Devolution Of Fiscal Responsibility

Mr Peter Hain (Neath) (Lab): Is it not the case that people in Wales would be buying a pig in a poke if income tax were devolved without a proper floor being put underneath the Barnett formula? The failure to address that issue has resulted in Wales being short-changed, so if income tax were devolved without the Barnett formula being addressed, it would be a bad outcome for Wales.

Mr Jones: I fear that the right hon. Gentleman has overlooked the arrangements that we put in place with the Welsh Government in October 2012, which ensure that if there is any danger of convergence, then the issue will be resolved. I believe that we should all be ambitious for Wales, and we should indeed be looking for a lower rate of income tax in Wales to give Wales the competitive advantage that it needs.

Hain welcomes exciting plan for a direct South West rail link to Heathrow

Heathrow airport have committed to a plan to create a new rail link that would take passengers from Reading directly to Heathrow by rail, a route currently only covered by coach. This will open up Heathrow Airport to passengers from South Wales, something that Mr Hain has been pushing for over a number of years. Heathrow’s status as a hub airport means that access to key business routes will become easier.

Reliable and efficient rail services to Heathrow are the key to reducing air pollution along the M4, M3 and M25 by reducing airport bound traffic. Rail accounts for 40% of passengers travelling to the airport but that should increase to 50% and eventually to 55%. The new link will go ahead regardless of plans for the third runway and it will be delivered by 2021 in partnership with Network Rail.

The new link will most likely tunnel under the M25 with minimal disruption to residents. Running four trains an hour between Reading and Heathrow via Paddington, it will improve journey times by up to 60 minutes.

Queen’s Speech 2014 – Pensions

Mr Peter Hain (Neath) (Lab): I wish to speak specifically about the pensions tax Bill and the private pensions Bill in the Queen’s Speech. The Government have proposed the biggest reform to pension tax rules in nearly a century. There is no denying that it is popular to give citizens—especially those with small pension pots—the choice to take lump sums that may be more beneficial to them than eking out a living from the small annual payments on which they would otherwise rely. Paying off a mortgage or a loan on retirement by drawing down a lump sum may well be better for such pensioners, but there is real danger in destroying good annuities. That has been going on for a few decades now, and is bequeathing a nightmare that Government policies are nowhere near capable of preventing.
We have a rapidly ageing population that is dumping a huge additional burden on the young, many of whom are already leaving university with massive debts thanks to this Government’s dysfunctional policies. Now they will be saddled with subsidising through their future taxes older people who are being encouraged to live for today and not protect themselves for tomorrow.

The closure of defined benefit schemes and the shift towards defined contribution schemes has been an utter catastrophe. Accelerated further by record demographic changes, that shift is a worldwide phenomenon and a product of the neo-liberal orthodoxy worshipped by the right hon. Member for North Somerset (Dr Fox), which has gripped Governments from the era of Margaret Thatcher and Ronald Reagan, and which this Government still seem to be in the grip of. In the US, for example, the number of defined benefit schemes halved in under 30 years, while direct contribution schemes tripled. Australia, also worshipping such neo-liberalism, saw an 80% reduction in the number of workers covered by defined benefit schemes from the 1980s.

That is the background, but there are disadvantages to the new pension freedom. For example, people might decide to spend all their pension savings at the point of retirement, dooming themselves to poverty later in life. Having saved into a pension fund, received tax relief for many years and reached retirement with a pot of money, they might be tempted to blow the lot at once, meaning that they will never have the benefit of the extra income that they would otherwise have had as they got older. If that happens, the tax relief they receive would not fund a pension, and employer contributions that they may have received along the way would end up funding immediate consumption, rather than providing a long-term income. We know that some people will do that; we do not know how many but we hope the number will be relatively low. Pensions expert Ros Altmann suggests that about 7% of people currently say that they would spend it all. In truth, it impossible to predict that accurately.

Geraint Davies: I am sure that my right hon. Friend is a supporter, as I am, of the idea of a British investment bank. Does he think that the Chancellor should have set up tax incentives to encourage people who have liberated their pension pots to reinvest in a British investment bank and create jobs and wealth for the future, instead of it being blown on everyday consumption?

Mr Hain: That is a very good point.

The new flat-rate state pension, which is cited in mitigation for this new approach to pensions, still means that a lot of people will fall back on the state having spent all their pension savings. Around 20% of pensioners will still be on means-tested benefits even after the new system starts. People might also try to game the system by taking all their pension money and recycling it into a new pension fund, getting more tax free cash and another lot of tax relief. That could mostly benefit those who are reasonably well-off with high incomes in later life, and it could be costly in extra Exchequer spending on tax relief.

