Pre-Budget Report 2009

My Lords, I have listened with interest to the excellent analysis of the PBR by many noble Lords. As my noble friend Lord Lamont pointed out, unlike the Irish Government, who have wisely moved to cut public expenditure now, the Chancellor is carrying on as though there is not too much wrong with the economy and, when growth returns next year, it will get better and we can go on as before. This is so inconsistent with the Government’s previous reverence for its golden rules, about which we have heard so much in this debate year after year. What about the 40 per cent ceiling on borrowing? The national debt will rise to double this level by 2014, and the Government now behave as though it does not matter much. As my noble friend Lord MacGregor said, the Prime Minister pretended throughout the summer that there was no need to cut public spending. The Chancellor said that the bonus tax is not designed to raise revenue but to improve behaviour; but what about the Government’s behaviour? Their squandering, over 10 years, of the healthy position which they inherited in 1997 made us ill prepared for the crisis, and yet they refuse to change their behaviour in any way before 2011, however serious the deficit. As my noble friend Lord Lamont has said, we will have to wait until after the election for the real Budget. I declare an interest in that I am employed by Mizuho International, the London-based investment banking subsidiary of the Mizuho Financial Group of Japan. I do not know whether bankers are more unpopular than politicians or politicians more unpopular than bankers. A year ago I think it was the latter, but now I think bankers are more widely reviled. The Government have already failed to defend the City’s interests by agreeing to the establishment of three new super-regulators at the European level, which will make the rules and set the strategy, leaving our FSA with the responsibility of supervising banks on a day-to-day basis. There is now a debate as to whether the discredited tripartite arrangements should continue, albeit with strengthened co-ordination systems, or whether the FSA’s supervisory arm should be subordinated to the Bank of England or even subsumed into it. The question is rather less important than it should be if the FSA’s real reporting lines are to be to the three new EU-level super-regulators. The alternative investment fund managers directive is an example of the kind of disproportionate and protectionist measure that we may see emanate from these bodies. This directive is intended to apply not only to hedge funds but to all funds which are not UCITS. When I was director-general of the European Fund and Asset Management Association in Brussels in 2006, the majority opinion seemed to me to be, "Let’s leave this well alone", although there were elements within the Commission that believed then that to regulate hedge funds would be a useful step on the road to extending the EU’s hegemony over the City of London. It would appear that those views have prevailed, taking advantage of a time when our unpopular Government’s eye was off the ball, concentrating only on staying in power. Furthermore, we do not need and cannot afford duplicating regulation. The noble Lord, Lord Turner, said, not so long ago, that the FSA needed more people and more highly paid people to ensure that in a future crisis they are less likely to be caught again with their eyes off the ball. I disagree with the noble Lord. I think the FSA already has too many people doing the wrong things, even if it were not soon to be emasculated to a member-state-level authority responsible only for managing day-to-day operations. Given that the FSA must also accept some of the blame for the economic crisis and for the state that it allowed some of the banks to get into, would the Minister confirm that the bonus levy will also be applied to all bonuses over £25,000 to be paid to FSA staff? Noble Lords may be interested to learn that the FSA did not manage its own wages bill so well. It forecast that the cost of its salaries and bonuses would rise by 4 per cent in 2009 over 2008. In the event, it rose by 14 per cent, and the authority had to borrow £23 million to balance its books and make its bonus payments. The £550 million which the Government hope to receive from their proposed levy on bonuses pales into insignificance compared with the £178 billion deficit now expected in the current year. However, as pointed out by Anatole Kaletsky, writing in the Times last Friday, the Treasury is risking serious damage to a leading British industry in pursuit of a one-off benefit which does not begin to make a serious contribution to reducing the deficit. The City of London Corporation has stated that this tax sends out a very mixed message of an arbitrary and unpredictable taxation regime. The City is already haemorrhaging bankers, brokers and fund managers to other financial centres, such as Switzerland and Hong Kong. Financial companies contribute around a quarter of the total yield from corporation tax, some £11 billion a year. On top of this, their employees contribute many tens of billions a year in income tax, VAT, stamp duty and other taxes. The Chancellor’s misguided move to impose a higher rate of income tax on incomes over £150,000 will, I believe, be counterproductive. The steady trickle of emigrating bankers could become a