Debate on the Address

My Lords, I declare my interest as a pension fund investment manager for the past 30 years, but before the noble Lords, Lord Rosser and Lord Whitty, draw in their breath, perhaps I may say that I agree with almost every word that they have said. I have to declare another interest; I am afraid that I am a long-standing, over-enthusiastic consumer of Cobra beer. I was most impressed by the splendid maiden speech made by the noble Lord, Lord Bilimoria. If he has a bottle of Cobra on his coat of arms, may it always be full. We heard also a very moving maiden speech by the noble Lord, Lord Rowe-Beddoe, on the problems of manufacturing employment, particularly in Wales, and I look forward to hearing much more from him. My noble friends Lord Newby and Lord Vallance combined their usual expertise and great good sense in their speeches on the Stern review. Perhaps I may tell the noble Lord, Lord Peston, that I had not realised he was such a cynic. I was particularly struck by the scepticism of the noble Lord, Lord Vallance, regarding defence research spending. I share that in spades. My noble friend Lord Lee spoke on tourism. I thought that my noble friend Lord Dykes was initially pitching for a place on the Government Front Bench, but he quickly corrected that impression. Finally, perhaps I may tell the noble Lord, Lord Marlesford, that the Thatcherite consensus does not extend to these Benches and that some of us might even have been on the side of the sans-culottes against the aristos in 1789. In replying to this debate, I wish to focus on the dangers of three types of debt—private, corporate and public. Debt in Britain is a monster gnawing away at the security and future of far too many lower-income and middle-income families, and threatens a whole generation of young people. For them, high house prices are a curse. If they are less educated and less skilled, the collapse of council house building under successive Governments and the shortage of affordable homes to rent can plunge them deep into debt, even in northern Britain, when they have to buy a house of their own. In southern England, lower-paid young people now see the housing ladder pulled high above their heads. Many of the brightest and best-educated young people coming out of university into well paid jobs also risk drowning in debt. Starting £15,000 or £20,000 under water from student loans and top-up fees as soon as they graduate, they will gasp for breath a few years later when they take on their 100 per cent, interest-only mortgage, as the noble Lord, Lord Sheldon, highlighted, to buy a basement flat or a tiny terraced house if they work in the south-east or other high-priced property areas. No wonder the personal finance editor of the Times calls herself ““young, gifted and broke””. And no wonder that a whole generation of young people are starting work with no realistic prospect of saving for a pension until it is too late to build the pot that they will need for a reasonably comfortable old age. Some 20 or 30 years ago, many young people saved without thinking for a pension when most large private-sector employers offered a defined benefit pension scheme. Now that happens only in the public sector. Crippling personal debt is a problem so far only for a minority of households. The November inflation report from the Bank of England shows how household debt has doubled since 1999 and is now equivalent to one and a half times the post-tax income of households. About one in six households in that survey said that they faced problems repaying debts, and about 0.2 per cent of the population became insolvent over the past year. That sounds a reassuringly small statistic, does it not? However, it represents more than 100,000 men, women, and children in families who have fallen off the financial cliff. For them it is 100 per cent, not 0.2 per cent, disastrous. And how many more families are peering over the edge? The chief executive of Debt Free Direct says there are now 2 million ““irreversibly indebted families””. They may be able to pay their monthly interest bills, but have no realistic prospect of ever paying back the loan, short of a lottery win. And he should know—debt is a booming business in Brown's Britain. The Association of British Insurers last week published its annual survey of how British people save, if at all, for a pension. The figure that really struck me was that 43 per cent of us owe credit card debt carried over from last month. That is a key indicator of someone at financial risk, because they will be paying a real interest rate in double figures on that debt. By carrying on with hard-core credit card debt you must be either overstretched or stupid, when much cheaper debt is freely available. The Bank of England inflation report also shows how the effective interest rate on household loans, mainly mortgages, was over 2 per cent above base rate in 1999, but today is only just over 1 per cent above base rate, so the interest rate margin has halved. Paying the interest on your mortgage is now easier, but paying back the capital is a real struggle. Perhaps I may tell the noble Lord, Lord Peston, that my scars of advising Government may go back only to the 1970s, but I certainly remember when inflation was 25 per cent. High inflation did at least wipe out a big chunk of your mortgage in real terms over the years, but now you have nowhere to hide if you borrow too much. These frightening figures on families in debt come after 10 years of high employment, falling interest rates and steady economic growth. That has created a balmy climate for borrowers—I disagree with the noble Baroness, Lady Noakes—for which the Chancellor can claim some credit, as he always does. There is one golden rule that he never takes the slightest risk of breaking: the politician’s golden rule—““If you don't blow your own trumpet, no-one else will do it for you””. He may prove me wrong in his Pre-Budget Report, but I would not count on it. Seriously, though, the economic cycle has not been abolished and the British economy will go through tough times. Far too many of our fellow citizens are already on a debt knife edge with no margin of safety as unemployment and house repossessions creep up. We on these Benches call for a massive expansion of integrated debt and pensions advice centres, building on and working alongside the National Association of Citizens Advice Bureaux. Only a one-stop shop with a trusted brand name can reach millions who need help. Otherwise, there is a real risk that the national pensions savings scheme will involve serious pensions mis-selling. Auto-enrolment in pensions, combined