly in advance, formed a consistent theme in the evidence that we received.

For our second topic, we looked at tackling avoidance of tax, both generally and in a specific Finance Bill provision which seeks to address avoidance by so-called disguised remuneration. We fully agree with the Government's strategic commitment to tackle avoidance early, which is particularly important when avoidance has the potential to mushroom and lead to a large tax loss. I was somewhat astonished when I saw the proposals in the Budget to discover that the loss of revenue from disguised remuneration was calculated at £750 million a year. Many of our witnesses thought that it was probably a good deal higher than that because disguised remuneration had become a very well marketed process which many were taking up. Clearly, that had been allowed to grow. We believe, in the light of that, that HMRC should review why action was not taken earlier and learn lessons for the future.

Even with subsequent amendments, including many during the Commons stages of the Bill, there remained a deep and widespread unhappiness with this legislation. I should have mentioned that when the disguised remuneration draft proposals were produced in December, I think there were something like 25 clauses but by the time it went through the process of consultation, the number grew to nearly 60 and then there were many subsequent amendments in the other place. Our firm view was that had there been consultation at an earlier stage, this complexity could have been addressed and the legislation would have been better targeted. The criticisms that we received of disguised remuneration were very striking indeed, including, for example, some who argued that this was the worst legislation that they had ever seen. So clearly, the new approach to tax policy-making fell down in this case. All our witnesses agreed that this avoidance had to be tackled, but their concerns were about the way in which the legislation to tackle it had been framed. It was not a good advertisement for improvement through consultation.

Our report recommends that HMRC should carry out an in-depth examination of the alternative approaches that the legislation could have taken which should enable lessons to be learnt and similar pitfalls to be avoided in future. I recognise that the new Government and the Treasury Ministers had been in place only for a short time, with many other crucial issues absorbing their attention. Therefore, I understand why this may have happened on this occasion. I am clear that in future it is going to be very important that a different approach is taken to some of this consultation.

One other point is that the disclosure rules have made a major difference. I am sure that the new disclosure rules led to much of the legislation in dealing with disguised remuneration and they should enable HMRC now to frame more precise legislation on other avoidance disclosures in the future.

The Minister mentioned evasion and the tax loss through evasion far exceeds that from avoidance. We recommend that the Government should publish an anti-evasion strategy to complement their anti-avoidance

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strategy. According to the HMRC figures, I understand that the tax loss from all forms of evasion is £22 billion compared with £7.5 billion for avoidance.

Finally, on CT reform, the last two Budgets and the CT road map, published last November, contained proposals for reform of the corporation tax regime. We welcome the CT road map which should help to promote the stability, consistency and certainty which many of our witnesses saw as so important. It is an excellent example of a strategy outline which we think would strengthen the new approach if adopted more widely. Indeed, the reforms should make the UK's corporate tax regime more competitive, as we concluded. However, some of our witnesses were concerned at the overall balance of the package and that it might disadvantage some sectors, particularly smaller businesses and manufacturing. We consider that post-implementation reviews of outcomes are particularly important so that early action could be taken if the reform package proves to disadvantage some businesses.

We thought that there was much to commend in the Finance Bill and the processes that led to it. Our report has concentrated on recommendations that are intended to be helpful in taking forward this new advance and we see the desire for greater parliamentary scrutiny as an important issue for this House. I commend our report to the House.

8.07 pm

Lord Barnett: My Lords, I thank the noble Lord, Lord Sassoon, for his personal apology to me for saying that I was wrong when I quoted the Chancellor as saying that flexibility was built into his plan. I am bound to tell the noble Lord, for whom I have a lot of respect, that it was wrong not to make a personal statement at an early time, apologising to the House for misleading the House, quite clearly, in his reply to me. I know what happened. He took personal advice from a leading source-I think I know the source-who must have told him that this was a major political difference of opinion so he did not need to give a personal apology. I can only advise the noble Lord that in future he should not take any advice from that particular noble friend.

