§ Mr. John McFall (Dumbarton)
I beg to move amendment No. 31, in page 14, line 26, after 'society', insert'or an industrial and provident society'.
With this it will be convenient to take amendment No. 32, in page 14, line 26, after 'society', insert'or an industrial and provident society covered by a loan deposit protection scheme approved by Her Majesty's Treasury'.
§ Mr. McFall
I am speaking on behalf of the co-operative movement, which has been largely ignored by the Government in the Bill. We welcome the inclusion of building societies in the TESSA—tax-exempt special savings account—scheme because they are part of the mutual sector. Co-operative societies have a long tradition of being savings institutions in addition to their role as retailers. We should welcome the inclusion of cooperatives within the scheme.
Since 1844, co-ops have encouraged their members to follow a policy of self-help and thrift, in line with the present Government's view on wider share ownership. The co-operative movement was built on the policy of savings. The surpluses arising on trading were allocated to members pro rata to their trading with the co-operatives. Those amounts were credited to the members' share accounts and formed the working capital of the co-ops, on which a limited rate of interest was payable.
The membership of co-ops in the United Kingdom today is about 8 million and the retail turnover is slightly less than £6 billion. That shows that it is still a fine example of self-help and a force in the retail market.
Up to 1984 it was accepted that co-ops were different from other organisations because they were liable to corporation tax at a special 40 per cent. rate, when other companies paid 52 per cent. on taxable profits. It was then decided to make changes in the structure of taxation: relief was withdrawn for the increases in trading stock, and first-year allowances and the special rates for co-ops were withdrawn. To compensate for those withdrawals, the rate of corporation tax was reduced to 35 per cent. The co-operative movement and I felt that that change benefited companies more than co-operatives.
Along with those changes, tax incentives were introduced to assist various categories of taxpayer, for example the business expansion scheme, profit sharing and personal equity plans. In all those cases, co-ops could not take advantage of any of the tax incentives. All those factors have disadvantaged co-ops in relation to their competitors. Therefore, if the proposed TESSA savings scheme is introduced, and co-ops are once again excluded, there is a considerable danger that that will result in money being withdrawn from co-operatives and invested in TESSAs with banks and building societies. That would undoubtedly place co-ops in considerable difficulties.
Therefore, we request that co-ops should have the same opportunities to participate in the operation of the new TESSAs as banks and building societies. We emphasise 950 that we are asking not for special treatment but merely for parity of treatment with those concerns, which we see as competitors in obtaining capital.
Amendments Nos. 31 and 32 are intended as alternatives. The first would bring all industrial and provident societies, including co-operatives and friendly societies, into the net. If the Government feel that that is too wide, the second amendment would bring in societies whose depositors are already protected under a scheme drawn up under the Banking Act 1987. Those schemes give our savers protection comparable with that enjoyed by depositors with banks and building societies.
We believe that either amendment would assist the Chancellor's objective of encouraging savings, because they would widen the social range of people taking advantage of the new concessions on TESSAs. I commend the amendments to the House.
§ Mr. Lilley
One of the key features of TESSA is that we have taken great care to keep the rules and regulations and general red tape to an absolute minimum. We can do that for a scheme that is confined to banks and building societies because for each of those types of institution there is already a proper statutory framework in the Banking Act 1987 or Building Societies Act 1986 providing for authorisation, regulation and investor protection, so we did not need to add that to clause 23.
Once we tried, however, to go wider than the two main groups of deposit takers, it would be necessary to complicate the Finance Bill provisions to take account of the different circumstances of the bodies concerned. I should be very reluctant to do that, and in the absence of a proper regulatory framework, the Inland Revenue would need to get more involved in checking that institutions were operating the new TESSA scheme properly.
The two amendments would appear to bring in all industrial and provident societies, many of which do not typically take deposits at all. It is true that it would be theoretically possible to limit the scope of the clause to co-ops, which I imagine is the intention of the hon. Member for Dumbarton (Mr. McFall).
