Savings

HL Deb 08 June 1998 vol 590 cc765-78

7.34 p.m.

Lord Patten rose to ask Her Majesty's Government what progress they are making in developing their policies to promote savings.

The noble Lord said: My Lords, I am very glad to have the opportunity to question the Government in this short debate as I am most concerned at their apparent failures in some key areas of the promotion of saving in this country. In doing so, I should declare my interest at Charterhouse plc., now a wholly-owned subsidiary of CCF (Credit Commercial de France).

Generally, since the last general election the Government's handling of the economy has been sound. It may surprise some noble Lords to hear that remark. However, I have never been one to oppose for the sake of opposing, but perhaps that is because I spent 18 years in the other place on the Government Benches, or supporting them, so I did not get into the habit. Nevertheless, I may learn it in this House. It is not surprising that, by and large, the Government's handling of the economy has been sound, as their economic policies have the soundest possible foundations based on their economic inheritance from the last Conservative administration and the three that preceded it.

Indeed, it seems to me very lacking in generosity and uncharacteristic on the part of the right honourable gentleman the Chancellor of the Exchequer never to have recognised explicitly—at least as far as I know from the record—the great inheritance he received from my right honourable friend Mr. Kenneth Clarke, one of the greatest post-war Chancellors. Where is the recognition? For that matter, where are the 364 economists who, early in the 1980s, signed that infamous round- robin letter condemning Tory prudence and Tory privatisation, the policy which is now a world economic orthodoxy? I am glad to be able to tell the House that, in my view, no one has been more orthodox than new Labour in its adoption of so many old Tory economic policies. I congratulate it.

Upon such foundations the Government can now afford to be radical in areas where the previous Conservative Government did not have that opportunity or chose not to be radical. I give two examples. The first is national savings; the second is capital gains tax. Both areas are in urgent need of reform as the Government develop their policies to promote savings and a rational approach to savings.

The late right honourable gentleman Mr. J. Enoch Powell was surely absolutely right when, in his book, Saving in a Free Society, published in 1960—in my view a classic work—he wrote, that National Savings have now remarkably little connections with saving". One can hear that political thinker saying those words. I am told that his birthday falls on 16th June; indeed, that may well be national political thinkers' day in future years. But if what J. Enoch Powell wrote in 1960 was true, how much more is it the case in 1998?

The idea that national savings somehow equal the meritorious activities of the thrifty and the deserving poor accumulating some savings via self-denial, has not been a reality since the inter-war years. I must tell the House that I believe that national savings are now redundant. They do not help the poor any more; neither do they help the Treasury in any significant way in funding the public sector borrowing requirement. There are much better instruments available for doing so, as the noble Lord on the Government Front Bench knows. Nor, as distinguished economists such as Mr. Richard Jeffery have argued, is it necessary any longer for the Treasury to use national savings as a policy tool, by making the rates so attractive as to soak up loose money. The Treasury now recognises that this will not affect liquidity in any way; rather it simply moves money around the chess board from one sort of savings to another.

There is a myriad of ways of saving. National savings are expensive to administer. Ministers have been good enough to give me figures showing that in the financial year just ended the running costs of national savings amounted to what seems the huge sum of £175 million a year, including a Civil Service pay bill of about £80 million. Just imagine what the right honourable gentleman the Chancellor of the Exchequer could do with such a sum, scratching around as he is at the moment, in his comprehensive spending review, to try to save much smaller sums of money here, there and everywhere.

National savings are an archaic hangover. They are redundant. They should be allowed to wither on the vine and be scrapped. Talking of scrapping, why do not the Government allow the private sector to scrap over these funds and in so doing save the taxpayer £175 million per year—all that money being spent in the past year to raise for the Government just £1 billion which is the predicted yield in the year 1998–99?

