Taxation: Tax Collection

Lord Flight Excerpts

Thursday 4th July 2013 Lords Chamber

[Lord Newby]

My Lords, this is exactly the issue which the OECD is looking at currently. Along with the French and the Germans, we have made a significant financial contribution in terms of getting experts working on this. There are a number of ways of dealing with it. The noble Lord suggests one way. The key thing is that we rapidly come up with new rules and get them implemented at an international level.

[Lord Flight]

Pertinent to the last question, some 20 years ago when transfer payments were introduced, I acted for the company that I was running in discussing with the Inland Revenue, as it was at the time, how they would operate. The arrangements were not based on legal matters, but on commercial reality. We went through each area of activity to see what was going on where and what would be a fair allocation of costs, revenues and profits. I cannot understand why transfer payments are not operated thus today. Will the Minister say whether we are operating transfer payment regimes in the way that they were intended and started 20 years ago?

[Lord Newby]

There is considerable scope for HMRC to undertake the kind of discussions that the noble Lord describes. The additional resources that we put into compliance have been spent in no small measure dealing with exactly that. The amount of revenue that we have been able to recover has increased by a number of billions, but this does not deal with problems such as the ones that my noble friend Lord Teverson has described.

Government Spending Review 2013

Lord Flight Excerpts

Wednesday 3rd July 2013 Grand Committee

[Lord Flight]

My Lords, I hope it will be the privilege of all of us to live long enough to see the judgment of economic historians on the times in which we are living. The Chancellor is following blatant neo-Keynesian policies, with an ongoing deficit of £120 billion-plus per annum and printing some £370 billion of money. If I wanted a definition of neo-Keynesian, that would be it. No wonder the Opposition is flummoxed, because to recommend even larger Keynesian policies on top of that is patently unrealistic. Will that approach be vindicated or will the Hayekian school be right that the problem with such policies is that they make returning to normality in due course even worse than it would be if you took hold of the situation much sooner?

In the 1930s when Chamberlain as Chancellor took Hayekian measures and slashed public sector pay, spending and taxation, and unleashed a housing boom because there were no planning restraints, we had growth of 4% a year from 1935 to the start of the Second World War. It was the highest period of growth in the 20th century. Today, although growth and recovery have been disappointing, there are positives and we have heard quite a few of them this afternoon. Thankfully, we are not in the euro. The economy is doing markedly better. Indeed, there was 0.6% growth in the latest quarter. I would expect growth of at least 1.5% this year against falls in the eurozone of 0.6%. Certainly there is no double dip. Foreign investment in the UK is up substantially. As I think the noble Baroness, Lady Kramer, pointed out, there is really good news on the apprenticeship scheme. Exports are rising. In my little territory, EIS venture capital investment has doubled in the past year, as has equity money for new small businesses, and as well as congratulating the noble Lord, Lord Risby, for what he is doing in Algeria, a little bird told me that Algeria was going to apply to join the Commonwealth, so the noble Lord seems to have done extremely well.

There are some useful micro-points as well, which I certainly approve of. The ending of automatic progression in the public sector should at least reduce average nominal pay in the state sector, which keeps rising in a blatant breach of supposed pay freezes. Tougher eligibility rules for jobseeker’s allowance are necessary. Having to learn English makes good sense. Ending winter fuel payments in hot countries is surely a no-brainer. The welfare cap on housing benefit, tax credits, disability benefits and pensioner benefits, and bringing it all together to assess people’s needs, is sensible. Limiting to £2 million the funds to be made available annually for investment by local enterprise partnerships, as suggested by the noble Lord, Lord Heseltine, is a fairly sensible economy. I am particularly keen on the extra 180 free schools and the extra technical colleges. The technical colleges go hand in hand with the apprenticeships and are going to make a big difference to this economy and to the people who attend them.

There is a lot of good going on behind the question of how to judge the macro-stance. Even on the macro-stance it is amazing to have achieved a near political consensus on the need to reduce welfare spending, which is really what the situation amounts to. The state is slimming down modestly. Between 2010 and 2017 it is, I think, a 2.7% reduction in real terms. No one has achieved that in living memory. There is a modest shift from current to capital expenditure, and I am sure that the noble Lord, Lord Deighton, will make the very most of that in the rational management of the infrastructure scenario, which of course is still crucial. However, what about the future? Debt is piling up—it will be 80% of GDP by the end of the year—interest bills are rising, and as QE has to come to an end they are likely to rise dramatically further. We are stuck with a deficit compounding of £120 billion per annum.