flood. Then there is the punitive treatment of pension contributions which will only be tax-free in respect of the basic rate of tax, but will be taxable when drawn at the recipient’s highest marginal rate, which will be 50 per cent. Furthermore, there is the 2 per cent national insurance contribution increase. I think it is now 2 per cent, but it is so stealthy a tax increase that I could not find it quickly in the documents. I think it was 1 per cent plus 0.5 per cent plus another 0.5 per cent, so I think actually we now have a 52 per cent marginal tax rate. The Government, by their actions, especially their bank windfall tax, and their failure even to begin to tackle the enormous and increasing Budget deficit, are already doing great damage to our crucial financial sector. The Minister will argue that the bankers caused the economic crisis. Obviously, the banks, the regulators, and governments here and abroad, all bear some responsibility. However, as the Minister is well aware, the estimated final cost to the Treasury of the bank bail-outs since the collapse of Northern Rock will be only some £10 billion compared with the previously estimated figure of £50 billion. The Chancellor has also predicted that the Treasury will eventually eliminate even this. The Government are taking advantage of the current unpopularity of bankers to push for the state involvement and regulation of their employers’ remuneration practices. That is extremely damaging to the perception of London as a good, competitive, efficient and stable place in which to operate a financial business. Surely the state has no right to interfere in agreements on remuneration between employer and employee, except where it is the shareholder. It is therefore eminently reasonable that, as the majority shareholder in RBS and as a significant minority shareholder in Lloyds, the Government should, and properly may, become involved in remuneration policy. They have no right to become involved in banks in which they are not a shareholder because, in doing so, they interfere with the rights of the shareholders of those banks. Furthermore, the right way to deal with excessive remuneration packages that are paid to practitioners in proprietary trading activities is to increase the capital requirements of such businesses in order to introduce a more sensible risk/reward ratio. Increasing the committed capital, which it is acknowledged is necessary, will automatically reduce the margin and correct the problem of excessive bonuses that are payable from short-term trading profits. As noble Lords are well aware, the Government are to a large extent protecting spending on schools, hospitals and the police, but if we are at war, as we clearly are even though the Prime Minister does not behave as though we are, defence spending should be similarly protected. The Government are fond of boasting how they have greatly increased spending on the National Health Service, but, as your Lordships are well aware, the increased resources have been most inefficiently applied, and the number of doctors and the availability of the best possible treatment have improved at best only marginally and in no way commensurately with the increased expenditure. This is because billions of pounds have been wasted on the failed IT system which the Government attempted to foist on hospitals up and down the land. Another important point is that the PBR shows that our net contributions to the European Union are set to rise from £4.8 billion in 2009-10 to £6 billion in 2010-11. In 2008-09, they were only £3 billion. Our rapidly increasing contributions to the EU budget could not have come at a worse time. While I congratulate the noble Baroness, Lady Ashton, on her appointment as High Representative for Foreign Affairs and Security Policy, I regret both the creation of this office and our failure to obtain in the Commission a powerful post with responsibility for economic affairs or financial services. It is reported that the FCO will face a substantial cut in its budget just as we are massively increasing the EU’s diplomatic presence around the world. We do not need and cannot afford two Foreign Offices. Even though many senior diplomats do not recognise the fact, one reason why we punch well above our weight around the world, especially in countries such as Japan, the world’s second largest economy, and in fast-growing economies such as China and India, is because of the high quality of our diplomats and the influential presence of our missions abroad. As Sir Win Bischoff, chairman of Lloyds Banking Group, said in his letter to the Financial Times on Monday: ""We need to strengthen our partnerships, and work through the global value chains, to make sure that the UK and London have better structural links with Asia. Only in this way can we remain a central part of that growth story"." Our maintenance of strong British embassies in these countries is crucial to the maintenance and enhancement of such structural links. EU embassies will at best be far less efficient in supporting London’s interests in those countries. The fact that after 12 years of profligate and misguided overspending by this Government, our diplomatic presence will have to be scaled back to pay for a wasteful and unaccountable European External Action Service, conveying a muddled message to our trading and economic partners in Asia, is a catastrophe.