The same goes for capital gains tax. It is never too late to say sorry. I am sorry that it was a Conservative Government who introduced that tax in the dying days of the 1959–64 administration. I believe that capital gains tax is wrong in principle. It is applied to money which has already been taxed at least once and which will probably be taxed again at a later stage via inheritance tax. I believe also that capital gains tax is wrong in practice. The £1.1 billion it raised in the past year would be multiplied many times over if the disincentives to saving and re-investment inherent in it were to be removed and the money left to cascade through the system.

Noble Lords will remember that back in the early 1980s old Labour used to look askance at Tory Chancellors cutting the top rate of personal income tax. But one has to consider the huge bonus that has been produced for the Treasury. The money has multiplied time after time. It has produced buoyant revenues that will allow the Chancellor shortly to run the economy at a surplus. New Labour should not look askance at the opportunities presented to carry off exactly the same trick as regards capital gains tax for the benefit of the national good.

I have recognised previously that the Government have a strong mandate for reform. They have clear objectives on investment and growth. They now need to recognise the golden opportunity that the reduction and eventual abolition of capital gains tax would give to mobilise savings and thus encourage longer term and higher risk investment. The Government do not seem to realise that the high headline rate of capital gains tax has acted as a positive disincentive for investors and managers thinking of investing not only their effort but also their savings in higher risk businesses. We need to mobilise those savings by engendering a virtuous cycle of saving, subsequent risk taking, subsequent wealth creation, and then the re-investment of success.

We all have our sources. It is not just Labour spin doctors who have their sources. I am told by my sources that the right honourable gentleman the Prime Minister has some private sympathy with the views I have just expressed. I have been told that the right honourable gentleman the Prime Minister regards capital gains tax as a "political" tax which is wrong but difficult to remove because of the politics of envy that might be engendered. I hope that the right honourable gentleman the Prime Minister and his right honourable friend the Chancellor of the Exchequer and others in the Administration will take a long, hard, radical look at capital gains tax in the interests of sustained economic growth via investment. Radical measures are needed. I look forward with interest to hearing the speeches that are to follow. I look forward with the greatest interest of all to hearing the speech of the noble Lord, Lord McIntosh, who is to reply to the debate and who is of course a well known radical.

7.44 p.m.

Lord Lucas

My Lords, I am extremely grateful to my noble friend Lord Patten for his most illuminating speech. The noble Lord, Lord Patten, has the great advantage over me of knowing what he is talking about. He is thus able to make suggestions. I shall confine myself to asking the Minister some questions.

I am interested in where the Government find themselves in their internal debate on savings and to what extent they have developed opinions as to where they should be going. What are their feelings on flexibility? Most of the discussions we have had in previous debates have related to what one might call fixed saving, such as pensions and building up money for old age to pay for possible illness in old age. These are savings that people generally do not have recourse to at an earlier stage. Someone can fall seriously ill and still not have recourse to money that he or she has tucked away for a pension fund. Their child may need a large amount of money to help him or her over a problem, but his parents cannot dig into their pension fund. Money that they have put aside in that way is allocated to just one liability, that of old age. However, the person in question may not attain old age.

To my mind there are clear disadvantages in focusing too heavily on fixed investment, not least the matter of the poverty trap. As this Government and others improve the benefits available to people who have not saved, it becomes harder and harder to compensate people who have made the effort to save, particularly those at the lower levels of income. They may have deprived themselves and their families of much good in their lifetimes but may not benefit from that in the end.

I hope that when the Government talk of encouraging savings they will focus on savings that are more flexible even if they are long-term savings, and that they will allow at least some part of them to be released when more immediate problems threaten. In a way that is a form of saving which has an additional benefit for the economy in that such savings are likely to be spent when the economy is in recession and at a time when it is generally helpful for savings to be spent. That is something the Government do in such circumstances. However, savings which are put aside for the long term stay locked up and contribute nothing to initiate the required recovery.