In the announcement, there was little net new. Cash spending continues to rise; it will be £720 billion this year, £730 billion next year and £745 billion in 2015-16. Most of the figures have already been announced. There are major changes within spending divisions, but not in the aggregates. For the poor spending divisions affected, out of public spending of £720 billion only £204 billion was really up for cuts. Six of them had cuts of at least 10% of their expenditure. It has become obvious that to have a health budget of £127 billion, a education budget of £97 billion, and a welfare budget of £220 billion in effect not up for cuts is a mistake. I am afraid that the NHS has not been vindicated by all that has come to light.

There are two quite separate points. First, will running a deficit of this size prove the right thing to do economically? For me, the great disappointment is the missed opportunity for sorting out the public sector and shrinking the size of the state. Over 10 years ago, I spent nearly two years of my life organising the James review. A team of consultants looked at each area of the public sector, and the level of potential waste and cuts was then approximately £100 billion. That does not seem to have changed that much. The issue is the will to sort it out and to get the state right out of areas where it should not be involved. Those are the key areas that matter. The cost of health and welfare together is nearly £360 billion, which is more than half of total public expenditure. I think even Prime Minister Attlee would have been shocked if it had been more than half of public expenditure in his time.

The leakage is not allowed for. The noble Baroness, Lady Noakes, referred to the growing public sector cash deficit on public sector pensions. I have banged on about it before, but the real figure is likely to be about £25 billion per annum, and there is no provision for it. There was a quiet study of the student loan book, which is worth £83 billion in total. Some 40% will have to be written off, which is another £30 billion, and there is no provision for that. Is there any review of the whole area as to why that is the outturn? I am afraid not.

Astonishingly, welfare, health and education together account for £516 billion of £720 billion, which is why only £200 billion-odd is eligible for cuts. The harsh truth is that much of the public sector remains bloated and poorly managed and has falling productivity. Many noble Lords may have seen the latest Taxpayers’ Alliance report, which pointed to £120 billion of waste, much of it gravy-train expenditure. It is a drag on the 50% private sector. In fact, it is a huge tribute to the private sector that it managed to create 1.3 million jobs when its opportunity is thus limited.

One thing remains. It is always the case that public sector pay layer by layer should be about 15% below private sector pay, allowing for shorter hours, lower productivity, better pensions and better security of employment, but it remains about 15% above private sector pay layer by layer. There is a gap of 30% in aggregate, which is the result of the strength of public sector unions under the previous Government. In the area of health, we have the highest paid doctors, the worst provision of health, some £20 billion of claims for negligence and the legal costs going with them. It is a great pity that there has not been anything like an adequate resolve to get to grips and sort out the public sector.

I shall end by commenting on the elephant in the room, which is QE. It was very clear that money printing was needed in 2008-09 because the money stock was contracting dramatically and the money supply with it, partly the result of the wrong government policies, because just when we needed to support the money supply, moves against banks led to it contracting. However, this has been allowed to go on and on. Inflation has remained higher than planned. When interest rates return to real levels, they will increase government interest costs substantially and probably hit the housing market seriously.

The reality is that there is no way in which the Bank of England will suddenly be able to sell off £370 billion of gilts into a falling gilt market with rising interest rates. We will have the extra money stock there, and all that it will need is higher velocity of circulation to produce a massive increase in the money supply. One can see what is likely to happen: as and when the economy recovers sufficiently there will be strong pressure for wages to be increased. People have had real-wage cuts for quite a long time. I am afraid that the overall money stock will be there to finance that uncontrollably. No one knows when, but there is clearly a substantial risk of a period of high inflation at some stage in the next 10 years. The idea that new Governor Carney could pursue a more expansionary monetary QE is simply unrealistic. He will need all his wisdom and experience to steer the British economy out of QE over the next couple of years.

In conclusion, if there is no collapse in Japan, which is always possible, or a banking crisis and collapse in China or a break-up of the euro over the next two years, the dear old British economy will look a lot better by the time of the election, even though we have not tackled such major issues. The Government could quite easily win the next general election on the back of that, but what then?

Financial Services

Lord Flight Excerpts

Thursday 20th June 2013 Grand Committee

[Lord Flight]

My Lords, first, I declare my interests as set out in the register, but which amount to 43 years in the investment management industry. Although I want to talk specifically about the initiatives in this year’s Finance Bill, I should say that when I started my career, I remember someone older than me asking, “Why on earth are you coming into this? London is too big and it only services the UK economy. It has lost all its international business”. He could not have been more wrong. One of the things that I am proud of over my career has been to see London return to being the major financial capital of the world, earning somewhere between £60 billion and £70 billion a year in invisibles that help to pay for so many of those cheap Chinese imports. Although the City is certainly subject to criticism, to regulation, and even to a Government policy that led to the banking crisis, it is an incredibly valuable asset to this country. For those who say that it is too big, I would just point to Hong Kong where the financial services industry is a far larger proportion of the economy, but because it got its financial regulation and economic policy right, it has never been a major problem. Rather than contract the City, let us expand other areas and get its regulation correct.

