Lords Sitting of 7 May 2003

Preamble
The House met at half-past two of the clock: The LORD CHANCELLOR on the Woolsack.
Prayers—Read by the Lord Bishop of Chelmsford.

The Lord Chancellor: Leave of Absence
The Lord Chancellor (Lord Irvine of Lairg): My Lords, before business begins, I take the opportunity to inform the House that I will be undertaking a ministerial speaking engagement in Stratford-upon-Avon on Friday, 9th May, when the House will sit. Accordingly, I trust that the House will grant me leave of absence.

Hyde Park: "Star Trek" Exhibition
Lord Berkeley Lord Berkeley asked Her Majesty's Government:
2.36 p.m.
How long the "Star Trek" tented complex will remain in Hyde Park; whether it was granted planning permission; and, if so, by which body.
The Minister of State, Department for Culture, Media and Sport (Baroness Blackstone): My Lords, the "Star Trek" exhibition closed to the public on Sunday, 27th April. The site is being dismantled and will be completely cleared by the end of May, if not before. It received planning permission on 17th October 2002 from Westminster City Council.
Lord Berkeley: My Lords, I am grateful to my noble friend for that Answer. As she gave me a Written Answer in March on the same subject, she will be aware that this large tented complex has been on the grass near Marble Arch since the beginning of December. Does she not agree that having so many large tented structures in Hyde Park for so much of the year—this is only one of about six—detracts from the beauty of one of the few remaining open spaces in London? What action will she take to ensure that this does not happen again in the future?
Baroness Blackstone: My Lords, I do not entirely agree with what my noble friend is implying. This was very much a one-off exhibition. I took the decision to support what the Royal Parks wanted to do in allowing the "Star Trek" exhibition, partly because it was to be held in the winter months, when the park is less used than in the summer months, and partly because it would earn the Royal Parks a certain amount of money. Indeed, it has led to more than £250,000 becoming available to the Royal Parks, which will be put to very good use. It will be used to support improvements in Regent's Park, where all the playing fields are being improved and where there is to
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be a new pavilion. I hope that your Lordships will agree that exhibitions of this kind, which can bring in extra funding for the Royal Parks, should be allowed to take place from time to time. There will not be another exhibition of this kind in Hyde Park for at least three years.
Viscount Falkland: My Lords, together with many people who enjoy the incomparable space, I am a regular user of Hyde Park and Kensington Gardens, where I ride my bicycle. I congratulate those who present to us a place of peace and quiet, but surely some standards of aesthetics must be maintained. The exhibition was a piece of corporate vandalism, a visual excrescence, which caused enormous distress to those of us who visited the park regularly each week and are now avoiding it. What kind of decisions will be made by Westminster Council in the future? That is what bothers us and, I imagine, bothers the noble Lord who asked the Question. If we can have that monstrosity there, what is coming next?
Baroness Blackstone: My Lords, I cannot answer for Westminster City Council. The noble Viscount will have to put his question about its planning decisions to its leader. The noble Lord is exaggerating in suggesting that this tented exhibition was a dire threat to the aesthetics of the park. It was located in one corner of the park on a patch of ground that is in very poor condition. Incidentally, in addition to the £250,000 I mentioned, an extra £110,000 or so will be spent by those who put the exhibition together on improving the ground on which it was held. So another benefit is that that area of the park will be greatly improved.
Lord Strabolgi: My Lords, I declare an interest as a member of the local residents association. Is my noble friend aware that, in addition to the tented complex, music concerts also cause considerable disturbance to people living around the park? The music is so loud that it can be heard from Marble Arch to Battersea. Will the Government reconsider the use of the park for these kinds of activities?
Baroness Blackstone: My Lords, the answer to that question is no. The Royal Parks are for the people of London. We try to ensure that they are used by the maximum number of people. We should try to attract as many people as possible, including young people, to use the parks and to benefit from what they have on offer. There are seven concerts a year. I regret that they are sometimes rather noisy—I have sympathy with my noble friend in that regard—but we shall certainly not tell the Royal Parks not to hold these concerts.
Lord Inglewood: My Lords, does the noble Baroness agree that many of the strictures that have been levelled against the "Star Trek" tented complex could equally have been made about the Crystal Palace?
Baroness Blackstone: My Lords, I am not responsible for the Crystal Palace. I do not even know what the problem is at the Crystal Palace, so I am afraid I cannot answer the noble Lord's question.
Lord Elton: My Lords, further to the point raised by the noble Lord, Lord Strabolgi, does the Minister not

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have some locus from which she can use her influence or authority to limit the decibels pumped out by the concerts when they take place? This would not reduce their enjoyment to the young people, but it might reduce the harm that it does to their ears, and it would certainly improve the environment for those who live near.
Baroness Blackstone: My Lords, I am certainly very happy to take up that suggestion. I will try to find out exactly what we know about the decibel level that such concerts produce and see whether there is anything we could do to encourage the organisers to make them a little less noisy.
Lord Brougham and Vaux: My Lords, will the Minister tell the House how much money the Royal Parks earn from these sort of events? It is valuable to them, as I believe it is about their only source of income.
Baroness Blackstone: My Lords, I cannot give the precise amount of money that the Royal Parks earn from these events, but I know that it accounts for something like 25 per cent of their funding from non-government sources. They also earn quite a lot of money from the parks being used for film productions, catering and similar facilities. I will write to the noble Lord and give him what figures we have on the precise amount.

Hospital Catering
2.44 p.m.
Earl Ferrers Earl Ferrers asked Her Majesty's Government:
Why the food for the new Norfolk and Norwich University Hospital is cooked in Colchester and sent to Norwich by road.
Baroness Andrews: My Lords, as with all hospitals, decisions on the systems to be used to provide catering services at the Norfolk and Norwich University Hospital are for the individual trust to make.
Earl Ferrers: My Lords, I do not think the noble Baroness can get away with it quite as easily as that. The Government take great pride in what happens in the hospital system and she must be concerned, I would have thought, to realise that £230 million is spent on building a new hospital which apparently does not have any kitchens. Or does it have kitchens which are not used? Presumably all the dishes that come up from Colchester, full of food, including porridge—because even porridge has to be cooked in Colchester—have to go back to Colchester again to be washed up and refilled. Can the noble Baroness say how many road movements, as the Civil Service would say, there are between Colchester and Norwich in bringing the food?
Baroness Andrews: My Lords, the noble Earl is quite right: I am concerned and I certainly do not intend to give him a flippant answer. To answer the last part of his Question first, I understand that every day the food is delivered from Colchester—that is one journey a day. The hospital is brand new, as he knows, built to a PFI contract, and it has opted for the cook-chill method of delivered food. It does not sound very appetising but it is. It means that the food is prepared outside but it is fresh food created to the highest possible quality standards. Because it is delivered in that way, we have a guarantee about that. It offers more choice for patients. The noble Earl is quite right that we are very concerned to increase quality and choice to patients. Hospital food has not been good; we want to make it better. That is why we have introduced the better food programme in hospitals.
Lord Renton: My Lords, can the noble Baroness say how many hours elapse between the cooking of the food at Colchester and its consumption in a hospital at Norwich? How much does it cost to transport that food from the one place to the other?
Baroness Andrews: My Lords, the food is cooked and chilled, so what is crucial is that when it reaches the hospital and is reheated in the kitchen, it arrives on the ward hot and appetising, something to which the patients can look forward. I cannot tell the noble Lord about the transport costs, but if I can find a figure I certainly will let him know.
Baroness Pitkeathley: My Lords, does my noble friend agree that the most important thing from the patients' point of view is not where the meal is prepared or even how it is prepared but its taste and the variety that is available to them? Could she therefore expand a little on her answer about the better hospital food programme, particularly in relation to the choice available to patients?
Baroness Andrews: My Lords, the whole purpose of the better hospital food programme which was introduced in the NHS Plan in 2000 was to put taste, quality and flavour back into hospital food. Among the initiatives that have been introduced over the past couple of years are snack boxes so that people who miss meals when they go to surgery have a nice meal when they return. What we are really proud of—I have here a visual aid—are the menus in which three dishes a day on offer in every hospital are designed by leading chefs. For example, Loyd Grossman is leading our panel implementing the programme. Some of the dishes are absolutely delicious, such as cauliflower cheese with extra cheesy sauce or sticky toffee pudding.
A Noble Lord: More!
Baroness Andrews: That is just the sort of thing, my Lords, that we see and enjoy in our own Dining Room.
Baroness Noakes: My Lords, in the NHS Plan there was a commitment to introduce 24-hour catering by

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December 2001, including the snack boxes to which the Minister referred. Can she explain why only 60 per cent of hospitals have introduced snack boxes and why not all hospitals have yet introduced 24-hour catering?
Baroness Andrews: My Lords, we set ambitious targets because we knew that patients really appreciate good food in hospitals. It proved difficult to meet those targets, but I am delighted to say that we are making progress all the time with 24-hour catering, ward kitchens and snack boxes. Two additional snacks a day are available on the wards for patients and a really nice hot meal in the evening. So we are making very good progress.
Lord Walpole: My Lords, where does this leave the Answer given last week to the noble Baroness, Lady Miller of Chilthorne Domer, by the Minister of Agriculture about the use of local food produced within 30 miles of where it is consumed?
Baroness Andrews: My Lords, the NHS Purchasing and Supply Agency is anxious to involve as many local suppliers as possible. They are supporting that in different ways; for example, the PASA speaks of supplier events. It produces booklets and information and supports the DTI, regional development agencies and small business services. We are very anxious to play a part in sustainable development in that way.
Lord Addington: My Lords, I declare an interest as a local boy. Hearing that food must be transported across the eastern counties to our newer hospitals, I wonder whether the Government are aware that we have "beautifully tender turkeys"—I believe that was the expression—in Norfolk. We also have an excellent catering department in Norwich City College. Are those assets not being under-utilised in this process?
Baroness Andrews: My Lords, I would very much like to see those local assets being used as part of the cook-chill experience. It would be excellent if we could get the local college involved. Because we are looking for innovation and choice, we are prepared to consider several different ways in which best to do things.
Baroness Sharples: My Lords, the noble Baroness said that there was no kitchen at the hospital. I assume that they must use a large number of microwaves.
Baroness Andrews: My Lords, I did not say that there was no kitchen. It is a particular type of kitchen that can cater for reheating large quantities of meals. Each ward has a little kitchen where snacks can be prepared.
Lord Tanlaw: My Lords, is there not a simple solution to this problem, offered yesterday at Question Time? We could serve more corned beef.