With that theme in mind, I am interested in what role the Government envisage for using savings in economic control. Let us suppose we find ourselves in a post-monetary union world. Many of the levers which the Government have traditionally used to control the economy will no longer apply. Do the Government envisage some measure of control over the flow of savings as the kind of lever they are likely to want to use? Is compulsion on the agenda therefore? Are we still looking at a system where in order to increase the level of saving the Government intend to exercise some degree of compulsion? Do the Government recognise that any form of compulsion inevitably implies some form of guarantee? You cannot compel people to do things without taking responsibility for the outcome. If you compel people to save, you are saying as a government that that saving will be safe; its terms will be fair; and the whole process will be a relatively simple one which will not result in the saver making many mistakes due to not understanding what is going on.

I hope that the noble Lord, Lord McIntosh has been briefed on these points. It is difficult to know whether that is the case with these wide debates. Does the noble Lord agree with me that the way to approach that kind of problem is the way a commercial company would approach it; that is, to concentrate on a single fund, to have it managed by a number of managers to spread the risk and to allow access to the market and expertise, but to get away from a whole multiplicity of different investment schemes and to find oneself looking—if one is compelled to invest—at a single investment fund?

That could have many advantages. It would cost a great deal less than a more complicated system, particularly one involving advertising and marketing. It would offer a great deal in terms of safety, and potentially a much better long-term return, because the fund would be cash-positive in the short and the long term. Investment mangers could therefore invest far more heavily in equities and take a far greater degree of risk with concomitant return than they could if a more laissez-faire strategy were pursued of allowing people to save in whichever way they want.

The whole question of saving, as my noble friend said, is of central importance to the future of the country. There is a great deal to be said for helping people to take risks. It is an approach that we are not good at in this country. Many aspects of our national and financial character have biased us against it. There has been a general feeling that those who have failed in business should not be trusted in business again. The problem does not affect those who set out with new ventures in America. One of the great reasons for their success is that those who have learnt through their failure are allowed the opportunity to succeed in the end.

If we examine the biases in the Pensions Act that we put in place, and in other pieces of legislation, we see that many creeping pieces of legislation on the side have made it much more difficult for institutional fund managers and others to take a risk. It has been difficult for them to take the chance that the return will be greater if they invest in young businesses and new businesses, compared with the safety of investing in the old established companies, knowing that at least the return will not cause heartache under the Pensions Act, or some criticism, and being picked up on in terms of short-term performance. I greatly look forward to the Government's reply.

7.52 p.m.

Baroness Macleod of Borve

My Lords, I intervene in the debate as the one woman who is prepared to take on the men on possibly a slightly different footing from the approach that one has been used to. Women are just as good at planning and saving as men.

I congratulate my noble friend Lord Patten on his speech; and also the noble Lord, Lord Lucas, whom I have known for many years and whose expertise in this field I have admired. When we were in government, we all followed him because he was so helpful. I wish to thank my noble friend Lord Patten for providing the opportunity for this debate. It will be short because one or two noble Lords have had to remove their names from the list of speakers.

The Government are rightly encouraging people to save. Apart from anything else, it would save the Treasury from having to rob Peter to pay Paul. However, I wish to emphasise the real difficulty that women of my generation all too often encounter.

There are 3 million widows in this country, and over 500 women are left without their partner every day. I declare an interest as an office holder of the National Association of Widows. Many of my widows are war widows. Unless they were very lucky, they are left without anyone to help them plan for the future, let alone save for themselves and possibly their children. This debate is about saving. However, one has to plan in order to save.

Those of use who fought in the war, and are proud to have done so, are now "past our sell by date". We find it difficult to get employment to help us to save. How awful those advertisements are which state, "Only those under 50 need apply". As we know, living expenses increase every year—sometimes every day. We are grateful for the pension awarded to war widows, but wish there were more in the Treasury kitty to help those who are younger than we are.