I want to speak about the initiative in this year’s Finance Bill which will set up the UK investment management strategy, a Treasury paper published back in March. I greatly welcome this. It is there to try to get more foreign fund management businesses to come to this country. That might obviously benefit those who work for them, as well as the lawyers, accountants, regulators and even HMRC because they would provide another source of income. By the way, I think that the total fund management industry represents around 1% of GDP, some £12 billion per annum, so as a sub-section it is pretty significant.

Thirty years ago, when my noble friend Lord Lamont was the Financial Secretary to the Treasury, I tried to persuade him to remove taxation on funds, then unit trusts, and put it firmly on individual investors in order to stop Luxembourg taking masses of new business which could rightly have come to London. The Revenue would not accept the argument, and so Luxembourg emerged with its huge industry of today, but at the time it did not exist. At last HMRC has got the message that this is an industry worth having in this country.

There is a level of serious commitment within the Government’s measures. First, there is the commitment to abolish the stamp duty reserve tax, of which there has been criticism for many years. Secondly, there is a commitment to make sure that the tax status of non UK-domiciled funds will not be affected if they are obliged to appoint a UK AIFM. I look forward to working with TheCityUK and the new Financial Services Trade and Investment Board to come up with an agenda of what I would call constructive proposals which might be politically possible, and I am glad to see that the IMA is coming up with good initiatives aimed at creating greater cost transparency in terms of the amounts charged by various funds.

There are obviously two key factors. One is tax; the other is regulation. The tax regime needs to be attractive for funds. It also needs to be attractive for the staff who might work for them; it needs to be competitive. Regulation needs to be, first and above all, good; and, secondly, it must not be too expensive or over-bureaucratic. Otherwise people will want to go to other places.

On the tax front, I remember some 12 years ago when I was seeking to drum up support for the Conservative Party in the City, one of the major world banks said to me, “We are totally happy as long as income tax remains at 40%, as introduced by Prime Minister Blair, and, secondly, as long as the pension plan arrangements aren’t interfered with”. Well, sadly, both of those have been lost. They were then boasting to me about the numbers of staff they transferred from Paris and Frankfurt to London. Do not forget that individual tax matters as well as the tax on the operations themselves.

I know that the Government are concerned because probably the largest fund management group in London has recently started shipping staff and a lot of its new business off to Luxembourg. I have explored that and it is really not about the taxation of funds; it is about the taxation of individuals. In particular, it is about what I think was a very unwise and aggressive taxation of non-doms relating to their property ownership, which for many will involve a 7% per annum mansion tax. For funds and the fund management business, broadly the tax regime over here is fine; and as corporation tax comes down to 20% for fund managers it becomes an attractive tax regime.

Again there is some very interesting data here in the Government’s paper. The volume of funds managed has risen from £2.7 to £5 trillion in the past six years. Where this paper is slightly mistaken is that while it initially focuses on the volume of funds managed in the UK, which is what matters, it also focuses on the domicile of funds. In fact, managing the funds—irrespective of where they are domiciled—is where employment and revenues come. It is much more important to keep the UK an attractive place to manage funds that are not actually domiciled here. There is a slight error there.

The second mistake is that the paper suggests that the new AIFMD regime may be good for the UK as it will encourage funds to be domiciled here. I think it is serious bad news for the UK and will lead to a significant loss of business. It is very expensive and very hasslesome. Anyone who is managing funds which are not to be marketed to the EEA and EU are going to move elsewhere and, indeed, are starting to move elsewhere—predominantly to Singapore and Hong Kong.

I am no great liker of hedge funds and have never invested a penny in one, but there is a great misconception in Europe that hedge funds caused the financial crisis, whereas it was money being easy for too long, bad regulation and so forth. It was really the banks and not the fund management industry that led to the trouble. In terms of regulations, the FSA as it was had become unnecessarily hostile to the fund management industry. Many reputable businesses said to me that they did not want to raise their criticisms of certain regulatory initiatives because they were frightened of retribution. There was a breakdown in communication. However, in Luxembourg, again, they virtually embrace you with both arms and offer you all manner of inducement and attraction if you will come and bring your business to them. I am pleased that the Treasury is “in discussions” with the FCA on that territory.