I readily admit that there was a political difference between us because clearly a major political difference was at the heart of my question and there needed to be some flexibility of a kind that was not enumerated by the noble Lord. Indeed, when I asked him whether the flexibility related to the Treasury's special reserve, he said, "Definitely not". On the other hand, could he tell us, as he did not tell me at the time, how much of the Treasury special reserve has already been used for the MoD, for unexpected expenditure in Libya, and for other departmental budgets that have been overstepped? Could he tell us what is left in that reserve to allow any flexibility to decide what should happen to the Chancellor's plan? There cannot be any doubt that it was misleading. To say to the House, "What I was telling them was wrong", is misleading the House. It was a major matter, and he refused to make a personal statement, and he was wrong in that. But I leave that alone.

My question had at its centre this political disagreement, a crucial disagreement between us. I do

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not for a moment regret having gone into that political difference, because political difference does not mean you cannot mislead the House. What it does mean is that the Government are ignoring this central problem of whether there should be some flexibility that could amount to a plan B. I have always said that no Chancellor could ever announce that he is introducing a plan B, because it immediately kills plan A. However, there may be other means of slowing down the cuts, which would help to introduce a sort of secret plan B. But the noble Lord, Lord Sassoon, denied all of that, and said that he was not misleading the House. Indeed, he nearly went as far as maligning that distinguished business editor of the BBC, Robert Peston, the son of my even more distinguished noble friend Lord Peston, by suggesting that it might have been in his mind or in that of the interviewer that there were some special flexibility built into the plan.

While I have had to read some difficult briefs in my time, listening to the noble Lord this evening and his degree of optimism about everything in the Finance Bill and the economic situation, I cannot believe that he could have believed what was in his brief. He should have deleted it. How can there be any degree of optimism about the economy and economic prospects at the moment? I would not propose to quote many of the numerous comments from truly independent forecasters about what is likely to happen to the economy in the next few months, let alone years. However, I would not mind just quoting one, before the noble Lord encounters what my dear old friend Denis Healey-the noble Lords, Lord Healy always said: the advice that, "If you're in a hole, stop digging". The noble Lord-Lord Sassoon, is digging deeper and deeper. If he is not careful, he will have to apologise not only to me-which I do not mind-but also to Robert Peston and many others for pretending that one can have any degree of optimism at the present time.

The flexibility that should exist is not there. I will refer to one particular statement from an authority that may not be as independent as some, but it is certainly independent of the Labour Party. I refer to Deloitte, the well known, major accountancy firm, which audits many large companies. It stated that finance directors in Britain's largest companies say that business optimism has fallen at a faster rate since the collapse of Lehman Brothers in 2008, and that one in three thinks there is a chance of a double-dip recession. I do not believe there is a chance of a double-dip recession; it seems unlikely, but certainly there are no grounds for optimism about what is happening in the economy. It is pretty clear that we can look forward, as my noble friend Lord Myners said, to many periods yet to come of low levels of economic growth, if not an actual downturn.

I do not doubt that there would have been some flexibility, but to compare it with the automatic stabilisers I find incredible. Surely the noble Lord, who is a very clever fellow, must have checked the Oxford English Dictionary and found that "stabilise" is somewhat different from "flexibility", to put it mildly. I will not read the summary of the long points made about the two words in that dictionary that I received

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from the Library, but to say that there is no difference and that he was therefore answering my question is ludicrous.

Answering my question is not important. What is important is that the economy should truly move forward, and that we should be a little more optimistic about the likely outcome for the economy in the coming year, let alone in the coming years. If this means that the Chancellor has in mind in his plan to slow down the cuts, I am very glad to hear it. If he does not want to call it a plan B, I do not mind that either. He can call it anything he likes, as long as he has it in mind to do it, because that is the one way that he can truly make us all a little more optimistic.

8.16 pm

Lord Bilimoria: My Lords, the philosopher Kierkegaard said:

"Life can only be understood backwards; but it must be lived forwards".

Right now the Opposition blame our current economic difficulties on the global economic crisis which started with the subprime crisis five years ago, and the current Government blame the previous Government's mismanagement of the economy, resulting in the huge deficit and the high levels of borrowing which have, in turn, led the Government to embark on a programme of cuts across the board, and a tax policy to try and address the deficit as well. Unfortunately, the current Government are also going to have to blame the woes on the European sovereign debt crisis and the eurozone crisis, neither of which are of this country's making.