My noble friend Lord Lucas referred to illness. Illness can come upon us at any time in our lives. It can come upon our children, or their husbands if they are lucky enough to have a husband, or upon the whole family. Very often, there are no savings in the bank or at the Post Office. There may be some savings behind a counter—which as I understand it is becoming more and more difficult to cope with. Having to queue up to have money handed over is demeaning in the worst possible way.

We are told to go out to work in order to save, and to plan in that way. But jobs of any sort are not easy to find. If you cannot work, you certainly cannot save. I look forward to hearing the remarks of the noble Lord, Lord McIntosh, as to how those who are older can save enough to help their grandchildren and their children if they are so minded. We all want to pass on money or goods of various sorts in order to help our children. That is very difficult when one has no money with which to do it.

I am lucky enough to work hard for several charities. I almost long to pass round the hat now for some of those charities. They need help with saving, as we all do. I look forward to hearing my noble friends speak. This is an important debate. Perhaps some ideas will emerge from the debate to help people plan their savings in future.

7.58 p.m.

Lord Taverne

My Lords, it is a great pleasure to follow the noble Baroness. She made a very important point; namely, the ways in which the Government help individual savers are not necessarily a matter of grand economic policy but are of importance to individuals, to those who need the savings for later life and to improve the quality of their lives. They are the ones most affected by the changes that are made to savings regimes. I do not intend to go into great detail in this debate. I want to follow the noble Lord, Lord Patten, whose Question we all welcome, in approaching the matter with a rather broad brush. I assure the noble Lord who will reply that I shall not put any questions to him.

The difficulty is that one can never know what effect particular changes in savings regimes will have on the pattern of savings. One cannot accurately predict patterns of consumption and one never knows how the patterns of savings will change if new incentives are provided for a particular form of savings.

I wish to look at the Budget changes in a rather broad perspective. I start with a piece of personal history—now almost ancient history. Just over 25 years ago I launched the Institute for Fiscal Studies. At that time, after a period in the Treasury, I was struck by the mess that the tax system was in. Like Topsy, it just grew, and that is almost inevitable given the nature of our parliamentary procedures. No one seemed to look at the tax system as a whole or at the way in which one tax affects other taxes. There has always been a tendency for a multiplication of exemptions in a way which has neither rhyme nor reason. There would be a special allowance at one stage for the blind but no allowance for the deaf, and it all depended on what a particular parliamentarian put forward, and occasionally on the softness of heart of Treasury Ministers.

The reputation of the Institute for Fiscal Studies was made by the setting up of the Meade Committee, the aim of which was to look at the tax system as a whole. The report of that committee is still influential today; it is regularly quoted. People go back to it as the original source for ideas on tax reforms. It was a very effective committee because it had a brilliant chairman, the great and wonderful Professor Meade, who subsequently won the Nobel prize—though not for his work on tax. I recruited for the committee three rather bright young economists. One was John Flemming, who later became the chief economist at the Bank of England; the second was Mervyn King, who was also connected with the Bank of England; and the third was John Kay, then a very young and bright economist, who has now also established a considerable reputation.

The committee recommended an expenditure tax—not an extension of VAT but an exemption of savings from income tax. Savings were to be exempt; income and savings funded were to be exempt; but when savings were realised, the proceeds would be taxable. Many economists still very much favour that system. It has one great advantage, apart from its intrinsic merits; that is, it goes very much with the political grain. There is always pressure from parliamentarians to create exemptions. Exemptions can be created for particular forms of savings but, provided the proceeds are taxed, a coherent system can emerge. Indeed, that is the way in which a number of reforms have gone. Another advantage of the system would be that all savings would be treated alike. Savings would be neutral in influencing people's choice of the assets they would select, which in itself would improve economic efficiency.

