PENSION FUNDS NO LONGER ENTITLED TO PAYMENT OF TAX CREDITS

HC Deb 29 July 1997 vol 299 cc150-92 3.40 pm

Mr. Peter Lilley (Hitchin and Harpenden)

I beg to move amendment No. 16, in page 11, line 38, after 'made', insert 'from 6th April 2004'.

Madam Speaker

With this, it will be convenient to discuss the following amendments: No. 17, in page 11, line 41, at end insert— '(lA) Any claim made under section 231(2) for payment of the amount of a tax credit if or to the extent that the qualifying distribution to which the credit relates is income of a pension fund shall be made to the extent mentioned in Column 1 of the Table below if the distribution is made on or after the date in Column 2 and before the date in Column 3.

TABLE
Column 1	Column 2	Column 3
Percentage of the amount or value of the distribution
21	6th April 1999	6th April 2000
17	6th April 2000	6th April 2001
13	6th April 2001	6th April 2002
8	6th April 2002	6th April 2003
4	6th April 2003	6th April 2004

No. 20, in page 12, line 42, at end insert— '(4) The Treasury may by order provide for the suspension of the operation of this section if it has reason to believe that it has had or will have adverse effects upon the number of individuals expected to opt out of the State Earnings Related Pension Scheme (SERPS) or upon the number of individuals in contracted—out pension schemes who are expected to opt back into SERPS. (5) An order under subsection (4) shall be by statutory instrument and shall be subject to approval by resolution of the Commons House of Parliament.'. No. 18, in clause 23, page 15, line 5, at beginning insert '(1)'.

No. 19, in page 15, line 6, at end insert— '(2) The Secretary of State may by order provide that any person providing a pension shall include in any annual statement to policyholders an assessment of the impact of the provisions in that Schedule upon the policy concerned. (3) Any order made under subsection (2) shall be by statutory instrument and shall be subject to approval by resolution of each House of Parliament.'.

Mr. Lilley

We consider the tax to be introduced under this clause to be the biggest of the 17 breaches of promise by the Labour Government in their Budget. Before the election, we received the clearest of assurances from the then Leader of the Opposition that: We have no plans to increase tax at all. Subsequently, he said: Our proposals do not involve raising taxes. If we have any such proposals we will make them clear before the next election. It was therefore extraordinary that the Government should bring in a Budget containing 17 tax rises, the biggest of which involves a £5 billion a year recurring tax on pension funds.

However, what I did not realise until recently was that it was a breach not only of a general pledge, but of a specific pledge. I understand that on 21 October last, the hon. Member for Southampton, Itchen (Mr. Denham), who is now the Under—Secretary of State for Social Security, addressed a meeting of the Institute of London Underwriters in Leadenhall street. Someone present at that meeting has written to me saying: As Deputy Chairman of the Trustees of Lloyd's Superannuation Fund, I was concerned that taxing pension funds, many of which have substantial surpluses, would be a relatively painless way of raising significant revenue, so I asked him"— the hon. Member for Itchen— to give an undertaking that any future Labour government would not seek to raise taxes from these surpluses. He replied that it was no part of his proposals that Labour would touch them. I have subsequently spoken to another person who was present at that meeting and who took notes. He confirms that his notes show, more or less word for word, that that Labour spokesman, before the election, solemnly gave an assurance that Labour had no plans or proposals to tax pension funds or their surpluses.

As we know, the primary justification that the Government have subsequently given for the tax is that the bulk will come from the surpluses of occupational pension schemes. There could not be a clearer example of breach of promise, and one for which I hope we will have a formal apology from the hon. Member for Itchen. If that is not forthcoming, we shall certainly be calling for his resignation as a junior Minister. [Interruption.] The Minister thinks that breaking trust with the electorate is an amusing matter, although Labour made trust the central issue in its general election campaign and said that greater trust was placed in it than in any other party.

The Economic Secretary to the Treasury (Mrs. Helen Liddell)

rose—

Mr. Lilley

I will, of course, give way to the hon. Lady if she will apologise for her colleague.

Mrs. Liddell

I am delighted that the right hon. Gentleman has given way. Perhaps the electorate will now receive an apology, after enduring the 22 separate tax rises that were introduced in the previous Parliament by the previous Government, who did not honour their own manifesto commitments. Ultimately, they suffered the consequences for that at the ballot box.

Mr. Lilley

The hon. Lady is absolutely right. We had to face the electorate with that issue before us—but the Government will have to do the same. The electorate will not accept as a sufficient excuse their statement, "As we have alleged that other people did that, we felt free to do the same"—especially because the Prime Minister made trust the central issue of Labour's general election campaign.

Subsequently, we have been assured that the tax will not matter because it will not hurt. To most people, it is self-evident that extracting £5 billion a year from pension funds will make those funds £5 billion a year worse off. The funds will have to be topped up by that amount if the pensions are to give the same pensions, or they will have to pay lower pensions to people retiring.

In what has become known as the "Primarolo paradox", however, we have been assured that the measure, far from being bad for pensions, will be good for pensions and pensioners, not bad for them … People should understand that our reforms will benefit pension funds."—[Official Report, 3 July 1997; Vol. 297, c. 507.]] Conservative Members have sought, pressed and asked for any coherent explanation of how it is possible that extracting £5 billion a year from long-term investments made for and on behalf of pensioners can benefit pensioners, but we have received only the most incredible explanations. Nevertheless, an attempt at explanation was made.

After we received Ministers' explanation and had some suggestion that their rationale—although incoherent and incredible—is that the measure will not hurt pension funds, we asked why the Government are attempting to protect charities from the impact of an allegedly benevolent measure if it is not damaging. There was total silence from Ministers.

In our amendments, we are attempting to extend to pension funds the protection that the Government are affording charities. We are very much attempting to mirror the precise protection that Ministers have vouchsafed charities, so that we can protect pensions, at least for a period, from the damage that will be done by a damaging tax. We hope that, by the time that that protection expires, the Conservative party will be back in power and able to ensure a much more satisfactory regime for pensions and for the economy overall.

3.45 pm

Mrs. Liddell

From the right hon. Gentleman's statement, am I to take it that Conservative party policy is to restore advance corporation tax after the next general election, should it be elected?

Mr. Lilley

We will not commit ourselves on any matter whatsoever at this stage, here and now, to undo the damage that may be done by the Labour Government between now and the end of their regime. It would be foolish for us to do so. We will state our position in our manifesto for the next general election, after we have seen how much damage the Government have done and in how many spheres, and after we have determined what we can realistically promise to make good.

There can be little doubt that the measure will be immensely damaging. It can be little satisfaction to anyone to know that the best that the Minister can say about it is, "It's no worse than other Governments may do, although you may well find yourself lumbered with it, at least for a while."

I have received a letter from the Chartered Institute of Housing, which is not only a charity but a charity with a pension fund. It states: We consider that changes to ACT and its potential impact on pension funds will probably require an additional 0.5 per cent.-0.75 per cent. contribution from the Institute. This money will have to be found from funds that would otherwise be committed to the development of education and training which in, turn creates employment opportunities in the housing sector. You will therefore appreciate our concern with regard to the Chancellor's proposals. Of course, the institute's problem is mirrored across the country in pension funds and in organisations with pension funds, be they charitable or commercial. They are all having to consider the extra money that they will be required to put into their pension funds and which will therefore not be available either to invest or to use for the charitable, educational or employment-generating purposes to which the Chartered Institute of Housing refers.

Another important issue that has arisen in our debates, and on which the amendments touch, is that of the mis-selling of personal pensions. We all deplore such mis-selling, and we are all keen to see the matter resolved and proper compensation given as rapidly as possible. I wish the Economic Secretary every success in achieving that. However, private mis-selling cannot justify public mis-selling.

The essence of mis-selling is allowing people to purchase pensions or to invest in pensions without full or accurate information being available to them about the implications of their actions for their own circumstances. The Government have now changed the conditions under which people have invested, but they are so far refusing to give the relevant information, either generally, to the public at large, or specifically, via the insurance companies, about the impact of the ACT changes on the contributions that they need to make or on the pensions that they can expect to receive. The Government should ensure that such information is made available. If they do not, people may find themselves opted out of SERPS when they should be opted back in, or they may be tempted to opt out in future when they should not do so.

On 13 July this year, the financial section of The Mail on Sunday said: Leading independent pensions expert Gareth Marr of Moores Marr Bradley says: 'We would advise anyone who is still contracted into SERPS to stay in because of the uncertainty now surrounding the returns that can be obtained on opted-out plans. We strongly advise those who have contracted out to get back in—unless the government increases the level of National Insurance rebates it gives them. The newspaper also states: Steven Cameron, pensions development manager at Scottish Equitable, hopes the government will raise NI rebates to stop a possible flood back into SERPS. He says: 'For many, the advantage of opting out of SERPS has been significantly reduced and for some it has vanished."' How can it be other than mis-selling to allow people to make decisions without that information?

If the Economic Secretary found any of the companies that she chooses to berate every month behaving in that fashion, would she criticise them? If they refused to give such information when selling a pension, would she put them at the top of her jawboning list, or would she say, "It all depends whether you are Government or private. If you're Government, you can do that sort of thing and I'll pat you on the back and praise you. If you are private, I will criticise and attack you"? I will happily give way to the Economic Secretary, who is a frequent intervener, if she would like to tell us whether she approves of such behaviour by private pension schemes.

Mrs. Liddell

I get the impression that the right hon. Gentleman thinks there is something wrong with the way in which the Government have tried to do something about pension mis-selling, but the point that he is making is spurious. The Government have gone to great lengths to ensure that people are aware of the implications for their long-term future of changes to their pensions. Indeed, had the right hon. Gentleman been in Committee, he would have heard the issue debated very fully. Perhaps it is because of the inadequacy of Conservative Members in Committee that the heavy guns have had to attend today's debate.

Mr. Lilley

The hon. Lady should know that, by convention, neither the Chancellor nor the shadow Chancellor sits on the Committee, and that is why I was not on it. However, I was extremely proud of the role played by my team in the appallingly short time made available for proper consideration of the measure. Once again, the hon. Lady ignores the issue and is content to make party political points. Would she tolerate, let alone praise and advocate, the misinformation and lack of information that the Government are providing if the private sector companies that she seeks to regulate had behaved in such a way? If she is not prepared to answer such questions, we can only assume that she has dual standards on this matter, as on so much else.

Mrs. Liddell

I am happy to make it perfectly clear that the Government have gone to considerable lengths to ensure that information is available to those buying pensions. We discussed the matter fully in Committee and, quite frankly, as a member of a Government who for eight years ignored pensions mis-selling, it is no wonder that the right hon. Gentleman cannot look me in the eye when I am responding to him.

Mr. Lilley

To say that the Government are going to great lengths to make information available when they spent tens of thousands of pounds of public money producing a pocket Budget—

Mr. David Heathcoat-Amory (Wells)

It cost £50,000.

Mr. Lilley

It cost the taxpayer £50,000, and its sole reference to this matter was an oblique reference to measures to promote long-term investment.

If the information is being made available outside the House, can it be made available inside the House? What will be the impact, for example, on a 30-year-old person who has been putting £100 a month into his or her pension scheme and who, as a result of the ACT changes, will have to reconsider the position?

The hon. Lady says that the information is being made available. Apparently, it was mysteriously made available in Committee, although none of my right hon. and hon. Friends who were present were aware of it. None of it is recorded in Hansard. Somehow the Hansard writer did not manage to get it down. Can she tell us the answer now? If she will not, I can tell the House about the calculation by the Association of Consulting Actuaries. If someone put £100 a month into a pension fund before, they will now have to put in £112. It is right that people should know the impact of the changes on their financial circumstances. It is monstrous that the Government are not providing the information.

I advise the Minister to follow the example of the Trades Union Congress, which has published a leaflet on "Pension power for women" suggesting that women do not have enough information on pensions and should have more. For example, one question in the leaflet is: Is there is a scheme I can afford? After the ACT change, there probably is not. The leaflet offers help in answering such questions as: I work part-time—Can I join my company scheme? The answer is, probably not. The answer may well be that it is not worth doing so now and it might be better to stay in SERPS. I am glad that the trade unions are taking over where the Government have failed to act and deliberately sought to leave people in the dark.

The impact of the change extends to the pension funds run by local authorities. The hon. Member for Putney (Mr. Colman), from his distinguished position, spelled out the overall impact that it will have on the 99 local authorities that belong to local government pension schemes. He wrote: It has been estimated that the abolition of ACT would add at least 3 per cent. or £300 million to our employers' pension costs. No such increase could be afforded by local authorities without making further cuts to services to their local residents". The alternative would be to increase the council tax, if they were allowed to do so.

Local authorities are beginning to do the calculations to find out how much it will cost their council tax payers in future if they are to ensure that their pension schemes are properly funded.

Mr. Geoffrey Clifton-Brown (Cotswold)

Does my right hon. Friend not find it extraordinary that, in a parliamentary written answer to me on 21 July, the Department of the Environment announced that the next actuarial revaluation for local authority pension schemes would not be until March 1998? Here we have the Government implementing a Budget measure with no idea whatever of the implications for public expenditure on local authorities. Does not my right hon. Friend find that extraordinary?

Mr. Lilley

I entirely agree with my hon. Friend. I seem to remember that the answer says something such as, "Not until then will the truth be known." Those words make it clear that, up to now, the truth has not been told by Government Front Benchers, and the facts have not been given, even to local authorities, about the impact of the cost of the measure on the pension funds and council tax.

