HL Deb 09 June 1988 vol 497 cc1497-9

3.37 p.m.

Lord Bruce of Donington asked Her Majesty's Government:

Whether they will remove the rent and mortgage components from the retail prices index and substitute the Building Societies Association's figures reflecting the rise in house prices.

Lord Young of Graffham

My Lords, we have no plans to change the treatment of housing costs in the retail prices index. The present treatment follows recommendations made by the RPI Advisory Committee, most recently in 1986.

Lord Bruce of Donington

My Lords, I fully appreciate that the use of the RPI in its existing form has certain influences that are statutorily in the income tax Acts of 1970, but is it not the case that the annual rate of inflation as published by the Government is itself derived from the RPI? In view of the terrific rise in house prices, would it not be better if the annual rate of inflation figures, as published, were derived from an amended RPI so that an accurate figure of the annual rate of inflation could be ascertained?

Is the noble Lord aware that at present the annual rate of inflation, taking into account the gross rise in house prices and all property prices, is running not at 3.9 per cent.—which is the published figure for the rate of inflation—but at nearer 7.3 per cent?

Lord Young of Graffham

My Lords, I do not know where the noble Lord, Lord Bruce of Donington, obtains his information. The make-up of the RPI is, of course, changed from time to time. An independent RPI Advisory Committee advises the Government and I came to your Lordships' House two years ago to announce the then deliberations of that committee.

No country in the world includes the capital cost of housing in its calculation of RPI figures. However, the mortgage payments are included. Each year, as the average for mortgages rises, the amount of interest paid is included in the RPI figures. I believe that the present system is about the best we could have.

Lord Bruce-Gardyne

My Lords, notwithstanding the source from which this suggestion came, does not my noble friend agree that there is some argument for looking again at the treatment of housing costs in the RPI? The unsatisfactory nature of the impact of the mortgage component in the RPI is a factor which could be looked at again.

Lord Young of Graffham

My Lords, I am very grateful to my noble friend. I am not sure where the unsatisfactory nature lies because within the index there is the cost of mortgage interest. It is not just the rate of interest; it is based upon the average amount of mortgages. As house prices increase so that amount increases and therefore the effect is contained within the RPI. It is not the average increase in house prices which affects the cost of living; it is the price paid for a house when one either buys or sells. I believe that after full advice this figure reflects the current cost of living.

Lord Grimond

My Lords, does the Minister agree that increases or decreases in the retail prices index affect different parts of the community quite differently? To pretend that one index reflects the effect for all is totally misleading. Is there not a strong case for taking into account the suggestion of the noble Lord, Lord Bruce of Donington, at least for certain kinds of indices as they affect the treatment of certain elements in the community?

Lord Young of Graffham

My Lords, the RPI Advisory Committee is composed of those representing consumers, retailers, employers, employees, the financial community, government departments and academics. It looks at all elements of the cost of living. It sat and deliberated long and hard as to how the cost of living should best be calculated. In looking at the cost of rents and mortgages it is quite difficult to produce a different RPI for different parts of the country.

For example, we might well find the RPI increase in Scotland rather lower than that in the South-East of England. I believe that it would be impossible to construct separate cost of living indices for each and every part of our country.

Lord Monson

My Lords, does the Minister agree that one of the main factors pushing up the price of houses is the tax relief on mortgage interest? This relief is totally counter-productive.

Lord Young of Graffham

My Lords, the tax relief on mortgage interest is limited to a mortgage of £30,000. In some areas of the country that is a substantial part of the cost of a house, but in others where the shortage is greatest, it is not. I suspect that local government has a great deal to do because it is planning permissions that determine the cost of land. That is a matter that is very much for local government.

Lord Bruce of Donington

My Lords, is the Minister aware that the real matter at issue is the Government's statement on the annual rate of inflation, which at the present time is derived from the existing RPI? Any announcement as regards the annual rate of inflation as such must take into account the real rate of inflation.

The noble Lord asked for the origin of my figures. They were published in the house journal of the party opposite, the Daily Telegraph, on 21st May last, as being the calculations of Shearson Lehman, the well-known stockbrokers.

Lord Young of Graffham

My Lords, I believe the noble Lord is suggesting that we should ask the RPI Advisory Committee not to recommend any future changes; that we should ask the Department of Employment to cease doing work, and that we should put it out to Shearson Lehman. I find that a very curious suggestion. We have an RPI committee and a procedure that has long been recommending this figure. It is the rate of inflation. I do not believe that it does a great service to those who work on the advisory committee and the statisticians of the Government to continue to question their work.

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