London obviously has a huge amount to offer: lots of people with high skills, a wonderful place to live, wonderfully international and so forth. However, I think that there is one danger of undermining all these attractions by an increasing nightmare of regulation. It is not just an AIFMD; the threat of the transaction tax would be a disaster for London and the trickle-down effect means often that it would turn out to be at least 1%. I hope that the Government will go to extreme measures to stop it happening—although I am hopeful that Merkel wants to give it up once the election is over We will now have to put up with EMIR. The Government have done quite well on MiFID II but are still somewhat protectionist towards third country suppliers. We have ESMA wanting to take over regulation in this country. Candidly, I have never known a more exhausting time of masses of excess and useless regulation, particularly the AIFM report. No one will read it—it is so voluminous and completely unnecessary.

Contrary to my noble friend Lord Dykes’s extolling of the situation, the main threat to the UK fund-management industry is the regulation coming from the EU. I end by saying that it was a great mistake of the previous Government to surrender sovereignty on financial regulation to the EU. We are inevitably vulnerable because some 70% of all financial transactions for the entire EU are done in London. I do not particularly blame Paris and Germany for thinking that they would like to have a bit of the cake and to encourage measures which might lead to that. As someone in the industry, I see that as the biggest threat.

Economy: Fiscal Framework

Lord Flight Excerpts

Tuesday 4th June 2013 Lords Chamber

[Lord Newby]

I will say yes to that as well. However, the Government completely agree with the point that the IMF made about the desirability of bringing forward infrastructure expenditure. That is why last year we put in place the infrastructure guarantee programme, which is already bearing fruit with the allocation of £1 billion to the Northern line extension to Battersea, and the recently announced £75 million to be given to Drax power station for its partial conversion to biomass.

[Lord Flight]

My Lords, does the Minister agree that running a deficit of over £100 billion when it was planned as roughly half that sum and creating money to the extent of £380 billion is extremely flexible in terms of policy? Some might even view it as rather excessively Keynesian.

[Lord Newby]

Clearly some do view it as that. It is worth bearing in mind that while we are reducing our deficit to the 3% EU Maastricht target over the period to 2017-18, even the relaxation that the EU has agreed in recent weeks with France, Slovenia, the Netherlands and Spain will get them back to a target of borrowing of less than 3% by 2015 or 2016. It is therefore taking us a lot longer. The Government have agreed to phase down borrowing over a much longer period than is allowed even under the reduced timetable elsewhere in the EU.

Queen’s Speech

Lord Flight Excerpts

Monday 13th May 2013 Lords Chamber

[Lord Flight]

My Lords, as the noble Lord, Lord Deighton, pointed out, there are some useful, detailed provisions in the gracious Speech for the economy, but it seems to me that there is really nothing of great substance. The national insurance allowance is welcome for small businesses. The help to buy scheme is extremely unwise in that it applies to existing property and not just to new builds and is in danger of feeding yet another housing bubble. It is perhaps inevitable, with two years before an election and with a coalition Government, that this is not a time for radical change. However, both the Labour Party and the IMF are by mistake or wantonly misreading the situation. The reality is that this Government are still running a deficit of £120 billion and they have financed most of the spending of £380 billion by printing money. They could not be much more Keynesian than that, in truth, whatever may be being said. In my book, we are erring on the rather incautious side in that territory and telling a slightly different story from the underlying reality.

I repeat that it is a question of what is politically practical at this stage of the cycle but, in principle at least, I would like to see radical supply side measures. Taxes are still too high, the state is too large, the incentives to work, invest and save are too low, regulations are too burdensome and increasing and the lack of planning reform is still the key delay to new housebuilding. The energy reforms will do nothing to reduce prices. Energy policy needs radical change to encourage fracking, given what is happening to the US economy as a result of that. There is plenty of potential here in that regard. We have a crackpot policy of massively subsidising unreliable and expensive wind power, which will result in ridiculously high tariffs for manufacturing industry and impoverish consumers. I am greatly disappointed that the Government have not yet got round to reviewing what is clearly a mistaken policy. The childcare scheme discriminates unjustly against single-earner families. Although I am absolutely convinced that the noble Lord, Lord Deighton, is doing his best, infrastructure investment needs to be released to a far greater extent than is the case. It is still hugely delayed by planning and environmental red tape. It is pathetic to continue to put off a decision on the airports serving London, which is clearly a very pressing decision relevant to overseas investment in this country.