Earlier today, I was in Uxbridge—not coincidentally, as there happens to be a by-election there in a couple of days. The Conservative party has a very good local candidate there, unlike the Labour party, which has parachuted in a career politician from outside the constituency. As a local candidate, he wanted to know the impact on Uxbridge people of the Budget and the pensions measure particularly. We were able to calculate that probably more than 7,000 people in Uxbridge alone have personal pensions. They, of course, will all wish to know how much extra they will have to put in if they are to receive the pension that they were previously expecting.

4 pm

The other night, I was being driven by a taxi driver. I did not ask whether he came from Uxbridge, but he may well have done. He said to me, "You are something to do with politics, aren't you?" I said, being very well known, "That sort of thing." He said that he had just been trying to persuade his father to tear up his Labour party membership card. When I asked why, he said that it was because of what the Budget had done to pensions. I thought that he put the point very pithily when he asked, "What is the point of us putting money into our pension funds if the Government are promptly taking it out?"

That is precisely what is happening. The amount of money that they are taking out is not so very different from the amount in rebates that the Government were previously putting in. It is a fair indication of how the Government see pension funds just as a source of revenue rather than as prudent provision by the self-employed and those in mobile employment for their future.

About 7,000 people in Uxbridge will be thinking, "Do I need to put in a full 25 per cent. extra, as will be required just to raise the dividend revenues if everything is in equities, or is the 12 per cent. calculated by the Association of Consulting Actuaries more like what will be required if I have a mix of different investments?"

Probably about 16,000 people in Uxbridge have occupational pensions. Their position will depend in part on whether their employers are prepared to put extra money into the schemes—in which case that money will not be available for investment, to pay wages or to enhance the firm's position—whether they will have to pay in the money, or whether their future pension rights will be downgraded as a result of the measure. They will have to decide whether their schemes will opt back into the state scheme. The scheme could decide that it is no longer worth being an opted-out scheme, and that it should opt back into SERPS.

We must consider what impact there will be on the council tax payer in Uxbridge. We understand that, just to pay the extra contributions required by the borough employees' pension fund if it is to offset the effect of the ACT changes, everyone in a band D house in Uxbridge will pay an extra £2 a month.

There are big impacts on ordinary people in ordinary places—and in important places such as Uxbridge. It is important that that information should be made available. We have tabled new clauses and amendments to try to ensure that more information is made available. If those do not succeed, we want the amendments that will protect pension funds for the next few years to receive the House's support.

The tax rise concerning pensions is the biggest unexpected tax rise that the Government have inflicted on us. They have done so in direct rejection of assurances given in opposition by hon. Members who now sit on the Treasury Bench. A Government who can do that, and enable it to be done by ramming the Bill through a truncated Committee, are a Government who are ashamed of their own actions—and they are right to be ashamed. We believe that they can partly ameliorate that by accepting our amendments.

Mr. Ross Cranston (Dudley, North)

I want to deal with the effect of the changes on investment, which was not covered at length in the Standing Committee, and which the House should deal with.

First, however, I congratulate the right hon. Member for Hitchin and Harpenden (Mr. Lilley) on his attitude to the mis-selling of private pensions. That mis-selling has been a tremendous scandal, and it is gratifying to hear the right hon. Gentleman admit it. I understood him to be congratulating my hon. Friend the Economic Secretary to the Treasury on the work that she is doing to try to remedy the situation.

We have heard little about pensioners in general, either in Standing Committee or on Second Reading. For example, we did not hear that the number of active members of occupational pensions schemes has fallen radically since 1979, so that 12 million people in work do not now have access to a company pension. We did not hear about the fact that private pensions can represent very poor value for those on low or modest incomes.

We heard a great deal, however, about the catastrophic effect that the changes would have on pensions, especially private pensions. In response, I quote to the House the words of Anne Young of Scottish Widows. She thought that one could not put a figure on the impact, and I agree with her: There are three main imponderables. The first is the attitude of companies who currently pay large dividends. The second is the effect the Chancellor's move will have on the valuation of shares, and the third is the attitude of pension fund managers". When I consulted my borough treasurer about the impact on the Dudley pension scheme, he could not give me a direct answer. He said, rightly, that a range of imponderables had to be taken into account before the impact of the changes could be estimated.

Incidentally, the Chancellor has left the tax relief on private pensions entirely untouched. Eagle Star and other advisers on pensions have said that they doubt whether there will be any change in the extent to which people take out private pensions.

I intended to deal with the effect on investment. I mentioned the subject on Second Reading, so I will not go over the same ground again. However, I must make the point that, when the imputation system was introduced in 1973, most shareholders were basic-rate taxpayers. They did not receive tax credits, but they did not pay tax on the dividends that they received. That system was supposed to be neutral as between companies paying out in terms of distributions and companies retaining earnings to invest. However, a quarter of a century later, we are in a different world, in which most shares are held by institutions—pension funds, mainly.

The effect of the tax system on distributions, as opposed to retention, has ramifications for that change in the nature of shareholding. In theory, shareholders should be indifferent between dividends and capital gains. If dividends are not paid, the retention within the company should build up the company's strength, and the value of the shares will therefore be enhanced.

Of course, that is not now the case. Shareholders have different concerns. Some shareholders—those in venture capital enterprises, for example—want capital growth and are not so interested in dividends. Conversely, some shareholders want dividends, for a variety of reasons. They may be unsure about what managers will do with the retained earnings, and therefore want to get dividends out quickly.

Another factor in the choice between paying dividends and the retention of earnings is the tax system. It can be argued that higher-rate taxpayers favour retention because they have to pay tax, despite the tax credit. Conversely, it can be argued that pension funds favour distribution because of the tax credit on dividends they receive. That puts pressure on companies to pay out money in dividends rather than taking the long-term view.

We did not hear anything about that argument in the Standing Committee. We did not hear about many people's active concern about the extent to which companies pay out dividends rather than taking the long-term view to invest. I realise from the quizzical look on the face of the hon. Member for East Worthing and Shoreham (Mr. Loughton) that he thinks that pension fund managers, if they get earnings, will use those distributions efficiently and will invest when the opportunity is worth while.

We say, however, that managers of enterprises should have greater scope to make the decision to invest than they have under the current system. We say that, at present, combined with other factors such as our market for corporate control, which we do not share with Germany and France, there is too much pressure to pay out dividends rather than for managers to use retained earnings to invest for the long term.

Mr. Shaun Woodward (Witney)

Will the hon. Gentleman be kind enough to comment on a survey carried out by Merrill Lynch between 7 July and 9 July this year, after the Budget? The company questioned 56 UK institutions managing £775 billion and discovered that, in the wake of the Budget, sellers outnumbered buyers of UK equities by 18 points, the highest figure in a year. Can the hon. Gentleman explain why, if the scheme is so spectacularly successful, this rush selling has taken place?

Mr. Cranston

The hon. Gentleman anticipates me. In Standing Committee, the hon. Gentleman did not answer one question put to him by my hon. Friends. Yesterday, the hon. Gentleman could not answer one question.

On Second Reading, I said that there were distortions as a result of the system that the Finance Bill will change. There are distortions in terms of the investment decisions made by pension funds. I pointed out that the existing regime favoured pension funds purchasing UK equities rather than foreign equities. I also said that there is an argument that there is a distortion in terms of buying debt instruments. I acknowledge that one might say that it would be better if pension funds continued to buy UK equities. The point is, however, that there is a distortion, and, as a result of the change, that distortion will be removed.

Mr. Nick Gibb (Bognor Regis and Littlehampton)

Will not the result of the measure be that pension funds will switch to overseas equities? Will that benefit the UK economy?

Mr. Cranston

I made the point just now that pension fund managers might decide to buy foreign equities.

Mr. Gibb

Is that better?

Mr. Cranston

I am not commenting one way or the other. [Laughter.] Hon. Members may laugh. I thought that they believed in free market economics. The existing system has a distortion in it.

As I said at the outset, the other effect of the change is that earnings will be retained to a greater extent. In that sense, managers of UK companies can take a long-term view which will benefit the economy.

The widespread debate in the literature and among City analysts and others about the adverse effect of the existing system on long-term growth has passed Opposition Members by. They completely ignored it in Committee; they ignored the possibility of a flat-rate tax on pension funds that was discussed in the reports that they quoted in Committee; and they ignored the possibility of returning to the classic system of corporate tax, which operates in the United States. They were more interested in political rhetoric and in the notion of smash and grab. I do not blame them for that—it was a nice political point to make—but they have not addressed the fundamental issue of long-term investment. As a result of this change, there will be more long-term investment in this economy. I oppose the amendments.

4.15 pm

Mr. John Swinney (North Tayside)

It may be a naive opinion for a new Member to express, but I hope that during the debate some minds may be changed and some opinions altered. I listened to the right hon. Member for Hitchin and Harpenden (Mr. Lilley) complaining about the lack of debating time. I suspect that, the more debating time we had, the more intransigent Members would become in their positions.

The amendment covers some serious issues. I did not serve on the Finance Bill Committee, but I have tried to intervene on this point before, and I am grateful for the opportunity to do so today. I have an interest in this debate, as, before my election, I was employed by Scottish Amicable, which is one of the principal financial institutions in Scotland and was recently taken over by the Prudential. My only continuing interest in that company is the welfare of the colleagues I left behind, as they face the challenges that that takeover will bring.

I also have an interest in that both the local authorities in my constituency area will be affected by the implications of additional contributions to pension funds that may be required as a result of these changes. As some hon. Members have said, that is unquantifiable at this stage, which is why I think that the Government have moved with such haste in introducing these changes and the proposals in the Finance Bill.

When I went to work at Scottish Amicable, I had experience in business development, but I had no experience of the life insurance and pension fund sector. I was struck by the fact that such companies never make decisions on the quality and strength of funds on a short-term basis: it is always on a long-term basis. Any factor that is away from the predictions—out of the ordinary or different—causes disruption to the long-term development of funds. It has an impact on actuarial calculations and on the position taken by officers on reserves for long-term distribution. Those are not day-to-day factors, but factors on which long-term judgments must be made. The scale of the change that the Government have undertaken disrupts the process of long-term financial management in the interests of those funds.

I was also struck by the importance that those companies give to the gearing of finance. The ability to transform small amounts of money into much more substantial sums is the art of actuarial science, and the art of investment management. Unless companies are given appropriate opportunities to pursue that essential part of their work without massively changing circumstances—which the proposals on tax credits constitute—many will face difficulties.

It would be easy for us to get caught up in an exchange of City anecdotes, but there are some simple truths about the proposed changes. Some people's—not everyone's—pension contributions will have to go up, and it is a myth to suggest that the tax will be easy or painless to raise.

The changes come on the back of the pensions mis-selling scandal. The right hon. Member for Hitchin and Harpenden was right to compliment the Economic Secretary on the energy that has been applied to the problem since the change of Government. I say that partly to encourage her to deal with my constituents' cases that I have forwarded to her.

It is welcome that the Government are taking such a strong line, and pursuing the industry to guarantee that the wrongs are righted, but it is unfortunate that they have created an element of uncertainty about pensions as a result of the frenetic debate on the Finance Bill—some of which, I concede, has been fuelled by the Conservatives. Anything that creates uncertainty is unwelcome in the pensions industry and the community at large.

One of my constituents, a trustee of a pension fund of which the principal contributor went out of business, wrote to ask who will pay if additional contributions are required. Some pension funds will be in extremely difficult situations.

Last week, Standard Life, the largest mutual insurer in the United Kingdom, suspended offering transfer values for occupational pension schemes until it could calculate the full impact of the measures, and various other life insurance and pension companies have said similar things. In pensions, there can be no quick initiatives of which the outcome can confidently be predicted, as the Government seem to think; all changes cause some uncertainty and unease in the industry.

Let us consider the message that our debate will convey to the country. The debate has been rather impoverished of substance, and fuelled by a great deal of party political rhetoric that will not allay public unease. Anything that undermines the confidence that people are beginning to have to make appropriate contributions to their pension funds, whether primary or secondary, is damaging.

Pension contributions and funds in this country are more substantial per capita than elsewhere, but they are not perfect. Under the current regime, some people will still have to live on extremely low incomes in their retirement; anything that detracts from people's confidence to contribute to pension schemes is bad news indeed.

The last thing that the sector requires is more uncertainty. The previous Government presided over many notes of uncertainty, but for the new Government to compound those mistakes in the very first weeks of their term of office would be extremely regrettable.

Mr. Quentin Davies (Grantham and Stamford)

Let me begin by taking issue with the hon. Member for Dudley, North (Mr. Cranston), whose interesting speech displayed the real confusion and misunderstanding on the Labour Benches.

The hon. Gentleman said that the present advance corporation tax regime—the arrangement that exists now, before the Bill is enacted, which I hope it will not be—represented a distortion in the market. The opposite is the case. The aim of the imputation tax—I genuinely fear that many Labour Members, including Ministers, do not understand this properly—was to prevent a very serious distortion that would have been inequitable, and would also have had serious and damaging economic consequences. I refer to double taxation. The whole purpose of ACT is to avoid that, but the removal of the dividend tax credit reintroduces the notion.

It is not right for pension funds to be subject to taxation. Why? Because, when their proceeds are paid to pensioners, those pensioners pay tax on them. The clause will introduce double taxation: the income that is invested for pensioners will be subject to tax, and they will still pay tax on the proceeds.

Some countries operate a system that is the reverse of ours, under which pension funds are themselves subject to tax, but the pensioner receives his pension tax-free. That is one way of avoiding double taxation; we have a different but very effective way of avoiding it. The hon. Member for Dudley, North is supporting a measure that will reintroduce the concept of double taxation, with all that flows from it.