Contraception: Morning-after Pill
2.51 p.m.
Baroness Seccombe Baroness Seccombe asked Her Majesty's Government:
What action they intend to take in response to the concern of some nurses that the morning-after pill is being dispensed to women without proper health checks.
Baroness Andrews: My Lords, the Committee on Safety of Medicines and the Medicines Commission fully considered all the safety and medical issues when pharmacy supply of this medicine was being considered during 2000. They advised that emergency contraception could be safely supplied by pharmacists. The Royal College of Nursing has not provided us with any evidence that emergency contraception is being supplied without proper health checks. However, officials from my department would be happy to meet with the RCN to hear its specific concerns.
Baroness Seccombe: My Lords, I thank the noble Baroness for that reply. Two years ago the Royal College of Nursing was in favour of the pill being dispensed over the counter, but now it is calling for tighter controls. Does the Minister share my concern that there appears to be a lack of advice, information and health checks before the pill is prescribed or sold over the counter? The assurances that were given to this House when the relevant Bill was going through the House seem to have been disregarded. I admit that the Minister suggested that she was willing to listen, but what will the Government do to ensure that those assurances are upheld?
Baroness Andrews: My Lords, we are very anxious that the system should work well. The pharmacists themselves are committed to offering an excellent advice service. We have had no evidence, information or feedback that that is not working well. Health checks are made when pharmacists assess patients for their appropriateness to receive emergency contraception, as they are for any other medicine sold by pharmacists.
The noble Baroness may have seen the press notice issued yesterday by the Royal Pharmaceutical Society, which reiterated its commitment. It referred to the very detailed professional guidance that underpins the sale of hormonal contraception. We are content that the system is safe and working well, but we are happy to meet the RCN if it is concerned.
Lord Clement-Jones: My Lords, is the Minister aware that the RCN Congress made absolutely no change to its policies, which were to support—and are still to support—the dispensing of emergency contraception by pharmacists? Is it not the case that no hard evidence was produced in that debate? It was all anecdotal. Would the Minister agree that the benefits

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of emergency contraception in terms of unwanted pregnancies vastly outweigh the issues that have arisen?
Baroness Andrews: My Lords, the noble Lord is right in every respect.
Lord Hylton: My Lords, do the Government agree that the recent introduction of the morning-after pill into schools at a time of rising teenage pregnancies shows the ineffectiveness of much conventional sex education? Will the Government therefore study the success of abstinence education in the United States and discuss it with education authorities here?
Baroness Andrews: My Lords, most contraceptive advice for young people is offered by general practitioners and family planning services. If a school's governing body decides to provide a school-based health service, it can offer contraceptive advice as part of a holistic service. That might happen through extended school services that involve a health service on site, so that we do not have the situation of school nurses prescribing contraceptives.
As regards the evidence from the United States, my information is that no abstinence-only programmes have shown strong evidence that they either delay sex or reduce teenage pregnancies. We are very concerned about teenage pregnancy; our own teenage pregnancy strategy, into which we put £47 million, seeks to inform, advise and support young people as well as possible so that they make the right choices.
Baroness Gardner of Parkes: My Lords, will the Minister say what the proper health checks are to which she referred? What are the contra-indications and how would ordinary people be aware of them, or would only pharmacists and doctors have such information?
Baroness Andrews: My Lords, with reference to the correspondence from the Royal Pharmaceutical Society, the society has issued mandatory standards. Practice guidance is being prepared and based on advice. The standard provisions are used: women are asked whether they have taken the medicine before, and whether there have been contra-indications, especially with regard to liver problems. That is the standard practice advice.
I cannot remember the second part of the question asked by the noble Baroness.
Baroness Gardner of Parkes: My Lords, I asked how the public would be aware of those contra-indications.
Baroness Andrews: My Lords, the only contraindication of which we are aware is that offered by the WHO, and it is simply pregnancy. It is a very safe medicine that has been passed by the Committee on Safety of Medicines. We have absolute confidence that there is no problem with it. Pharmacists are in a good position to give sound advice because they are part of
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the community and people are confident in dealing with them. Again, I can reiterate that we are happy with the situation.
Baroness Whitaker: My Lords, can my noble friend confirm that the rate of teenage pregnancy is actually coming down a little now?
Baroness Andrews: My Lords, yes, I can confirm that. As a result of the teenage pregnancy initiative it has dropped by 10 per cent. That figure is for over-16s and under-16s. It is still too high, but we are seeing improvement.
Baroness Noakes: My Lords, can the Minister confirm that the rate of use of emergency contraception fell slightly in 2001, after the morning-after pill was made available from pharmacists, thus undermining one of the initial rationales? Does she join me in being concerned that the proportion of women obtaining the morning-after pill from their doctor has plummeted from 59 per cent to 43 per cent, thus increasing the likelihood that sexually transmitted infections will go undetected?
Baroness Andrews: My Lords, I do not have the figures that the noble Baroness quoted. I would be most interested in seeing them, if there has been a drop in prescribing. However, we should bear in mind that the morning-after pill, prescribed in this way, was not intended to deal with teenage pregnancy. It was intended to be provided for older women, in fact, and the average age for prescribing is 28. That figure comes from Schering's own research. We are looking at a particular part of the population.
The increase in sexually transmitted diseases has many causes, and I do not see any parallel.

Iraq: Arms Inspections
2.58 p.m.
Lord Judd Lord Judd asked Her Majesty's Government:
Whether, since the Secretary of State for Defence has confirmed that they accept the principle of "independent" verification of arms inspectors in Iraq, they will now advocate the return of the United Nations inspectors led by Dr Blix.
The Minister for Trade (Baroness Symons of Vernham Dean): My Lords, the Government appreciate the need for credible, independent validation of any discoveries made by coalition forces. We have been actively engaged in discussion with all interested parties in order to take this forward. UNMOVIC and the IAEA would be an option to provide such a validation. Dr Blix himself, however, has said that the circumstances are not right for the return of UN inspectors at present. The task of any inspectors in current circumstances would be monitoring verification, not one of detection.
Lord Judd: My Lords, while thanking my noble friend for that reply and agreeing that it will be

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necessary for matters to move forward and, arguably, for new United Nations authorisation to be introduced for the return of Dr Blix and his inspectors, I wonder whether she will confirm that—given that the Government were at pains to argue that the legitimacy for war was the series of United Nations resolutions over the years recently preceding it calling on the Saddam regime to disarm, and that the Government and their allies went to war because the demands were not met and the conditions for proper inspection were not present—the logical step now is for the UN to continue its work as soon as it is possible to do so? Does she not also agree—I think that she does, but will she confirm—that the international community will welcome the credibility of the UN rather than handpicked inspectors from outside the coalition?
Baroness Symons of Vernham Dean: Yes, my Lords. I hope that I made that absolutely clear in my Answer by saying that we appreciate the need for credible and—I stress the word—independent validation of any discoveries. Of course it is important to find the evidence of the weapons of mass destruction. That is why coalition forces are now actively pursuing sites, looking at documentation and interviewing individuals who have been connected with Iraq's weapons of mass destruction programme. Both the United Kingdom and the United States have deployed specialist personnel and both countries are due to send more specialist personnel into Iraq. However, I entirely agree with my noble friend. It is important that there is independent verification of anything that is found.
Lord Hannay of Chiswick: My Lords, does the Minister agree that the difficulty that the coalition is having in locating these weapons and these programmes casts a rather new light on the carping criticism that was made of UNMOVIC in the period before hostilities broke out by many circles in the United States? Does she not also agree that there is a trade-off between the credibility to which she and others of us would, I am sure, attach primordial importance and the length of time that it takes to get UN inspectors back into Iraq working alongside the coalition?
Baroness Symons of Vernham Dean: Yes, my Lords, I can agree with that. I am glad that the noble Lord, Lord Hannay, was very clear in saying that what he described as "carping criticism" had come from the United States. I do not believe that any of that criticism came from the United Kingdom. I also remind the noble Lord that we are dealing with a country the size of France where we believe that these weapons have been very carefully hidden. As he will know—indeed, the point has been made in another place by my right honourable friend the Prime Minister—in Northern Ireland it has taken a very long time to be able to discover weapons which have been very carefully hidden.
Even now, scientists are coming forward or being found by the coalition forces who we believe were part of the programme of weapons of mass destruction. We
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hope very much that they will be able to contribute to our sum of knowledge about the whereabouts of those weapons.
Lord Howell of Guildford: My Lords, does the Minister agree that smallish containers of germs, poisons and nerve agents are extremely easy to hide in a very large country and probably remain beyond the capacity of any visiting inspectors to uncover? Further to the remarks of the noble Lord, Lord Judd, does she therefore not also agree that it might have been a little more prudent from the start not only to have talked about weapons of mass destruction but also to have emphasised the fact that Saddam was quite simply a brutal tyrant, an aider and abettor of terror of all kinds and a huge threat to Middle East stability, and that it was and remains the duty of all responsible states to get rid of him and restore Iraq to the democracy which it knew before 1968?
Baroness Symons of Vernham Dean: My Lords, I very much agree with the point about these being small containers and substances that are very easy to hide. Indeed, I believe that I made those points very strongly from these Benches in the discussion that we had in your Lordships' House prior to the military conflict. I agree with the noble Lord that it is important not to forget the type of regime with which we are dealing. However, I stress to him, as I think I did before the military conflict began, that, however brutal that regime, the legal basis on which we took up the military conflict was the United Nations Security Council resolutions which stressed the importance of the weapons of mass destruction. That was the legal base. However, I agree wholeheartedly with the noble Lord. It would be a great mistake to forget what a terrible regime that was. In remembering that, we should also remember the brutality facing those who might have wanted to come forward and tell us about the weapons of mass destruction and the fear that they would have had.
Lord Redesdale: My Lords, this morning there was an article in the Guardian saying that some of the Iraqi scientists who worked on these programmes are fearful of coming forward and working with the Americans because any statement they might make that they did not work on weapons of mass destruction will meet with joy from the Americans. They fear that they could end up being arrested. Is there not a case for giving an amnesty to those scientists if they are prepared to work with the Americans in locating materials produced under those programmes?
Baroness Symons of Vernham Dean: My Lords, I have not read the article in the Guardian and I do not know its origins or the validity of the points that it makes. However, the point of substance in the question from the noble Lord, Lord Redesdale, is whether there will be an amnesty for scientists. I believe that the full circumstances in which people were forced to work on those terrible weapons programmes—it is quite possible that some individuals were forced to work on them—should be

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taken into account. However, amnesty for the prime movers—for those who perhaps exerted the force majeure on other scientists—would be entirely inappropriate.
Lord Clinton-Davis: My Lords, what if anything has Dr Blix done which deserves his treatment as a pariah?
Baroness Symons of Vernham Dean: My Lords, I am afraid that I do not accept the premise of my noble friend's question that Dr Blix is being treated as a pariah. I am sure that there are those who have said disobliging things about Dr Blix—indeed, I have heard disobliging things said about Dr Blix—but they have not been said by any representative of the United Kingdom Government.
Lord Rea: My Lords, since Hans Blix and UNMOVIC withdrew voluntarily from Iraq at the start of hostilities, why can they not return as soon as they feel that the security situation is safe enough, without having a further UN resolution?
Baroness Symons of Vernham Dean: My Lords, the best way that I can answer my noble friend Lord Rea is to quote from what Dr Blix said at the Security Council on 22nd April. He said:
"It is evident that in a situation that is still insecure and where military considerations and measures dominate, civilian international inspection can hardly operate".
He went on to say:
"It is also evident that some of the premises upon which the Council established UNMOVIC and gave it far-reaching powers vis-à-vis Iraq have changed".