However, my particular concerns are what I call “kicking the can down the road” measures, things being done today which do not attract much opposition from the Opposition or the media but will be the source of major cost in the future. It seems to me that care for the elderly will saddle the taxpayer with huge future liabilities, is a regressive extension of the welfare state and does not really solve the fundamental problems. Shifting the burden of identifying illegal immigrants onto landlords just adds to their costs and is unlikely to be successful. We have spent time in this House debating the Public Service Pensions Bill. Nobody seems to be concerned that by 2017 there will be an annual cash flow deficit of somewhere between £20 billion and £25 billion per annum. I question whether the Government of the day will be able to afford that, whichever party is in power.

The House of Lords Library recently presented a most interesting report which forecasts that the proportion of students who do not repay their student loans will rise from 28% to 40%. Forty per cent of a total of £80 billion is £32 billion to write off on the student loan book. There are two problems here. One is that a lot of students simply do not earn enough because their degrees have no commercial value. A second category of students either go overseas or return to Europe and do not repay their loans. The whole machinery needs to be tightened up. I have been told by students in Europe that they would be happy to repay their loans but do not how to do so because it involves getting a standing order from a bank account in Europe, which is in euros, translated into a sterling order over here and finding a representative bank to pay it. However, behind that there is a much more serious problem of the establishment still not attaching sufficient value to vocational training. The figures show that people doing proper vocational training get jobs more easily and earn more than those doing a lot of liberal arts degrees. Their debts are much lower because it takes much less time to complete vocational training. The truth is that the policy of trying to send 50% of the population to university, and then saddling them with massive debt, is wholly mistaken. What we need in this country is much more vocational training and for it to have the status it deserves given its economic value.

I now want to switch to a much more positive angle because it seems to me that few people realise that the UK economy is recovering extremely well. That is not just according to the latest figures, which I will come on to. What is happening is that the impact of the depreciation of sterling is finally working its way through. The second quarter showed 0.8% growth, strong factory output and particularly strong advertising spend, which is always a pretty reliable precursor to wider economic recovery. The true picture in relation to what has been happening for the past four years has also emerged. There has been a major reduction in North Sea oil production, and if you take that out of the equation the private sector has been growing by an average of 1.3% annually—more than 5%, which I said was the case when we debated the budget. That is where all the new jobs have come from. In comparison to much of continental Europe, the UK economy, as a matter of fact, has been doing surprisingly well. That is extremely good news and is not adequately recognised. In that context, it would be mistaken for government policy to overegg what is already happening of its own accord. In Birmingham South, you have an economic region in Europe that is among the most successful.

I want to close by picking up on the odd comment on the eurozone. In the 1930s it was the gold standard and reparations which caused chronic unemployment, particularly in Germany, and which, bluntly, let directly to the rise of Hitler. It is horrific that people are standing by and seeing some 50% youth unemployment in Spain and some 30% youth unemployment in Italy. This risks causing dangerous political reactions. It is a crackpot policy, all in the name of keeping the euro together. It is absolutely clear that the characteristics of southern and northern Europe mean that they cannot comfortably share a currency. The reality of that needs to be addressed. The German policy of getting away with doing as little as possible and temporarily financing it through the ECB ignores completely the political risks that are staring us in the face. The fact that Germany of all countries, having lived through what happened in the 1930s, cannot see that is completely extraordinary. Whether it is Italy or perhaps, eventually, Germany, I hope that they wake up to the dangers and realise that there has to be currency adjustment within Europe if they are to avoid severe political dangers. I hope that it is going to happen sooner rather than later.

Infrastructure: Expenditure

Lord Flight Excerpts

Monday 25th March 2013 Lords Chamber

[Lord Deighton]

My Lords, first, it is necessary to clear up the numbers. There is a significant difference between public investment numbers and investment in infrastructure. Public investment includes huge investments in health and in defence, so there is a significant difference there. Also, if you look at the national infrastructure plan, you see that approximately 80% of the investment that we expect over the next 15 years in fact comes from the private markets and not from public capital expenditure.

[Lord Flight]

My Lords, the national infrastructure plan has identified some £200 billion of energy infrastructure investment and £200 billion of communication and transport infrastructure investment. What proportion of that total does the Minister estimate might be under way by the end of five years, and to what extent are any delays caused not by the absence of finance—where sovereign funds and others are willing to put up the money—but by planning and environmental legal constraints in this country?

[Lord Deighton]

I thank my noble friend for that question, which focuses us on the issues to do with accelerating the delivery of this very important programme. With respect to the proportion that will be under way within this Parliament, this Government have focused activity on the top 40 programmes and projects, which accounts for about £200 billion of the £400 billion my noble friend refers to. Approximately 20% of those projects are currently in construction, and we would expect that proportion, by 2015-16 and the end of this Parliament, to be approximately 50%. There is no question but that the gate that most constrains our ability to accelerate the stream of projects is to do with the variety of planning regulations that surround any major public infrastructure investment.