Mr. Cranston

Can the hon. Gentleman explain why the United States does not have our imputation system, and in what way the United Kingdom system is more advantageous than that in the United States? Can he also explain how the neutrality aspect differs as between higher-rate taxpayers, basic-rate taxpayers and pension funds that are tax-exempt?

Mr. Davies

The hon. Gentleman has asked me a series of questions, many of which are irrelevant to the issue that we are discussing. I think, Mr. Deputy Speaker, that you would rapidly halt me if I embarked on a disquisition about the American tax system. We are talking about the British tax system. As for the question of equity between basic-rate and higher-rate taxpayers—[Interruption.] I am endeavouring to answer the hon. Gentleman's questions. Labour Members obviously do not want me to answer their questions, but I shall answer them anyway, whether they want me to or not.

The equity between higher-rate and basic-rate taxpayers under an imputation system is entirely preserved. The basic-rate taxpayer incurs no further tax liability on his dividend, but the higher-rate taxpayer must account to the Inland Revenue for the difference between the standard rate and his own marginal rate—or the difference between the dividend tax credit rate and the higher marginal rate. That is perfectly simple. Equity is preserved, and the principle of double taxation is avoided.

If the clause is passed, however, double taxation will become a principle in our tax system. That is a retrogressive and damaging step, and the whole country should be in no doubt about what is happening.

The measure will affect not only institutional pension funds—which, rightly, we have been discussing today, and about which I shall say a little more shortly—but individuals. It produces another anomaly, in that individuals will be subject to double taxation. Individual taxpayers who should not be paying tax at all, because their incomes have not reached the taxable threshold, will now do so, under legislation introduced—amazingly—by a Labour Government.

The Labour party used to be proud of concepts of social justice, and proud of being committed to giving the less well-off a fair deal. What will happen now is that a little old widow with her half a dozen privatisation shares who previously could reclaim dividend tax credit and so not pay tax will no longer be able to do so. She will be subject to an invidious and new form of taxation, to which she or anyone below the tax threshold is currently not subject. That is extremely unfair. As well as destroying the neutrality of the system and introducing a distortion, the measure will cause pain and financial loss to those who least deserve to suffer.

Mr. Peter Brooke (Cities of London and Westminster)

Has it been my hon. Friend's experience, as it has been mine, that pensioner constituents who have been alerted to the change at this late stage in the passage of the Bill are beginning to write in to say that they had not appreciated the situation? Can he contemplate, as I can, the number of letters we will receive after the Bill has become law?

4.30 pm

Mr. Davies

I am going to give my right hon. Friend an honest answer, because we all try to give honest answers in this place. The honest answer, which I know is not the one he was hoping to hear, is no. There is a simple reason for that, and the reason is twofold. First—I know they will not mind my saying this—my constituents in Lincolnshire are probably not quite as financially sophisticated as my right hon. Friend's constituents in the Cities of London and Westminster. One would expect the City of London to contain exceptionally financially sophisticated people.

Secondly—I do not know whether or not this is a compliment, but it can be taken either way—the remarkable success of the Mandelson propaganda machine has been that it has still not become entirely apparent to the general public what will be the effect of the Budget, not only in the field we are discussing now but in many others. If the Labour Government want to regard that as a positive achievement, they can.

It is a remarkable achievement of propaganda that, in terms of the broad public perception of the initial debates on the Budget, the Government have managed to get away with saying that they have found a pot of gold that no one knew about—that magic holy grail, for which Chancellors of the Exchequer have looking for centuries, if not millennia, but have never found. It is the equivalent of the philosopher's stone—the tax that is not a tax at all; a source of money that can be tapped without doing damage to anyone else. The abolition of the dividend tax credit has been presented to the public as though no one would suffer from the extraction of £4 billion or £5 billion a year from those who currently benefit from the dividend tax credit—institutions such as pension funds as well as individuals.

My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke) is correct. As Abraham Lincoln said: you cannot fool all the people all of the time. I do not think the British people can be fooled for long, and I am certain that the people of Lincolnshire cannot be fooled for long, so to those who are manipulating that remarkable propaganda machine I say that the truth will come back and hit them—reality always wins in the end, and the truth will be victorious.

When people realise how they have been defrauded, not only by the tax, but by the way in which the tax has been presented, which compounds the offence, they will be extremely angry. We shall receive thousands of letters full of anguish and distress—not that we will be able to do much for the correspondents, many of whom will express sincere regret at having voted the wrong way on 1 May, not realising what costs would flow from that unfortunate and, in many cases, hasty decision.

That is just one aspect, and I have not by any means finished my strictures in support of the amendment to the Government's appalling clause. I have tried to show that, far from removing distortions from the tax system, the Bill is introducing for the first time some very onerous and unpleasant distortions into our tax system.

The other point which the hon. Member for Dudley, North made was also wrong. He said that the abolition of dividend tax credit would increase the retention rate of profits by companies. That, too, comes out of the Mandelson propaganda machine all too frequently, and it is complete and utter nonsense.

There are only two ways in which a company can be responsibly managed in terms of the distribution and level of profits. The first is the classic method taught in business schools around the world, which is to retain for investment such profits as can be invested in projects whose prospective yield will be equal to or higher than the average cost of capital of the company concerned. That rule has a certain mathematical rigour. It is not always easy to estimate profits from potential investment projects, but that is the science of investment appraisal, and it is what professional managers are supposed to do.

The second approach is also responsible. It supposes that company directors exist in a fiduciary capacity on behalf of their shareholders, and should therefore do whatever is in their shareholders' interests. If some other principle overrides the one that I have just outlined, they should be prepared to allow that to happen, at least in a certain measure. Where a large number of their shareholders—in this case, institutional pension funds—say to the company directors, "We absolutely depend on the maintenance of our dividend cash flows, our own beneficiaries are pensioners who depend on that, and we look to you as directors of our company to ensure that we are, as far as possible, protected from what the Government are doing", the directors may responsibly say that they need to maintain their distribution rate at a slightly higher level than would result from the objective application of the principle that I have set out.

Mr. Cranston

Can the hon. Gentleman explain why the ratio of dividends to GDP is higher in this country than in the United States?

Mr. Davies

It is probably a function of the structure of industry in the two countries. An awful lot of mistakes are made, such as comparing stock market performance, because the structure of industry in certain countries is not taken into account. In some industries, a higher pay-out ratio is clearly appropriate, because the opportunities for investment that achieve the criterion that I have just set out—yielding the same return as the average cost of the capital of a company—are less strong than in other sectors of the economy. However, I do not think for a moment that differential pay-out ratios have anything to do with the existence or otherwise of an imputation tax.

I thought that the hon. Gentleman had intervened to say that he found something wrong with my argument, but far from it. If he finds nothing wrong with it, that may be because he has already seen what inevitably and logically flows from it. In the first case, if companies adopt what I call the "professional principle" in determining their pay-out ratios, by definition the pay-out ratio will not change as a result of the abolition of the dividend tax credit. Thus, far from the Government's measure bringing about a higher retention ratio, the ratio will remain exactly the same.

The second possibility is that the pay-out ratio will increase because company directors will decide to increase it so that cash inflow to their gross pension funds will remain the same. The exact opposite will thus occur: the retention ratio will fall, and the pay-out ratio will rise. I hope that that shows that the assumption behind the hon. Gentleman's analysis was absolutely wrong.

Mrs. Liddell

The hon. Gentleman makes an interesting point. Is not the logic of his point that it is up to companies to decide whether it is in their long-term interest to retain or distribute profits? The tax credit system we seek to abolish put a distortion into the system. It created a subsidy for the distribution of profits, and thereby removed the freedom of company boards to determine their long-term future.

Mr. Davies

I can tell the hon. Lady that I have sat on the boards of companies, and not for one moment would I have been influenced by that consideration. I would always have adopted the first principle, and I would adopt it now if I were on the board of a public company. I would say that we will determine the pay-out ratio on the basis that we pay out everything to our shareholders, except where we believe that we can reinvest at equivalent risk at equivalent returns—or, of course, at lower risk or better returns.

Beyond that, we have an absolute fiduciary responsibility to hand the money back to the shareholders to whom it belongs. They can then decide how to reinvest it themselves. I would leave tax distortions out of the matter.

Mrs. Liddell

The hon. Gentleman makes my point for me. Companies are in the best position to judge what is the best way forward for them. He is arguing against—and, in so doing, making the case for—giving companies the right to determine their own future. That is not logical.

Mr. Davies

The hon. Lady has not been listening to me; she has been weaving a web of fantasy of her own. I said nothing of the kind. I said that there were two possible sets of consequences relating to the pay-out ratio. As a company director I would wish to operate on the basis that there would no change in the pay-out ratios of British companies as a result of the abolition of the dividend tax credit.

The hon. Lady implied that that was the basis on which good management would operate, and I agree with her. If she accepts that, she pulls the rug out from under the feet of the hon. Member for Dudley, North, who argued that one of the supposed benefits of the abolition of the dividend tax credit would be an increase in the retention ratio.

I suggested a second scenario, in which the company was being slightly less objectively and professionally managed. There, the effect of abolishing the dividend tax credit would be to increase the pay-out ratio in order to satisfy the demands of a majority of shareholders.

Yvette Cooper (Pontefract and Castleford)

Does the hon. Gentleman accept that there will be pressure from shareholders on the decisions that companies make, and that those shareholders in the form of pension funds will have an incentive to call for dividends to be paid to them, rather than their potential dividends going into the long-term future of the company and the increase in the value of that company over time?

Therefore, the distortion comes via the shareholders. Even if other board members are as far-sighted as the hon. Gentleman, the shareholders will put pressure on them to pay out now, rather than to hold the money in investment for the long-term future of the company.

Mr. Davies

It is typical of traditional Labour myopia about industry to see some antithesis between shareholders and companies. There is no antithesis at all. A company consists of nothing more or less than its shareholders. The members of the company are its shareholders. The board of directors is there only in a fiduciary capacity to manage the shareholders' money. There can be no antithesis or conflict arising between them in a properly managed company.

The rest of the hon. Lady's point supported my argument that the effect of the abolition of the dividend tax credit will be that some shareholders—the present gross funds, the institutional shareholders and the poor non-tax-paying individuals whom I mentioned earlier—will put pressure on companies to increase the pay-out ratio over what the board of directors would normally consider its responsibility to decide.

Mr. Heathcoat-Amory

Does my hon. Friend recall that, when there was a 5 per cent. reduction in the ACT credit, the consequence was that, in some cases, pension funds, which own many of the companies, required a higher distribution to compensate for the tax credit that they were no longer receiving? Will he confirm that he has observed the paradoxical element in the proposals, which may lead to a higher distribution, higher dividends and higher pay-outs from some of those companies? That goes against the Government's position that profits are better retained.

4.45 pm

Mr. Davies

I agree with my right hon. Friend. He touches on a minor but intriguing theme of the Budget. When the Labour party goes astray, it usually does so by compounding an initial error made by a previous Conservative Administration. It is true that previous Conservative Administrations made a few mistakes, otherwise I suppose that we should still have a Conservative Administration. The Government seem to have said in so many aspects of the Budget, "You sinned a little, so we will sin a great deal more."

If the Government had examined the consequences for company pay-out policy following the 5 per cent. reduction in ACT a few years ago, they would have seen that those consequences were exactly the opposite of those advanced by their propaganda machine and so ably represented in the debate by the hon. Member for Dudley, North.

It has taken some time to deal with the illusions betrayed by the hon. Member for Dudley, North, but I shall return to the essence of the clause and the need for the amendment. One hopes that, before the Treasury made such a disastrous proposal, it considered the consequences of abolishing a dividend tax credit. As we shall probably find later, when we discuss foreign income dividends, little consideration and no consultation took place. The Government must confront the damage that would be caused by the Bill, which was not anticipated and which gives rise to confusion and consternation.

As for the impact on pensions, one can distinguish five consequences that flow inevitably from the abolition of dividend tax credits. The first is that personal pensioners and those with defined-contribution, as opposed to defined-benefit, occupational pensions—there are millions of people in those two categories—will be significantly worse off.

It simply will not to do to say that, although those pensioners are worse off because of the abolition of dividend tax credit, they are better off because the stock market has done well over the past few months. That would be thoroughly hypocritical, because the Government have not the faintest intention of reintroducing the dividend tax credit if the stock market should cease to perform so strongly.

When we introduce tax measures, we must always consider the effect if other things remain equal. If this measure is implemented, those two categories of pensioners—millions of our fellow citizens—will be decisively worse off. We heard an estimate of 12 per cent., which more than justifies my saying significantly worse off. There is no escaping that fact.

The second category is the defined benefit occupational schemes—the traditional occupational schemes in this country. Again, money is being taken away from them. There is no doubt that someone will be worse off; who will it be? In so far as there is a surplus in those funds, some or all of which might have been allocated to pension benefits of one kind or another, clearly the pensioners in those schemes will be worse off.

In so far as those pension schemes go from an actuarial surplus to an actuarial deficit because of the necessary writing down in the prospective rate of return on the funds that every actuary will have to undertake, the companies that have established those defined benefit schemes will be worse off. Under the law, they will have to make additional contributions.

I complained about that on Second Reading. I said that it was quite irresponsible for the Government to introduce a proposal that will necessarily have a considerable impact on corporate post-tax profitability without making any estimate of the impact on the corporate sector: to what extent it will reduce corporate profits that are available for investment or distribution. Clearly, the effect will be more than significant—although we do not know whether it will run into many hundreds of millions or many billions of pounds a year.

