Bank of England (Economic Affairs Committee Report)

Viscount Chandos Excerpts

Thursday 2nd May 2024 Lords Chamber

[Viscount Chandos (Lab)]

My Lords, I am very grateful to the noble Lord, Lord Bridges of Headley, for introducing this debate, and for the exemplary work that he and other members of the Economic Affairs Committee have done to produce this report. I was privileged to be a member of the committee previously, when it conducted inquiries into both quantitative easing and the case for a central bank digital currency. This report revisits those subjects, at the same time as taking a broader view of the Bank’s working. The result is a powerful endorsement of Select Committees generally sticking with subjects and themes over a longer period of time, rather than allowing an inquiry to be seen as a one-off.

There is not a single conclusion or recommendation in this report with which I disagree, which prompts me, like the noble Lord, Lord Bridges, to ask myself whether the unanimity of the committee and the wide support for its findings represent an example of the very groupthink that the committee questioned the Bank of England and other witnesses on. So perhaps I should express my disappointment that the title of the report is blander than some in the past, even if the Governor of the Bank of England was critical of the committee suggesting that the Bank’s use of QE might equate to “addiction”.

As a young banker—so a very long time ago—I developed admiration and respect for the Bank and its culture. As a market participant, it had a profound understanding of the financial markets without generally being captured by them. Of course, even in those halcyon days, there were problems and failings, from BCCI to Barings, but there was widespread confidence in the integrity and competence of the Bank, even though it did not enjoy formally the independence that was granted to it by the Labour Government in 1997.

The structure and remit of the Bank has, as the noble Lord, Lord Bridges, already said, changed considerably—massively—even since then: from one deputy governor to four and from eight executive directors to 21. The multiplicity of additional objectives and “have regards to” was also highlighted by the noble Lord. Has the culture of the Bank remained fundamentally unchanged as a result of this process and evolution? I believe that at the core, the best aspects of this culture remain, but that the recommendations of the report are important and necessary steps for protecting and reinforcing it.

I will focus on two issues: transparency and governance. In doing so I will comment on more specific policy issues and performance. I profoundly believe that transparency should be at the heart of public bodes generally; even the intelligence services are now significantly more open, if in a limited and carefully controlled way. Rather nostalgically, this made me think of my maiden speech, a frightening 42 years ago, on the subject of a European directive on bank accounting. Back then, although the clearing banks did report their true profits, merchant banks still disclosed profits only after transfer to or from a hidden reserve. As a middle-rank employee of one such bank, I questioned whether this really added to the stability of the financial system, faced by innumerable chairmen of banks in the same debate—I think the management of banks has become a little more diverse—arguing for the maintenance of the status quo.

Transparency should be at the core of the financial markets, and of the Bank of England’s role in them. For that reason, I regret that, in the otherwise sensible review of the Bank’s forecasting, Ben Bernanke did not advocate the adoption of forward guidance or the use of a so-called dot plot to provide markets with more data on which to base their interest rate expectations. The central bank is not there to provide the framework for traders to maximise the opportunity for trading games; it is there to create a stable and predictable environment for the benefit of the economy as a whole.

Likewise, as the noble Lord has already touched on, I am baffled by the Treasury’s refusal to publish in full the indemnity under which the Bank of England makes whole any losses from the QE and QT programme. The reasons given by the Government are as opaque as the policy itself. In what way would the publication of the deed of indemnity jeopardise the Government’s cash management operations? Would the Minister be kind enough to answer that when she comes to wind up, and explain why the protection of the Debt Management Office’s operation is not unfairly at the expense of other market participants?

After the nearly three years since the committee’s report on QE was published, it is still hard to come to any definitive conclusions, but this latest report provides an important update. I believe that the QE programme, in its three phases, was right in principle but wrong in degree. Its efficacy in bringing stability to the financial markets at times of maximum stress was clear, but it was of indeterminate impact in more general macroeconomic management. As a result, the scale of the purchases was almost certainly too great, and the speed of subsequent sales too slow. This has arguably exacerbated the problems of responding to a rising interest rate environment, and increased the cost to the Exchequer of the intervention. Can the Minister say what the net realised gain or loss currently is since the start of the programme, and what the mark to market unrealised loss is on the assets still held by the Bank, all of which are for the Treasury’s account under the deed of indemnity, as -far as we know?

Very briefly, on governance and appointments there are serious doubts about, among other factors, intellectual diversity and political independence in relation to the court, the MPC and senior management. Some of this is visible; more lurks below the surface. I very much hope that the next Government—no complacency, on today of all days, but I hope a Labour one—will conduct a thorough review of the governance arrangements and appointment rules for every part of the Bank of England, and in addition look at the whistleblowing and independent process for resolving problems as and when they occur.