Nottingham City Council Bill [H.L.]
3.8 p.m.
Read a third time.
Clause 5 [Information to be kept by registered dealers in second-hand goods]:
The Chairman of Committees (Lord Brabazon of Tara)The Chairman of Committees (Lord Brabazon of Tara) moved Amendments Nos. 1 and 2:
Page 5, line 25, leave out "this section" and insert "the relevant paragraph"
Page 5, line 43, after "may" insert "by resolution"
The noble Lord said: My Lords, both the amendments have been proposed by the promoters and are minor drafting amendments. They are available in the Printed Paper Office in the usual way for Private Bills. I hope, therefore, that it will be for the convenience of the House if I ask leave to move the two amendments en bloc. I beg to move.
On Question, amendments agreed to.
On Question, Bill passed, and sent to the Commons.

Business of the House: Debates this Day
The Lord Privy Seal (Lord Williams of Mostyn): My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the debates on the Motions in the names of the Baroness Hogg and the Lord Hanningfield set down for today shall each be limited to two and a half hours.—(Lord Williams of Mostyn.)
On Question, Motion agreed to.

Burdens on Business
3.9 p.m.
Baroness Hogg Baroness Hogg rose to call attention to the fiscal and regulatory burden on businesses; and to move for Papers.
The noble Baroness said: My Lords, I am honoured to have been invited to move this Motion. I should like to thank the House for this opportunity and the Minister for what I know will be a thoughtful and considered response. I believe that this debate is extremely timely because it comes at a point of great vulnerability in the business cycle.
I must start by declaring my interests, which I hope will also serve as my credentials to speak on this subject. I am currently chairman of two companies. One is large-3i, Britain's leading venture capital company, started nearly 60 years ago and today invested in more than 2,000 businesses across Europe—and one is rather smaller: Frontier Economics, started less than four years ago, which has a turnover of about six and a half million pounds. I am on the board of Carnival, the dual listed company that—uniquely—is in both the FTSE 100 and the S&P 500. I am also on the board of one of Britain's most respected engineering companies, GKN.
In all these contexts I see enterprise as being about capturing the value associated with business opportunity. First, for people to do this successfully there clearly needs to be opportunity. Secondly, people have to see and want to take that opportunity. Thirdly, to enable and encourage them to do so, there needs to be the right economic, fiscal and regulatory climate, which is where government, which can destroy enterprise but never create it, come into the picture.
When talking of the economic climate I always remind myself that God created economists only in order to make weather forecasters look good. But I think that any fair-minded person would acknowledge that this Government started, in 1997, with the economic climate set fair. Their predecessor had provided British business with important advantages in terms of the fiscal and regulatory regime, the incentives provided by five years of continuous economic growth, widely spread across the economy, strong investment and low inflation.
I readily acknowledge that this Government have helped to embed macro-economic stability by their approach to monetary policy. I also should like to pay

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tribute to the Chancellor's commitment to competition policy which—again unlike some of his colleagues—he clearly understands to be essential to efficiency and growth. On the fiscal side, I welcome the reduction in capital gains tax to 10 per cent and the development of the Enterprise Management Initiative.
But I know that the Minister is too sensible, and too honest, to pretend that everything is sunny today. Perhaps the most serious evidence of trouble has been the collapse in business investment, which helped to precipitate the economic slowdown and the sharp downturn in business confidence. We must hope that the Chancellor is right to forecast in his Budget that the economy will pick up in the second half of this year. But I note that even he is not forecasting much of a recovery in business investment.
I think that we have all learnt by now that there is an inverse correlation between the weight of the Budget book and the weight of its contents, so it was with something of a relief that I found that this latest one hits the kitchen scales at close to a kilo. There is this year less micro-engineering in the Budget and some evidence that the Chancellor has recognised the cost of complexity in some of his earlier ideas. Since the hefty increases in national insurance had been announced previously (and the Chancellor did not exactly dwell on them in his Budget speech), all the Budget does is to take roughly the sum of money of which taxpayers have been deprived by a refusal to index their income tax allowances and spread that around elsewhere.
Even so, there are interesting tax proposals in the Budget that need clarifying. We have yet to see how the changes to VAT will work out in practice, though I recognise good intentions. On stamp duty the picture is more confused and the Government are in danger of creating damaging uncertainty here. However, as a member of the Select Committee which is having its first shot at reviewing elements of the Finance Bill, I hope that we can mobilise expert opinion on these issues to good effect. I believe that via this important innovation your Lordships' House will be able to expose some of the weaknesses in tax legislation in Britain—the paucity of consultation, the uncertainty created by a lack of preparation or poor drafting, the erratic approach to implementation dates—without in any way infringing the constitutional rights of another place.
The key conditions for creating a good fiscal climate are that tax should be fair, that it should not be overcomplicated to administer—either for business or for the public sector—and that it should not be at levels that will drive business away from Britain. The same criteria apply to the regulatory regime.
There is something of a paradox involved in making international comparisons. As a member of the European Union we badly need other members to stop dragging their feet on economic reform. Reluctance to proceed with the Lisbon agenda is undoubtedly acting as a drag on growth in our most important market. I commend the Prime Minister's intentions in pursuing this, although I would rather be commending his
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success in achieving it. At the same time we need to maintain the edge in terms of light regulation and low business taxation established in the late 1980s and early 1990s in order to attract investment and encourage growth in Britain.
Last year the European Venture Capital Association published a benchmarking study of the tax and legal environments in member countries. The fact that Britain was still in the lead is both good news and bad. With Germany in the bottom three, it shows how much needs to be done to give the European economy the stimulus to growth provided by a healthy venture capital market. At the same time it reminds us that the UK has relied on a leading edge which can easily be blunted. The latest international survey of corporate tax rates shows that edge is suffering from some erosion. These warning signs should discourage Ministers from imposing yet more distracting regulation, from conceding regulatory agreements in Brussels that might damage British business, and from counting on business to be the financial source of the Government's spending plans.
There are warnings enough even in the Budget arithmetic. This shows how the Chancellor's revenues have been dented by the weakness of the economy, and most notably by the weakness of the corporate sector. Yet he is expecting the overall tax burden to rise rapidly, to over 40 per cent of GDP by 2006. I have to warn noble Lords that the Minister is likely to give them a rather lower percentage because the Government have developed a rather cute way of netting off the total of the tax burden those bits of the social security system that are being combined with the tax system. The proper national accounts measures, free of this distortion, are, however, safely in the Budget Red Book, provided you get as far as page 260. They will show you that the Government plan to have increased the burden of taxation from last year to the end of this Parliament by £150 billion.
I say "even in the Budget" because most respected outside commentators believe that the Chancellor is overestimating the revenue that is likely to be generated by the existing tax regime. The important point to note is that this is true even of those—most notably the highly respected National Institute—who go along with the Chancellor's forecasts for economic growth. That is to say, they believe that even if the economy grows at over 2 per cent this year—a number of people have challenged that figure—and accelerates next year, tax revenue will still fall well short of the levels in the Budget Red Book. That means, of course, that tax rates would need to be raised substantially to deliver the tax revenues the Chancellor forecasts.
As a member of the President's Council of the CBI, I know how great industry's concerns are that the current levels of regulation and taxation should not be further increased, and about measures in the pipeline from Brussels and Whitehall that may add to the burden. We appreciate the steps that the Chancellor took in his latest Budget to lift a few straws out of the sack, but I fear that his colleagues are still puffing behind him with further loads for the camel's back. Perhaps it is foolish of me to hope that timely warnings

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can be helpful, but I shall let hope triumph over experience today and look forward with the greatest confidence to the Minister's response. My Lords, I beg to move for Papers.
3.18 p.m.
Lord Haskel: My Lords, I am most grateful to the noble Baroness for moving this Motion. I was very interested to hear her review of the economy but I should like to take this opportunity to lay some of the myths and misapprehensions about the effect of regulation and taxes on business.
If you listen to the rhetoric, you get the impression that if business were free of regulation and taxes, the economy would flourish and the world would be a better place. Yes, there are some countries where there is very low taxation, little regulation and the minimal state. There are the oil rich countries of Nigeria and Angola. Haiti has very little regulation and virtually no taxes. But these are not places where people want to live. People want to live in the G8 countries, which are the most highly taxed and have the most highly regulated economies. People want to live in those countries because they are the most economically successful.
The explanation of this apparent paradox is simple. Business does not exist in isolation, it exists within society. Markets are as much a social phenomenon as an economic one. If business is to operate successfully within a society it has to accept the values of that society and the norms of its communities. Ignoring that has led to the disappearance of many, many businesses.
It is regulation and taxation which balances the needs, rights and responsibilities of society and business and enables them both to thrive. The balance is achieved by long-standing public regulatory institutions, and the economic success of the rich states depends crucially on the quality of institutions such as the Financial Services Authority, the Food Standards Agency, Ofcom and all the others that we have.
Yet if we listen to organisations such as the CBI or the IoD, we get the impression that they want business to be relieved of the burden of regulation, so that they can be free—free to pollute the atmosphere, to sprawl over our countryside, to exploit staff and customers, and to undertake risky and hazardous activities without any responsibility for negligence or mismanagement. I think that most members of those organisations simply would not want to live in a country with that kind of society. However, we are constantly fed misleading information about how excessive the burdens are. Let me give an example.
At the British Chamber of Commerce conference on 31st March, we were told that 3,849 regulatory instruments were passed last year and that the huge burden on business was becoming unbearable. Nothing like that number of statutory instruments come before your Lordships, so I am grateful to Polly Toynbee, who found out a little more about them. It seems that nearly half were to do with local traffic
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restrictions in order to allow road works and other activities to take place. Others dealt with stopping arms being exported to terrorists or to countries such as Zimbabwe. Many dealt with regulating bus services. There was a regulation abolishing VAT on lifeboats.
Are those really an unbearable burden on business? Yes, there was a regulation about fitting seatbelts to fork-lift trucks because there had been a number of serious accidents, including fatalities, caused by forklift trucks tipping over. Surely that is something that most reasonable businesses would do anyway, yet it is listed as a burden on business.
Another regulation on the list of burdens was to do with maternity arrangements. Do we really want to label women having children as a burden on business? Surely the end result will be that business will lose 50 per cent of the nation's skills and alienate 50 per cent of the nation's brain power. Is that what business wants to do? I do not think so. Family-friendly working has been shown to bring benefits.
The truth of the matter is that our regulatory institutions—they are proportionate and minimalist—work better than most. That was confirmed in a recent OECD report, which said,
"entrepreneurs face a better business and regulatory environment in the UK than in most OECD countries".
The same applies to the so-called burden of taxation. The noble Baroness, Lady Hogg, pointed out that our burden was less than in most OECD countries. They are catching up. When the average level of corporation tax in the world's 30 richest countries was 37.5 per cent, ours was 30 per cent. They have had to cut their rates to bring the average down to 31 per cent, so ours is being cut yet again, particularly for small businesses. Another example is social insurance, which makes up 21 per cent of employment costs in America, but the average in Europe is 24 per cent. In the UK, it is 13 per cent.
One reason why I think that our institutions work well here is that we have a counter-regulation culture in place, and have had for many years under both Tory and Labour governments. Regulations are looked at to see if they are a barrier to innovation and progress, and we are getting better at it. As David Arculus confirmed recently, we have got much better at consulting on regulation.
In spite of our relatively low fiscal burden and the warm words of the OECD, all is not well with British business. In spite of the low burdens on business, productivity here is lower than in most OECD countries. Could it be that, although we have fewer regulations, the standards are too low? Was the noble Lord, Lord Heseltine, right when he said that a great deal of German productivity gains came because Germany's government imposed even higher standards on manufacturing which could be paid for only by improved productivity? When the EU decided that fridges had to be disposed of without releasing ozone-depleting chemicals into the atmosphere, we had to buy German technology to achieve the required standard.