It is particularly disingenuous of the Government not to make such an estimate when they make much of the fact that they have reduced the nominal rates of corporation tax in the Budget. It is all very well saying that they will reduce corporation tax by 2 per cent., but if not only the utilities, which are targeted in a discriminatory way and face a substantial increase in their corporate taxation, but other companies, which will have to make additional, unexpected and unbudgeted pension contributions, have a new levy imposed upon them, the net position will be a great deal worse. The net impact of the Budget on the corporate sector will be, without the slightest doubt, negative to the tune of several billions of pounds—although we do not know by how many.

I invite the Economic Secretary and the Paymaster General to intervene in order to give the House that figure. I shall gladly give way now. The hon. Gentleman merely smiles sheepishly: he has not the faintest intention of satisfying my curiosity. There are two reasons why he will not do that. First, he does not know the figure—in which case, he has not done his homework properly. It is a disgrace that the Treasury should advance proposals of that kind without conducting some elementary costing exercises. Secondly, he may know the figure, but he does not want to tell me. He knows how unpopular the news would be for British industry, which would read it in Hansard tomorrow morning—or perhaps the figure would be announced on the airwaves well before then, as I suspect it would be pretty sensational.

The more reticent, shifty and evasive the Government become every time I question them about this point, the more I am forced to conclude that they have something nasty to hide. If the figure is not calculated by the Government, it will be calculated in due course by analysts in the City and by the actuaries of the various pension funds involved. It will take many months to aggregate the calculations, but, when they are released, the 1997 Budget will be viewed as a grievous one that imposes substantial burdens on industry.

Despite all the rhetoric and the Mandelson propaganda about the Government's being friendly to business and wanting investment, their deeds totally belie their words. My right hon. Friend the Member for Cities of London and Westminster (Mr. Brooke) is correct: it is only a matter of time before the British people realise how badly they have been taken in, and then there will be political retribution for the guilty.

A third inevitable consequence of abolishing dividend tax credits and reducing the yield from pension savings will be fewer pension savings. That is an automatic consequence: if one reduces the yield from a particular investment, one reduces the volume of that investment. We shall have fewer pension savings, and no doubt fewer savings as a whole, in this country. I pointed out on Second Reading what a curious move that is at a time when the Government claim that the economy is overheating and when, logically, they should encourage, rather than penalise, savings. Considerable aggregate economic damage will flow from that action.

The fourth important consequence has been mentioned this afternoon. Some funded occupational pension schemes with defined benefits are in the public sector. Local authorities are a good example—civil servants are not, because they have a pay-as-you-go system. Public sector occupational pension schemes are funded, and therefore will lose the income that is currently represented by dividend tax credits. Some schemes will go into actuarial deficit, or surpluses—where they exist—will decline.

In the course of debate, some pretty frightening estimates have been given of the extent to which local authorities will have to use council tax payers' money—which would otherwise be used for service provision or debt reduction, in the case of Conservative authorities; I do not think that Labour authorities advocate debt reduction programmes—to make up the solvency of the pension schemes. That automatic increase in public expenditure must be set against the gains in public expenditure as a result of abolishing dividend tax credits.

Yet we have seen no net figure. It is simply not satisfactory to come to the House with a gross figure for tax yield and not tell us the net figure for the necessary losses in revenue or increases in public expenditure that will flow from the same measure. That is a thoroughly unprofessional, unsatisfactory and shoddy thing to do, and it is simply not good enough.

Mr. Brooke

I am extremely appreciative of my hon. Friend for giving way again. Does he recall that, when the matter was raised with the Prime Minister on the Floor of the House, he absolutely deflected the question, and said that the problem would be solved by the behaviour of the stock market?

Mr. Davies

Evasiveness is clearly the hallmark of this Administration, and the Prime Minister's colleagues have followed his example. Perhaps we should allow them some moral mitigation—after all, their leader should bear primary responsibility for the tone he establishes in running the Government. On this and other subjects, that tone has been complete evasiveness, as my right hon. Friend has said. That is an extremely worrying state of affairs.

The fifth consequence of abolishing dividend tax credits also affects public expenditure—but, again, we have absolutely no estimate of its impact. Clearly, all investment decisions are taken at the margin, and the return from potential investment in personal pensions has been reduced significantly.

Therefore, it follows that many people who, on the basis of the previous equation, would have opted out of SERPS and into a personal pension scheme, will now not do so. There is much evidence that responsible advisers are warning people not to do that. That will impose a greater burden on SERPS as fewer people will opt out, and therefore future public expenditure projections must be revised upwards. However, we do not know by how much.

Several judgmental assumptions must necessarily be made in this case. When the Paymaster General was the manager of Jaguar, I am sure that he did not allow his finance director, the treasury department or accountants to bring forward budgets without stating their assumptions and calculating the consequences of a particular line of expenditure on a net basis. I am convinced that he did not allow that. Will he intervene now and say that he did? I am sure that he demanded to see the net position. If the net position then had to be calculated on the basis of judgmental assumptions, I presume that he would have demanded to know what they were.

I think that the Paymaster General was a more successful business man than he is a politician, so he would have queried those assumptions. I am sure that he looked hard at the methodology, and insisted that the job be done properly. He may have said, "I won't employ in Jaguar people who do not do that." However, the hon. Gentleman apparently employs in the Treasury many people who have not even begun to do that work—or perhaps they have done the work and we have not been told the results.

There is no third, fourth or fifth possibility; it is one of two: either they have not done the job properly—they have not done their basic homework—or they are being less than frank with the public. That fundamental issue runs through the Bill, but nowhere does it pose itself more acutely and more pertinently than in this clause.

I hope that we now finally receive an answer, from whichever Minister winds up the debate, to that essential question. Which is it: do Ministers not know what the net position is—do they not know what the consequences are of the increases in public expenditure or of the reductions in public revenue that will flow from the clause, set against the potential gains from the dividend tax credit? If they do know, why do they not tell us, and when will they tell us?

5 pm

Mr. Damian Green (Ashford)

I cannot aspire to the comprehensive, indeed heroic, coverage of the landscape of the clause that my hon. Friend the Member for Grantham and Stamford (Mr. Davies) has just achieved, but it is important for the House to consider a few more points as to the inadequacies of the clause and the necessity for the amendment tabled by my right hon. Friend the Member for Wells (Mr. Heathcoat—Amory).

The discussion of the behavioural effects of the proposed change to dividend tax credits has been particularly interesting. Behind much of the Government's argument and, in some cases, behind some of the points made by my right hon. and hon. Friends, is the assumption that the Government, through the clause, may be able to change the way in which companies distribute their profits. The point was made most starkly and most instructively by the hon. Member for Pontefract and Castleford (Yvette Cooper), who said, more or less, that all dividend payments were bad, that if shareholders demanded extra dividend payments they were likely to fritter them away and that it was therefore extremely important for the Government to try to direct dividend payments in socially responsible ways, such as towards investment.

That was instructive in two ways. First, it showed a catastrophically fundamental lack of knowledge of and sympathy with any free-market system, in which the interflow of the needs of investors, companies and different classes of shareholder means that investment goes into the most productive sectors. If history, particularly the UK's history in the past 30 years, teaches us anything, it is that attempts by government to micro-manage the economy to the extent of, for instance, managing flows of dividends always end in disaster.

Secondly, even beyond that misunderstanding, there was a more important misunderstanding: that by cutting companies' incentive to distribute dividends—by changing the ACT rules in this case—we will produce greater investment and greater research and development.

Mr. Gibb

Would the Government have bothered to deal with this so-called distortion so early in their term if it were not for the fact that it just happened to raise £5 billion a year as a helpful by-product?

Mr. Green

My hon. Friend makes an extremely pertinent point. The answer to his question is no, of course not. If the Government's proposal directed investment—which they clearly wish to do—but did not raise any money, they would not have introduced it in this emergency Budget. Clearly the fact that dare not speak its name about this tax increase is that the Government were desperate for revenue and took this route because they thought that it was so technical and directly affected so few people that they would get away with it.

During the debates both upstairs in Committee and on the Floor of the House, the Government have not got away with it. Those involved—the industries, the pension funds and, perhaps most important, the many millions of pensioners who will be affected by the proposal—are beginning to realise what kind of raid this is on their pension funds. When they extract the £5 billion from those pension funds, the Government will notice that pensioners rebel and condemn the clause as much as we do.

To return to the direct point about whether this tax grab will have any beneficial effect on the flow of funds in British industry, upstairs, we discussed various academic studies that show that what might be regarded as the populist, intuitive line—that, if we make dividends less attractive, companies will put more of their money into productive, long-term investment—is simply not borne out by any evidence.

All the evidence shows that the companies that devote most effort to research and development are in particular sectors—pharmaceuticals, health care, engineering and electronics—that those companies do not have any particular dividend policy, and that, if there is any link between dividend distribution and investment in research and development, it is that they go together, which is intuitively plausible as well as being true. Companies that invest for the long term are, over the long term, more profitable. They require capital to continue the flow of investment and the flow of profits. Therefore, they need to keep their shareholders happy, so they have generous dividend payments.

The basic rationale behind the Government's stated desire—the fig leaf that they use to try to disguise the fact that this is simply a tax grab—is itself wrong. There is no rationale that says that, if we reduce the desirability of paying out profits in dividends, we increase the amount of money that goes into research and development; so, even on the Government's own rationale, the clause has no merit.

If the Government were genuinely interested in the rationale that they state for the clause, they would no doubt give tax credits for research and development. A general principle of Conservative Members—and of the previous Government—is that we want a simpler tax system that reduces corporation tax levels and does not have distortions such as tax credits. In other parts of the Budget, the Government have already shown that, where it suits them, they do not follow that regime. They say that various parts of Bill reduce taxes such as corporation tax and try to simplify the tax system, but when it suits them—as with the film industry—they are happy to introduce tax distortions that they regard as beneficial, so if they were really concerned about research and development they could introduce tax credits.

Mr. Quentin Davies

While my hon. Friend is on the matter of distortions and pay-out ratios, does he agree that it is damaging for an economy to force companies to retain an excessive rate of profit? If an excessive amount were retained in companies that happened to be generating a lot of cash, not only would it disadvantage their shareholders for reasons that I explained in my speech, but the mobility of capital in the economy as a whole would be reduced and less capital would be available for other parts of the company where growth and investment prospects might be better. It would be an extremely ineffective and unproductive economic mechanism.

Mr. Green

My hon. Friend is right. The underlying point is that businesses and the people who run them know, by and large, where they should be investing. History tells us that, when politicians and civil servants, however well intentioned, try to interfere in the investment policies of individual businesses, they always get it wrong and make businesses worse off in the long term.

There is another part to the argument. Many of my hon. Friends have shown that the tax change is damaging to industry, but more important is the effect that it will have on pensioners. Does it help any pensioner? No. Does it damage many pensioners? Yes. Certain classes of pensioner, particularly vulnerable and future pensioners, will be particularly hit.

Another fig leaf that the Government produced when they introduced the clause was that many pension funds were in surplus, so it did not matter. That betrays a morality which, in itself, is extremely questionable. When Mr. Maxwell decided that surplus pension funds were suitable to be raided for his own purposes, many people rightly found that morally unacceptable. I fail to see the distinction between that and the Government deciding that surplus pension funds are there to be raided. Moreover, while some pension funds are in surplus, many are not, and they will need to find the extra money to increase the pensions available to future generations of pensioners or pay out lower pensions.

Some classes of business that are important for future job creation, such as small firms, will be particularly hard hit by the measure. In addition, underlying businesses will be affected. Many of them may well take a responsible long-term view about how they should treat their employees. They might say that their employees should not be disadvantaged by the Government's rather immoral one-off raid on pension funds. If, as a result, they decide to increase the contribution from the underlying business to the pension fund, the net effect will be that, again, investment and dividend payments are reduced. The firm concerned will be forced to do things with its capital that it would not otherwise do and the overall net wealth of the economy will, in the long term, be reduced.

Mr. Gibb

Is my hon. Friend aware of another consequence of trying to confiscate surpluses from the nation's pension funds, which is that many vulnerable pensioners receive a discretionary increase from those pension funds in the payment of their pensions because those pension funds are in surplus, but once those surpluses are eliminated there will be far less scope for such discretionary increases to the more vulnerable pensioners in Britain?

Mr. Green

My hon. Friend makes a good point. A point that I would develop from that is that whether any individual pensioner is particularly hard hit will be arbitrary. It will probably be no consequence of any action taken by the individual pensioner whether he is with a pension fund that is in surplus or in deficit, or whether that pension fund is associated with an underlying company that is or is not able to make up the deficit or is in a position to pay discretionary payments. Because of the arbitrary imposition of the tax, pensioners or future pensioners will suddenly find themselves severely disadvantaged.

Another point that I want to draw to the attention of the House is the long-term nature of savings for pensions. For most people involved, this hit will come halfway through the process of saving for their pension in old age. Because this measure changes the terms they thought they were saving under, it is effectively retrospective legislation. People may have been saving for 15 or 20 years under a certain set of rules. This measure changes those rules, dating back to the time when a person started to save for a pension. I hope that all hon. Members will agree that retrospective financial legislation is a bad thing.

Mr. Clifton-Brown

My hon. Friend touches on an important point. Is not the measure a total misrepresentation, particularly to pensioners who are drawing nearer to retirement who have built up their expectations of their standard of living on a certain pension who will now be denied that level of benefit? They have no time left in their working life to make up the shortfall.

Mr. Green

That is an extremely good point, and it illustrates the amount of extra uncertainty that is injected into the system. The hon. Member for North Tayside (Mr. Swinney) referred to the fact that, from his experience in the pension industry, the worst that can happen for those running the industry and, more important, for those looking forward to receiving a pension, is an increase in uncertainty. Uncertainty is precisely what this tax increase introduces into the system.