The present system is still anomalous. I looked at the IFS green budget recently: there is a system for pensions; a system for TESSAs and PEPs—and now there are to be ISAs; a system for owner-occupied houses; a system for life assurance; and a system for stocks and shares. But there is a trend towards a certain uniformity of the treatment of savings, and a number of the reforming Chancellors have encouraged that trend. They also go the other way, because they are looking for new sources of revenue, preferably hidden sources. The noble Lord, Lord Lawson, was a very distinguished Chancellor who was very interested in tax reform. He moved towards a rationalisation of the system, but in fact he also moved the other way and looked at a hidden source; namely, insurance policies. The present Chancellor has also moved in the general direction, which I think is to be encouraged, but he, too, has looked for hidden sources and has decided to impose a hidden tax on pension funds, which is going in quite the wrong direction. Private pensions were at least a good, classical pattern: exempt when contributions are made and the income taxed, with one anomaly, which is the lump sum. If the Chancellor had wanted to be rational about pensions, he should have started to phase out the tax-free lump sum, but instead he went the wrong way.

This process is also consistent with the phasing out of SERPS and the substitution of private pension contributions, which I feel should be compulsory pension contributions, free of tax when the contributions are made. It would almost certainly increase savings among lower income groups more effectively than any other single measure.

What was striking before the Budget was the different treatment of the savings of the better-off who invest in PEPs and TESSAs compared with the savings of those who invest in building societies or liquid bank deposits. That is why I think that, on the whole, ISAs are to be welcomed. They are complicated, but they are a step in the right direction because they will help individuals on lower incomes, even if one does not know exactly what effect they will have. The system of ISAs is not quite an expenditure tax regime; it is not quite the exemption of contributions from income tax and taxation of benefits; it is not the EET but the TEE regime, contributions out of taxed income and then exemptions at the next two stages. At least there is now a certain consistency. It was right to encourage the inclusion of those who could not afford to keep their savings in any account for a long time. Low income families, particularly those with children, need liquid accounts, drawing on them for their varied needs and being unable to put money away for a long period. I am glad that the Chancellor has lifted the cap which he had previously proposed which would have created many difficulties. People will have a wider choice.

On the whole, the Chancellor is proceeding in the right direction. One does not know what the effect will be over time. It is likely that the effect will be beneficial, although, if the Chancellor is really interested in increasing savings for their future among the lower paid or those with lower incomes, I think he must bite the bullet and accept that the single most important measure will be the introduction of compulsory, privately funded pension schemes to replace SERPS.

8.6 p.m.

Lord Mackay of Ardbrecknish

My Lords, we have had a short but interesting debate, and we are grateful to my noble friend Lord Patten for introducing it. A number of issues have been raised and in my seven minutes I hope to range across them.

In introducing the debate, my noble friend discussed two matters—capital gains tax and national savings. I think my noble friend knows that, towards the end of our term of office, we were thinking of phasing out capital gains tax, for the very reasons he mentioned: it was a disincentive to save and a disincentive to reinvest. That is perhaps a conclusion that the present Government may come to at some stage; certainly I think we ought to be looking to it for the future.

My noble friend described national savings as redundant and wanted the system to be privatised. I have news for him. If he had been here on the Thursday when we adjourned for the Whitsun Recess he would have heard an interesting exchange between the noble Lord, Lord McIntosh, and myself, in a House even emptier than it is today, in which the Government began the process of privatisation in a contracting out order for national savings. I cannot resist suggesting to my noble friend that he should study that.

My noble friend will know from his membership of the other place that the Labour Party was not very keen on contracting out of services. It certainly was not very keen on the deregulation Act; indeed, it was going to abolish it when it came into office. Instead, the Labour Government decided to use the Act on the question of national savings, despite the fact that as recently as January 1997 a Labour Party press release described any kind of contracting out of national savings as privatisation. Perhaps my noble friend and I can delight in the fact that the Labour Party has now decided that privatisation is a good thing. The contracting out—or partnership, as I think the Government prefer to call it—is 95 per cent.:5 per cent. One of the trade unions, which probably used to be a great friend of the Labour Party, did not think that that split described a partnership but sounded much more like a total shift of national savings to the private sector.