with a means-tested state pension for many years to come, could easily be a toxic cocktail. Turning to the points powerfully made by the noble Lord, Lord Rosser, we may also be storing up a potential debt problem in the corporate sector with the explosion of private equity funds. Richard Lambert of the CBI is right to warn about the risky financial structures of private equity-backed companies and the public policy questions for an economy, as he put it, where large swathes are held in these high-debt structures. The British Venture Capital Association today launched a campaign to protect those companies’ favourable tax status. Its Government lobbying operation is pretty slick and it enjoys a powerful voice in the Chancellor’s ear in Sir Ronald Cohen, who built Apax Partners into a $20 billion private equity group. But today’s multi-million pound buyout funds are more about fancy financial engineering, not real venture capital, as the noble Lord, Lord Wade of Chorlton, described in his fascinating speech, which backs start-up and early-stage entrepreneurs and small companies. Sir Ronald’s firm, Apax Partners, helped by the Economist Intelligence Unit, produced a report, Unlocking global value, which points out, "““Most major buyout firms have little or no involvement in pure venture capital, where there is less money and higher risk””. " That is their business decision, but shuffling the ownership pack of mature companies has none of the economic or social benefits of successful early-stage venture capital. This year has seen a flood of private equity bids for water companies and other privatised utilities. How does our economy benefit? Where is the value added for Britain when a secretive buyout fund bids billions for a publicly quoted British water company and loads it up to the eyeballs with debt so that it pays no corporation tax to the UK Exchequer? The Apax report also shows how buyout deals are getting riskier and more highly geared: in 2005, buyout firms borrowed, on average, five and a half times the target company's earnings before interest, tax, depreciation and amortisation, against only four and a half times in 2004. So, if British pension funds invest in this buyout vehicle, they are just paying higher fees to the Goldman Sachses or Apaxes of this world to invest in the same underlying water company assets that the pension funds previously owned anyway in their quoted share portfolios. No pension funds would publicly borrow several times their stake to invest in the equity market, but that is what they are doing indirectly through these big buyout funds. A fat chunk of the current mergers and acquisitions boom in the City of London is private-equity driven. The buyout bonanza is paying for plenty of multi-million pound mansions in Notting Hill and agreeable country estates across southern England. When the noble Lord replies for the Government, can he tell us what estimates the Treasury has made of the loss of corporation tax from major British companies being taken privately into these highly geared tax-deductible vehicles, and can he assure us that that will be taken fully into account in the Treasury’s review of how these funds are taxed? Like the noble Lord, Lord Rowe-Beddoe, the Liberal Democrats want a straight cut in corporation tax for all businesses, not favourable tax treatment for a few. This Government are not straight in accounting for their own debt. I have tried from these Benches over the past five years to help to expose the worst examples of their off-balance-sheet accounting. It misleads Parliament and the public and they hand out billions of pounds of public money to private financiers in unnecessary consultancy fees and long-term liabilities on uncommercial terms. Two particular examples stand out in my memory. The first is the public/private partnership deal for London Underground. The noble Baroness, Lady Valentine, in her businesslike speech, called for more investment in transport in London, but on the Tube today Londoners suffer a disgraceful service without the absolutely essential safeguard of being able to sack a failed supplier. The second is Network Rail—a creature of creative accounting if ever I saw it. The noble Baroness, Lady Noakes, the noble Lord, Lord Jenkin, and the noble Lord, Lord Moser, in his excellent speech, have all already stressed the significance of the Statistics and Registration Service Bill, which will in due course come to this House. On this, I am delighted to say that we are on the same side as the angels, as is the noble Lord, Lord Peston. We are telling the Government today that we will scrutinise and amend that Bill as rigorously as we can when it comes to this House to make public accounting open and honest once again. National statistics must be truly independent in future. Statisticians who are embedded in separate departments must also report directly to the National Statistician, and I see no need at all for the pre-release of sensitive statistics to government Ministers. Playing fast and loose with statistics is second nature to new Labour. The words ““Iraq”” and ““peerages”” will feature on the front of Tony Blair’s political tombstone, but ““spin”” will certainly be there on the back. The other vast unquantified debt on the Government's balance sheet is in respect of public sector pensions. When historians judge this Government's record in 10 or 20 years’ time, their harshest criticism may well be on their total surrender to the public sector unions over pension ages, paid for by tax and council tax payers in the private sector who have far worse pensions or none. Two nations in pensions are simply not sustainable. If you get a grip on public sector pension costs, that helps to pay for a non-means-tested decent state pension for all. That is the only way to give women a fair pensions deal and to ensure that savers keep every extra pound they save for a pension. Neither the Government's nor the Conservatives' pension proposals face up to the scale of the problem. But, as with PFIs and PPPs, Gordon Brown prefers to spend the taxpayers' money now and leave someone else to pay the bill later. That is not prudence; it is just putting off the evil day. These debts are cunningly concealed for now in the public sector, and millions of ordinary families in the private sector are just making ends meet with debt looming over them. But if the Chancellor is in No. 10 after the next election, both the private and public sector debt monsters will come back to get him. Returning to today’s subject, I am afraid that this Queen’s Speech is just a flat swansong from a lame-duck Prime Minister.