Budget Statement

Lord Flight Excerpts

Thursday 21st March 2013 Lords Chamber

[Lord Flight]

My Lords, I believe that this will go down as a successful Budget politically, particularly within the narrow scope for manoeuvre that the Chancellor had. It is perhaps correct that it should have been broadly an unexciting Budget. The one key initiative is the help to buy scheme, which seems to be somewhat the Neville Chamberlain strategy. As the noble Baroness, Lady Kramer, has pointed out, in the 1930s the economy was very much got going by the increase in housebuilding; indeed, few people realise that the most successful period of growth in the 20th century was 1935-40, when the British economy grew at 4% per annum compound. I point out that Chamberlain also addressed the other key problems of the time in that he cut public sector pay, which had got out of line with private sector pay, and he cut taxes substantially as well, generating demand without overborrowing. Perhaps there is a little more to learn from that period. However, these initiatives will have to be managed extremely carefully. They smack slightly of the Clinton measures that caused the housing bubble and all the trouble thereafter to the banking system.

My preference would be, if it were possible, to accelerate the infrastructure projects which the noble Lord, Lord Deighton, is appointed to manage, and I am sure that he will do extremely efficiently. Within the plan, there is about £200 million of investment in roads and other infrastructure and £200 million needed for power generation. That is massive scope to have infrastructure investment that will get the economy moving, but we have to get rid of the planning and environmental red tape, which is delaying that. I am convinced that there is the money for them. We have seen developments such as the recent Qatar involvement, but I am amused to learn that even the new road between Edinburgh and Glasgow is being financed by the Agricultural Bank of China, which has set up in this country to do business in that area.

We have to realise that the fundamental problem is less the banking explosion and more that Gordon Brown created a more than £100 million structural deficit. He relied on frothy income from an overheated financial sector and embarked on spending when there was not regular, sustainable tax income to finance it. We are stuck with that problem, caused by deliberate overspending, rather more than we are the parallel problems of the banking system.

Together with that was the policy of allowing people to borrow more and more. I remember asking Gordon Brown when he was Chancellor of the Exchequer whether he was concerned about the fact that consumer debt was far too high per person—about £18,000 per couple—and that house prices had gone up too much. His reply was that increasing individual indebtedness was fine because people could afford to service more debt. We have ended up with not only the public sector but the private sector overborrowed. The idea that you can stimulate growth by still more spending is, to my mind, a path to ruin. This economy cannot be turned into a growth economy by yet more consumer debt and more consumer spending.

It is clear that growth must come from either an increase in exports or an increase in capital investment. The scope for exports clearly lies with the BRICs and the Commonwealth. I welcome the Government’s initiatives, but a lot more could be done to improve our trade. We are lucky to have the Commonwealth relationship, which many have ignored or thought little of it, but those countries are substantial conduits to improve trade. There is clearly little scope in the eurozone; the economies are paralysed by the euro. Even if there is no collapse, the problem is not going to be mended easily.

As for the private sector here, in my view, we have an attractive tax regime and we have, broadly, to leave it to private sector companies to invest as and when they are ready. The private sector has built up massive cash reserves over the past three years. Even companies in the small and medium-sized sector have built up about £180 billion in cash reserves. The corporate sector has the money when the time is right for it to invest.

I understand but am slightly cautious about the case for using currency depreciation and higher inflation to ease the problems of overindebtedness, which is clearly what is happening. That needs to be watched very carefully or it could get out of control and worsen the situation. At least, as a result, we are now highly competitive internationally as well as taxwise. There is a huge incentive for companies to come here and do their business from here.

I end by pointing out that the private sector has already done a lot better than people realise. Let us look at the movements since 2010. Taking account of the reduction in the public sector and the significant downturn in North Sea oil output, the private sector has grown by about 4%. That is partly where the extra 1 million jobs have come from. I know that a lot of high-tech business in this country is starting to do very well indeed. I believe that the predictions for the private sector over the next year will turn out to be overcautious. I detect a significant pickup. Of course, North Sea oil output is about to turn in the opposite direction. We may be surprised by an upside to economic growth over the next year.

Overall, the potential is there. The Chancellor has been responsible and, as I said at the beginning, I believe that this will be seen as a politically successful Budget.