It is true that co-ops have historically undertaken small-scale deposit taking. The hon. Members who sponsored the amendments were obviously well aware of that, and I recognise that the co-ops' depositors are covered by an investor protection scheme, as the hon. Gentleman mentioned. But the point is that co-ops benefit from total exemption from the Banking Act and are not subject to the detailed authorisation or prudential supervision applied to banks and building societies. I do not therefore think it appropriate that they should be allowed to offer TESSAs.
Moreover, co-ops' exemptions under the Banking Act exist largely because their deposit taking is on a small scale and incidental to their main trading activity. If societies wanted to expand their deposit-taking activities significantly or to enter the mainstream of retail banking with products such as TESSAs, those exemptions would no longer be appropriate.
Co-ops also have a certain tax advantage; they can pay interest gross on their deposits to taxpayers and non-taxpayers alike. So they do not get a bad deal overall under the present arrangements.
The co-operative movement is not excluded from TESSA altogether, since I understand that the Co-op bank is authorised under the Banking Act. I must advise the 951 House not to accept the amendments, which go further than is necessary or desirable and which complicate unduly what is now a very simple scheme.
§ Mr. McFall
The Minister correctly said that the Co-op bank is included, but there are many other aspects to the co-operative movement and it was to highlight them that I moved the amendment. I have no intention of pressing it to a Division but I should like the Minister to consider incorporating co-ops in future. As I said earlier, we have a membership of 8 million and a turnover of £6 billion, a not inconsiderable element in the economy. Perhaps if the Minister cannot give me an answer today, he will do so at some time in the future.
§ Mr. Lilley
I shall certainly do that, and I welcome the co-operative spirit in which the hon. Gentleman moved the amendment. We recognise the valuable contribution that the co-operative movement makes, both to its members and to the economy, and I shall look into the matter in that spirit.
§ Mr. Harry Ewing (Falkirk, East)
I have not previously attended the debates on the Finance Bill, but the Minister's agreement to consider what my hon. Friend the Member for Dumbarton (Mr. McFall) has proposed was helpful. I look forward to the outcome of his consideration.
To help the Minister's consideration, may I say a word or two as the former chairman of a co-operative society, the former chairman of the Scottish co-operative wages board and salaries committee and as a member of the national wages board? In my younger days I was deeply involved in the co-operative movement, so I am well aware of the integral part that that movement has played in various localities, especially in the industrial areas of Great Britain.
It is certainly true, as my hon. Friend would concede, that much of the co-operative movement has disappeared from industrial Britain for the very reasons that my hon. Friend adduced—the co-operative movement, through no fault of Governments, has gradually been placed at a disadvantage vis-a-vis its competitors. If the movement were placed at an even greater disadvantage, that could be serious.
The problem is that the capital that shareholders invest in the movement is not in shares in the sense in which they are quoted on the stock exchange; nor are they shares in the sense that they must be sold to someone else before a person can redeem his investment. This is a banking system from which people can withdraw share capital at seven days' notice. When more attractive avenues for savings open up, there can be a run on share capital, and co-operative societies throughout the country face severe difficulties when such runs occur because they can have a grave impact on a society's trading position.
I am glad that my hon. Friend the Member for Dumbarton has taken this opportunity to speak about his amendments, and he is right not to push them to the vote. He has given the House a chance to hear about the continuing importance of the co-operative movement in many places throughout the country. Indeed, I notice that co-operative organisations are springing up again in deprived areas where groups are getting together to form them. In many ways that takes us back to the days of the 952 Rochdale pioneers and even to the founder of the co-operative movement himself—Owen. History has come full circle, so I am glad that the Minister is keeping an open mind. I hope that he will consider the amendments as seriously as he spoke about them.
§ Amendment negatived.
§ Question proposed, That the clause stand part of the Bill.
§ Mr. John Battle (Leeds, West)
This was a Budget of small measures, and TESSAs are another small measure. One of the Government's claimed highlights in an otherwise lacklustre Bill is the introduction of the tax-exempt special savings accounts, now running under the acronym TESSAs. They constitute the Government's attempt to make savings more attractive.