I very much hope that the Economic Affairs Committee will continue to bring its laser-like focus on the workings of the Bank of England, with many aspects of its operations not covered in this report. As the noble Lord, Lord Bridges, has also advocated, I hope that your Lordships’ House will have much more time than in the past to debate these issues.

Autumn Statement 2022

Viscount Chandos Excerpts

Tuesday 29th November 2022 Lords Chamber

[Viscount Chandos (Lab)]

My Lords, what can a Back-Bench speaker this late in the order usefully do other than allow your Lordships to get home as early as possible? It is not to repeat arguments powerfully made by other speakers on every side of the House, nor is it to usurp the role of the Front-Bench spokesman in winding up—although speaking late after my noble friend Lord Eatwell so passionately opened for these Benches prompted happy memories of my winding-up debates which he opened when I was his apprentice in 1995 to 1997. What a time of justified optimism that was.

My noble friend drew comparisons between the austerity inflicted by George Osborne and that now proposed by Sunak and Hunt. As Marx said, history repeats itself,

“the first time as tragedy, the second as farce,”

although in this case, the farce came under Truss and Kwarteng, followed by a repeat of tragedy for millions of people as the Government resort to overkill in a certainly vain attempt to restore confidence in their shattered economic and financial credibility—a sticking plaster over a deep wound. For the avoidance of doubt, I am more inclined to follow Marx for his one-liners than for his economics.

I propose to use my time to cover a couple of points raised by the Minister which have perhaps not received particular attention. The Minister talked proudly of investing in capital—the noble Lord, Lord Horam, just emphasised how important that is—and then tried to spin a budgeted freeze in nominal terms in public investment at a time of rocketing inflation as confirmation of this, whereas, as the Resolution Foundation has calculated, it represents a £15 billion cut in real terms in capital investment.

Why do these cuts have to take place? A number of noble Lords have highlighted the hugely increased debt service cost that is causing the Government to look for savings elsewhere. The noble Lord, Lord Lamont, highlighted the increase in index-linked debt from 6% in 2001 to 22% now, the vast majority of that coming under Conservative or Conservative-led Governments. However, as important a factor in the increase in the debt service cost are the projected payments by the Treasury to the Bank of England under the indemnity that has been entered into for the operations of quantitative easing.

At the Economic Affairs Committee meeting earlier today, the Governor of the Bank of England said that he did not believe in hindsight and therefore he would not agree with his own chief economist’s evidence earlier this month that maybe too much quantitative easing had taken place in the period since the start of the pandemic. Quantitative easing represents a huge interest rate swap or a hedge fund carry trade, so that debt service has been lower than the last 10 years as payments under the indemnity have gone from the Bank to the Treasury. However, this is payback time. Even John Redwood has noticed this.

The Minister also made a point of the tax rises on wealthier individuals—wealthier but not the wealthiest. Growth in inequality over the last 12 years, as the noble Lord, Lord Willetts, has highlighted, has been much more in terms of wealth and capital than in income. I hope my friendship with the noble Baroness, Lady Noakes, who I am glad to say is not in her place, will survive my advocating a much more significant increase in the taxation of wealth than the phased reduction of the capital gains tax tax-free allowance, whose impact anyway is much more relevant to the relatively wealthy but is a rounding error for the very wealthy.

I am not as convinced as my noble friend Lord Sikka by the arguments for equalising the rate of CGT with that of income tax. Evidence from the tax take after that doctrinaire socialist, the noble Lord, Lord Lawson, equalised the rates suggests that it may not be the optimal policy. Equally, the right rate in terms of both tax take and fairness is almost certainly not the 50% of marginal income tax that currently applies.

Finally, inheritance tax is so important. The noble Lord, Lord Livingston, highlighted the question of why gifts should be taxed at a lower rate than income. The great reform of inheritance tax that is needed is the restoration of the taxation of inter vivos gifts as applied in capital transfer tax, introduced by Denis Healey. It is worth saying that this is particularly relevant for non-doms because, even if a non-dom volunteers to pay income tax on income from assets held overseas, the potential avoidance of UK inheritance tax deprives the Exchequer of substantial revenue, as the Prime Minister and former Chancellor must be aware. Increasing rates of VAT, personal tax and corporate tax is often said to be the only way of raising substantial amounts. However, just as public expenditure is made up of a mix of large items and smaller items, so the raising of tax is a combination of large, cash-generating taxes and smaller ones such as CGT and inheritance tax.