Another effect of the measure is flatly contradictory to much of the rhetoric that we hear from the Government Front Bench, particularly the reforms favoured by the Minister for Welfare Reform, the right hon. Member for Birkenhead (Mr. Field). He believes that there should be greater personal responsibility for savings and he wants the welfare state to move more towards the application of personal savings.

One definite effect of the clause, because of the uncertainty that it introduces, is that people will be discouraged from taking that route; they will want to take what they regard as a safer route. If at any time a Government can come along and take £5 billion out of the pension fund industry and possibly damage personal pensions, people will feel more reluctant than they were before to go down the route of personal savings to provide for themselves in old age or in times of illness or unemployment.

5.15 pm

What is proposed shows the enormous gap between rhetoric and reality in the Government. We hear a lot of rhetoric about an increase in personal responsibility and modernising the welfare state, but a couple of weeks after taking power the Government introduced an emergency Budget that marches strongly in the opposite direction. The Government have failed to come up with any rationale in terms of their own rhetoric on welfare for taking this action.

Companies will be badly affected by this measure, particularly small companies and companies that take the honourable route of trying to subsidise their own pension funds. Existing pensioners will be worse off, and future pensioners will be more uncertain about the life that they will be able to live in their old age. This is a thoroughly bad clause which at the very least needs amending.

Mr. Tim Loughton (East Worthing and Shoreham)

As a new boy, I might be forgiven for feeling rather frustrated. For 26 hours, members of the Finance Bill Standing Committee went through the Bill clause by clause. My hon. Friends may have felt during those 26 hours that we had strayed on to the set of "The Woodentops", such was the level of debate not forthcoming from the Government Benches.

I was almost encouraged that some of those mutes appeared to have found their voices today. Alas, the one who did find his voice—the hon. Member for Dudley, North (Mr. Cranston)—appears swiftly to have disappeared. I can only hope that the reason for his disappearance is the former of two probabilities—the first, that he has gone to the Library to check some of his facts, which have been found to be sorely lacking or, secondly, that his pager has summoned him to Mandelson towers, whither he has hurried hotfoot, quickly shoving a copy of the Order Paper down the back of his trousers to mitigate the consequences of speaking out of turn.

Particularly galling is the fact that the hon. Member for Dudley, North, the only one to venture any opinions on the matter, has completely and utterly—either by choice or out of ignorance—misunderstood and ignored what we spent much of those 26 hours upstairs debating in fine detail. For his benefit, in case he reads Hansard tomorrow, and those few of his colleagues who have bothered to turn up, I want to go through, step by step, the serious implications of these clauses to a deep stratum of companies, pension funds and individuals.

Last week, I drew on the example of a large FTSE company, one of the largest employers in my constituency, SmithKline Beecham. Despite being a large multinational company, typically its pension fund was only about 93 per cent. covered at its last actuarial valuation. We know that, from an actuarial valuation basis, if the ACT credits are lost, the fund will be severely less fully funded than it currently is, but what are the options for the trustees of a pension fund such as that of SmithKline Beecham?

First, it can have a much less well funded pension fund and in due course be hauled up under the minimum funding requirements. Secondly, it could choose, if it is feeling generous towards its pension holders, to stump up the difference and underwrite the shortfall that will be exacerbated by the Government's moves. The cash injection required to do that will amount to approximately 7.5 per cent. of last year's pre-tax profits. That is not a good way to go about maximising funds for investment, something about which we heard so much from the hon. Member for Dudley, North.

What will this mean for SmithKline Beecham? To enhance shareholder value, it will probably have to launch a share buy-back programme, for which it will have to borrow money when interest rates are rising. That does not leave a great deal of extra money for investment, which is so important. It will have less money to pay out in dividends—which Labour Members apparently so resent. It will have less money for research and development, which is also important. Labour Members refuse to contemplate introducing a tax credit against research and development expenditure, as operates with varying degrees of success in France and the United States. It will have less money for expansion. I cannot envisage any way in which the Bill will increase the opportunities for that company to improve on its already enormous research and development expenditure.

The problem will be compounded by any tightening of the minimum funding requirements that the Government may introduce. Although that may not apply to SmithKline Beecham, there are less scrupulous smaller companies with pension funds that may put pressure on their actuaries so that there is a less stringent requirement to top up the pension fund, which may then mask the real nature of those funds. Less scrupulous pension fund managers may switch their pensioners out of defined benefit schemes into money purchase options, which are then open to the vagaries of the stock market and the underlying investments in the schemes.

The proposals will have especially harmful effects on many large, previously nationalised—or still nationalised—companies, all of which operate in Labour-held constituencies. As I have said, the old National Coal Board pension fund is worth a whopping £20 billion and looks after 500,000 former miners. It does not attract new funds, but it still has a great deal to pay out from a diminishing pot of money. The same goes, to a lesser extent, for the Post Office, with a £12 billion fund and 350,000 employees and former employees; for the steel industry; and for many formerly large engineering companies. The pension funds of all those companies will suffer.

Let us consider the impact on dividend payouts. SmithKline Beecham had a 15.9p full-year dividend last year. What options are open to it now? It could pay a reduced dividend to its shareholders. Because it will not get the advance corporation tax credit, the impact will fall on its shareholders, who will receive a dividend worth 20 per cent. less. That is certainly true for pension funds now and for individual shareholders from 1999. Its own pension fund will suffer as it understandably holds a large number of SmithKline Beecham shares, within the limits allowed. It will be a double whammy.

Shareholders will suffer immediately and investors will be less attracted to the equity issue, so the cost of capital to borrow goes up, which means equity finance is more expensive, which again affects the capacity of those companies to expand and spend more money on research and development and investing overseas. As raising capital is a speciality of the City of London, it will be a loser under the proposed measures.

SmithKline Beecham may feel generous. It may feel able to pay out that 20 per cent. lost ACT credit in a higher net dividend to its shareholders. It would be exceedingly generous of that company to do so, but the effect would be less money in the pot for the important investment that the Labour party goes on about—so yet again, the measures are self-defeating.

What about the impact on individuals? I have already said that people with occupational pension schemes who rely on money purchase arrangements where companies are not making up the difference will be instant victims. Private pensions, which are unlikely to be in surplus, such is the nature of those schemes, will be hit to the tune of 11 per cent. The Association of Consulting Actuaries calculates that about half of final salary schemes will be in deficit and individual schemes will be hit as well. The implication is that pensions will be worth less at a time when the Government have just issued a new basis for encouraging further private pension provision.

The right hand of the Treasury appears not to know—or chooses to ignore—what the left hand of the Social Security Department is doing. Again, it will be self-defeating. Last week, we heard in detail about the implications for the investment trust and unit trust industry. Holders of those investments will be doubly hit by the changes.

The upshot is that the measures will undermine individuals' ability to retire early. They will undermine the great clichè of the flexible decade of retirement that we were promised by Labour before the election. Individuals with private pension schemes who already contribute the maximum are given no option to contribute more to make up the ACT shortfall. There have been no changes to the limits. As my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley) said, there will be a serious impact as people will no longer be incentivised to contract out of the state earnings-related pension scheme and may indeed now contract back in.

There will be an impact on local authority pension schemes. We have had some mixed messages from Labour Members on that issue. My local authority, West Sussex county council, has already estimated that lost ACT credit is likely to cost it £3.4 million. Half of that will be down to the county council; half will be down to the district councils in West Sussex. It comes to about 5 per cent. of the annual payroll for West Sussex. We have received no assurances that that shortfall will be made up.

I want briefly to read from a letter from Sir Jeremy Beecham, the chairman of the Local government Association, to the leader of West Sussex county council.

He said: I am pleased to be able to report that the Association correctly anticipated the Chancellor's announcement"— very good Mystic Meg qualities; he obviously gets the Financial Times well in advance of most hon. Members— and had made representations to the Government about the adverse impact on local authority pension funds in advance of the Budget. The Government has accepted that the loss of tax credits will need to be taken into account in determining local authority provision for 1999/2000 and subsequent years. We are, however, continuing to press the Government on this point and are asking for the increase to be fully underwritten by an increase in TSS and Government grant from 1999/2000 when the results of the next revaluation are implemented. However, when the chairman of the UKSC, now the hon. Member for Putney (Mr. Colman), claimed it as a great triumph that local authorities would be underwritten for any shortfall of ACT credits, there was a great deal on squirming on the Government Front Bench and the assurance was not repeated. We have been given no firm commitment by the Government, upstairs, downstairs on in any lady's chamber, that the shortfall will be underwritten. We know that the result can only be increased council taxes, which also depend on what the Government do on capping, or further cuts in local authority services.

Mr. Gibb

Does my hon. Friend agree that it is astonishing that the Red Book takes into account the extra pension contributions that companies will be required to pay because of the measure—it is stated on page 46 that there will be a consequent reduction in corporation tax—but that it makes absolutely no provision for the extra contributions that local authorities will have to pay so that they can balance their pension funds?

5.30 pm

Mr. Loughton

Of course it is astonishing—but then everything that Ministers have loosely said about their intentions to deal with local government pension funds has been quite astonishing. We have heard that the full implications for local authority pension funds will not really be known until next year, but—as any reasonable, responsible council leader or local authority pension fund trustee will say—it is prudent for all local authorities to have as soon as possible an ad hoc valuation of the very real damage that will be done.

Mr. Clifton-Brown

Is my hon. Friend aware that not only is it desirable to make up those contributions but the prescriptions governing rules of local government pension funds require trustees to make an informal valuation each year? If they feel that there is a shortfall, they must make it up each year—not when the next actuarial valuation is due.

Mr. Loughton

My hon. Friend is absolutely right. Ministers' sense of urgency in the matter has been positively snail-like and quite disgraceful. Yet again, local authorities have been left on their own to assess ways of making up the damage. The Government have left local government in a disgraceful position.

On a related subject, I have a copy of a letter from the Minister for Local Government and Housing to the hon. Member for Putney in which she wrote: We spoke briefly last night about the impact of the Budget on local authority pension funds. Pension funds should benefit from improved company performance as a result of encouraging quality long term investment, reflected in long term share values. The reduction in Corporation Tax announced yesterday will greatly assist company performance. In my experience in dealing in investment matters, every promise of investment performance had to contain the qualification that past performance should not be taken as a guarantee of future performance or gains. The Minister for Local Government and Housing, however, apparently takes stock market gains for granted and holds the sentiment, "Don't worry about what we have done, boys, because any shortfalls will be compensated by our great friends in the City—new Labour, new stockbrokers. Our great friends at the temple of Mammon—the stock market—will bail us out."

As my hon. Friend the Member for Grantham and Stamford (Mr. Davies) asked, however, will the Government reverse their decision when the stock market starts going down? In Committee, I elaborated on the fact that the UK stock market rise has been something of a mirage compared with the much greater rises in other major markets, and that that has had a particularly significant impact on multinational companies, the share prices of which, in many cases, have fallen alarmingly.

The Government's measures will have a serious impact in four spheres—resulting in a quadruple whammy for companies and their company pensions funds, for beneficiaries of those pension funds, for ordinary people with private pension funds, and, inevitably, for anyone who pays council tax. It is entirely fallacious to suggest that dividend payment levels have positively discouraged investment, because those levels and investment are not mutually exclusive. I have already mentioned how a comprehensive study has shown that, in the vast majority of the past 18 years, dividend payments rose as investment rose.

Let us leave the final word to the former chairman of a major quoted engineering technology company. On the first page of the company's report and accounts for last year, the second strategic objective was described as achieving sustained growth in dividends per share. In his report, the chairman was quite proud to report a dividend rate increase of 15 per cent. over the previous year, when he was able also to increase investment in the company by well over the 15 per cent. dividend increase rate.

The chairman believes that dividend payments and investment are not mutually exclusive, and that dividend payments are a major incentive for equity finance—which is one of the cheapest and most cost-effective ways of producing funds for expansion and research and development—and I believe him. I trust that his colleagues on the Labour Benches will believe him also, because that former chairman of TransTec plc is now the Paymaster General. It is a shame that he is not in the Chamber to echo the words that he wrote only a few months ago in his own company's report and accounts. I hope that one of the few Labour Members remaining in the Chamber for this debate might pick him up on those points.

Mr. Clifton-Brown

The change to advance corporation tax amounts to an income tax of 20 per cent. on pension schemes that hold equities. ACT is paid because the taxpayer suffers an income tax rebate of 20 per cent., which is collected by a corporation on behalf of the Treasury. The tax change is therefore a severe raid on people's pension funds.

I shall dwell on the effects of the change on local authority pension funds. As I said in an intervention on the speech of my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), on 21 June 1997 I received a written answer from the Department of the Environment, Transport and the Regions stating that the next actuarial valuation for local government pension funds would be in March 1988. The Government therefore included the measure in the Budget, although they had no idea—if they did, perhaps the Minister will tell us—of the precise costs and implications for local government.

Various calculations have been made of the measure's costs to local government, the most accurate of which is perhaps that provided by the chief executive of the London Pension Fund Association—who, as a member of the Chartered Institute of Public Finance and Accountancy, is a professional in the field. He has calculated that the combined cost to local authorities will be £200 million to £400 million. The effect for most local authorities, including mine, will be increases in council tax bills of between £10 and £12.

Mr. Richard Cockcroft, whose current title is director of corporate services for Gloucestershire county council—it is a job to keep up with his title, because he keeps giving himself new jobs—has made the point that the next actuarial valuations will be made in March 1998. He states that an informal survey was conducted on behalf of the United Kingdom steering committee, which showed that the average County Council was less than 90 per cent. funded". Therefore—far from being one of the 50,000 companies with a pension fund surplus mentioned by the Chancellor of the Exchequer—the local authority sector is in deficit and must quickly make up the shortfall.