There is no question that public expenditure under the previous Government reached levels that were far too high-50 per cent of our GDP when it should have been 40 per cent. Reducing this to 40 per cent would sort out our budget deficit in one swoop: but it cannot be done overnight. The imbalance between the public and private sectors has finally come to a head. The Government are finally starting to address this, but again it will take time.

As to monetary levers, the Bank of England is forced to keep interest rates at 0.5 per cent in spite of ballooning inflation because of the fragile state of the economy. Of course, the final lever that the Government have is the Finance Bill and taxation. Before I go into detail, I will highlight the 10 tenets of a better tax system, as laid out by the Institute of Chartered Accountants in England and Wales, of which I am proud to be a fellow. They are: statutory, certain, simple, easy to collect and to calculate, properly targeted, constant, subject to proper consultation, regularly reviewed, fair and reasonable, and competitive. Does the Finance Bill tick all these boxes?

I was proud to serve on the Finance Bill Sub-committee of the Select Committee on Economic Affairs, and I thank our chairman, the noble Lord, Lord MacGregor, his staff and advisers and the rest of the committee for the excellent work that they performed. There was a clear consensus among our witnesses that, if implemented consistently, the Government's new approach to tax policy-making would represent a major step forward on the road to better tax legislation for this country. I do not wish to blow our own trumpet, but most witnesses proposed that better use should be made of

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the expertise and experience of the House of Lords in matters of tax policy and legislation.

We have far too few Joint Committees of our two Houses. We all know about the new Joint Committee that has been set up to deal with reform of the House of Lords. However, given that as things stand the House of Lords does not have the power to vote on Finance Bills, would it not be wonderful if we had a Finance Bill Joint Committee of the two Houses, on which, sitting around the table, the expertise of this House could be brought to bear side by side with those who are going to legislate on the matter? There should be more Joint Committees of our two Houses. This would lead to both Houses working more closely together and to better mutual understanding-an understanding that at the moment is greatly lacking in the other place. This has been openly admitted by many Members who came from the other side of the building and who concede how little they knew and understood of the workings of this House. Will the Government consider this suggestion?

A serious matter that was spoken about in our sub-committee was the worrying disconnect between the workings of Her Majesty's Treasury and Her Majesty's Revenue and Customs, and the lack of specialisation in either. The sub-committee also looked at tax evasion and tax avoidance. More and more, the lines between evasion and avoidance are being blurred. As the noble Lord, Lord MacGregor, said, on the basis of HMRC's figure, the Exchequer loses £22 billion from evasion compared with £7.5 billion from avoidance. We have therefore recommended that the Government should publish an anti-evasion strategy as well as an anti-avoidance strategy.

Lowering the corporation tax rate was seen as a very good move, as headline rates matter, especially in attracting global inward investment: but, sadly, the impact of these reductions is lessened because capital allowances are being changed, meaning that the effective rate of corporation tax for many businesses will not be reduced. That is particularly the case for small businesses and manufacturers.

We still have the 50p rate of tax that the Finance Bill did not address. This desperately needs to be removed, especially if we want to attract inward investment and the best talent from around the world. Many of our taxes are far too high. For example, and declaring my interest as the founder of Cobra Beer and chairman of the Cobra Beer Partnership, a joint venture with the global brewer Molson Coors, we in Britain have one of the highest rates of beer duty in Europe. Points have been made about how the Treasury says it is tackling problem drinking by increasing the tax on higher-strength beers and trying to stimulate the market for lower-strength beers. However, this is toying at the edges as it represents a very small portion of the beer market.

Meanwhile, the Government's ban on low-cost selling, covering VAT and duty only, means that, given tax anomalies, £20 could allow retailers to sell up to 40 cans of beer at 4 per cent ABV-70 units-10 bottles of wine at 14 per cent ABV-98 units-seven bottles of fortified wine and up to 103 cans of cider, making a total of up to 340 units. What will the Government do to assess alcohol taxation in the light of maximizing revenue and minimizing harm?