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How do we explain higher productivity in France despite its inflexible and over-regulated employment laws? I am not suggesting that it is because we have too little regulation. I am suggesting that perhaps the market is less effective and slower at driving up standards than regulation—and rising standards is what we all want. The indiscriminate and exaggerated condemnation of regulatory and fiscal burdens does not do business any good in the eyes of the public, who are after all our customers. The recent scandals about pay and dishonesty only add to the mistrust of business by the public.
It is the mentality behind the corporate scandals—that senior executives can use their powerful positions for their personal gain rather than accepting the duty, care and responsibility for the livelihoods of their employees, customers and others who depend on the company—that is worrying. Sadly, the same mentality exists here in Britain and in the US. The opportunities are fewer here than in the United States thanks to our regulatory institutions.
I end where I started. British business should be thankful that we have institutions which regulate effectively and proportionately, and tax relatively lightly. The continued carping and exaggeration by business organisations do us all a disservice, because they seem to be calling for the minimalist state, a place where none of us would want to live. Indeed, it is that exaggerated complaining about regulation which is making business less trusted, and that lack of trust will inevitably lead to calls for yet more regulation.
3.27 p.m.
Lord Freeman: My Lords, noble Lords will wish to congratulate my noble friend Lady Hogg on a most excellent speech. It was succinct, clear and comprehensive, and I am sure that at least we on these Benches will very much agree with it. If she will permit me, I do not intend to try to emulate her contribution, but rather to pick up a number of points made by the noble Lord, Lord Haskel. I very often follow him in debate, and each time I find myself in total disagreement, not only with the general tone, but with a lot of the particulars. He is a good debater, but I am sure that noble Lords will appreciate the chance to have some of his assertions properly debated.
I declare an interest as a chairman of an electrical engineering company and a consultant to PricewaterhouseCoopers, which has to grapple with the flow of tax legislation to which my noble friend referred, and on which I want to touch. I do not intend to quote examples or even to get into an argument with the noble Lord about the number of regulations introduced and their sub-categorisation. That is a blind alley that will not be constructive to the debate. However, I want to follow him in looking at the process whereby governments create regulation and parliaments fail to check it.
I have only 20 years' experience in Parliament, which is a mere fraction of the service of many in this Chamber. However, to be frank, we are losing the battle. The noble Lord says that we live in a counter-regulation culture. We do not. I refer to both
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government and to Parliament, which, sadly, fails to check the executive. We all live in a culture of regulation in this country. I believe that we are losing the battle. More regulations affecting business are issued each year than can be dealt with under the excellent initiative referred to by the noble Lord, Lord Haskel, introduced by the noble Lord, Lord Heseltine—improved, it must be said, by the present Government in 2001—to introduce deregulation measures. Despite those welcome initiatives there is a continued net increase in regulations which adversely affect business.
The Finance Bill gets longer each year—a point referred to by the noble Baroness, Lady Hogg—and is now becoming almost unwieldy. New initiatives from the Department of Trade and Industry in particular, and state aids, which are offered by a number of departments, although each is individually welcomed by different lobby groups, now amount to a blizzard of initiatives which are extremely complicated to understand and which in many cases are counterproductive.
The problem is that Ministers and civil servants can always justify each new regulation on its merits. But if you look at one regulation incrementally added to the totality of regulation affecting business, there are always arguments for and against. Ministers are always eloquent in arguing that social justice, pressures from Europe, the need for the improvement of the interests of one section of our economy or society over the rest will justify the introduction of a regulation. The problem is that there is no one looking at the totality—not only of those regulations introduced during the course of the year but cumulatively. There is no one making a judgment as to whether, overall, they are in the best interests of our economy. I believe that the burden on business is now intolerable.
Lord King of Bridgwater: My Lords, will my noble friend allow me to intervene? Will he, with his great experience, address the point which I do not believe is sufficiently reflected in either the Government's or Parliament's consideration; namely, the ability of the system to administer and deliver what Parliament has enacted? He and I have lived through a period in which all-party support led to the introduction of the Child Support Agency—which proved practically impossible to administer. The problems faced recently by MAFF and then DEFRA were almost beyond the capacity of that ministry to administer and cope. I believe that we now have problems with the tax credit scheme, in regard to which there is a similar qualification. Does my noble friend think that sufficient consideration is given, in terms of worthy measures that might be implemented, as to whether people really consider that the system and the organisation can actually manage to administer what Parliament has enacted?
Lord Freeman: My Lords, I am grateful to my noble friend. The short answer is "No". One of the reasons is the lack of practical experience on the part of those

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in our great departments—both Ministers and civil servants—but, secondly, the great rush that there always seems to be to introduce a Bill without thinking of the consequences down the line.
I shall conclude my remarks in a few moments by commenting on new proposals coming from the Procedure Committee of another place and from the Procedure Committee in this House which will go some way towards dealing with the problem referred to by my noble friend Lord King; namely, legislating in haste and repenting at leisure.
However, I do not want to leave the comments of the noble Lord, Lord Haskel, about living in a counter-regulation culture and the idea that everything in the garden is rosy. Perhaps I may briefly quote two leaders of industry, to whose comments I believe your Lordships should pay attention. The first is Mr Chris Humphries, a former director-general of the British Chambers of Commerce, whose comments appeared in a press release dated 20th January 2001:
"Despite all the rhetoric, the reality is that government has dramatically increased the regulatory burdens that threaten small business competitiveness. Excessive red tape is stifling the very enterprises the Government is seeking to promote".
Those are considered words from someone who is much respected in industry.
Mr Digby Jones, the director-general of the CBI, was quoted in the Daily Mail on 11th August 2000 as saying:
"They [businesses] would say that regulation is the most dominating feature of running business. It is no longer creating wealth it is having to deal with regulations".
The attitude that I am afraid both national and local government have to introducing not only primary but secondary legislation is that no risk should be taken in making detailed regulations or orders that any eventuality could arise that would embarrass either the Government or the Minister. There are no prizes for taking a balanced judgment about making sure that there is a light touch—that you are looking at the outcomes and not at the specific requirements or processes. In fact, civil servants and Ministers get the blame when things go wrong. So we are not a risk-taking culture.
I quote the chairman of the Audit Commission, writing in The Times on Tuesday, 6th May:
"Extremely bright and committed people are shackled by a system that in no way balances the negligible rewards for success against the daunting penalties for failure".
So all the pressures are to gold-plate regulations, to make sure that the regulations are comprehensive and that every eventuality is considered.
What are the solutions? Briefly, let me look at government. Both administrations have tried a number of initiatives over the past 20 years, and particularly over the past 10 years. We had the regulation task forces, led by Frances Maude under the previous administration and by the noble Lord, Lord Haskins, in this Administration. They produced regulatory impact assessments. But all their work was advisory. At the end of the day, if the Minister and the Government did not agree, their advice was ignored.
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I pay tribute to both the previous administration and the present one for introducing the deregulation procedure. There is an example on the Order Paper today of an excellent piece of regulatory reform concerning sugar beet research and education. It removes one piece of legislation. But, frankly, that is a very small contribution to dealing with our overall problems. We are not dealing properly with the new flow of legislation.
I believe that within government we need a Minister of Cabinet rank responsible for vetting all primary and secondary legislation, with the support of advisers, and to be of equal rank with the departmental Minister—so that if it can be shown, not only by outside lobby groups but by internal advice, that there is an incremental burden on business, that Cabinet Minister would have the right and the power to argue with his colleagues that the Bill should not proceed.
Secondly, the Chancellor of the Exchequer must grip the problem of tax simplification. My noble and learned friend Lord Howe is chairman of the excellent Tax Law Review Committee. But that committee is examining the clarification of our tax law, not its simplification. The Chancellor should take the initiative and possibly rely on a Select Committee of both Houses of Parliament or on a group of advisers, or both, in simplifying year by year great chunks of our tax law and writing them into the Finance Bill.
I turn finally to Parliament itself. I believe that there is a good deal of work that should be commended. I pay tribute to the various committees of this House and another place which look at whether regulations are intra vires. But the Delegated Powers and Regulatory Reform Committee in this House and the Scrutiny Committee in another place are not dealing with the merits of regulation. I am very pleased that the Procedure Committee in this House has proposed and I understand that we are to have a new procedure in this place in the new Session of Parliament looking at the merits of delegated legislation. That is much to be welcomed.
I regret to inform your Lordships that a similar proposal in another place has been blocked by the Government—at least, that is how it appears. The proposal was to have a Joint Committee of Members of another place and of this House examining the flow of legislation and making a judgment—it must be said that this is a judgment about politics—as to whether the regulations are necessary. I ask the Minister whether it is true that the Government are blocking the creation of a Joint Committee to examine delegated legislation and, if so, whether the Government will think again.
3.40 p.m.
Lord Brooke of Sutton Mandeville: My Lords. I join my noble friend Lord Freeman in congratulating my noble friend Lady Hogg not only on having initiated this debate, and providing us with the opportunity of participating in it, but on the quality of the speech that she delivered. My late noble kinsman succeeded her late noble kinsman as Financial Secretary to the