Richard Cockcroft goes on to say that, even before the Budget measures, Gloucestershire county council was already contributing an additional £1m a year to rectify the situation, with the fund's other employers"— the district councils— also having to contribute significant extra amounts. He states that preliminary discussions showed that actuarial costs for the county council would be at least another £2m a year, with the District Councils in total being faced with similar additional costs. Moreover, he states—as I said in an intervention on the speech of my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton)—that the Regulations governing Local Government Scheme require all 'actuarial deficits' to be made good by the employer. Mr. Cockcroft continues: Without some form of assistance, I can see no option but for those additional pension contributions being made at the expense of 'front line' services. He states that, alternatively, council taxes could be increased. A third option, of course, would be to increase local authority standard spending assessments.

This is a serious matter, because the Government announced in the Budget that they would stick to the previous Government's targets for the next two years. If they do so, it means that there will be no extra money for local authorities to meet their additional burdens. Local authorities will therefore have to bear those burdens themselves. If, as they said the other day, the Government are going to apply strict capping criteria and not allow council taxes to be increased above very tight limits, the extra contributions will have to come straight out of the money for front-line services. I hope that council tax payers and the recipients of such services across the country will be made aware that their services will deteriorate solely because the Government have introduced this new measure.

Mr. David Ruffley (Bury St. Edmunds)

I suggest that the position is in fact even worse than my hon. Friend describes. Given the change in the forecast for inflation, it is estimated that there is a cut of between 1 and 2 per cent. in real terms in the amount of central Government grant to local authorities. That is estimated to be a cut of about £570 million this year, and double that the following year. Is not the position therefore rather more grievous for local authorities than my hon. Friend described?

Mr. Clifton-Brown

I am grateful to my hon. Friend for making that important point. It is all very well to stick to an expenditure programme in nominal terms, but in real terms—after inflation has been taken into account—the situation is in fact far worse. I suspect that that is why the format of the Red Book was changed this year so that it does not include departmental spending totals, as that makes it easier to work out what the shortfall is next year and, indeed, the year after. The effect will be the same in other Departments that have to make up shortfalls in pension contributions to pension schemes within their remit. Those Departments include, for example, the Department of Health.

While I am on the subject, it is worth pointing out that there is a local authority pension time bomb. There are many completely unfunded local government pension schemes. For example, firemen have no funded scheme at all—not that the change which we are discussing will affect them—but in view of the demographic changes and the fact that people are living longer, each departmental budget is being increasingly stretched to make up an ever greater shortfall in pension funds each year. The Government will have to take that into account.

We shall have to wait and see, but this measure may well depress by up to 20 per cent. the value of the equities held by pension funds. I hope that that does not happen, because it would be very serious for many pension funds. Should it happen, it has been calculated that the capital value of pension funds would fall by about 11 per cent. which, I believe, pension fund trustees would be required to make up in the first year. Some employer and employee contributions will therefore have to increase steeply this coming year.

My hon. Friend the Member for Grantham and Stamford (Mr. Davies) mentioned the effect on different types of pension scheme. The objective of a defined pension scheme is to ensure that the pensioner receives a defined benefit when he retires. If he suddenly finds that the performance of his fund is 20 per cent. less than expected, he has two options: he can either accept a 20 per cent. diminution in the value of his fund at the time of retirement or, over a period, make up the shortfall in his contributions.

As I mentioned in an intervention on my hon. Friend the Member for Ashford (Mr. Green), that is all very well for us youngsters, because we have plenty of time to make up any shortfall. However, someone who is within three or four years of retirement—this is true of many of my constituents, because I live in an area which has an elderly population—has virtually no opportunity to make up such a shortfall, because he will not earn enough to do so before his retirement. He will therefore retire on a false prospectus. Such pensioners have reason to feel aggrieved about the Government's proposal.

5.45 pm

Of course, the effects depend on the balance of the individual fund. I must make it clear that what happens depends on how the individual fund is structured—the proportion of its investments in equities and the proportion in other fixed or variable interest-bearing stocks. I suspect that one of the effects of the proposal will be to force pension fund trustees to consider other interest-bearing fund stocks—for example, gilt-edged stocks—and increase the proportion of such stocks in their funds. Over time, I suspect that that will mean that the performance of such funds will not be as good as it would have been had they continued to invest the norm of 55 per cent. of their funds in equities.

Whether institutional investors require companies to pay out their increased dividends to make up the 20 per cent. shortfall or retain the money in their company retained profits, the effect will be distorting. A simple switch out of the equity market of a proportion of the pension funds sounds fairly innocuous, but the Government should bear in mind the combined value of the pension funds—a switch of that nature over a relatively short period could cause a dramatic downturn on the equity market.

I deal finally with a matter that has not yet been mentioned—the combined effect of the ACT credit withdrawals and the changes to foreign income dividends proposed for 1999. In 1993, Norman Lamont, the then Chancellor of the Exchequer, introduced the foreign dividend scheme to enable companies with large earnings on their foreign trading activities to mop up the surplus ACT on those dividends. To the extent that they were able to pay out foreign income dividends, they could mop up the surplus, but, should they not be able to pay out FIDs in future as a result of a measure that we shall debate later this evening, companies would find that they could not reclaim the surplus ACT that they had paid to the Treasury. That is monstrous.

As I explained at the outset, ACT is paid because the individual taxpayer is getting tax credit on his income. To the extent that the Exchequer is gaining from surplus ACT—more ACT than the income tax credit paid—it is monstrous that companies are not able to reclaim the surplus. I hope that, when we debate foreign income dividends, that point will be highlighted.

I believe that the Government are seriously rethinking how they will operate the foreign income dividend scheme. I hope that, when further amendments are tabled, perhaps in the other place, the Government will consider the serious effect on some companies that we wish to encourage to make a profit and to repatriate that profit. It would be bizarre if companies were discouraged from repatriating their profits or, indeed, even encouraged to demerge their foreign subsidiaries or if the foreign subsidiaries were taken over by a foreign concern which could then remit the money into this country but not suffer tax damage as a consequence. That would indeed be a bizarre and perverse consequence of the proposed changes.

The ACT proposal is the most far-reaching measure in the Budget. To take some £5.5 billion from the pensions and hard-earned savings of the poorest people in this country is a cruel deception. Most people are not able to understand this highly complex tax, but they will understand when they suddenly find their standard of living and their income reduced. I hope that, when they realise that, they will protest loudly against the changes that the Government have introduced. I have no doubt that that will hasten the demise of the Government and the return of a Conservative Government at the next election.

Mrs. Liddell

I must confess that, during the two hours or so that we have spent discussing the amendments, an irritating refrain has been going through my head. It is an old song and I hope that the Library will be able to remind me of its words. It goes something like, "I think I may have heard this song before."

In the past couple of hours, we have heard the same speeches to which we listened in Committee, not once, not twice, but on a number of occasions. However, we missed the presence of the hon. Member for Daventry (Mr. Boswell). We send our good wishes to his mother, about whom we heard a great deal in Committee. The hon. Member for East Worthing and Shoreham (Mr. Loughton) told us at great length about the pleasures of English wine. His constituents may find that extremely interesting, but mine are more concerned about a secure future for the economy.

I found it interesting that the shadow Chancellor opened the debate today. He made much of the fact that, by convention, the Chancellor and the shadow Chancellor do not sit on Committees considering the Finance Bill. He is correct in that. I wonder how much of a precedent it is to field the shadow Chancellor against a junior Treasury Minister. That shows that the right hon. Gentleman has a lack of confidence in his own troops. He still has not answered the point that was made repeatedly in Committee: why, if ACT is so important, did the previous Conservative Government change it?

Mr. Clifton-Brown

The hon. Lady makes a political point as to why my right hon. Friend did not address the Committee. He gave her a perfectly cogent answer. However, he has appeared here today: are we entitled to ask when the Chancellor of the Exchequer might take part in our proceedings?

Mrs. Liddell

My right hon. Friend the Chancellor of the Exchequer is currently engaged in other Government business. I take it as a great compliment to his team that he did not consider it necessary to address the House today. The fact that we have such a substantial majority means that we have sufficient Members to staff Committees.

Mr. Quentin Davies

Will the Minister give way?

Mrs. Liddell

No. I shall make some progress; no doubt I shall give way to the hon. Gentleman later.

This evening, we have discussed what are, in effect, wrecking amendments. Their effect would be to allow pension funds to continue to receive tax credits until April 1999. After that, payments would be phased out over five years.

I am pleased that, at long last, the Opposition have apparently accepted the principle that the damaging distortion of payroll tax credits should be removed, albeit over a more extended period. That hardly seems logical, but we do not expect logic from the Opposition. That is about all that I can say about the amendments, as they are technically deficient in a number of ways. They would only save the payment of tax credits for companies, when most pension funds do not work in that way. They also purport to allow pension funds to continue to receive payment of tax credits after 1999 at a rate of 21 per cent., when by then the rate of tax credit will have been reduced by 10 per cent.

Their inadequacies are not really the point, however. The amendments are designed to wreck the carefully constructed package of corporation tax reforms that we have laid before the House. I referred to the fact that the shadow Chancellor has not been able to say why, if tax credits are so vital, the Conservative Government reduced them. It is clear that tax credits were lowered in order to fill a black hole in the Government's finances. Our changes to the corporation tax structure will assist business by ensuring that there is a reduction in the rate of corporation tax for large and small companies.

It is clear that Opposition Members still do not accept the need for stability and the conditions for long-term growth. That comes as no surprise after 18 years of a Conservative Government who were wedded to the concept of boom and bust. Frankly, people do not want that to continue, and that is precisely why they elected a Labour Government on 1 May.

Mr. Gibb

How is it stable for a family that, under the new Labour Government, has to pay an extra £10 a month because of the Government's decision to abolish mortgage interest relief at source, and an extra £20 on the mortgage because of three interest rate rises, and now needs to find another £20 a month because of clause 19, which will result in higher pension contributions? How can a family find an extra £50 a month if it did not have £50 surplus in its pay slip before the Budget?

Mrs. Liddell

I am surprised by the hon. Gentleman, who prides himself on being a technician. If that is the level of his expertise, for the sake of his clients, I am grateful that he is in the House.

Earlier in the debate, the shadow Chancellor acknowledged that all the rhetoric is pointless. When I challenged him specifically about whether a future Conservative Government would reintroduce ACT, he refused to make any such commitment. That sums it all up. What we have seen here is posturing. Throughout the Standing Committee, Opposition Members were posturing without raising any points of substance.

Mr. Lilley

The hon. Lady berates my caution in not making commitments at this stage in a Parliament. What has she to say of the present Under-Secretary of State for Social Security, the hon. Member for Southampton, lichen (Mr. Denham), who, only months before the general election, gave a clear and explicit assurance to people in the City that the Labour Government had no plans to introduce this very measure?

Mrs. Liddell

The right hon. Gentleman is the shadow Chancellor, and his hon. Friends have subjected us to weeks of scaremongering. The hon. Member for North Tayside (Mr. Swinney) legitimately made the point that the worst thing that we can do to pensioners is to introduce uncertainty. The only uncertainty that has been introduced has been created by the scaremongering of Opposition Members. If they were so wedded to the concept of ACT, why in 1993 did the right hon. Member for Charnwood (Mr. Dorrell) say that it was the least damaging way for the Government to raise money?

Mr. Clifton-Brown

Will the hon. Lady give way?

Mrs. Liddell

No. I must make some progress.

The right hon. Member for Hitchin and Harpenden referred to the mis-selling of pensions. He did it with a straight face. We should like to know how it was that the previous Administration had eight years to act on the mis-selling of pensions, but did not do so. They sat on their hands. That shows how much they were concerned about the impact of the mis-selling of pensions.

The shadow Chancellor made some dubious comments about his visit to Uxbridge and the number of pensioners there who would be affected by the measure. He did not tell us how many pensioners in Uxbridge had been mis-sold pensions and how many of them had died without the problem being solved. We do not take lectures from Opposition Members who have been responsible for the biggest financial scandal this century.

The right hon. Member for Hitchin and Harpenden talked about how local authority pension schemes will hit council tax payers. That theme has come up repeatedly in debate. Yet again, I should like to put it on record—I know that Opposition Members do not like listening to the facts—that any impact on local authority budgets will not apply until after the next revaluation in March 1998. I say to the hon. Member for North Tayside that, in Scotland, revaluation will take place a year later than that, so the earliest effect will be between 1998 and 2000. Any impact on budgets will depend on decisions taken by actuaries.

Mr. Ruffley

Will the hon. Lady give way?

Mrs. Liddell

No, I am going to make some progress.

Any impact on budgets depends not just on the actuarial impact of changes in ACT but on the impact on company performance of the reduction in corporation tax.

Much has been made of the letter that my hon. Friend the Minister for Local Government and Housing sent in relation to the impact on local authority pension funds. This time, I shall quote from that letter—and I quote accurately. I had the letter in front of me while Opposition Members were trying to quote it, and I found a wide discrepancy between what they said and the facts. The letter states specifically: The Government will take all these factors into account in determining he level of local authority provision for that and subsequent years. That to me is quite clear-cut.

Mr. Loughton

Will the hon. Lady give way?

6 pm

Mrs. Liddell

No, I want to make some progress.

A number of hon. Members, especially the right hon. Member for Hitchin and Harpenden, talked about the briefing paper of the Association of Consulting Actuaries. It has been much prayed in aid in the debate. I understand that the consulting actuaries have now acknowledged that they failed to take into account the effect of the 2 per cent. cut in corporation tax rates. They also failed to take into account the distortion to which tax credits led and the preference that pension funds had for dividends rather than capital gains.