My noble friend highlighted the costs of running the national savings scheme. The private sector's view is that, of the 4,000 jobs currently in national savings, 1,500 are simply not needed. Perhaps, therefore, the Government are beginning to listen to the kind of philosophy my noble friend and I backed over many years.

My noble friend Lord Lucas discussed a number of interesting issues, one of which was the relationship between high returns and high risks. The reality is that the new ISAs cannot be significantly different from bank accounts or building society accounts where, if we put in our money and leave it there with certain provisos—for example, we want high performance; we will only withdraw once or twice a year or with 90 days' notice and so forth—we will receive a higher return than if we put the money into a day-by-day account. If the ISAs are to be day-by-day accounts they will not be able to give the kind of high return that the Government probably want.

My noble friend Lady Macleod of Borve made an important point in relation to savings for women, in particular war widows. I could probably finish my seven minutes discussing those matters. I made no secret previously from this Box, even when I answered from the government side, that I felt there was huge merit in younger war widows receiving their pensions for life. I hope that when the MoD looks at pensions—not at social security—it will go down that road.

The noble Lord, Lord Taverne, and I concluded that the debate would end up in the same kind of way. We are both interested in pensions—he perhaps more lucratively than me. We addressed a number of conferences together. What puzzles me about the Government's attitude is that they have separated pensions and savings. I would have put pensions first, but we are still waiting to see what pension ideas are going to come forward and, returning to savings, still waiting to see what the ISA benchmark will look like.

As my noble friend Lord Lucas said, a high performance in the equity element of ISAs is inevitably associated with high management charges. That is inevitable. There are those who think we can go to tracker funds. That is fine, provided there is a rising market. What happens to tracker funds in a falling market? They have never been tested in a falling market.

What if, as inevitably will be the case, the non-benchmarked ISAs perform better than the benchmarked ISAs? Will the Government attempt to bring in regulations to tie the hands of the non-benchmarked ISAs so that they come nearer to the benchmarked? The real problem in relation to benchmarking is that the Government will look as though they have authorised benchmarked ISAs. Savers will see them as safe or guaranteed. They will buy that benchmark and if the benchmark provides a lower return than non-benchmarks, as it inevitably will, they may feel that they have been robbed and decide that they have been misled by the Government. Therefore, I say to the Minister that he must watch out on benchmarking as it could easily be a difficult thing for people to understand and deal with.

I conclude with the point that I made to the noble Lord, Lord Taverne. The most important saving that people can do is in relation to their pensions. The Government have put the cart before the horse. I do not know what they are going to do to make pensions more attractive than savings. I see what they have done for savings. What are they going to do for pensions? They have already taken away one of the tax advantages. Pensions were once exempt when money was put in; exempt while the money grew and taxed when it came out. The Government have removed that second exemption. Their abolition of ACT on pensions means that £5 billion more—the noble Lord will expect me to say this—will be taken out of pension funds by the Government in the future and that means £5 billion less for the people who put their money into pensions. It is inevitable. The Government must therefore be extremely careful in relation to pensions.

The Government must try to introduce a pensions package which is more attractive than the savings packages and encourages people to invest in their pensions. That is the most important thing a government can do for ordinary people—those who do not have the kind of pension funds that many of us possess. They need our help and encouragement so that they can enjoy the security in old age that only pension savings will bring, not ordinary savings.

8.15 p.m.

Lord McIntosh of Haringey

My Lords, the Government too are grateful to the noble Lord, Lord Patten, for introducing this short and amazingly wideranging debate. I am not sure whether he was setting a trap for me. He described the Government's achievements as resulting from sound economic policies. I thought, "That sounds fine; we can start from there". Then at the end he described me as being a well-known radical. That sounds to me as though he is seeking to distance me from government policies and to tempt me to unorthodoxy and instant dismissal. I shall resist that temptation.

