Finance (No. 2) Bill

Mark Simmonds Excerpts

Monday 11th October 2010 Commons Chamber

[Mark Simmonds (Boston and Skegness) (Con)]

I draw the House’s attention to the Register of Members’ Financial Interests.

I am aware, as the Government and Opposition Front Benchers have said, that this is primarily a dry and technical Bill, and I shall address one particular area later in my remarks. However, it is important to set out the macro-economic climate and conditions if we are to provide a context for the Bill and for next Wednesday’s statement.

The contribution from the hon. Member for Wallasey (Ms Eagle), the shadow Minister, was perplexing. While wanting to congratulate her on her promotion, and on the fact that she clearly has a grasp of economic issues, I note the sense of complete denial about the serious situation in which we as a country find ourselves. It is quite clear that the coalition Government’s very difficult inheritance—with the previous Government having doubled the national debt so that we have the biggest deficit in the G20 and with more being paid in interest than the police, defence and transport budgets combined—emphasises the critical need to address the problem of the fiscal and structural deficit.

Treasury Front Benchers, the Chancellor and his colleagues, are absolutely right to dismiss the Opposition’s complaints. Why would anyone listen to a strategy from the very people who created the problem in the first place? I shall pick out one aspect of what the hon. Lady said, because it is something that the country needs to understand. The structural deficit, and the amount of money that the previous Government borrowed and this coalition Government have inherited, are not down to the banking crisis. The economic indicators update, which the Library provides, states very clearly:

“The Government borrowed £155.6 billion in 2009/10 (11.1% of GDP)”—

staggering numbers. Secondly, it states:

“The OBR’s Budget forecast for borrowing in 2010/11 is £149 billion. The OBR forecast that government debt will be £932 billion in 2010/11.”

And, it makes the third point:

“These figures exclude the effect of government intervention in the banking industry.”

That completely destroys the hon. Lady’s main focus and the point that she tried to make.

However, the issue is not just about the irresponsible and unsustainable Government expenditure that took place prior to the general election. I do not want to describe myself as a particularly visionary or prescient individual, but I point out to the House a question at Prime Minister’s Question Time that I asked the then Prime Minister, Tony Blair, on 25 May 2005. I shall not read it out, because it would be tedious for the House to hear it again, but I asked him what he would do to rein in the dramatically deteriorating fiscal deficit. Inevitably, as ever with Tony Blair, one did not receive a particularly comprehensive or detailed reply, but Treasury Benchers are absolutely right to focus on reining in the growing fiscal deficit.

It is quite clear, from the previous statement by the Secretary of State for Work and Pensions, my right hon. Friend the Member for Chingford and Woodford Green (Mr Duncan Smith), that the welfare budget was completely out of control, and from the initial findings of Sir Philip Green’s review of Government expenditure, that many procurement procedures are completely out of control. There was sloppy governance, and that needs to be addressed.

People may ask, “Why is it important if the Government don’t get a grip on spending.” If there is no such grip, there will be no or slower growth; if there is no growth, there will be no sustained recovery; and if there is no sustained recovery, there will be no wealth or job creation. It is no coincidence that since June’s emergency Budget, the credit rating of the UK’s risk has dissipated and yields on Government gilts and bonds have fallen significantly. It means that some confidence is returning to the markets—specifically because of the Government’s and Chancellor’s announcements back in June. They announced, first, some fiscal consolidation and, then, a promise of some control over public expenditure.

The dangers of not doing anything are considerable: sovereign debt credit downgrades; interests rate rises; additional debt interest that should be spent on investment in reformed public services; and the potential explosion of Government bond yields, as we have seen elsewhere in Europe. We need to challenge the myth, which we heard from the Opposition Front Benchers today, that fiscal consolidation and public expenditure contraction automatically lead to economic slowdown; they do not necessarily.

I hope and think that we will have, in the technical jargon, an expansionary fiscal consolidation. There are two facets to that. First, if we control public expenditure, we get greater consumer confidence as people revise down future tax burdens, something that the coalition in time need to deliver. That will encourage further consumer expenditure, and I very much hope that such control will be permanent, not temporary.

[Alison McGovern]

How will that increased confidence play out in different regions where—for the right reasons, because work is cheaper in such areas—public sector jobs are now focused? How does public confidence work in an area where a high number of public sector workers face redundancy?