Budget Statement

Viscount Chandos Excerpts

Tuesday 14th March 2017 Lords Chamber

[Viscount Chandos (Lab)]

My Lords, the Government have given your Lordships the opportunity to debate the economy in the light of the Budget, billed by the Minister as the last one in spring—until, of course, a future Chancellor switches it back again. But they then fielded a flyweight contender of a Budget whose likely fiscal impact will be minimal—going out with a whimper, as the director of the IFS has said. It is rather remarkable that the Government have been able to whip up such a political storm out of a mouse of a Budget. But that is perhaps more a reflection of the cynical and irresponsible triple-lock commitment in the Conservative Party’s manifesto—to which the noble Lord, Lord Macpherson, referred in more diplomatic terms—than of any radical streak in last week’s measures.

In the interests of time I shall confine myself largely to one issue—one which was only elliptically included in this year’s Budget. In table 2.2 of the Budget report there is a list of items announced in previous Budgets or Autumn Statements but only now taking effect. In passing, I note that by far the largest numbers are in column BG concerning the cost of the phased reduction in corporation tax to 18%: £17.7 billion in the five years to 2021-22—a figure dwarfed by the £64 billion estimated to have been given up by the Exchequer in the period from this year as a result of all corporation tax cuts enacted since 2010. I had understood the Prime Minister and the Chancellor to have only threatened to turn the UK into a corporate tax haven as part of their sophisticated negotiating tactics with the EU, but now I realise, of course, that the process is already well under way—even before we knew that we were leaving the EU, let alone before the only too possible breakdown of negotiations. As we struggle to pay for the NHS, social care, education and other public services, can we justify the corporation tax cuts already introduced, let alone contemplate any further reduction implied by the, frankly, incredible negotiating position suggested by the Government?

My principal theme, however, relates to one of the other significant line items, in column BE: the cost of the new inheritance tax nil-rate band for main residences —an estimated total of £2.8 billion over five years, which compares with a total IHT take in 2013-14 of only £3.4 billion. Other noble Lords and I highlighted in last week’s debate on housing the folly of introducing new distortions to an already overheated housing market. As the noble Lord, Lord Macpherson, said, a sensible tax system should not favour one group over another. But then this falls under two of the no-go areas he identified: residential property and inheritance. Even before this measure—and indeed the Government’s cack-handed introduction of a stealth tax in the form of hugely increased, albeit graduated, probate fees—the Nobel economics laureate Sir James Mirrlees wrote in his IFS review on taxation in 2011 that,

“the current UK system does not stack up terribly well against any reasonable set of principles for the design of a tax on inherited wealth”.

The “biggest barrier”, Sir James concluded,

“to the effective working of inheritance tax … is that it is levied only at or close to death, allowing the wealthy to avoid it altogether by the simple expedient of passing on wealth well before they die”.

My noble friend Lord Eatwell, five years ago, asked the then Commercial Secretary whether the Government would undertake a comprehensive review of inheritance tax and the case for moving to tax the lifetime receipt of gifts by individuals rather than the estates of those who have died. Since then the system has become only more unfair and more complicated. In addition to the simple expedient of giving assets away long before death, which of course only the very wealthiest can afford, there is also a plethora of reliefs to be exploited, further increasing unfairness and reducing the reasonable tax take for the Exchequer. Agricultural land and business reliefs alone amounted in 2013-14 to more than the total net IHT take.

A moment searching on the internet provides a plethora of fund managers offering AIM portfolios with the specific and principal aim of reducing individuals’ liability for IHT.

“Our Inheritance Tax Portfolio Service is a bespoke, discretionary service designed to reduce … IHT”,


says one firm.

“A plan to reduce your IHT liability”,


reads another.

“We adopt a conservative approach … in order to diversify the risk we seek to hold a minimum of 15 different companies”,


says another. Does the Minister not agree that that sounds very much like aggressive tax avoidance, and what are the Government going to do about it?

The current inheritance tax system is deeply flawed, sacrificing revenue for the public purse, and manifestly unfair, infecting the public trust in the tax system overall. I urge the Minister and her colleagues in the Treasury to overcome the taboos identified by the noble Lord, Lord Macpherson, and institute urgently the comprehensive review advocated by these Benches for so many years.

Budget Statement

Viscount Chandos Excerpts

Wednesday 23rd March 2016 Grand Committee

[Viscount Chandos (Lab)]

My Lords, it feels quite like old times, not just to be sitting alongside my noble friends Lord Eatwell and Lord Desai but to be sitting opposite the noble Lord, Lord Lupton, although previously we did so on other sides of the negotiating table in our roles as corporate finance advisers. I wear as a badge of honour his suggestion that I am a member of the hypocritical group of Labour Peers on these Benches and I will come back to some of the points that he made on capital gains tax changes.