Despite all the hyperbole and invective of Opposition Members, the reality is that pension schemes are still very favoured by the tax system. There is tax relief for contributions, plus tax-free build-up, plus a tax-free lump sum where that is part of a scheme. It is important to get a sense of perspective into the debate.

The hon. Member for Bognor Regis and Littlehampton (Mr. Gibb) claimed that pension funds would shift out of United Kingdom equities. The decisions that pension funds take are for them. Rational investors put their money where the return is greatest. In international comparisons, the UK still has a very high dividend yield. From 1992 to 1996, the return in UK equities was higher than that in foreign equities, even without the payment of tax credits.

My hon. Friend the Member for Dudley, North (Mr. Cranston) made one of his very perceptive speeches in which he talked about the impact on investment of retained profits. We have returned to that point repeatedly. Although it is always very interesting to listen to the hon. Member for Grantham and Stamford (Mr. Davies)—once one gets beyond the hyperbole, one often finds that he has something to contribute to the debate because of his expertise and experience—he argued in circles about decisions that companies will take on the future of investment. The Government make the point that it is up to companies to decide what is to their long-term benefit as against distributed profits or retained profits.

The hon. Member for Bognor Regis and Littlehampton made a most impassioned speech about the operation of free markets. For a free market to operate effectively, it has to operate without distortion. Frankly, his argument is fallacious.

I turn to a point made by the hon. Member for North Tayside.

Mr. Quentin Davies

Will the hon. Lady give way?

Mrs. Liddell

Yes, I promised that I would.

Mr. Davies

Does the hon. Lady agree that the abolition of dividend tax credit involves the institution of double taxation in many circumstances? Double taxation is, by definition, a distortion.

Mrs. Liddell

I shall come to that in a minute.

I first want to reply to a point made by the hon. Member for North Tayside, who referred to Standard Life. He said that it was delaying quoting transfer values for people changing occupational pension schemes and claimed that that was due to loss of tax credits. A number of factors affect transfer values for people moving from one occupational pension scheme to another. Share values and general dividend levels, which have been changing substantially over the year, are just as important as issues such as tax credits. There is no reason for Budget changes to cause any serious delay in the quotation of transfer values.

Mr. Swinney

The point which I was making was that, as the hon. Lady correctly identified earlier, a variety of factors will bear on decisions made by actuaries. No one factor can be isolated. If the Government introduce a measure that increases uncertainty in the entire decision-making process of actuaries, they must accept some responsibility for the disruption that that causes in the marketplace.

Mrs. Liddell

The hon. Gentleman is contradicting the point that he made in his speech. He referred to the need for long-term stability. As long as there is distortion in the tax system, there are automatically preconditions for instability. The change would mean a move to greater long-term stability. The minute that the previous Government started altering the rate of tax credits, a process of uncertainty began. If we want a coherent corporation tax policy, the logical next step is to get rid of tax credits.

I turn to the point made by the hon. Member for Grantham and Stamford about double taxation of pension funds. There is no such double taxation. The basis of imputation will continue as it is now. Where individual shareholders are taxable on dividends that they receive from a UK company, they will continue to get a tax credit to set against that liability. That mitigates any double taxation. Pension funds, however—this is the point that the hon. Gentleman was seeking to make, but he confused the two matters—are usually exempt from tax. There is no tax charge on exempt pension funds when they receive dividends, so there is no double taxation.

Mr. Quentin Davies

I think that the hon. Lady has seriously misunderstood the basis of corporation tax. The whole purpose of a dividend tax credit is indeed to ensure that pension funds are not taxed. Now, they are having tax deducted in the form of ACT, which is not being refunded to them. They have therefore suffered a tax on their dividends. The hon. Lady has not understood the basis of her own tax system.

Mrs. Liddell

Frankly, that is nonsense, and the hon. Gentleman knows it. I congratulate him on being able to say it with a straight face. To the extent that pension funds are not exempt from taxation, they can set any tax credit against their liability, just like anybody else. In the debate on 9 July, I believe that he suggested that pension funds were being taxed on their dividends. That is not so.

I turn to another point made by the hon. Member for Grantham and Stamford about pensioners and pension funds being worse off, "if other things remain equal". We are all familiar with that phrase. Other things are not remaining equal. We are cutting corporation tax rates and boosting capital allowances as part of the package. That means that we are not only removing a damaging distortion but encouraging more and better investment, to the benefit of the UK economy in the long term.

Mr. Davies

Will the hon. Lady give way?

Mrs. Liddell

No, I want to make some progress. I am very anxious to do so because I know that Opposition Members wish to debate other matters. I have already given way a number of times.

I should like to take up one other point that the hon. Member for Grantham and Stamford made about whether companies will have to make higher pension contributions to defined benefit pension schemes. There should be no effect on many companies until the next actuarial valuation of their pension schemes, which could be as far as three years away. What is more, removing a distortion benefits the pension funds, because they get a more stable corporate base on which to develop investment.

Mr. Davies

Will the Minister give way?

Mrs. Liddell

No. The hon. Gentleman made a great contribution in Committee, but he tends to make the same speech, about how companies that invest in research and development pay dividends. If I have made the point to him once, I have made it half a dozen times: yes, many companies that distribute dividends spend money on R and D—but they would do that anyway, because they are large global companies with large reserves to spend on that activity. The change affects specifically the smaller high-tech companies that the distortion has forced to distribute dividends, when it would have been more effective for them to retain the money.

The gracelessness of the hon. Member for East Worthing and Shoreham has marked our debates. On behalf of his hon. Friends, I must testify to the fact that he has been most insulting to them, describing them as "woodentops". I accept that several of them are new to the House, but they tried hard, and the fact that the hon. Gentleman used that description may suggest that he has been indulging a little too much in the English wine about which he talked earlier.

The Leader of the Opposition has talked several times about why the previous Government fared so badly in the general election, and has made it clear that features such as arrogance and a lack of humility put the voters off. Perhaps the hon. Member for East Worthing and Shoreham does not care what the right hon. Gentleman thinks—perhaps he supports the prince across the water—but I must tell him that, when people look at the House and see the condescension that was portrayed in his speech, they tend to tar us all, not only on the Opposition side but on the Government side, with the same brush.

To summarise, we have seen in the debate an attempt to replay the Standing Committee. The shadow Chancellor said that we were ramming the Bill through the House. That is nonsense. Considerable time was given in Standing Committee. That must be so, because I now have an intimate knowledge of the family tree of the hon. Member for Daventry, we have been taken up and down the Orinoco by various members of the Committee, and I also now have a considerable knowledge of English wine, which may lead me to sample it in the next few weeks. However, what we have not heard are convincing arguments about why the Government should not make the change. I therefore ask the House to reject the amendment.

Mr. Lilley

I am sorry that the Minister is made to feel so inadequate by my presence at the Dispatch Box. I assure her that she does not need to feel that way. When I held her post, I certainly did not possess the brazen self-confidence that she brings to it—but then I never had to convince the House that taking £5 billion out of long-term investment would somehow encourage increased investment.

It is undoubtedly a great help to the hon. Lady to have the effrontery that she no doubt picked up in Glasgow politics and elsewhere.

Mrs. Liddell

I feel that, for the sake of my constituents in Airdrie and Shotts, I must make the point that not only am I not a Glaswegian, but I live between Glasgow and Edinburgh, and my constituency lies between Glasgow and Edinburgh. There is no greater affront to a Lanarkshire lassie than to suggest that she is a Glaswegian.

Mr. Lilley

I apologise unreservedly to the hon. Lady, and look forward to the repercussions that her remarks may have among her hon. Friends. I should say that such Scots blood as I have comes from the same part of Scotland from which she comes, so I have no excuse for having made that mistake.

I must return to the essential issue that faced us throughout the Committee stage. There have been only 12 working days between the publication of the Bill and today, the end of Report. That compares with an average of about 77 days during the preceding 18 years of our consideration of Finance Bills.

That is a measure of how compressed has been the time within which people outside the House have been invited to make representations. My hon. Friends have done sterling work in Committee in exposing the inadequacies and putting forward reasoned arguments and propositions, but they have had to do so without backing, without being able to mobilise the considerable unease felt in the country as a whole. People have not had the time they have had in previous years to make representations.

6.15 pm

That is all the more alarming because—I have already exposed this fact—the Government have introduced in this measure the biggest of the 17 tax increases that they have made, in flat contradiction of specific promises and assurances given by Front-Bench Labour spokesmen only a few months before the election.

That is another reason why the Minister needs her brazen effrontery. When faced with the truth, she goes into auto-rant about the defects of other people. The fact is that the people who now form the Government made promises to the British electorate that they have broken, and for which they will be held to account.

The hon. Lady pretends that the measure involves some high-minded purpose to do with fiscal neutrality—but it is not fiscally neutral to take £5 billion out of pension funds. Nothing that she has said, or can say, can convince us that it is. She has not answered the Primarolo paradox. If the measure is harmless, why is it essential to protect charities from its impact? The Financial Secretary to the Treasury could not explain that, and the Economic Secretary has not been able to do so either.

The hon. Lady took up the issue of mis-selling, from which she sometimes shrinks when it is raised from the Opposition Dispatch Box in such debates, although she had the effrontery to say that she would take no lectures from us on the subject. I shall certainly take no lectures from a former public affairs director of the Maxwell group during the four crucial years when Maxwell was ripping off surpluses throughout the country in a way that the Government now seek to emulate.

When I became Secretary of State for Social Security, the biggest issue that I faced was the Maxwell—[Interruption.] I got the money back for the pensioners, including the Minister—every penny of it. Not one of those pensioners had to suffer a penny's loss. That is why we will take no lectures, especially on this issue, from a Government who reassure pensioners by putting a former Maxwell employee in charge of dealing with mis-selling, who appoint as a Government spokesman someone who was previously Maxwell's fearless seeker after truth—Alastair Campbell—and who employ Lord Donoughue, one of his cronies, as another Minister. I am afraid that this is not an issue on which we shall take lectures from them.

We want to know the answers to our questions. Will what the Government have done encourage people to opt back into the state earnings-related pension scheme system, as we are convinced it will, and as are all the experts whose testimony I have read out? Do the Government agree that that will be the impact? Was that their intention? Have they made any calculation of the number of people who will be persuaded to opt back in?

Will that number be equal to the number who ought to opt back in? If not, will it constitute mis-selling that those who are not properly informed and persuaded to do that, despite the change in their circumstances, will be left outside with pensions less adequate than those that they could have received inside, because of the changes?

The other big issue that has come up in the debate is the impact of the measures on local authorities. We have received no satisfactory response from the Government Front Benchers to the issues raised by their own Back Benchers as well as ours, and by Labour as well as by Conservative councils throughout the country.

Council tax payers need to be reassured that the change will not inevitably feed through into higher council tax when hundreds of millions of pounds extra are required every year to ensure that local authority employees receive the pensions that the boroughs, the districts and the county councils have promised them. It is just not good enough for the Minister to say, "Oh, we shall not know the cost for a year or so; therefore, we need not take any action or inform everybody about the impact now."

This is a very important issue. Some £5 billion of tax revenue is to be raised for no purpose other than to be spent in future, because Labour Governments only tax now to spend later. The Government are acting in clear breach of their election promises, and in a way that will disadvantage members of occupational and personal pension schemes and leave them in ignorance of how the change will affect them. Our amendments would help to remedy some of those defects, and we urge the House to support amendment No. 16 in the Division Lobby.

Questions put, That the amendment be made:—

The House divided: Ayes 168, Noes 328.