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In conclusion, we know that high taxes stifle not only consumer spending but businesses and growth. What the economy desperately needs is confidence and growth, and the Finance Bill should do its best to encourage growth. In the other place, we were told that between 2008 and 2009, nominal GDP fell by 1.8 per cent, which cost £20.6 billion, and tax receipts dropped by 3.7 per cent, costing £19.9 billion. That shows that growth more than anything else-more than the cuts-will bring down our deficit and our borrowings. However, with high taxes across the board, we are stifling growth. As long as we do that, with the best will in the world, consumption will continue to falter, inward investment will continue to be deterred and the economy will continue to bump along the bottom.

I welcome much of the work that the Government have done in reforming taxation policy: but going back to Kierkegaard's words, the future has to be lived, and the future should be about a simple, competitive tax policy that generates growth for our economy.

8.24 pm

Lord Higgins: My Lords, we are really having two separate but related debates: on the one hand, on the report of the Finance Bill Sub-committee on the Budget of 2011-I congratulate my noble friend Lord MacGregor and his committee on what they have produced-and, on the other hand, more generalised debate about the state of the economy.

I begin by commenting on what is said in the report of my noble friend Lord MacGregor. It refers to a new approach to tax policy-making involving the tax consultation framework. The idea that this is new is rather surprising. It is a very long time since I was involved in producing a draft set of clauses on VAT legislation. The more we can have consultation in advance of the tax proposals, the better. The other aspect of this side of things is the question of how the proposals, when they arrive, are considered. I was tempted to go back into the archives and look at the first report from the Select Committee on Procedure (Finance) for the Session of 1982 to 1983, which it so happened I chaired. It had a distinguished membership, including Mr Enoch Powell. The proposals that it brought forward are still relevant and particularly in the context of my noble friend's Bill. Perhaps his committee might like to look at this report, which I think is very valuable and still relevant to our situation.

We said that there should be a division in the Finance Bill and that there should be a taxes management Bill, which would be introduced at the beginning of the Session. This would involve the mass of technical-I am inclined to say-junk, which appears in this massive document that we have in front of us this evening. The actual Finance Bill would be as far as possible only concerned with tax rates and the management side of them. There is a strong case for this division and, as we went to suggest, for a separate Bill if a new tax were being introduced. But, the present arrangement that we have with Finance Bills so far as scrutiny is concerned is not satisfactory. Perhaps my noble friend could tell us how many of the clauses in the Finance Bill were debated in detail in the

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Commons; it would be interesting to know. With this legislation, the Commons does not have the longstop that your Lordships have of being able to look at it, which they have for other legislation.

I turn now to the other aspect of the matter. I am becoming increasingly heretical over the idea that the case for absolute minimum rates of interest has been made. We ought to consider the considerable disadvantages of a hyper-low interest situation. My former constituents in Worthing living on fixed incomes, having been prudent all their lives and having saved, are being devastated by the low interest rates which they can now get. It is a major disincentive to saving, which is very important in the present context, not least in relation to the extent to which there are bank deposits which might enable the banks to lend more.

On the other side of the argument, this does mean that we have a lower exchange rate than we would otherwise have. This may be important as far economic growth is concerned but people are also being misled into believing that this hyper-low interest rate policy will go on indefinitely. A large number of people are taking out mortgages and borrowing on the expectation that interest rates will not go up further. This policy is being sustained only because the Bank of England has effectively given up any prospect of using interest rates to control inflation. That cannot go on indefinitely. There is bound to be a significant increase in interest rates, which could have devastating consequences. I am very concerned about that.

More particularly-this will not be news to the usual suspects in this debate-I am concerned about the way in which the Bank of England is preoccupied with the price of money-that is to say interest rates, and not the quantity of money. Fascinatingly, having thought at the weekend of what I might say today, I suddenly found on my desk this morning a report by the Institute of Directors on the big picture and on whether we are we making a big mistake. It stresses the importance of the money supply. It also-and this is interesting politically-says:

"There is a real risk of economic weakness as a result of the money supply"-

it means the lack of money supply-

I recommend this report to your Lordships. It even goes on to refer to the monetary equation MV=PT which the noble Lord and I had exchanges about when he was a Minister. That shows its credentials are good.

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