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Treasury, and her late noble kinsman succeeded my late noble kinsman seven years later as Chief Secretary to the Treasury. It is therefore a privilege to follow her lead in this debate. This is approximately the anniversary of the last debate which was initiated from these Benches on this subject, which is at least an index that the problem has not gone away during the course of the ensuing year. I hope that I shall avoid duplicating anything that I said a year ago. I shall therefore follow my colleagues in erring on the side of brevity. I hope that I shall not repeat myself.
I acknowledge the proposals in the Budget for the alleviation, at least in some degree, of the problems thrown up by regulations and tax. I like to feel in a modest way that the fact that noble Lords on these Benches have continued to come back to these issues has drawn to the attention of the Government the fact that they needed to improve their record. That is our effect operating in slower time. I compare that with the real time proposals several years ago on corporate structures and international tax arrangements, where I heard, on the morrow of the Budget at one of those breakfasts put on by accounting firms, a tax partner at PricewaterhouseCoopers revealing his concerns about the arrangements which the Budget contained in that regard. Those of us who heard him in that audience were not surprised that the Treasury sought later that day to rubbish him. Indeed, I can recall it happening on the Floor of the House of Commons. Likewise, we were not surprised by the significant number of government amendments to the Finance Bill later in the summer in order to respond to the thrust of those earlier criticisms that he made.
My noble friend Lady Hogg alluded to the welcome reduction in micro-engineering in the Budget, and the Minister will know from the exchanges that he and I have had what pleasure that gives me. The fact that there has been so disappointing a take-up of tax credits is itself an index of how the complexity of schemes that the Chancellor introduces, particularly when they have to be understood by people who are not familiar with these issues, can be a deterrent to the take-up occurring on the scale that the Chancellor would wish. Before the present Government took office in 1997, I served on the Finance Bill with members of the present Government who were then in the Shadow Treasury team. I can remember the future Chancellor of the Exchequer's genuine commitment to increasing productivity and his enthusiasm for training and education. I admired them both.
Five-and-a-half years on from 1997, compared with the five-and-a-half years that went before, one can compare decently and fairly the productivity record in the nation as a whole between the economy under the then Government and the economy under this one. Some might say that five-and-a-half years is not a long enough time scale, but the present Government have been keen to demonstrate to us that boom and bust is now a thing of the past. In that regard the five-and-a-half years that they have been in office seem to me to be a fair comparison. I say in sorrow rather than in anger that it is a genuine disappointment that the growth rate in manufacturing and service industries
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has been less than a half of that which it was in the five-and-a-half years before the Conservative Party left office.
One can ask oneself why that might be? An obvious candidate is the reduction in manufacturing investment that has been occurring under the present administration. My noble friend Lady Hogg referred to that. That is an irony after the raid on pension funds that occurred in the first Finance Bill after 1997, when the Government's logic or rationale was that they wished to reduce the amount of dividends paid by corporations, so that that money would go into long term investment. I remember taking part in the Second Reading of the Finance Bill in 1997, and alluding to that aspect of the Government's policy as a mild example of chaos theory. The Chancellor was throwing quite a large boulder into the placid pool of pensions policy. Meanwhile, as happens under chaos theory, in due course little old ladies in sub-post offices up and down the country would be paying extra for their stamps because the Post Office pension fund was in difficulties. It gives me no pleasure at all to find that that is now what is happening—as I understand it the stamps go up in price tomorrow.
There are commentators who take the view that manufacturing investment is now at its lowest point since 1984. The Chancellor's forecasts of the level of manufacturing investment have dropped very sharply from the forecasts that he made in the Budget last year for the current year, compared with the one that he has made in this year's Budget. It is no surprise that in the list of six proposals that the CBI makes for ways in which manufacturing investment can he restored, the second is a reduction in regulatory obstacles. Inevitably figures will be exchanged in debates of this kind, and there is no way in which we will all end up with the same figures on the hymn sheet. However, there is reasonable agreement that the fiscal cost to business of the Government's policies since 1997 has been of the order of £47 billion, if it is carried through to 2005 under existing plans.
That is not quite as much as the largest warrant that I signed as a Lord Commissioner of the Treasury. Such a warrant has to be signed by two members of the Board of the Treasury. In the 1983 general election the only two members of the board who were in London were my noble and learned friend Lord Howe of Aberavon and myself. I joined him in signing a warrant for £49 billion. A million here and a million there soon adds up to serious money and £47 billion is a pretty inexorable burden for business to carry by comparison with what it was carrying before the present Government came into office.
Lord Haskel: My Lords, I thank the noble Lord for giving way. Can he say how the £47 billion is made up? For instance, does that include the extra money paid out under the minimum wage?
Lord Brooke of Sutton Mandeville: My Lords, the calculation, as the noble Lord knows well, was presented by the CBI. If the matter of detail is of acute importance to him, I will take a leaf out of the

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Minister's book and write to him after the debate. I recognise that when the Government came to office in 1997 they had around their necks the commitment that they had made about not increasing personal taxes. By last year they were reduced to a stealth tax through NICs that were introduced last year and executed this year, falling both on individuals and employers. That £47 billion has inexorably had its effect on business, and has led to the fiscal burden to which this Motion refers.
As to regulations, there seems to be broad agreement from a number of different sources. I take the Chamber of Commerce figure of £20 billion which has cumulatively occurred between 1997 and this year. That figure is not markedly different from that quoted by other commentators. If current rates of growth are maintained from year to year, that figure is likely to expand to between £25 billion and £30 billion by 2005, and thus make it comparable to the fiscal figure. My remarks about the £47 billion fiscal burden likewise apply in this regard.
I have sympathy with the Government with regard to regulations. I recognise that we can be defeated in Europe and find ourselves having to administer schemes and directives from Brussels. I take as a particular example—simply because I have reasonably close working knowledge of it—the agency workers directive. I pay tribute to Alan Johnson, who was the Parliamentary Secretary at the DTI in the previous Parliament and who was responsible for handling that. He published a series of drafts about what the directive would say. In the nature of things, agency workers were highly prevalent in my constituency, where the best part of 1 million people came to work. I took the trouble to write to every employer in that field in my constituency not once but twice as the various drafts emerged. We had round-table conversations about the drafts and what their implications would be and, on behalf of the employers, I wrote to Mr Johnson or the relevant official at the DTI to explain what the consequences would be. I pay tribute to Mr Johnson for the manner in which he absorbed those remarks. The process was fairly prolonged, which itself was a commendation of the Government's attitude.
I said that I have sympathy with the Government. The Government were not happy or enthusiastic about or particularly supportive of the directive but Labour Members of the European Parliament had no hesitation in voting for it when it went through Strasbourg, thus inevitably giving the sense that the right hand did not know what the left hand was doing. The CBI's calculation is that the directive will cost 160,000 people their jobs.
I turn to the effect on individual businessmen, who must deal with regulations as well as taxation. I cast my mind back to when I was running a small business in the mid-1960s. The then Chancellor was encouraged to introduce legislation into that government's policy by two Hungarians. I have absolutely no problem with Hungarians; any nation that can generate as English a motion picture as "The Scarlet Pimpernel" with Sir Alexander Korda as a Hungarian impresario,
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Baroness Orczy as the Hungarian author and Leslie Howard, who was born in Hungary, as the principal actor, has much going for it. Those two Hungarians encouraged the then Chancellor to introduce legislation requiring a foreign company—the company in which I was working was foreign—automatically to pay its profit in dividends at the end of the year to the parent company unless it could prove that it needed the money to keep in the United Kingdom. In investment terms, that was the exact opposite of the philosophy that governed the Government's policy towards investment when they came to office in 1997. But time passes; 30 years have gone by.
I do not know why the Government took that view. It would appear to have placed downward pressure on sterling. It was presumably done in order to raise cash and hope that the money could come back in thereafter. The Inland Revenue required extremely detailed accounts about why one needed not to pay a dividend and to keep the money in this country. I remember spending weekend after weekend preparing schedules, which my wife somewhat resented, explaining why we needed to keep the money here. One's frustration was increased by not knowing why the Government thought that it was useful to employ businessmen's time in that way. In the fullness of time, the Inland Revenue agreed to every proposal that I put to it.
Of course I appreciate all of the arguments about businessmen's other problems, some of which the Minister may adduce. The YouGov poll, which was reported in the Mail on Sunday earlier this year, went to 472 company directors. YouGov has a good record in terms of interactive polling and the accuracy of its political forecasting. It asked the company directors to list three main barriers to growth for their companies. The largest problem was red tape, with 57 per cent; the second was the tax burden, with 44 per cent: the strength of the pound was 8 per cent; being outside the euro was 5 per cent; and I acknowledge that weak demand was 38 per cent. That is an index of the perception of what the business community must live with. I repeat my gratitude to my noble friend for initiating this debate and I look forward to the Minister's response.
3.55 p.m.
Baroness Noakes: My Lords, I add my thanks to my noble friend Lady Hogg for bringing this important topic before your Lordships' House today and for her excellent introductory speech. I declare an interest as a director of a number of companies.
When considering what to cover in today's debate I felt spoilt for choice. There are so many areas of business life that have been burdened by the Government that we could easily have spent the whole day talking about the harmful effects of the Government's policies.
The productivity analysis in this year's Red Book is damning: UK productivity in terms of output per worker is only three-quarters of that achieved in the

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US and, to our shame, we lag behind France and Germany whose economies we do not normally admire. Productivity is now increasing at only half the rate it was at the end of the last period of Conservative government. It is easy to see why that is the case when we look at the fiscal and regulatory burdens that have been created.
I shall concentrate on just three areas. I start with the impact that the Government have on small and medium-sized enterprises. I emphasise that I have no personal experience of working in the SME sector but I have met many chartered accountants who work in or advise SMEs. They are absolutely convinced that the Government's policies make life increasingly difficult for them. One of them, a finance director of a successful online business, was quoted in the accountancy press last week. I am conscious that the accountancy press is not the reading of choice of most noble Lords, and they may not have read what he said. He said that Britain is not a good place for small businesses. Like all small businessmen—or perhaps all businessmen—he thought taxes were too high. But his real concern was the increasing burden of regulation. He said:
"The Government sometimes have a view that time is free and that a finance director's time is well spent in filling in forms".
Filling in forms is not value-adding work. The time could be better spent building businesses. It is the diversion of time from running the business, rather than the direct cost of regulation, that is so devastating.
Nearly 80 per cent of members of the Institute of Directors surveyed earlier this year said that they were spending more time and money on tax-related administration alone. Businesses are the Government's unpaid tax collectors and administrators. That has been the case since PAYE was so ingeniously devised more than 50 years ago. While that affects businesses of all sizes, an increasing burden in this area affects the SME sector disproportionately.
A particular concern in recent years has been the administration of the working families' tax credit system, which has been forced on to business. This year, employers have a new burden in the transition to the working tax credit system. After the transition, about half of the businesses surveyed by the Institute of Directors thought their compliance costs would increase and half thought their costs would stay the same. Not a single business thought that its costs would reduce.
The Chancellor has been endlessly inventive with his schemes of tax credits—he has designed and redesigned them—but he seems blind to their impact on businesses. A further area that small businesses find hard to cope with is the Government's extension of employee rights. We have extra pay and leave for maternity, for paternity and now even for adoption. If you are a small business—
Lord Haskel: My Lords, before the noble Baroness leaves productivity, she told us that although
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productivity in France and Germany was higher, according to the OECD there is more regulation in France and Germany. Can she explain that?
Baroness Noakes: My Lords, that is a paradox I cannot explain. It is perhaps easier to see why we lag behind the US in terms of regulatory burden. Other matters must operate to counterbalance the regulatory burden that exists in France and Germany. That is perhaps not the whole story but I believe it is an important part. I shall not let the noble Lord, Lord Haskel, deflect me from talking about the burdens on small businesses and the imposition of additional rights for employees. I spoke of maternity, paternity and adoption leave and pay.
I was about to make the point that a small business finds it difficult to cope with those burdens. The impact that a single employee can make in a business of 40 or 50 employees can be disproportionately large. In turn, that makes it difficult to run a business successfully. Employees now have new rights to ask for flexible working hours. For many small businesses that is a nightmare. To the noble Lord, Lord Haskel, I say that family-friendly policies can cause many problems for small businesses.
I can quite understand why the Government think that all of those changes are a good idea in electoral terms but they seem to ignore the very significant impact experienced at the sharp end by small companies. If we ignore the SME sector we ignore a very important part of the economy. The contribution that SMEs—businesses of 250 employees or fewer—make to the economy accounts for around 40 per cent of GDP. If one harms that sector one potentially harms the engine room of growth in our economy. That can be very difficult. The Government have an important part to play, particularly, I hope, in looking at exemptions from regulation for SMEs so that regulations do not continue to cause economic harm.
My second topic is pensions. I do not need to remind noble Lords that this country has a pensions crisis. A major contributor to that has been the Government's fiscal stealth raid on pension funds, to which my noble friend Lord Brooke referred. The change in the tax credit system is costing pension funds and, therefore, ultimately the businesses that support them £5 billion a year. Another £1.5 billion a year is lost in contracted out rebates. Those annual hits are equivalent to around 15 per cent of pension fund income. That is not insignificant. Cumulatively, pension funds must have lost well over £30 billion. That has increased the financial burden of pensions on businesses. The plain fact is that that financial burden has become so intolerable that companies have been closing their defined benefit schemes in droves. The Association of Consulting Actuaries found that only 40 per cent of final salary schemes were still open to new members and half of those were considering closure.
On the subject of pensions we must remember the Government's big idea of stakeholder pensions which all employers with more than five employees were obliged to set up. The result of all of that effort by businesses was that 90 per cent of employer-designated