Division No. 71]	[6.20 pm
AYES
Ainsworth, Peter (E Surrey)	Hague, Rt Hon William
Allan, Richard (Shef'ld Hallam)	Hamilton, Rt Hon Sir Archie
Ancram, Rt Hon Michael	Hammond, Philip
Arbuthnot, James	Harvey, Nick
Atkinson, David (Bour'mth E)	Heald, Oliver
Atkinson, Peter (Hexham)	Heath, David (Somerton & Frome)
Baker, Norman	Heathcoat-Amory, Rt Hon David
Baldry, Tony	Horam, John
Ballard, Mrs Jackie	Howard, Rt Hon Michael
Beggs, Roy (E Antrim)	Howarth, Gerald (Aldershot)
Bercow, John	Hunter, Andrew
Body, Sir Richard	Jackson, Robert (Wantage)
Boswell, Tim	Jenkin, Bernard (N Essex)
Bottomley, Peter (Worthing W)	Johnson Smith, Rt Hon Sir Geoffrey
Bottomley, Rt Hon Mrs Virginia
Brady, Graham	Jones, Nigel (Cheltenham)
Brake, Thomas	Keetch, Paul
Brazier, Julian	Kennedy, Charles (Ross Skye)
Breed, Colin	Key, Robert
Brooke, Rt Hon Peter	King, Rt Hon Tom (Bridgwater)
Browning, Mrs Angela	Kirkbride, Miss Julie
Bruce, Ian (S Dorset)	Laing, Mrs Eleanor
Burns, Simon	Leigh, Edward
Burstow, Paul	Letwin, Oliver
Butterfill, John	Lewis, Dr Julian (New Forest E)
Cable, Dr Vincent	Lidington, David
Campbell, Menzies (NE Fife)	Lilley, Rt Hon Peter
Cash, William	Lloyd, Rt Hon Sir Peter (Fareham)
Chapman, Sir Sydney (Chipping Barnet)	Loughton, Tim
	Luff, Peter
Clark, Rt Hon Alan (Kensington)	Lyell, Rt Hon Sir Nicholas
Clarke, Rt Hon Kenneth (Rushcliffe)	MacGregor, Rt Hon John
	McIntosh, Miss Anne
Clifton-Brown, Geoffrey	Maclean, Rt Hon David
Cormack, Sir Patrick	McLoughlin, Patrick
Cotter, Brian	Madel, Sir David
Cran, James	Major, Rt Hon John
Curry, Rt Hon David	Malins, Humfrey
Davey, Edward (Kingston)	Maude, Rt Hon Francis
Davis, Rt Hon David (Haltemprice)	Mawhinney, Rt Hon Dr Brian
Davies, Quentin (Grantham)	May, Mrs Theresa
Day, Stephen	Merchant, Piers
Donaldson, Jeffrey	Michie, Mrs Ray (Argyll & Bute)
Dorrell, Rt Hon Stephen	Moore, Michael
Duncan, Alan	Morgan, Alasdair (Galloway)
Duncan Smith, Iain	Nicholls, Patrick
Emery, Rt Hon Sir Peter	Norman, Archie
Evans, Nigel	Oaten, Mark
Ewing, Mrs Margaret	Öpik, Lembit
Faber, David	Ottaway, Richard
Fabricant, Michael	Page, Richard
Fallon, Michael	Paice, James
Fearn, Ronnie	Pickles, Eric
Flight, Howard	Prior, David
Forsythe, Clifford	Redwood, Rt Hon John
Fowler, Rt Hon Sir Norman	Robertson, Laurence (Tewk'b'ry)
Fox, Dr Liam	Roe, Mrs Marion (Broxbourne)
Gale, Roger	Ruffley, David
Garnier, Edward	Russell, Bob (Colchester)
George, Andrew (St Ives)	St Aubyn, Nick
Gibb, Nick	Sanders, Adrian
Gill, Christopher	Sayeed, Jonathan
Gillan, Mrs Cheryl	Shephard, Rt Hon Mrs Gillian
Goodlad, Rt Hon Alastair	Shepherd, Richard (Aldridge)
Gorman, Mrs Teresa	Simpson, Keith (Mid-Norfolk)
Gorrie, Donald	Smith, Sir Robert (W Ab'd'ns)
Gray, James	Soames, Nicholas
Green, Damian	Spelman, Mrs Caroline
Grieve, Dominic	Spicer, Sir Michael

Spring, Richard	Viggers, Peter
Stanley, Rt Hon Sir John	Wallace, James
Steen, Anthony	Walter, Robert
Streeter, Gary	Wardle, Charles
Stunell, Andrew	Webb, Professor Steve
Swayne, Desmond	Wells, Bowen
Swinney, John	Whitney, Sir Raymond
Syms, Robert	Whittingdale, John
Tapsell, Sir Peter	Widdecombe, Rt Hon Miss Ann
Taylor, John M (Solihull)	Wigley, Dafydd
Taylor, Matthew (Truro)	Willetts, David
Taylor, Sir Teddy	Willis, phil
Temple-Morris, Peter	Woodward, Shaun
Townend, John	Yeo, Tim
Tredinnick, David	Young, Rt Hon Sir George
Trend, Michael	Tellers for the Ayes:
Tyler, Paul	Mr. Nigel Waterson and
Tyrie, Andrew	Mr. Malcolm Moss.

NOES
Ainger, Nick	Clarke, Eric (Midlothian)
Ainsworth, Robert (Cov'try NE)	Clarke, Rt Hon Tom (Coatbridge)
Allen, Graham (Nottingham N)	Clarke, Tony (Northampton S)
Anderson, Donald (Swansea E)	Clelland, David
Armstrong, Ms Hilary	Clwyd, Ann
Ashton, Joe	Coaker, Vernon
Atherton, Ms Candy	Coffey, Ms Ann
Atkins, Charlotte	Coleman, Iain (Hammersmith)
Banks, Tony	Cook, Frank (Stockton N)
Barnes, Harry	Cooper, Yvette
Barron, Kevin	Corston, Ms Jean
Battle, John	Cousins, Jim
Bayley, Hugh	Cox, Tom
Beard, Nigel	Cranston, Ross
Beckett, Rt Hon Mrs Margaret	Crausby, David
Begg, Miss Anne (Aberd'n S)	Cryer, Mrs Ann (Keighley)
Bell, Martin (Tatton)	Cummings, John
Bennett, Andrew F	Cunliffe, Lawrence
Benton, Joe	Cunningham, Jim (Cov'try S)
Berry, Roger	Cunningham, Rt Hon Dr John (Copeland)
Best, Harold
Betts, Clive	Curtis-Thomas, Mrs Claire
Blears, Ms Hazel	Dalyell, Tam
Blizzard, Bob	Darling, Rt Hon Alistair
Blunkett, Rt Hon David	Darvill, Keith
Boateng, Paul	Davey, Valerie (Bristol W)
Borrow, David	Davies, Rt Hon Denzil (Llanelli)
Bradley, Keith (Withington)	Davies, Rt Hon Ron (Caerphilly)
Bradley, Peter (The Wrekin)	Davis, Terry (B'ham Hodge H)
Bradshaw, Ben	Dawson, Hilton
Brinton, Mrs Helen	Dean, Mrs Janet
Brown, Rt Hon Gordon (Dunfermline E)	Denham, John
	Dewar, Rt Hon Donald
Brown, Rt Hon Nick (Newcastle E)	Dobbin, Jim
Browne, Desmond (Kilmarnock)	Dobson, Rt Hon Frank
Buck, Ms Karen	Donohoe, Brian H
Burden, Richard	Dowd, Jim
Butler, Christine	Drown, Ms Julia
Byers, Stephen	Dunwoody, Mrs Gwyneth
Caborn, Richard	Eagle, Angela (Wallasey)
Campbell, Mrs Anne (C'bridge)	Eagle, Maria (L'pool Garston)
Campbell, Ronnie (Blyth V)	Edwards, Huw
Campbell-Savours, Dale	Efford, Clive
Canavan, Dennis	Ellman, Ms Louise
Caplin, Ivor	Ennis, Jeff
Casale, Roger	Etherington, Bill
Caton, Martin	Field, Rt Hon Frank
Cawsey, Ian	Fisher, Mark
Chapman, Ben (Wirral S)	Fitzpatrick, Jim
Chisholm, Malcolm	Fitzsimons, Lorna
Church, Ms Judith	Flint, Caroline
Clapham, Michael	Flynn, Paul
Clark, Rt Hon Dr David (S Shields)	Follett, Barbara
Clark, Dr Lynda (Edinburgh Pentlands)	Foster, Rt Hon Derek
	Foster, Michael Jabez (Hastings)

Foster, Michael John (Worcester)	Linton, Martin
Fyfe, Maria	Livingstone, Ken
Galbraith, Sam	Lloyd, Tony (Manchester C)
Gapes, Mike	Lock, David
Gerrard, Neil	Love, Andrew
Gibson, Dr Ian	McAllion, John
Gilroy, Mrs Linda	McAvoy, Thomas
Godman, Dr Norman A	McCabe, Stephen
Godsiff, Roger	McCafferty, Ms Chris
Golding, Mrs Llin	McCartney, Ian (Makerfield)
Gordon, Mrs Eileen	Macdonald, Calum
Graham, Thomas	McDonnell, John
Grant, Bernie	McFall, John
Griffiths, Jane (Reading E)	McGuire, Mrs Anne
Griffiths, Nigel (Edinburgh S)	McIsaac, Shona
Griffiths, Win (Bridgend)	McKenna, Ms Rosemary
Grocott, Bruce	Mackinlay, Andrew
Gunnell, John	McLeish, Henry
Hain, Peter	MacShane, Denis
Hall, Patrick (Bedford)	Mactaggart, Fiona
Hamilton, Fabian (Leeds NE)	McWalter, Tony
Hanson, David	Mahon, Mrs Alice
Heal, Mrs Sylvia	Mallaber, Judy
Healey, John	Marek, Dr John
Henderson, Doug (Newcastle N)	Marsden, Gordon (Blackpool S)
Henderson, Ivan (Harwich)	Marsden, Paul (Shrewsbury)
Hepburn, Stephen	Marshall, Jim (Leicester S)
Heppell, John	Martlew, Eric
Hesford, Stephen	Maxton, John
Hill, Keith	Meacher, Rt Hon Michael
Hinchliffe, David	Meale, Alan
Hodge, Ms Margaret	Merron, Gillian
Home Robertson, John	Michael, Alun
Hoon, Geoffrey	Michie, Bill (Shef'ld Heeley)
Hope, Phil	Milburn, Alan
Hopkins, Kelvin	Miller, Andrew
Howarth, Alan (Newport E)	Mitchell, Austin
Howells, Dr Kim	Moffatt, Laura
Hoyle, Lindsay	Moonie, Dr Lewis
Hughes, Ms Beverley (Stretford)	Moran, Ms Margaret
Hughes, Kevin (Doncaster N)	Morgan, Rhodri (Cardiff W)
Humble, Mrs Joan	Morley, Elliot
Hurst, Alan	Morris, Ms Estelle (B'ham Yardley)
Hutton, John	Morris, Rt Hon John (Aberavon)
Iddon, Dr Brian	Mountford, Kali
Illsley, Eric	Mudie, George
Jackson, Ms Glenda (Hampstead)	Mullin, Chris
Jackson, Helen (Hillsborough)	Murphy, Denis (Wansbeck)
Jenkins, Brian (Tamworth)	Naysmith, Dr Doug
Johnson, Alan (Hull W & Hessle)	O'Brien, Bill (Normanton)
Johnson, Miss Melanie (Welwyn Hatfield)	O'Brien, Mike (N Warks)
	O'Hara, Edward
Jones, Helen (Warrington N)	Olner, Bill
Jones, Ms Jenny (Wolverh'ton SW)	Organ, Mrs Diana
	Pearson, Ian
Jones, Jon Owen (Cardiff C)	Pendry, Tom
Jones, Dr Lynne (Selly Oak)	Perham, Ms Linda
Jones, Martyn (Clwyd S)	Pickthall, Colin
Jowell, Ms Tessa	Pike, Peter L
Kaufman, Rt Hon Gerald	Plaskitt, James
Keeble, Ms Sally	Pond, Chris
Keen, Alan (Feltham & Heston)	Pope, Greg
Keen, Mrs Ann (Brentford)	Pound, Stephen
Kennedy, Jane (Wavertree)	Powell, Sir Raymond
Khabra, Piara S	Prentice, Ms Bridget (Lewisham E)
King, Andy (Rugby & Kenilworth)	Prentice, Gordon (Pendle)
King, Ms Oona (Bethnal Green)	Primarolo, Dawn
Kumar, Dr Ashok	Prosser, Gwyn
Ladyman, Dr Stephen	Quin, Ms Joyce
Laxton, Bob	Quinn, Lawrie
Lepper, David	Rammell, Bill
Leslie, Christopher	Reed, Andrew (Loughborough)
Levitt, Tom	Reid, Dr John (Hamilton N)
Lewis, Ivan (Bury S)	Robertson, Rt Hon George (Hamilton S)
Lewis, Terry (Worsley)
Liddell, Mrs Helen	Robinson, Geoffrey (Cov'try NW)

Roche, Mrs Barbara	Stringer, Graham
Rogers, Allan	Stuart, Ms Gisela (Edgbaston)
Rooker, Jeff	Sutcliffe, Gerry
Rooney, Terry	Taylor, Rt Hon Mrs Ann (Dewsbury)
Ross, Ernie (Dundee W)
Rowlands, Ted	Taylor, Ms Dari (Stockton S)
Ruane, Chris	Taylor, David (NW Leics)
Ruddock, Ms Joan	Thomas, Gareth (Clwyd W)
Russell, Ms Christine (Chester)	Thomas, Gareth R (Harrow W)
Ryan, Ms Joan	Timms, Stephen
Salter, Martin	Tipping, paddy
Savidge, Malcolm	Todd, Mark
Sawford, Phil	Touhig, Don
Sedgemore, Brian	Trickett, Jon
Shaw, Jonathan	Truswell, Paul
Sheerman, Barry	Turner, Dennis (Wolverh'ton SE)
Sheldon, Rt Hon Robert	Turner, Desmond (Kemptown)
Short Rt Hon Clare	Turner, Dr George (NW Norfolk)
Simpson, Alan (Nottingham S)	Twigg, Stephen (Enfield)
Singh, Marsha	Vaz, Keith
Skinner, Dennis	Vis, Dr Rudi
Smith, Rt Hon Andrew (Oxford E)	Ward, Ms Claire
Smith, Angela (Basildon)	Watts, David
Smith, Miss Geraldine (Morecambe & Lunesdale)	White, Brian
	Whitehead, Dr Alan
Smith, Jacqui (Redditch)	Wicks, Malcolm
Smith, John (Glamorgan)	Williams, Rt Hon Alan (Swansea W)
Smith, Llew (Blaenau Gwent)
	Winnick, David
Snape, Peter	Winterton, Ms Rosie (Doncaster C)
Soley, Clive	Wise, Audrey
Southworth, Ms Helen	Wood, Mike
Squire, Ms Rachel	Wray, James
Starkey, Dr Phyllis	Wright, Dr Tony (Cannock)
Stevenson, George	Wright, Tony D (Gt Yarmouth)
Stewart, Ian (Eccles)	Wyatt, Derek
Stinchcombe, Paul
Stoate, Dr Howard	Tellers for the Noes:
Strang, Rt Hon Dr Gavin	Mr. David Jamieson and
Straw, Rt Hon Jack	Janet Anderson.

Question accordingly negatived.