Let us remember that just 10 years ago this country was enjoying what was claimed to be an economic miracle. Tax revenues were rolling in; house prices were rising; consumer confidence was high and the then Chancellor. Nigel Lawson, capped it all with a giveaway Budget of tax reductions and plans to increase government spending as a proportion of GDP. But look what happened to that miracle—it all went bust. Those policies resulted in a disastrous boom-bust cycle.

When we talk about the inheritance of previous governments—I do not doubt the justice of some of the points made by the noble Lord, Lord Patten—let us record over a longer period the number of boom-bust periods in the 18 years of Conservative rule. Let us record also our determination to avoid that rollercoaster of macro-economic instability which discouraged long-term saving and investment and damaged both business and individuals. Instead we are determined to create the right environment in which individuals and businesses will be encouraged to save and invest for the long term with confidence. That is the starting point of our attitude to savings—to ensure economic stability.

Too often in the past an individual's hard-earned savings have been eroded by hard-earned inflation. That is why, within days of taking office, we gave the Bank of England operational responsibility for setting interest rates. We recognised that a new monetary framework was necessary to achieve low and stable inflation—the essential bedrock on which people will be encouraged to save and invest. That framework ensures that interest rates are set on the basis of the long-term needs of the economy, not short-term political considerations.

Similarly, we recognise the importance of sound public finances to create the right environment for individuals and businesses to plan ahead. That is why we are introducing a statutory code for fiscal stability and why we set out a five-year deficit reduction plan which brought public finances back to a sustainable footing which we are determined to lock in. That framework will ensure that fiscal policy, like monetary policy, is set with Britain's long-term interest in mind. The introduction of the fiscal framework will not only create a more stable macro-economic environment, but it will also have the effect of improving the Government's own saving position. For the economy as a whole it is the nation's savings—the sum of private and public sector savings—that matter for economic growth. The Budget shows that we are well on course to meet the Government's two strict fiscal policy rules. Over the past year the fiscal stance has been tightened by around 2.5 per cent. of national income. That will feed directly into the nation's savings through lower government borrowing.

In that context, I did not find the radical suggestions of the noble Lord, Lord Patten, in relation to capital gains tax at all attractive. Of course, capital gains tax raises around £1 billion a year. It must surely be right in principle to tax capital gains; to maintain some measure of equity between taxation of income and taxation of gains. But the abolition of capital gains tax, or even its partial abolition, to which the noble Lord, Lord Mackay, referred, would bring us straight back to the situation that I remember very well in my early days in business when lawyers and accountants spent vast amounts of time and money finding ways to convert income into capital gains in order to benefit from lower capital gains tax rates. That would happen if we abolished the concordance between income tax and capital gains tax and, still more, if we followed the more radical proposals of the noble Lord, Lord Patten, to abolish capital gains tax altogether.

If we did that the loss to the Revenue would be many billions of pounds rather than the £1 billion which capital gains tax raises at the moment. In passing he referred to inheritance tax. Clearly, the level of that tax has to be set to stop the kind of evasion that was all too common under previous régimes. The Government's fiscal policy and their probity are direct ways in which they can increase overall savings, encourage better balanced growth and support monetary policy.

I was puzzled by some of the things that the noble Lord, Lord Lucas, said at this point. He talked about the need to have more flexible and more liquid long-term savings. We do not see it that way. As the noble Lord, Lord Taverne, said, we see a fundamental difference between long-term, locked-in savings, which is what pensions are, and liquid savings for the shorter term. It is very dangerous to confuse them or to try to get them to meet because they are serving different purposes. Both are important in building up a good savings ratio, just as low government borrowing is important for building up a good national savings ratio. But our economic policy must be to encourage saving and not—and I come back to the noble Lord, Lord Lucas—to think of savings as a means of economic control. I found that a very strange concept indeed. Our tax and regulatory regime encourages and supports long-term saving and investment.