I welcome the chance to debate the Budget measures and the implications they have for the economy, but I regret that this debate is not taking place on the Floor of the House but here in the Moses Room, whatever the charms of this room may be. I regret that particularly in terms of the exceptional maiden and valedictory speeches of the noble Lord, Lord Price, and the noble Baroness, Lady Knight, respectively, and in the context of the separation of this debate from the Motion which will take place as last business in the Chamber today, to which my noble friend Lord Desai referred. Perhaps it is an unworthy thought that this room is being used not just because of the pressure of legislative business in the Chamber but, rather, because the Government remember their good friend and supporter the late Lord Hanson, who made a practice of always holding the annual general meeting of Hanson Trust on one of the days between Christmas and the new year, while denying that that was done in any way to discourage the attendance of troublesome shareholders.

As the last Back-Bench speaker and having heard so many powerful comments about the macroeconomic scene—I support entirely the contributions of my noble friends Lord Eatwell, Lord Darling and Lord Desai—I propose, even before hearing the speech of the noble Lord, Lord Lupton, to focus on one or two areas of specific tax policy, particularly capital gains tax, relating to entrepreneurial activity.

The Minister referred to the problem of low productivity, as did my noble friend Lord Eatwell and many other speakers this afternoon. Of course, the linkage between productivity and technology, innovation and entrepreneurial activity is complex and what we see in the US reflects many of the issues that we struggle with here. But notwithstanding the suggestions of the noble Lord, Lord Lupton, like all my colleagues on these Benches in both Houses, I strongly recognise the contribution of small and innovative businesses to the increase in productivity.

The Minister referred to the CGT changes as a measure to encourage investment. He also said that tax should be not just competitive but fair. That last statement reminded me of something written by the excellent Financial Times political commentator Janan Ganesh—indeed, the biographer of the Chancellor —when he wrote last year:

“A country’s tax code is not just a mesh of rules and rates—it is a secular bible of moral signals”.

Although Ganesh was writing principally about inheritance tax in that particular article, which I will refrain from addressing at least today, his argument is compelling on a broad view. I will quickly examine the CGT changes and indeed the related pre-existing tax treatment of investment in smaller companies, and ask whether this achieves the aim of stimulating productive investment and at the same time sends the right signal of fairness.

The noble Lord, Lord Lupton, took us through a long history of the changes in CGT rates. He rather glossed over that it was the noble Lord, Lord Lawson, who as a Conservative Chancellor raised the CGT rate to the same level as the marginal rate of income tax, which I think we can see now as a triumph of intellectual purity over practical efficacy. We then went through the period that he described of taper relief. It was then my noble friend Lord Darling who simplified the system, removed in large part the separate taxation of business assets, private company shares and so forth from other assets, and introduced a single rate of 18%. At the same time he introduced entrepreneurs’ relief at a 10% rate capped at £1 million in any entrepreneur’s lifetime. The current Chancellor, both during the coalition Government and subsequently, significantly raised the CGT rate to 28% but at the same time substantially increased entrepreneurs’ relief in two stages to £10 million.

The changes in this year’s Budget Statement bring us back to a basic rate that is very similar to that introduced by my noble friend Lord Darling, but with a further broadening, in effect, of entrepreneurs’ relief and the reintroduction of a two-tier system. There may be a reasonable argument, as is made by Hamish McRae in today’s Independent, that 20% as a general CGT rate may be optimal from the point of view of raising tax revenue. That may have influenced my noble friend Lord Darling when he pitched the rate at 18%. But do we need ever-growing concessions to small and private company investment? In 20 years of advising and investing in early-stage companies, I have never seen any evidence that a capital gains tax as low as 10% makes any difference to the quality or quantity of investment in these companies, let alone the effect of the income tax breaks that apply through EIS and VCT investment. What are the Minister and his colleagues doing to try to assess the total cost of concessions to private company investment, both the pre-existing ones through income tax and other CGT breaks and the newly introduced ones? Will he give an assessment of whether the taxpayer gets value for money from that? If we do not, surely we are falling into the trap that Mr Ganesh referred to in the FT of sending the wrong moral signal.

I should emphasise that these Benches strongly support the activities of small companies. As I have said, I have devoted most of my working life to working with them. But we need to be rigorous in the way that we examine what allowances are really needed as opposed to currying favour with the small business lobby.