This is mainly a market problem, and it should perhaps have been possible to reform that market without the draconian retreat from annuities proposed by the Government. Would it have been possible to insist that insurers are obliged to treat customers fairly, and ensure they would be liable if they did not carry out suitability checks to identify which type of annuity was best and offer a good rate? Would it have been possible to reform the way annuities work, and allow more freedom but not complete freedom?
What protections will be built into the new system to ensure that unsophisticated consumers are not left at the mercy of product providers offering poor product choices, or higher risk products that people simply do not understand and through which they end up losing significant sums? The Financial Conduct Authority needs to be on top of that right from the start, but judging by past form can we be confident of that? I have very serious doubts.

If guidance is delivered by product providers, those providers are liable to entice their customers towards more poor-value products. Experience shows that they will do whatever they can to try to keep customers’ money, or give them poor value and make extra profit. The annuity market has worked poorly for years, with rising profits to insurers and reducing value for customers. How will the Government ensure that the new products developed finally offer good value, and that the charges are fair and terms reasonable?

The Government are right to legislate to permit collective defined contribution pensions, but I warn Ministers about over-hyping the benefits. In principle, such pensions ought to be better for employers than traditional final salary schemes and better for workers than traditional defined contribution schemes, but in practice they still suffer from market and actuarial risks. Ros Altmann points out that lower earners may subsidise higher earners, and younger members may subsidise older members. The new pension freedoms to take most, if not all, of the pension pot in a lump sum, however attractive and justified that may be to certain people, may also mean that people prefer pure defined contribution schemes that they can access in retirement if they wish. Collective defined contribution schemes, admirable as they may be in principle, usually mean that people cannot just take the cash, which means they may well be less attractive for members.

My challenge to the Government is this: rather than leaving the private pension system to market providers and their whims, why not build a new system that works? We need a system with longevity that savers will understand and find confidence in—a lack of confidence in this Government’s approach to pensions is something that I imagine savers and I share. While the Chancellor’s right hand further fragments and individualises pensions through these tax proposals, the pension Minister’s left hand makes legal collective direct contribution pensions. Why should any employer move to that collective system when they can see the Treasury going down precisely the opposite route? I doubt whether many will do so.

The Government are not doing anything like enough to face up to the time bomb of our ageing society and the whole person social care that the shadow Health Secretary eloquently advocated, or anything like enough to face up to the pensions needed to underpin the new life that is rapidly overtaking us, and the whole person care necessary to protect us. The whole Government philosophy of leaving private pensions to the market and saying to citizens, “Effectively, you are on you own” has failed abysmally in the past, just as I believe it will fail abysmally in the future at a terrible cost to all of us—pensioners, taxpayers and the public in general. I urge the Government to look again and come back with proposals that really begin to meet the scale of both the pension challenge and the whole person care challenge that haunts the whole of this country.

Youth Unemployment Wales

Mr Peter Hain (Neath) (Lab): Given that the future of businesses in Wales depends on the vibrancy of our young workers, is the right hon. Gentleman encouraged by the fact that the Welsh Government’s policies are clearly working, in that the youth unemployment rate has come down faster and further than anywhere else in the United Kingdom? Will he be less churlish towards the Welsh Government and praise the jobs growth fund and that achievement?

Mr Jones: Far from being churlish, I commend Jobs Growth Wales for making an important contribution. Having said that, it is a limited contribution, and the important thing is for the Welsh Government to work closely with the Department for Work and Pensions to ensure that we can drive down even further the unemployment rates.

Budget Debate 2014 – it was the banking crisis that caused debt to rocket, the deficit to rise and borrowing to rise

Mr Peter Hain (Neath) (Lab): I agree with the hon. Member for Cardiff North (Jonathan Evans) over Tata, but the one thing that cannot be said about the economy under this Chancellor is that it has recovered quickly from the shock of the global financial crisis. Total output still has not reached pre-crisis 2008 levels, quite unlike in the USA and Germany both of which passed their 2008 peak back in 2011. What took them three years to achieve is taking the British economy under this Chancellor six years, and the reason is the savage cuts since 2010, a far tighter squeeze than in the USA or the eurozone. Under Labour, recovery was already well under way in the first half of 2010 when the Chancellor came into office. It was his policies that choked it off and the British people have been paying a heavy price ever since.

Today we have an unsustainable, out-of-balance recovery. The Chancellor acknowledged that neither investment nor exports are high enough. We already knew that higher consumer spending has come out of reduced savings, not out of higher incomes, because real incomes have been stagnating for years. It is a short-term recovery that cannot last. The ex-chair of the Financial Services Authority and ex-director general of the CBI Adair Turner said so in January at Davos when he warned:

“We have spent the last few years talking about the need to rebalance the economy away from a focus on property and financial services and towards investment and exports. We are now back to growth without any rebalancing at all…If you chuck enough monetary stimulus at an economy something happens. It is as if we have had a cracking great hangover, had a stiff drink and off we go again.”