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stakeholder schemes have no members at all and the Government have missed their target of 5 million stakeholder pensions by a mile. Only a little over 1 million people have signed up. The Government have created a pensions crisis but have no solutions. The Green Paper published last year was a damp squib in terms of policies but the small print shows an alarming potential for increasing the regulatory burdens on employers.
The third and last area I shall cover is the impact of regulation in the health sector and in particular as it affects care homes. In relation to the NHS the Government have never been happier than when prescribing in the minutest detail how things should be done. For the past six years they have been busily micro-managing the NHS. It was perhaps no surprise that the diversity of provision in the largely private care home sector was too tempting to resist.
With great enthusiasm the Government devised a new regulatory regime for care homes including new standards to be met down to the smallest details such as the width of doors. Many things were wrong with those standards. Some showed that the Government did not understand how care was delivered to certain types of resident. Others clearly showed that the Government did not understand the economic impact of their recommendations in terms of the cost of alterations to care homes. Above all the Government failed to understand that many of those businesses were small businesses that simply could not or would not live within such a complex regulatory regime.
Very late in the day the Government watered down the standards, but it was too late. Care home owners had already thrown in the towel. The facts are that 60,000 care home beds have been lost since the Government came to power. In many cases the regulations were the straw that broke the camel's back. The care home sector has been decimated at a time when society, with an ageing population, needs it most.
I know that the Government talk a good story on deregulation and I have no doubt that we shall be hearing more of the same from the Minister today. But there is a simple way in which the Government could show their deregulatory intent: they could have an annual budget for the regulatory burdens on business and a department that needed to impose burdens could have a share of that budget. Unlike all other budgets, it should go down every year, so that if a department wanted to impose additional burdens, first, it would have to play a zero sum game to find burdens that it could reduce and, secondly, it would have to examine its total burdens to see what further reductions it would have to make. If that simple discipline were imposed on departments by the Government, in particular by the Treasury, that could have a very important impact. I commend that to the Government.
4.7 p.m.
Lord Razzall: My Lords, I join noble Lords in thanking the noble Baroness for introducing the debate. Having listened to the early speeches, particularly those from the noble Baroness, Lady Hogg, and the noble Lord, Lord Freeman, I was optimistic that the debate would be about steps that the Government should take to reduce the regulatory burden in the United Kingdom, rather than the partisan discussion that appears to have emerged in the past couple of speeches. They seem to suggest that until 1997 we lived in a regulation-free low-tax successful economy and that since then we have lived in an unsuccessful economy because of the groaning burdens that this Government have imposed on industry.
That is the impression that one would have received from listening to the attacks that the noble Baroness. Lady Noakes, and the noble Lord, Lord Brooke, made on the Government's record. In relation to pension funds, for example, they made no mention of the cataclysmic collapse in stock markets in the past two to three years or the fact that the whole of the private sector during the 1990s took a pensions holiday because they were advised by their actuaries so to do. If one listens to the noble Baroness, Lady Noakes, or to the noble Lord, Lord Brooke, that is entirely the fault of the Government. Such is party politics even in your Lordships' House.
Then the noble Lord, Lord Haskel, tells us that we live in a regulation-free climate and that this country has the best government in the world for regulation of businesses. Again, that does not help us much in the debate. As an outside observer and as someone who has not been a member of a party that has been in government during the period, I would have thought that it would be fair to say—both sides could agree on this—that by and large we are probably less regulated than continental Europe. Those of us who have conducted business in the United States would probably suggest that we are less regulated than that bastion of capitalism. Those on this side of the House who wish to argue that regulation in this country depresses our rate of growth below that of other countries have a difficulty explaining the French and German examples—and, indeed, the example of the United States of America. Anyone who has done business there groans under the regulation forms that have to be filled in.
Having said all that, we on these Benches consider that the way to approach the matter is not to be complacent and say, "Yes, we are a successful economy". There are problems with regulations. Indeed, on every page of my party's most recent manifesto, we printed a regulation that we would want a future government to repeal. There are 25 of them, many of which still exist.
I shall not ask the Minister to answer about all 25 when he responds, because we would run out of time. I shall not even ask him to write to me, because I know the answer. However, at least five characteristics cause

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a problem in the imposition of regulation by central government. Perhaps I may briefly describe them and give one or two examples.
The first, which has been touched on, is what has become known as gold-plating of European Union legislation. Your Lordships would not expect someone from my party to disagree with the optimism with which a large number of European Union directives, especially employment legislation, have been implemented. However, to take the Working Time Directive as an example, we supported it, as did the Government, but its implementation in this country has been cumbersome and contrasts with the light touch employed elsewhere in continental Europe.
Far too often, governments—this is not an attack on the Labour government, but on governments of all persuasions—fail to adopt that light-touch approach, which involves providing a high-level legal framework that avoids complex and mandatory record-keeping, but which workers can use to assert their rights where necessary. Regulatory impact assessments, which have been mentioned, help in that area, but to be more effective they should be performed by an independent body, rather than by government departments. That process works extremely well in the Netherlands, by the way. So the first point is gold-plating and over-zealous implementation of European Union legislation.
The second area in which governments of both persuasions have been guilty is where conflicting UK and European Union regulations address the same issue. One example is coming down the track with the proposed European Union duty to trade fairly, which, if the Government behave in the way in which governments normally behave, will sit alongside existing UK customer protections.
We have argued in favour of the general duty to trade fairly and will support implementation of the directive when it is introduced, but we shall require that its application to each sphere of business is clarified simply. If there is a conflict between the European directive to trade fairly and existing UK law, that UK law must be repealed. In the past, there has been a tendency to leave in place UK law that is in conflict with or touches on the same points as European directives, increasing the burden of regulation on British industry.
My third point concerns multiple layers of application. The best example of that is the fire regulations. With the Fire Precautions Act 1971, the Fire Precautions Regulations 1977 and local Acts and by-laws, more than 100 different regulations are currently actively in place which affect dealing with fire problems. That requires each layer of regulation to be assessed to identify the requirements applying to a business at any one time—a major burden on large, small and medium-sized firms alike.
Where regulations are amended or updated, it should be a requirement that a single explanation of the regulations that apply is produced. When a new regulation is introduced, any owner, operator or director of a business should receive an explanation of exactly what regulations apply to that activity.
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My fourth point concerns the requirement to provide information under the Statistics of Trade Act 1947. That is a major irritation to large sectors of British industry. I have in my hand a letter from a small manufacturing company in Stockport—at the heart of our manufacturing sector in the North West—which, under that Act, is required to report regularly on the following: its quarterly capital expenditure; annual business inquiries, parts 1 and 2; monthly wages and salaries; quarterly stocks; a survey of research and development carried out in the UK in the current year; the annual register inquiry; an annual inquiry into international trade and services; an annual/quarterly production inquiry; and a sales quarterly inquiry.
The writer of the letter states that when the company has slowed down and not filled in the forms, the Office for National Statistics in Newport has told it that it will refer it to the enforcement squad under Section 1 of the Statistics of Trade Act 1947. That is an example of the sort of thing discussed by the noble Baroness, Lady Noakes, which seriously reduces the productivity of British industry because of people having to be employed to answer such inquiries.
What is the remedy? One remedy would be that any regulation should be governed by a sunset clause, lapsing automatically unless positively reimposed, prompting the Government to assess whether the regulations were strictly necessary. I should have thought that regulations under the Statistics of Trade Act 1947 could well fall into that category.
My final point, which I have saved until last because it concerns a major con trick on British industry by governments of all persuasions, is the use of business to administer government policy. The most effective method of collection of tax was imposed through the pay-as-you-earn system, which has enabled enormous numbers of people in the private sector to collect tax on behalf of central government. The Inland Revenue does not collect PAYE; employees working for business do. That cost is imposed on British industry.
Similarly, when value added tax was introduced, the system was clever. The private sector collects VAT, not Customs and Excise. The most recent example of that is the administration of the working families' tax credit, which provides an additional cost to business. Governments of all persuasions should consider that fifth area and whether it is the most efficient use of the private sector's time to be the free collection agency of tax revenue.
In conclusion, I agree with the noble Lord, Lord Freeman: the problem is that governments of all persuasions start with questions asked here and in another place. Every time one of your Lordships stands up to ask, "What are the Government going to do about X, Y or Z?", if the Minister replies, "We shall consider it", that process inevitably grinds its way through the system and ends with a new regulation.
Lord Freeman: My Lords, I am grateful to the noble Lord for giving way; time is still with him. He helpfully referred to scrutiny of European legislation. Does he agree that we have an anomaly? Your Lordships'