This seems to me a backhanded attempt to acknowledge that a great economic error was made in the 1988 Budget—the tax cuts of the right hon. Member for Blaby (Mr. Lawson), which were much heralded at the time but which have since been shown to have fuelled a massive increase in consumer spending and to have generated a spending boom. By handing out deep tax cuts, the Government merely fuelled a massive trade deficit.
The tax-cutting Budget of 1988 also resulted in a massive redistribution of wealth from the poorest to the richest. In the 11 years during which the Government have been in office, £6 .7 billion has been taken from the bottom 50 per cent. of the population and £5 .6 billion of that has gone to the richest 10 per cent. Of that sum, £4 .8 billion has gone to the top 5 per cent.
We encourage savings, but we are entitled to ask whether that will encourage real savings or whether it will be another tax break for those who already have savings. TESSAs were welcomed by the Secretary of State for Wales and there was a tribute to that welcome in The Times on 21 March:A wry smile flashed across the relaxed face of Peter Walker, out-going Secretary of State for Wales, when John Major disclosed details of the new Tax-Exempt Special Savings Account—which he promptly abbreviated to `Tessa'. For that is the name of Walker's wife. After the speech Walker admitted he had indeed been smiling for that reason. 'I was at the Cabinet meeting this morning when John Major told us the news and I told him that I was very grateful that, for my last Budget, there was something in it dedicated to my wife'".Perhaps the right hon. Gentleman and his wife are thinking of taking up a TESSA. They are in a good position to do so because TESSAs will not reach down to the small savers but will be geared to people in the middle and higher income brackets.
TESSAs were welcomed with caution by the City. There was not an immediate response, nor the view that they would result in an increase in savings throughout the population. A recent report from the Select Committee on the Treasury and Civil Service said:We would not necessarily expect to see a very sharp increase in aggregate in savings in the short term as a result of the Budget measures.A Mr. Olivier, of Hambros unit trusts business, was reported in the Financial Times as saying:TESSAs are more likely to reshuffle old money about.If that is the case there may well be no real encouragement for new savings.
The key question is, who will be expected to save in the current economic climate? The Bill gives some tax 953 concessions to companies and to the City but does nothing to help the poorest to meet higher costs in rents, mortgages and the poll tax. It does nothing for 7 million people on low pay. The Treasury figures show that, although 85 per cent. of couples who earn more than £35,000 a year will benefit, only 25 per cent. of those who earn between £5,000 and £10,000 will gain from the Budget.
The number of people caught in the poverty trap of taxes and means-tested benefits is estimated to increase to 410,000, compared with 290,000 in November 1985. Since the poll tax was introduced at the beginning of last month, a family on half average earnings will be about £1.80 a week worse off as a result of the Bill. That also results from the holding back of an increase in child benefit and the introduction of the poll tax. Many families will pay an extra 91p a week in spending taxes.
Let us look at those who would not benefit from taking up a TESSA because they have no liability to tax anyway. They include people on benefit or income support, the unemployed, pensioners without substantial occupational pensions, and single people earning less than £6,500 who are unlikely to have much spare cash to move into TESSAs. Couples earning less than £13,000 are also unlikely to have much spare cash to spend on them.
In the case of married couples where the wife does not work and there is not much in the way of savings, the interest income is already covered by the wife's tax allowance, so TESSAs will not benefit such couples. The same applies to couples where the wife is earning less than £3,000 and there are no large savings. Anyone with a mortgage of more than £30,000 is unlikely to take up a TESSA because it would be better for him to pay off his mortgage.
The categories of people that I have mentioned make up the bulk of my constituents, and I am sure that they fit the constituents of many other hon. Members. The average wage is £269.50 a week, but on the whole people in my constituency do not earn as much as that. Although west Yorkshire is a low-wage area, it is at the top of the savings league; the people there save 14 .8 per cent. of their income. They are good savers, although they have very low incomes, hut TESSAs will not help them. The real beneficiaries will be married couples who already have investment income of £3,300 or more on current interest rates and who have at least £25,000 in the bank or about £60,000 in shares. Couples where the wife earns over £3,300 but who do not have a mortgage of more than £30,000 will also benefit, as will single people earning more than £6,500.