Monetary Policy Committee: Inflation

Lord Flight Excerpts

Wednesday 13th February 2013 Lords Chamber

[Lord Deighton]

My Lords, it is extremely clear from the MPC’s own minutes how it treats that trade-off. With the House’s indulgence, I will read the most appropriate lines:

“The Committee discussed the appropriate policy response to the combination of the weakness in the economy and the prospect of a further prolonged period of above-target inflation. It agreed that, as long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation”.

That is the perfect mandate for flexible inflation targeting.

[Lord Flight]

My Lords, how credible does the Minister think it is that the Bank of England could unwind £380 billion of QE and sell £380 billion of gilts, in the event of velocity of circulation recovering and the economy picking up, so as to stabilise the money supply?

[Lord Deighton]

My noble friend raises an important question: the technical unwind of the quantitative easing strategy, which is not something which would appear imminent. However when it does take place it will be done in full consultation with the Debt Management Office to ensure that we minimise any volatility to the gilt markets.

Public Service Pensions Bill

Lord Flight Excerpts

Tuesday 12th February 2013 Lords Chamber

[Lord Eatwell]

My Lords, it may be for the convenience of the House if I refer to the amendments tabled in the name of myself and my noble and learned friend Lord Davidson, since the government amendments are substantially responses to the points that we made in Committee. I want to make it clear why we feel that the situation has, let us say, not moved on far enough.

Let me deal first with Amendments 37, 38 and 39 because they make a proper, logical story. They seek to remove from Amendment 36 the role of the authority in deciding whether an adverse effect on the pensions payable has in fact occurred. In other words, the authority has to decide whether its measures should be challenged in consultation. This is as if, in a game involving Manchester United, penalty decisions against it were to be made by Sir Alex Ferguson. I am sure that he, as a talented football manager, would then make a decision on a reasonable basis. However, with all due respect to that distinguished person, do we think that these decisions would be made in a way which was balanced? I could choose any other football manager, including Mr Wenger, who apparently never sees things that happen on football pitches.

I refer to balance because in Committee the noble Lord, Lord Newby, in setting out the criteria that he applied in these circumstances, said that he wanted to achieve a sensible balance between members’ protection and the role of the authority. It seems that while the proposed new clause in Amendment 36 provides for a significant protection for members of the scheme, it is still not balanced in that it leaves the authority with the responsibility for deciding that its own measures have had an adverse effect on those members. In those circumstances, even the most reasonable person is likely to be reluctant to feel that measures which they are taking have a negative impact upon the scheme. Our amendments simply remove the role of the authority so that the new clause would say,

“containing retrospective provision which appears … to have significant adverse effects”.

In those circumstances it seems to me that the authority, facing the responsibilities that the noble Lord referred to, and without the protection of the statute giving it the decision-making responsibility—a decision-making role or power—would take a more balanced and reasonable view. These amendments are to encourage reasonableness on behalf of the authority.

Moving backwards, our Amendments 22 and 23 refer to what is now Clause 12, which deals with the employer cost cap. The problem with this clause is in subsection (7), where it is recognised that steps to change the cost cap may result in an,

“increase or decrease of members’ benefits or contributions”.

In other words it may decrease members’ benefits so that the action of using the cost cap to encourage efficiency and efficient management of pension schemes may result in the retrospective diminution of benefits which members feel that they have accumulated.

The key question is whether Amendment 36 covers that eventuality. The eventuality that it covers is,

“where … the responsible authority proposes to make scheme regulations containing retrospective provision”.

Changing the cost cap may have retrospective consequences but does not contain retrospective provision. Much as we welcome the general intent of Amendment 36, then, it does not deal with one of the significant cases of retrospection that still deface the Bill. Amendments 22 and 23 are designed to protect the benefits of pensioners against retrospective effect, perhaps unintentional, when there is some change in the cost cap. We are delighted to see the noble Lord, Lord Sassoon, here performing duties that were formerly performed for him.

Those two amendments are necessary unless the Minister can find a way for Amendment 36 to refer not simply to regulations containing retrospective provisions but to regulations that have retrospective consequences. That would be a way, I suggest, to transform Amendment 36 from a rather imperfect structure to one that would deal with retrospection throughout the Bill.

The amendments that I and my noble and learned friend have tabled are in the spirit of Amendment 36 and indeed of the Government’s laudable attempts to remove the retrospective elements—the ones, that is, which are unnecessary and potentially harmful to members; I understand that there are technical retrospective elements that are necessary—but I feel that they have not yet managed to achieve what the whole House wishes to achieve. Our amendments would contribute to that goal.