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House scrutinises European legislation upstream, as it were—before detailed directives and regulations are drafted—while the other place carefully scrutinises legislation when it is issued as directives and regulations; but the left and right hand do not appear to grasp each other.
Lord Razzall: My Lords, I agree entirely with what the noble Lord, Lord Freeman, says, except for one word that he used. He said that the other place looked "carefully" at what comes out of Europe. I agree entirely that the left and right hands are not in tune in monitoring changes.
The problem starts with us. Noble Lords stand up to ask what the Government are going to do about different issues. The noble Lord, Lord Dormand, very often asks what the Government will do about excessive pay. He is right: what will the Government do about it?
Lord Dormand of Easington: My Lords, I am glad that the noble Lord is adding to my case. But he has probably noticed that recently, in the papers, the Government have specifically mentioned doing something. Not before time, if I may say so.
Lord Razzall: My Lords, the point that I was making is that, if you have succeeded in your campaign to get the Government to do something about excessive pay, it will add to the regulatory burden on business in complying with what you want. The problem always starts with us.
4.21 p.m.
Lord Saatchi: My Lords, I, too, thank my noble friend Lady Hogg for allowing us the opportunity for this timely debate in your Lordships' House. As always, it is a pleasure and a privilege to make the winding-up speech for our Benches in a debate to which so many distinguished noble Lords have contributed. It is often said that there is a special merit in the composition of your Lordships' House through its ability to bring into play in debates such as this one people with real experience and specialist knowledge of economic affairs. That has been clearly evident again today.
My noble friend Lady Hogg, who, I assure noble Lords, knows as much about the subject as anyone I know, set the scene in a typically pointed and robust introduction. Let me try to sum up in the same spirit. It is a striking fact that the debate coincides with the report today from the manufacturing industry which says that government policies are doing it more harm than good. Apparently, new measures such as the climate change levy, higher national insurance contributions and employment law red tape make matters worse for it, while so-called DTI assistance policies suffer from extreme bureaucracy and therefore fail to make things better.
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It is certainly a grim fact that, despite the Prime Minister's Better Regulation Task Force, the new Regulatory Impact Unit in the Cabinet Office and the Regulatory Reform Act 2001, it is a losing battle, as my noble friend Lord Freeman said. New regulation affecting business has been introduced every 26 minutes of the working day since the Government came into office, a rate exceeded only by government press releases, the emission of which occurs every four minutes. In the mean time, as my noble friend Lord Freeman said, and my noble friend Lady Noakes underlined, while taxes on business have increased in the past six years so have the cost and complexity of compliance.
The question is whether anyone actually cares. Imagine the journey of a missive from industry to the splendid desk of the Chancellor in the new glittering palace of the Treasury. Consider, for example, the sort of submissions that my noble friend Lord Freeman read out to us from the British Chambers of Commerce or the CBI. That would constitute the sort of "carping and exaggerated complaints" that the noble Lord, Lord Haskel—I think that they were his words—read out. Picture the scene when those weighty tomes from the CBI, the IoD or the British Chambers of Commerce pass across the desks of the Chancellor's staff. Imagine the reaction from those who learned their economics at the knee of the noble Lord, Lord Haskel. "What do the fat cats want today?" one of them would ask. "What are they complaining about now?" another would groan.
Why do they say such things? Why are the Government so profoundly anti-business? Doctors say that our faults today are often explained by genetic defects inherited from a previous generation. That certainly seems to apply to the Benches opposite, whose birth defects in relation to business arose at the first meeting of the International Working Men's Association at St Martin's Hall in London in September 1864. Then, a group of long-forgotten individuals—except that one of them was Karl Marx—published the resolutions of their new party. The first was:
"The economical emancipation of the working classes".
From whom were they to be emancipated? As the noble Lord, Lord Haskel, implied, and the Communist manifesto made clear, from the "capitalist exploiters" of course. As Beatrice Webb said later:
"Some people fall in love with their chauffeur. I fell in love with Soviet Communism".
The descendants of that famous gathering in 1864, now comfortably seated on the Front Bench opposite—yes, you two—believe that "unbridled capitalism", usually associated with America, should be reined in, controlled, or, as the noble Lord, Lord Haskel, put it, balanced. Hence, the anti-globalisation, anti-multinational corporation agenda that drives the EU, to which our own Government have succumbed.
Like the EU, our Government present themselves as the quintessence of caring, overlooking the fact that labour laws that they enact to protect employees end up costing them their jobs. Those are the unintended

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and accidental consequences of which my noble friend Lord Brooke spoke. It is, perhaps, why a German consultant told Die Welt last week:
"I would not recommend any investment in manufacturing in Germany".
It is probably also why French company bankruptcies rose by 17 per cent last year. It is also why in both countries—I think that the noble Lord, Lord Razzall, said that those countries had a light touch—unemployment is twice that of America or Britain. On the second part of my noble friend's theme in this debate, it is also why, mesmerised by the idea of unfair tax competition, the Government are set on their path of closing the gap in tax between the UK and the euro-zone by the brilliant expedient of raising our tax burden to their level.
Do I exaggerate? I shall trace a direct line from that meeting in 1864 to another meeting that took place a few years ago in Brussels. Again, this story will particularly appeal to the noble Lord, Lord Razzall. At that time, my right honourable friend Michael Howard was the Secretary of State for Employment. There was the threat of a new EU directive concerning employment law that he thought would be likely to lead to a loss of jobs, lower profits, higher costs and more unemployment. Michael Howard gathered from an article that a finance Minister of one of the EU states had some sympathy with that view, so he got on a plane and went to see him. He told the Minister that he was against the new directive because he was worried that it would put up costs, lead to job losses, lower pay and higher unemployment, and asked him whether he would support his opposition to it. The Minister looked at him in an uncomprehending way and asked, "But if we all do the same, what is the problem?"
That brings me to the basic problem. I shall suggest to noble Lords a test of this Government's approach to business. I know that in a few moments the Minister will contest the basis of the tests and, I am sure, will offer his own marking system. The test concerns the type of leadership that the Government give to business by the example that they themselves set for businessmen. I shall take some headings from the coursework at Harvard Business School. Perhaps we can consider what a hard-pressed businessman would make of what the Government do with them.
I shall start with the heading "Cost control". Some 154,000 people have been laid off in manufacturing industry in the past 12 months. Who hires them? The Government. Some 124,000 people were hired in the same period in what is called public administration. What is the result? The most accurate gauge of public sector inflation—known, for some reason, as the GDP deflator for government consumption—rose by 2.2 per cent a year in the five years to 1998. By the end of 1999, it was running at 4 per cent. It rose to 5.75 per cent in 2000. In the financial year to the end of last March, the figure was 6.5 per cent—three times the economy's overall inflation rate of 1.8 per cent.
The number of pages of recruitment advertisements in the "Society" section of the Guardian has trebled from an average of 50, in 1997, to an average of 150
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today. Like my noble friend Lady Hogg, I carried out a weight test. I can confirm that, at 327 grammes, the "Society" section of the Guardian, where the Government do their hiring, now weighs more than the Financial Times, The Times and the Daily Mirror put together. Meantime, head office costs—I am talking about No. 10—which are a good and telling measure of the mindset at the top of an organisation, have doubled from £6.9 million in 1997 to £13 million today, partly because of a doubling of the number of PR men.
Any savvy business school student could work out the result. Output per worker in the public sector rose by 0.3 per cent in the past year, versus 3.5 per cent for the private sector. That is why 70 per cent of' the public are right to say that the new national insurance contributions money will be wasted. Seventy per cent of it is wasted in higher costs.
I shall take a second heading from Harvard: "Debt management". Every businessman knows how crucial it is. What would your Lordships do with a finance director who said that he needed to borrow £32 billion in the next financial year, then said that he needed £54 billion, then said that he wanted £72 billion of new debt, then, last November, said that he needed £100 billion, before, two weeks ago, saying that he made it £118 billion—all in the space of 18 months? Care with debt, as any good business school teaches, is always vital for the good business manager. What example do the Government give? Income is up 1.5 per cent and spending up 7.5 per cent. The Government's response is, "Don't worry, we'll borrow the money to fill the black hole".
Lord Razzall: My Lords, would the noble Lord, Lord Saatchi, be prepared, in order to elucidate his point, which I well understand in the context of criticism of governments, to give similar figures for 1996 and 1997?
Lord Saatchi: My Lords, does the noble Lord mean figures for the rate of growth of spending?
Lord Razzall: My Lords, I mean figures for the amount of borrowing that the Conservative government left this Government with.
Lord Saatchi: My Lords, I do not have that figure to hand.
Lord McIntosh of Haringey: My Lords, you could write to him.
Lord Saatchi: My Lords, that is a good idea. As we know, the Government made a great deal of the fact that they had repaid the debts of their predecessor. We now know what happened.
Lord Razzall: My Lords, I thought that the point that the noble Lord was going to make was that, when the finance director—the Chancellor of the

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Exchequer—for 1996 and 1997 got to the ballot box, he was sacked by the electorate in the way that he ought to have been.
Lord Saatchi: My Lords, I am not sure that I completely follow that point, but I am sure that it was a good one.
The third course heading is "Transparency". Business school students are taught never to weave a tangled web and never to engage in too-clever-by-half accounting practices because it will all unravel in the end. What is the Government's example to business? First, they tried to bury £15 billion a year of tax credit costs in the notes to their accounts. Currently, they are trying to magic about £100 billion of debt off their balance sheet by the creation of special purpose vehicles that carry the debt away from the public gaze. It is no wonder that Professor Likierman, chief adviser to the Treasury on such matters, said:
"Reader understanding [of financial reports in the public sector] is sometimes felt by those who compile them to be a disadvantage".
I end the series of tests with the final Harvard coursework heading. It is probably the most crucial, as it concerns human relations, a vital issue to everyone in business. The heading is "Profit-related compensation". Business school students are taught that pay should be linked to results, which could be sales, profits, market share, share price, customer satisfaction or whatever. In a bizarre caricature of business school teaching, the Government have somehow absorbed into their collective brain the idea of business-like targets for their employees. So it was that the Secretary of State for Health told a radio programme on 4th March that,
"Everyone has targets these days. It's part of the currency of management in the private sector".
Today, the Government have more targets than there were in the first Soviet five-year plan, published in October, 1928. In its initial form, that plan prescribed just 50 targets for industry: the 2002 Comprehensive Spending Review contains 130 such performance targets. The Department for Education and Skills has 18 targets, the Home Office has 20, and the NHS Plan contains 400, some of which, I am sure, deal with what my noble friend Lady Noakes described in the care home area.
The editor of the Guardian agrees with what my noble friend Lord King of Bridgwater said about what, I think, he called the inability of the system to administer what Parliament has enacted. Here is what he said about the Government's business-like approach:
"They have become the modern day equivalent of Russian train managers who, in the most oppressive period of Soviet rule, sent out numerous empty trains through the middle of the night to fulfil their timetable targets".
We can see why Lenin warned the second Comintern in 1920 that that approach was "an infantile disorder". The result is not just a ham sandwich without mustard or trifle without custard, which would be bad enough, but a dysfunctional hybrid, a bizarre caricature of the capitalist business model.
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The Government directly employ 25 per cent of the population—7 million people. They control the lives of 40 per cent of the population by, first, taxing them and, then, allowing them to claim means-tested benefits. They have made 90 per cent of the population eligible for a government credit. It is on to that body that the Government are attempting to graft the head of the American type of businessman that, they say, they so admire. They are putting a panther's head on a camel's body. Is it any wonder that the monster so created is doomed to die?
With regard to the regulation or taxation of business, the Government are nobbled by their heritage. As all my noble friends said today and as my noble friend Lady Thatcher—I am sorry not to see her in her place today—once memorably said,
"The facts of life do invariably turn out to be Tory".
4.37 p.m.
Lord McIntosh of Haringey: My Lords, I am particularly grateful, for two reasons, to the noble Baroness, Lady Hogg, for introducing the debate. First, there is the more personal reason that she anticipated a response from me that would, she said, be thoughtful and considered. I shall try to achieve that, although I cannot promise that I will. I must say to her that I thought that her introductory speech was thoughtful and considered, and I am grateful for it. It was a contrast to some of the speeches that followed.
The second reason why I am grateful to the noble Baroness is that she added to the words of her Motion. To the phrase "fiscal and regulatory burden", she added the word "economic". That was right. We cannot think about the position of business in this country or in any country without considering the economic circumstances as well as the fiscal and regulatory circumstances. As one who ran a small business myself for 30 years—I have declared that interest before—I believe that it was the economic climate, rather than the fiscal and regulatory burden, that was the key to whether I slept at night, whether I could employ people and whether the business was successful.
In the 1980s, I paid interest at a rate of something like 16 per cent and, because of international connections, was able to go to a Swiss private hank and get finance at 7 per cent. It was then that I realised that there was something wrong with the way in which that government conducted economic policy. That was enormously more important to me than fiscal burdens. I paid corporation tax roughly every other year because it was advantageous to claim it back in the years when I could avoid paying it. That is true of a great number of small and medium enterprises. As to regulatory burdens, yes, I went quite frequently to the office on Saturday afternoons and Sunday mornings to complete the VAT returns. I hasten to say that that was much more serious than any other regulatory burden. It is only under the present Government that small enterprises have been relieved of that burden by being allowed to make a VAT return on the basis of turnover rather than on the basis of a collation of transactions.