There are two essential requirements for a TESSA to be of any advantage to a family. The first is that that family has the resources to be able to put money into a TESSA. The second is that there would otherwise have been a tax liability on the interest receivable. If the first requirement is not satisfied, in practice it is not possible to use a TESSA at all or no tax advantage can be obtained. If the second requirement is not satisfied, a TESSA can be operated, but it obviously offers the family no tax advantage.
Before we can make a judgment about whether there are adequate resources to put money into TESSAs, we must bear in mind the requirement that the money cannot be withdrawn before the end of the five-year period. That means that only people who are able to save as a matter of course each year out of income are likely to be able to take up TESSAs. 954 As I have said, non-taxpayers, those on benefit and pensioners who do not have a substantial occupational pensions will not be able to benefit, nor will those whose incomes are largely taken up trying to survive by day-to-day expenditure. That category could be said to include single people earning less than £6,500, virtually all single-parent families and married couples earning less than £13,000 a year. They are all unlikely to have any disposable income for TESSAs, especially after mortgage rises are taken into account. We challenge the Government's notion that TESSAs are a great gift and an incentive to savers. It will be seen that the advantages of TESSAs are for high-income families and that that advantage will be magnified because both husband and wife can take up a TESSA.
Despite the Government's warnings about the inflationary wage spiral, top company directors continue to award themselves rises far in excess of inflation. Recent increases in directors' salaries have been as high as 171 per cent., and average rises are 40 per cent. I am not talking just about boardroom directors. A recent feature in the Financial Times showed that Britain's business managers —those earning between £30,000 and £200,000 a year—are on schedule for pay increases of between 12 and 14 per cent. Perhaps it is to precisely such people that TESSAs are directed. It would have been better not to directly redistribute income to them in the first place in the tax-cutting Budget of 1988.
It remains to be seen whether TESSAs will result in a new build-up of savings rather than switches from other accounts or perhaps from shares. Will they attract people who would have saved in the medium term anyway? It could be argued that, at a time of a high interest rates, no one with a mortgage is likely to save money on a regular and long-term basis when it could be used to repay that mortgage. Have the Government considered that argument?
One could push the logic of the argument and say that TESSAs will encourage borrowing. If the Government have not considered it they might like to take account of the way that TESSAs will impact on working out repayments of mortgage interest. In practice, they may have the opposite effect to encouraging savings.
This is a small measure, and we believe that TESSAs will have a marginal effect—at best, increasing the personal sector savings ratio. We question the usefulness of a scheme which, in the current economic climate, merely rewards existing savers for their existing savings. There is no evidence that TESSAs will encourage those on low incomes to save. A much better alternative to TESSAs would be positive public support for bodies such as credit unions, which provide community-based means of encouraging even those on the lowest incomes to save and share. Even such bodies found favour and encouragement in The Economist on 31 March. I shall be pressing my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) to do all that he can for credit unions when he is appointed Chancellor of the Exchequer, as he will be soon.
§ Mr. Lilley
The hon. Member for Leeds, West (Mr. Battle) described TESSA as a tiny measure. I think that it is an important measure both for what it achieves and for the signals that it generates in the economy as a whole. It is one of the most imaginative features of the Budget. He suggested that the name "tax-exempt special savings 955 account" was a deliberate attempt to ingratiate ourselves with my right hon. Friend the Member for Worcester (Mr. Walker). There may be some truth in that, but, if so, it was because I could not find a name for the scheme that would result in the acronym NORMA and that meant the same thing.
This is a straightforward and simple instrument. It took a lot of paring down to make it as simple as it is. We have deliberately kept the rules and restrictions to a bare minimum. That is desirable in any case, but it is especially important if the scheme is to attract ordinary taxpayers. We do not want a scheme which appeals only to sophisticated financial whiz kids. TESSA is for all taxpayers. I am pleased to note that it has been welcomed from both sides of the House and outside.