A second factor making the situation unsustainable is that UK productivity has been flat for years. This pushes up unit costs and keeps our export prices higher. Our export predicament is dire. On top of that, we are witnessing a housing bubble again, with property prices rocketing in London in particular. In short, nothing fundamental has changed to avoid a rerun of a financial crisis brought on by a debt-financed consumer boom and a Government-backed housing bubble that sooner or later will burst, because bubbles always do burst.

Yes, the economy is recovering faster than forecast last year, but growth is forecast to be slower next year than this. The Chancellor expects the economy to run out of steam almost as soon as it starts to grow again, yet there is plenty of scope for much faster growth, and faster growth would mean less need for spending cuts and a quicker reduction in the Budget deficit.

The austerity programme, which this Budget continues to drive forward is based upon what I call the big deceit of British politics: that Labour “overspending” left the country with the mountainous levels of debt and borrowing which the Tory-Lib Dem Government inherited after the 2010 election. [Interruption.] The idea that the global credit crunch was caused by Labour’s public investment in Britain is risible. [Interruption.] The proposition that by building new hospitals and new schools, and by recruiting tens of thousands of extra nurses, doctors, teachers and police officers in Britain, Labour caused the sub-prime mortgage defaults in the US that ricocheted throughout the world’s financial institutions is preposterous. [Interruption.]

Robert Flello: It is amazing to hear the laughter from the Government Benches. Does my right hon. Friend recall, as I do, Conservatives standing up time and again saying there was far too much regulation of the banks and that they needed to reduce it?

Mr Hain: Absolutely.

It was not Labour’s public spending that triggered Britain’s or the world’s economic crisis; it was the global inter-dependency of reckless banking that the Conservatives wanted to be less regulated that in 2008 triggered an economic meltdown in Britain and right across the globe. [Interruption.] Labour responded by boosting public spending and borrowing to offset the catastrophic collapse in private sector spending, and the £90 billion spent on bank bail-outs plunged the public sector into record annual deficits, but these were deficits that stopped a shocking slide into a fatal slump and laid the basis for recovery from the biggest shock to hit the world economy in peacetime since the 1930s great depression. [Hon. Members: “Give way.”] If I have time at the end, I will.

Contrary to right-wing free market mantras and Tory-Lib Dem history rewrites, it was the banking crisis that caused debt to rocket, the deficit to rise and borrowing to rise as well. The low yields on UK Government bonds before, during and after the credit crunch under Labour bore eloquent testimony to the fact that the international markets had full confidence in its policies, and that they were not clamouring for the right-wing dogma subsequently visited upon Britain. Indeed, so desperate was the right hon. Member for Witney (Mr Cameron) to identify with Labour’s success on spending, investment, jobs and growth that he pledged to match Labour’s spending plans for three further years in September 2007 up to 2010. [Interruption.] Members on the Government Benches shake their heads, but that is what he did. If we had spent too much—if all the charges made by the Conservatives were true—why on earth would the current Prime Minister have backed our spending plans for three years ahead? It would help the quality of this debate and the quality of assessment of the Chancellor’s Budget if the Conservatives and the Liberal Democrats had the decency to acknowledge that essential fact, including this Prime Minister’s support for our spending programmes, instead of ploughing on regardless, with no end to austerity in sight.

Mr Redwood: Why did the new and very expensive and complicated regulators the Labour Government introduced fail to control the banks when people like me were telling them they did not have enough cash for capital?

Mr Hain: I agree with the right hon. Gentleman to this extent: we did not regulate the banks well enough or carefully enough, but his party—not necessarily him, but his leadership—was saying that there should be less regulation of the banks at that time, yet now they have the temerity to attack our spending plans when we brought borrowing down. [Interruption.]

Madam Deputy Speaker (Mrs Eleanor Laing): Order. All other speakers have been heard in silence. The right hon. Gentleman has livened up the debate, but he also ought to be heard.

Mr Hain: It is interesting how those on the Government Benches do not like to hear the truth, Madam Deputy Speaker. The level of debt under the Labour Government before the banking crisis was lower than we inherited from the Conservatives in 1997. We brought borrowing down and we brought the deficit down compared with what we inherited, and yes we invested in repairing the desperate state of our public services—people dying on trolleys in hospitals, schools crumbling, the railways decaying. We repaired all of that and then the banking crisis came along and blew it out of the water, and there was a failure by every Government right across the world to recognise the seeds of that banking crisis, but it was not caused by Labour overspending, and not caused by Labour high borrowing or high debt, because none of those things was going on prior to the banking crisis, and if we had not dealt with the banking crisis in the way that we did, the whole of the economic and banking system in Britain would have collapsed. We need the decency and honesty from the Government Benches to acknowledge that central fact.