Treasury and Work and Pensions

Some of us expressed scepticism about the costs from the very beginning, but we wished to be constructive and wanted the Olympics to succeed. Clearly, however, we must be prudent about costs, although it is clear that the Government have not been. Apart from public spending growth, the other element of unsustainability in the economy relates to personal debt. We have had a remarkable recent trend of consumer expenditure running ahead of the growth of the national economy in every single year. One of the consequences of that has been that the savings ratio has fallen from 10 per cent. to less than 5 per cent. A further consequence has been the substantial build-up of personal debt. The aggregate figure, which is about 150 per cent. of income, is the highest in the developed world by a long way and the highest in British history. Much of that has been necessitated by the enormous boom in house prices, with 85 per cent. of that debt secured against houses. Of course, much of the problem is a matter between private borrowers and private companies, rather than a matter for the Government, but the Government could and should be doing many things. Over the years, the Government have talked about promoting generic financial advice, but very little has happened. They have talked about financial education, and although a little bit is happening as part of maths education, we have seen little else. There seemed to be possibilities for debt pooling, but that has not happened on any scale. We are now faced with a possible collapse in the insurance market for mortgages, which would expose many people to vast liabilities and possible repossession owing to the failure of the market. The Government should be focusing on those matters, but they are not. In the last part of my speech, I wish to refer to big, long-term issues, which, if properly handled, could take us very far forward. The first such issue is the response to Stern. The Government were fortunate to have access to Nick Stern, who is probably one of the really outstanding economists in the world. His analysis is outstanding and recognised internationally. The Stern report came up with several clear conclusions: action is needed urgently; action is needed initially in the developed world; and we in this country have responsibility for sharing the lead on that action. In due course, we will have a system of internationally traded permits at the European and global levels, but in the meantime, national policy will largely focus on taxation. We have led the way in that debate, and the Conservatives are following, although it is unclear exactly what they are advocating. We have a difference with the Government, however. It may be an artificial disagreement, but I hope that in the course of this debate it will be clarified. The Government have criticised us, and the Conservatives, for arguing for environmental taxes on the grounds that there is a fundamental incompatibility between raising taxes to change behaviour and raising taxes to raise revenue. I ask the Chancellor to reflect on something that I am sure he would consider a success, the climate change levy. The levy has undoubtedly had a significant effect in reducing carbon emissions; there are good independent academic studies to support that assertion. It has also raised in total about £4 billion in revenue, which has been fed back in tax cuts elsewhere. It seems an entirely sensible precedent, and I am at a loss to understand why the Government have such difficulty with the idea of applying that principle more widely. I conclude with a few words on Turner and pensions. There is a broad consensus on the overriding architecture. We all accept that there has to be improvement in the basic system of state pensions and it has to be offset by delayed pension ages. We all agree that there needs to be a new system of state second pension provision with employer, employee and Government support. Our disagreements are partly about timing. We take the view that it is unnecessary to depart from Turner’s recommendations. The Government seem to have brought forward by five years the later retirement age and postponed by five years the age at which people will be entitled to earnings linking with their pension. Of course there are costs involved in that, and there are tough choices to be made. We believe that the Government have ducked some of those tough choices in failing to deal, for example, with the issue of public sector pensions. We also disagree with the Government’s decision to depart from Turner’s conclusions in respect of women, or more generally the citizens’ chest for pensions. The big philosophical disagreement, however, is about the role of means-testing. We take the view that the longer the postponement of the improved state pension, the greater the number of people who will be sucked into means-testing over a long period, and that will have very damaging economic consequences. The Government, and particularly the Secretary of State for Work and Pensions, of whom I have asked questions on this matter several times, believe that there is no significant disincentive effect from a marginal rate of tax and benefit withdrawal of 40 per cent., but we believe that there is. We find it very difficult to square the Government’s relative agnosticism on this question with their insistence that they must retain a system of 40 per cent. tax relief for high earners. If incentives work at the top end of the scale, why do they not work at the bottom? If incentives are important in saving for pensions, why are not the Government much more concerned about the damaging impact of means-testing? The Chancellor will shortly have the opportunity to present his pre-Budget report. It could be an opportunity for crowing and displaying self-satisfaction, and he will be entitled to a certain measure of that, but I hope that, in the national interest and in the interest of his own credibility as Prime Minister, if that is what he becomes, he will start to acknowledge that there are very serious problems of imbalances in the British economy which will have to be addressed, and that there are big long-term challenges in environmental taxation and pensions policy which the Government are so far ducking.