Contrary to what the hon. Member for Leeds, West said, TESSA is aimed at the ordinary person and, because of that, we based the scheme on the most simple and straightforward form of saving—putting money into a high street bank or building society. We are not saying that this form of saving is better than any other. My right hon. Friend the Chancellor took the opportunity in the Budget to encourage other forms of saving, including significant increases in the amount that could be saved in personal equity plans. I hope that many of those who are encouraged to begin saving in a TESSA will go on to discover the attractions of share ownership. If we are to influence people's decisions at the margins between saving and spending, rather than just affecting the choice between different ways of saving, it is absolutely right to target the most simple and familiar form of saving.
TESSAs can be started from 1 January 1991. Already there are signs that the major banks and building societies will offer TESSAs. We are delighted that they are putting their marketing efforts behind this form of savings. In some cases, institutions may offer several variants, aimed at the people in different circumstances. I welcome this because we want TESSA to reach as many people as possible. It is clear that she will be a great success.
The hon. Member for Leeds, West said that TESSAs will not benefit those in low income groups because so many of them are not paying tax. We have raised tax relief by 35 per cent. in real terms, and inevitably, if a larger chunk of income is relieved from tax, more people are paying less tax. They should not benefit twice from the absence of tax—through not paying on low incomes, and with a relief such as TESSA. That is inevitable, but it is more desirable that allowances are set at this level rather than at the level that we inherited.
The hon. Member for Leeds, West claimed that TESSA is aimed at, and will benefit, the rich. There is a £9,000 limit on the amount that can be paid into a TESSA over five years. During the Budget debate, the Leader of the Opposition said of the £16,000 limit on savings above which people could not benefit from community charge relief, that it was not "a prince's ransom". Therefore, £9,000 is even less of a prince's ransom. It is a respectable, modest amount and many people will be able to aspire to contribute that over five years.
The hon. Member for Leeds, West quoted a City document which said that TESSA would simply result in the reshuffling of old money. All money is either in bank 956 notes—in the minority of cases—or in bank and building society deposits. TESSA will encourage people to shift from highly liquid deposits to deposits for which there is a growing incentive not to spend. There is a distinction between having money in a deposit that is spent frequently and therefore circulates freely about the economy and having money in a deposit that is saved. The latter is the one that we are trying to encourage. Once people have put their money into a TESSA, they will have put it into something like a mousetrap. They will lose nothing by doing so, but should they then spend the money they will have to forgo the tax relief that has built up in the TESSA. There may be a reluctance to withdraw money from a TESSA, but there is not to withdraw from ordinary deposit accounts. That is an incentive to save and is thoroughly desirable.
§ Ms. Diane Abbott (Hackney, North and Stoke Newington)
I apologise for not being here for the beginning of the Minister's speech.
There is an argument over whether TESSA will involve only the reshuffling of money, or, as Conservative Members imply, result in an increase in the overall volume of saving. The Select Committee on the Treasury and Civil Service has addressed this question, and we questioned Treasury officials when we took evidence on the Budget. They said clearly that any claims that TESSA would increase the overall volume of savings were invalid. It will involve switching money not from ordinary deposit accounts or current accounts but from other forms of saving. The Committee could find no one to say that TESSA would either mean people switching money from a liquid state to a savings account or do anything to increase the overall level of saving.
The claims by the Chancellor of the Exchequer that this is a Budget for saving were bogus and invalid. This is not just the common coin of political half-truths but a serious matter because under the Government the savings ratio has dropped sharply and one of our problems is lack of saving.
§ Mr. Lilley
I will examine the evidence to which the hon. Lady refers, but I doubt whether her interpretation of it will be the same as mine. I am sure that my officials did not say that most contributions to TESSAs would come from some other source than deposits already in the banks and building societies. We do not know where it will come from, but undoubtedly a great deal of it will come from money already in the banking system. It will be rendered less liquid by being put into TESSAs.