[Mark Simmonds]

The hon. Lady makes a fair point, and I should say two or three things. First, the national insurance changes that the coalition Government have made will make it better and easier for employers to take on new employees in the private sector. Secondly, the Treasury is working on the regional fund to address the difficulties that are faced in some regions, which, I would argue, are over-dependent on public sector jobs, so that people can move into the private sector quicker than would otherwise be the case.

The second element of the expansionary fiscal contraction is to encourage business to invest, and I do not agree with the fundamental argument of the shadow Treasury spokesperson. There is a direct inverse correlation between Government borrowing and business investment, which means that when Government borrowing declines business investment goes up, and vice versa. That would be especially true if it were supported by expansionary monetary policy, which it is and, I hope, will be for the foreseeable future.

Opposition Members may say, “That all sounds very well theoretically, but has it ever happened in practice?” The simple answer is, yes. It has happened twice in recent times—not only in the early 1980s, when the then Chancellor of the Exchequer, Geoffrey Howe, reduced public expenditure and interest rates and, therefore, stimulated economic growth, but—

[Kelvin Hopkins]

Will the hon. Gentleman give way?

[Mark Simmonds]

In a minute, because the hon. Gentleman might be keen to comment on this point. The correlation also occurred under the previous Labour Government, between 1997 and 1999, when they stuck to the preceding Conservative Government’s expenditure plans. That is when GDP growth under the previous Administration was at its highest, averaging roughly 3.5% per year—significantly higher than during the rest of their tenure. So, the correlation has occurred before, and I see no reason why it should not occur again.

[Kelvin Hopkins]

I hesitate to say this, but I was around in 1979, and I remember it very well. The Government at that time massively increased VAT and increased interest rates. The pound rose, and neo-classical economists, like the hon. Gentleman no doubt, said that unemployment would fall to below 1 million. It actually rose to more than 3 million, and one fifth of manufacturing disappeared. It was only when the Government later reversed those policies that the economy started to expand, but sterling depreciated by 30%, during Nigel Lawson’s tenure, when the economy started to grow again.

[Mark Simmonds]

I am grateful for that intervention. The hon. Gentleman will not be surprised to hear that I do not share his analysis. In fact, the parallels are interesting. I would argue that in the early 1980s Geoffrey Howe and Margaret Thatcher were clearing up the mess that they inherited from the previous Labour Administration, just as the Chancellor of the Exchequer and Liberal Democrat colleagues in the coalition are tidying up the mess that we inherited from the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) and Tony Blair, his predecessor.

[Stewart Hosie]

The hon. Gentleman is giving an interesting analysis, which I do not share at all. He spoke about monetary loosening and monetary expansion. We have had a zero bound in interest rates and 99% of the £200 billion of quantitative easing has gone to buy Government debt—it has gone right through the tube, without hitting the sides of the real economy. Where does he think the monetary easing and expansion will come from to give the cash needed by businesses that want to invest? It is not coming from QE.

[Mark Simmonds]

The hon. Gentleman is right, in a way. I hope that interest rates will remain low for a considerable time to give businesses confidence to borrow money, when they need to, to invest; we could be having a whole argument about the banking sector and structure as well. When interest rates start to tick up again, I hope that the quantitative easing position will start to unwind and the Bank of England will start to sell some of the QE back into the market, which will then create confidence. Personally, I am very nervous about future quantitative easing; we have probably done just about enough. If interest rates stay low as a loose monetary policy, I am reasonably confident that we will have steady growth, for reasons that I have just explained.

From where will the potential dangers come? I do not think that we are assured a return to good times expeditiously. There are risks and problems, particularly in the global economic context—especially given the need to balance the UK economy away from consumer expenditure and the financial sector. I am afraid that recent news from around the world has not necessarily been encouraging. US economic growth is slowing, Chinese manufacturing is cooling and problems in Japan may spread to other Asian economies. Furthermore, there is the dangerous US-China currency stand-off, which could lead to protectionist policies. I very much hope that those will not be put in place.

If we are to have a strong export-led-growth UK model, we will require a strong eurozone. Although the eurozone grew strongly in the second quarter of this year, it remains highly dependent on German growth. We will have to monitor extremely carefully the impact that fiscal tightening has in the eurozone and its particular relevance to UK exports, although I very much hope that that will be assisted by a weakening and a sterling depreciation. Given what they inherited, the Government’s macro-economic policy is absolutely right.

I want to focus on a particular aspect of the Finance Bill. It relates to the aside, made by the Exchequer Secretary in his opening remarks, about real estate investment trusts, which are covered by clause 10 and schedule 4 of the Bill. I support the changes that are set out, but I have a couple of specific questions, which the Minister could answer in her winding-up speech or about which she could write to me, with a copy of the letter being put into the House of Commons Library.