[Lord Flight]

My Lords, I should be grateful if the Minister could comment on the extent and the manner to which the Government’s amendments to the ability to make changes and to make retrospective changes affect the fundamental issue of affordability. I apologise for raising this issue yet again but it is fundamental. We start, as everyone knows, from the OBR advising that there will be a cash flow deficit of £15.4 billion by 2016-17. My related question to the Minister is: what is the Government’s estimate of the additional cash flow deficit costs of both increasing longevity and, more particularly, the new single-tier pension proposals made by the DWP? It strikes me that two separate silos have been working on this, with the Treasury in one and the DWP in the other. Precisely what the effects of the loss of employer and employee NI contributions and the ending of contracting out will be on the deficit of pay-as-you-go public sector schemes seems to some extent to be a mystery.

I think it was in Committee that the Minister advised that he felt the estimates I suggested were too high; thus I would be grateful if he would comment on what the Government’s estimates are. My revised estimates, done with the assistance of Michael Johnson, who many noble Lords will know has done significant work on the subject, are that there is an additional cash flow cost from longer longevity of the order of £2 billion per annum, and there may now be an additional £3.4 billion resulting from the loss of public sector employers’ NIC rebates with the ending of contracting out and a further £4 billion per annum as a result of public sector employees continuing to enjoy an enhanced occupational pension as if contracted out while still being entitled to further accruals under the new single-tier state pension, once it appears. In contrast, private sector employers who are contracted out will be permitted to change their scheme rules, effectively to reduce pensions paid, without trustee consent. As I have said, I cannot believe that the prospect of a potential cash flow deficit of some £24 billion per annum will be acceptable to whoever is in power at that stage, given the state of the public finances. Dare I say that it seems that not only the Opposition but the Government are ignoring the affordability issue with regard to this legislation as it passes through both Houses of Parliament?

I would be grateful for a response to the question about to what extent room for manoeuvre is being reduced by the government amendments. Secondly, what is the Government’s revised, post-OBR estimate of the total cash flow deficit cost of the arrangements under the Bill?

[Lord Whitty]

My Lords, as the Minister said, I have Amendments 7, 31 and 35 in this group. I should explain that for the remainder of the discussion of the Bill on Report I am likely to be seeing it through the perspective of the Local Government Pension Scheme which, in response to the noble Lord, Lord Flight, is a funded scheme, not a pay-as-you-go scheme, and, moreover, a funded scheme that has recently reached agreement between the trade unions and the LGA, sanctioned by the CLG and the Treasury, on a new cost-management structure. I therefore think the costs of any limit on retrospection in that scheme are unlikely to arise. I probably should declare that I am an honorary vice-president of the LGA and a member of the GMB, although I have no pecuniary interest in the pensions covered by the LGPS. I was also, until recently, chair of one of its schemes.

The Minister deserves considerable credit for moving significantly on this front. It is clear that what appeared to be quite an open-ended ability to amend primary and secondary legislation in the original text of the Bill has been significantly modified by the changes which he has proposed and the procedures that he has outlined, particularly in relation to Amendment 36. It would be nice if he could go a little further, particularly in respect of two points. Amendment 7 would effectively prevent retrospective changes for non-administrative reasons that had a material detriment for any members of the scheme. The reference in Amendment 36 to “significant adverse effects” sounds like a significantly higher threshold than “material detriment”. Does the Minister think there is a real distinction there? Could some quite serious detriment in effect occur without triggering Amendment 36? I would hope not, but I would like some on-the-record reassurance on that point.

Government: Economic Policies

Lord Flight Excerpts

Wednesday 30th January 2013 Lords Chamber

[Lord Deighton]

There are many positive signs. I do not think that the patient does look so ill. I refer to the extraordinary employment levels—the biggest increase in employment for the past 20 years. On the question of the exchange rate, the noble Lord is absolutely correct that sterling has recently weakened against the euro. The exchange rate has two sides: the strength of the eurozone versus the UK economy. What that exchange rate reflects is that many of the risks that have been confronted by the eurozone over the past two or three years are perceived by the market to be diminishing.

[Lord Flight]

Does the Minister agree that, beneath the aggregate figures, the private sector has actually grown by about 4% since 2010 but that this has been matched by the public sector reduction?

[Lord Deighton]

I welcome my noble friend’s encouragement to delve a little deeper into the figures. Certainly, with respect to employment, we are seeing a switch from an overinflated public sector to a much more dynamic private sector, which will stand us in very good stead in the longer term. If one looks at the specific factors relating to the output figures, there are some very interesting facts; for example, the majority of the decline in the fourth quarter relates to maintenance in the North Sea, and coping with the long-term decline of that source of revenue to the United Kingdom is a structural problem to which we must adjust.