I crossed out of my speech the passage about tax credits and pensions believing that no one was going to raise those subjects, but I underestimated the noble Lord, Lord Mackay. The abolition of tax credits last year removed the artificial tax bias that encouraged companies to pay dividends rather than retain and reinvest profits. The reform will improve the climate for long-term business investment. This Government have helped businesses by reducing corporation tax, and it is now the lowest in any major EU economy. They are committed to keeping it at that level, or below, for the life of this parliament. I do not take any lessons about the abolition of dual dividend relief.

A number of noble Lords said that pensions are more important than short-term savings. I hope I have made clear our view that both are essential. The fact that we have brought forward our proposals for individual savings accounts before we have concluded our discussions on stakeholder pensions does not mean that we are any less keen on improving the pension régime.

But I have to remind the House that it was a Conservative Government which in effect destroyed the SERPS régime in the 1980s by eroding benefits dramatically so that they were based only on the average of 20 years rather than the three best years, and by making them more uneconomic by encouraging opting out into less suitable private schemes with the disastrous effect that we all know.

If we are appraising radical measures, what sort of government are they that, within a month of their inevitable removal from office after five years, produce a proposal, as the Conservative Government did in March last year, which would have imposed taxation on the payments into pension funds and removed taxation on the receipts? That was a huge change in inter-generational equity without any sort of consideration or discussion whatever. If by any chance they had won the election, we would have been stuck with that.

I am not going to anticipate the conclusions that we come to about compulsion. As the noble Lords, Lord Lucas and Lord Mackay, already recognise, the compulsion of stakeholder pensions is a fundamental issue which we have to resolve. I remind them, however, that we already have a substantial compulsory pension element in national insurance contributions.

In addition to long-term pensions, we want to provide other incentives to save, not only to ensure security in retirement, but to encourage savings more widely. It is a scandal that half the adult population has less than £200 in liquid savings and half of them have no savings at all. Our aim is to spread the savings habit to many more people and to get those who currently have only modest savings to save more.

In saying that, I do not underestimate the difficulties that the noble Baroness, Lady Macleod, raised for women, widows and war widows in particular. Characteristically, she has hit on the most important and most difficult areas of policy which we are having to address. That is the balance between social security expenditure and what people can do for themselves. That is the fundamental issue of social policy in our time.

We are determined to reduce dependency with our welfare-to-work policy; policies for reducing, when we can, the lower income tax rate to 10 per cent.; and increased child benefit in real terms. With all these measures we are seeking to encourage people to get back into work and to discourage them from the kind of dependency which the noble Baroness recognises is so demoralising and which denies people hope and control of their own future.

In view of the time, I shall cut out what I was going to say about individual savings accounts. We published a consultation paper at the end of last year. That has had an effect on the final version which we have agreed and which will begin next April. I appreciate the difficulties that noble Lords have identified, but I point out that the difficulties they identified in November and December last year have largely been dealt with in the final scheme.

I must say a word about national savings since the noble Lord, Lord Patten, gave considerable emphasis to them and since he was reminded by the noble Lord, Lord Mackay, of our debate just before Whitsun. However, I believe he is addressing his remarks to the wrong "McIntosh". The noble Viscount, Lord Mackintosh of Halifax, is the grandson of the founder of national savings. Perhaps he would put up a strong defence of his grandfather's brainchild.

We recognise that national savings have to move with the times and that they have to provide a good return to individual savers as well as to the Government. They bring in £1 billion a year, which is not to be rejected lightly. As the noble Lord, Lord Mackay, reminded the House, national savings will now have its operational activities contracted out which should improve its efficiency.

I do not have time to deal further with the private sector promotion of savings, which is enormously important to the Government, but, together with the economic stability that I mentioned earlier and the Government's tax strategy, what I have described represents the building blocks of our policy to promote savings.

Lord Haskel

My Lords, I beg to move that the House do now adjourn during pleasure for five minutes.

Moved accordingly, and, on Question, Motion agreed to.

[The Sitting was suspended from 8.30 to 8.35 p.m.]