At the moment, dividends through real estate investment trusts, which are tax-friendly vehicles for the ownership of property, particularly commercial property, have to be paid in cash. The Bill will allow them to be paid in stock as well. What will the tax status of those dividends paid in stock be? Will income tax or capital gains tax apply? Clearly, capital gains is paid only when a gain is realised or made. What would happen if the stock deteriorated rather than increased in value? In the Bill there seems to be some provision for a market value. I am not sure how that will work in practice and over what time scale that market value will be assessed.

Real estate investment trusts, which the previous Government brought in, are an excellent vehicle for the ownership of commercial real estate in particular. The HMRC REIT unit has a very good reputation and is extremely helpful to those involved in the industry. However, there are issues that should be in the Bill but are not. The Treasury needs to consider them to improve real estate investment trusts.

The trusts should be the worldwide answer to property investment, in which all our pension funds invest. They are very significant to the future well-being of most of the UK’s population. We need to make the reforms to strengthen further the position of the UK as a place for these important capital markets. The current tax structure of REITs should have put an end to the offshore floating of companies and funds, but that has not happened. It is very complex to bring back onshore a fund that is already listed elsewhere. The Treasury needs to consider ways of simplifying the procedure, therefore reducing the costs and making such a move more efficient and effective.

The Treasury also needs to look at the transition period, which is currently 12 months. It needs to be three years. Some 75% of the money raised inside a real estate investment trust has to be spent within 12 months, and that needs to be looked at and extended. At the moment, to avoid losing their status, investment trusts are having to invest in incorrect assets that are not necessarily going to produce the returns that the people involved believe they should be getting for themselves or their shareholders, whether individuals or pension funds. That issue needs to be looked at carefully.

I am also extremely nervous about the income cover rule. I will not bother boring the House with that at the moment, although officials will know what I am talking about. Currently, it is 10%, but I would argue that it needs to be the same as the takeover percentage, which is about 29.9%.

I want to make one final point about real estate investment trusts. Currently, they can be listed only on recognised exchanges. That does not include the alternative investment market, or the AIM. Many smaller REITs want to float on the AIM so that they can generate income and funds and grow their business. At the moment, they have to be listed both on the AIM and an exchange offshore. That adds costs and bureaucracy and it is utterly unnecessary. I should like the Treasury to make dual listing a thing of the past and make it much easier for entrepreneurial REITs and new REITs.

[Paul Uppal (Wolverhampton South West) (Con)]

I share my hon. Friend’s interest in real estate investment trusts. Commercial property is a success story. UK commercial property is one of the most coveted assets globally and brings in a great deal of revenue to the Exchequer. I echo my hon. Friend’s eloquently put sentiments. If we look at the restrictions on the creation of real estate investment trusts, there could be a win-win situation for the UK. We should particularly look at a policy of incorporating that for private property companies as well.

[Mark Simmonds]

I am grateful for the intervention of my hon. Friend, who is absolutely right. If he has an interest in these matters, he will also be aware that one of the outstanding main problems of UK commercial and investment banks is their level of debt against commercial property, which has fallen in value since the heights of the market back in 2006-07. The banks are finding it difficult to unravel some of those positions. The real estate investment trust structure may enable them to find a way through some of those problems.

[Stewart Hosie]

I very much welcome what the hon. Gentleman is saying about REITs. Some of his Front-Bench colleagues will remember that the same pleas were made to the then Labour Government when REITs were first introduced. All power to the hon. Gentleman’s elbow in persuading his Front Benchers to do what he suggests. Would there not be an advantage in getting small private companies, or even groups of housing associations, to benefit from REITs in respect of social for-profit housing as well?

[Mark Simmonds]

I agree with the hon. Gentleman. That is not a new idea. Many years ago I was chairman of the housing committee on Wandsworth borough council. He may be surprised to hear that at that time—back in 1993-94—I proposed to the then Treasury Minister exactly what he has just suggested about housing associations. It was about creating the ability for them to raise capital, reinvest in the stock and so on. He is absolutely on the right lines. I hope that one day he and I can work together on trying to develop our thoughts on this matter.

The Government’s macro-economic policy is absolutely right. We must control public expenditure, and that control must be permanent, not temporary in order just to get us through this crisis. Then we must ensure that UK taxpayers’ money is being spent to the maximum benefit of those who are using public services. I support the Bill.