The hon. Member for Leeds, West said that this was a measure to redeem the tax cuts made in the 1988 Budget. That is not the case. We are trying, by the period of high interest rates through which it is necessary to go, to ensure that borrowing is discouraged and saving is encouraged, and to bring about a balance between the two. We welcome the fact that we now have much higher investment in the economy. Every pound of investment requires a pound of savings to finance it. We want a higher level of savings, so we want to encourage a climate in which savings are looked upon favourably. TESSA will contribute to the creation of a new climate, over and above the amount of money drawn into it, which could none the less be considerable. This is an important measure. It has 957 been widely welcomed in the City, by savers and by hon. Members on both sides of the Committee. I commend the clause to the Committee.
§ Mr. Battle
The Financial Secretary to the Treasury seems to have narrowed the definition of "ordinary person-. He has not acknowledged that many people will be excluded from the scheme. For example, not everyone has a bank account. Surely we should encourage people throughout the income range to take up savings.
It seems that the measure will not reach the many. It appears to be a residue of the trickle-down theory. It will not reach those on low pay. It will not involve the least well-off. I accept that the limit is £9,000, and that is why it is a small measure. It will be crucially undermined by the impact of interest rates on mortgages. Until 1980, the measure could have been useful for a low to middle-income family, but with the introduction of independent taxation for women, the majority of people in that band will not enjoy any tax advantages from TESSAs. It seems that TESSAs are most handy for middle and high-income, mortgage-free families and for single people. If they were not going out of fashion, it would seem to be a classic yuppie handout. That would seem to be so unless the impact of TESSAs can be widened to embrace the entire population.
§ Mr. Ian Taylor (Esher)
The hon. Gentleman is forgetting that there are many on modest incomes and with modest cash flows who strive to amass some capital. That is why many of my right hon. and hon. Friends were keen that the capital cut-off point for social benefits should be increased from £8,000 to £16,000. We welcomed that increase. We are talking of material sums for people on modest incomes. We want to give incentives to them, through the tax system, to save more. I think that TESSAs will have quite a considerable impact on those who are paying tax and earning an income, and at the lowest levels.
§ Mr. Battle
I must disagree with the hon. Gentleman. We may find ourselves in dispute over the term "modest income". I have tried clearly to identify income bands in which people will not be able to take up TESSAs. As I have said, they will not be available to most of my constituents. I represent part of west Yorkshire, an area which has the lowest pay rates in the country. I must add that it has the highest saving rates.
§ Mr. Battle
There is a savings tradition, and my right hon. and hon. Friends and I are not opposed in principle to saving. We are questioning whether TESSAs represent a wide-ranging measure. They might prove to be the result of a rather narrow measure. As a throw-away line, I suggest that they might prove to be Now Only the Rich Man's Answer. That would produce the sort of acronym for which the Minister was looking.
§ Mr. Lilley
I shall not respond to the final part of the response of the hon. Member for Leeds, West (Mr. Battle). I merely say that I wish that I had thought of it myself.
The hon. Gentleman argued that his constituents, or many of them, will not benefit from TESSAs. There are 34 million people with deposits in banks and building societies. Of that total, 14 million are not taxpayers and therefore will benefit from the abolition of composite rate tax. I am sure that he will welcome that. The other 20 958 million are taxpayers, and they will be able to benefit from establishing TESSAs if they so wish. I know that we have made considerable progress, but I do not think that we are yet a nation of 20 million yuppies.
§ Mr. John Home Robertson (East Lothian)
I am disappointed that the Financial Secretary to the Treasury has not responded to the remarks of my hon. Friend the Member for Leeds, West (Mr. Battle) about credit unions, with which I much agreed. Credit unions are a genuinely practical way in which people in deprived areas can help themselves. In a particularly deprived part of my constituency, people are trying to work together to establish a credit union. I appreciate that that is not strictly relevant to a debate about TESSAs, but the people that my hon. Friend and I are talking about would find it difficult, if not impossible, to take advantage of TESSAs. A credit union, however, is a way in which such people can help themselves and in turn help their own communities. I do not know whether the Minister has had an opportunity to consider the concept of credit unions on other occasions. I sincerely hope that the Government will look favourably on that sort of local initiative.
§ Question put and agreed to.
§ Clause 23 ordered to stand part of the Bill.