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I return to the economic climate because that seems to be the most important consideration. Of course it is true that our economic performance has improved over the past six years; of course it is also true that some of the foundations for that were set in the previous few years. But we are in an economy which has the lowest inflation for 30 years; which has the lowest business interest rates for nearly 50 years; which has the lowest unemployment rate since the 1970s; and which has faster growth than any other major EU economy. Any honest businessman or woman will say that that is more important than the other issues which have been debated today.
The noble Baroness, Lady Hogg, made a legitimate point about levels of business investment, to which I shall return. Business investment is not dependent on fiscal or regulatory burdens, it is dependent on volatility or stability in the economy. That is what we should have been debating. If the noble Baroness, Lady Hogg, had put down her full Motion at the beginning rather than the more limited Motion, perhaps the debate would have been a little wider and would have benefited for it.
I turn therefore to the issue of taxation. I have heard it said—indeed the CBI has said—that business taxes have risen by over £47 billion. I studied those figures in some detail and I shall respond to them. But I look at taxation in the context of the fact that we have the lowest corporation tax rates in history and that we have capital gains tax on business assets at 10 per cent, which the noble Baroness, Lady Hogg, specifically welcomed. That is a lower figure than in the United States. Within the past year, the OECD said that this is a "lightly taxed economy". We have a high VAT threshold which is of enormous importance to small businesses, as well as having the option of more simplified VAT calculation.
The CBI said, and the noble Lord, Lord Saatchi, repeated it, that taxes on business have increased. I listened to the points made by the noble Lord, Lord Brooke, about the CBI and I have looked at those figures. The £47 billion figure that he quoted includes the abolition of payable tax credits which removed a major distortion in the tax system and which encouraged companies to pay out their profits as dividends rather than retaining them for reinvestment in the business. It includes the windfall tax, which was a clear Labour manifesto commitment and a one-off tax—£5.2 billion of which was spent on measures of direct benefit to business, including employer subsidies and efforts to enhance labour supply.
The figures include the increase in employer national insurance contributions announced in the Budget 2002, which have just taken effect, and which of course are of huge benefit to business because the money is going into the National Health Service to improve the health of employees. The CBI said that workplace absence cost over £10 billion in 2002. Above all, the CBI figures are aggregated over a period of eight years, which gives a somewhat misleading picture.
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Therefore, I challenge the view that the Government have raised business taxes by more than 47 per cent. I point to the rates of business taxation as evidence that our fiscal system is far from being inimical to business and is recognised, not just in this country but internationally, as being favourable to business.
Returning to the economy, it is true that we arc not isolated from the global economy. Unlike the position in the 1990s, world trade is falling—profits, markets and investments are falling, as is the volume of world trade. As my noble friend Lord Haskel and the noble Baroness, Lady Noakes, noted, of course that has an effect on productivity. Until the slow-down in the world economy our productivity was rising fast. Our productivity was the fastest growing in Europe. We were closing the gap with France and Germany and I believe we are closing that gap still. But clearly a world slow-down makes a huge difference.
A large part of my speaking notes, such as they are, was devoted to matters which have not been raised in debate—in other words, to the actual regulatory regime for business. It is interesting that few of the matters I noted as being a significant element in the regulatory regime of business came up in debate. That must be because—I am glad to hear—they are no longer in controversy in this House. On listening to business leaders and to those who write letters to the business press, there are constant complaints about employment legislation, environmental legislation and other such matters. But today there has been a strange silence on nearly all of these points. There are those in business who would say that the Conservative Opposition have pulled their punches. The noble Lord, Lord Brooke, in particular, commented on the cost of employment legislation. But he quoted the gross figures which include the value of benefits to recipients. The gross costs of employment legislation are indeed £5 billion; namely, I per cent of the wages and salaries bill or £4 per employee per week. But the administrative cost, which is what we ought to be concerned with, is one penny per employee per week. In respect of tax credits, as the noble Lord, Lord Razzall, pointed out, yes, for more than 50 years we have been using business as tax collectors. Governments of all shades have done so and I do not hear the Conservative Party saying that it will abandon that and go back on PAYE. The real cost of tax credits is the implementation costs and not the gross costs. I have heard no criticism of that.
I have heard no criticism of the minimum wage, which is criticised widely outside. I have heard criticism of pensions policy, but that was answered very effectively by the noble Lord, Lord Razzall. I do not propose to repeat what he said because I could not say it as well. I have heard hardly any criticism of the working time directive, holidays, time off, or maternity leave. Yes, the noble Baroness, Lady Noakes, criticised flexible working, although she failed to recognise that the flexible working provisions allow a request to be made to the employer for flexible working; they do not require the request to be fulfilled.

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I have heard no criticism of what employers complain about often; namely, trade union recognition and the role of employment tribunals. There was some comment about agency work and the noble Lord, Lord Brooke, paid tribute to Alan Johnson. There was reference to the extraordinary claim made by the CBI that this measure will cost 160,000 jobs. We heard that type of claim about the minimum wage when it was introduced and we shall sit quite comfortably until we hear whether the claim is fulfilled. Of course, the noble Lord, Lord Brooke, knows as well as I do that agency work was used as a way of avoiding employment protection laws. It had to be dealt with and has been dealt with effectively.
Turning to manufacturing industry, I heard no comment today on the beneficial aspects of government policy—for example, the way in which we set up the small firms loan guarantee scheme, which we debated last week, the regional venture capital funds or the regional selective assistance. All of these were set up with the support of both the CBI and the TUC. One would have thought that there might be some discussion of that in a debate in your Lordships' House. While criticism has been made of manufacturing investment and manufacturing productivity levels, to both of which I have responded, so far as I can see, that criticism has not been related effectively to fiscal and regulatory burdens.
We recognise the productivity gap between us and other European countries, but no one answered the legitimate questions of my noble friend Lord Haskel about why it should be true that there is higher productivity where there is also a higher degree of regulation.
Baroness Hogg: My Lords, I am most grateful to the Minister for allowing me to intervene. Does he recognise that in those areas where the level of unemployment is higher, there is a false calculation; that is, if he were to measure output across the entire workforce in countries with higher rates of unemployment than the UK, the so-called productivity gap would disappear?
Lord McIntosh of Haringey: My Lords, I am not sure whether it is true to say that productivity is measured across the entire workforce rather than across the actual or potential workforce. I shall have to think about it. The point made by the noble Baroness sounds reasonable, but I am not convinced that that is how the statistics are produced.
Lord King of Bridgwater: My Lords, if the noble Lord is adducing in support of his argument the question posed by the noble Lord, Lord Haskel, why is it the case that the Prime Minister has been trying to persuade the governments of Europe to adopt a more flexible and less regulatory approach? The noble Lord's arguments appear to be totally contrary to his own Government's policy.
Lord McIntosh of Haringey: My Lords, my noble friend Lord Haskel sought to point out that there are
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many different ways of running one's own economy and that, within the European Union, there is room for diversity of social and economic policies. My right honourable friend the Prime Minister certainly would not dissent from that.
I should have thought that some reference would have been made to the way in which the Government have encouraged competition. I am grateful for the passing reference made by the noble Baroness, Lady Hogg, but surely the Government's support for competition—it is an outstanding feature of this administration—ought to be a relevant subject for debate.
I listened to all that was said about small and medium enterprises and I agree with the noble Baroness, Lady Noakes, that the old phrase, "They are the engine room of growth"—we must coin a new cliché—still rings true. However, when the noble Lord, Lord Freeman, quoted the Director-General of the CBI, Digby Jones, on the effect of regulation on small businesses, he cited a remark made in February 2001. In January of this year Digby Jones was quoted in the Sunday Express as saying,
"Britain is definitely the best place to do business compared with the rest of Europe. We also have a more entrepreneurial legislative and fiscal framework than the United States".
I suggest that we look to comments made in 2003 rather than those made in 2001.
The noble Lord, Lord Saatchi, said that DTI help for small businesses was too complex and bureaucratic. He was entirely right to make that point. That is why in December of last year the Secretary of State announced a "bonfire of support services". The department has cut the number of different support services from well over 100 to approximately 25. We are now allowing a 12-week period between the passing of regulations and their implementation so that the Small Business Service has sufficient time to ensure that small businesses can comply with and benefit from the newly organised services.
The Anderson and Growth Plus study entitled Not Just Peanuts awarded the United Kingdom first place in a study of business environments, saying that we are the country providing the most "entrepreneur-friendly environment". The other countries studied were nine European nations and the United States.
I had hoped to hear reference made to companies legislation or the draft Bill, while no reference at all—except in an attack on the climate change levy by the noble Lord, Lord Saatchi—was made to environmental legislation, landfill tax or packaging regulations, all of which are enormously helpful to business as well as to consumers. Furthermore, no reference was made to science and innovation and to the Government's science policy. Noble Lords did not mention the fact that while we comprise 1 per cent of the world's population, we have 5 per cent of global science budgets, while our R&D tax credits have already amounted to over £400 million per year and are continuing to increase.
I believe that I have dealt with practically all the points, but I refer now to the regulatory aspect of the debate. We have gathered sufficient evidence to say

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that, of the approximately 4,000 statutory instruments referred to, some 95 per cent of them have no effect whatsoever on business. In February 2002 we put in place the Regulatory Reform Action Plan. Some 500 measures were identified and already over one-quarter have been implemented. Certainly the Better Regulation Task Force, under the competent leadership of Mr David Arculus, is more effective not only as regards consultation but also at going into action, above all in persuading departments to put forward deregulation proposals. Although the task force may be only advisory, as the noble Lord, Lord Freeman, pointed out, it is finally having an effect.
I turn to the EU regulatory burden. Both the noble Lord, Lord Razzall, and the noble Baroness, Lady Hogg, referred to this issue. Because we are a part of the European Union, consumers enjoy lower prices, employees have better jobs with higher minimum standards and business has access to one of the largest and richest markets in the world. Surely that is worth while.
I listened to what was said about an annual regulatory budget, but as my right honourable friend the Chancellor announced in the Budget this year, departments are now to be accountable in their departmental reports for reporting progress on deregulation. Furthermore, on the issue of sunset clauses raised by the noble Lord, Lord Razzall, the guide to regulatory impact assessments produced in January of this year cites examples of good practice in sunset clauses. It is something to which we are not at all antagonistic.
We have had a debate introduced with great skill and clarity, for which I thank the noble Baroness, Lady Hogg. We heard a series of speeches to which I have listened with interest, although sometimes with a degree of incredulity. However, I hope that we have reached a conclusion which is worthy of your Lordships' House. I am grateful to all noble Lords who have taken part.
Lord Freeman: My Lords, the Minister has dealt with many points set out in his brief, even if they were not raised in the debate, but he has not responded to the point I put to him in my remarks. If he cannot answer the point I made about the Government's approach to a Joint Select Committee to deal with the merits of secondary legislation, will he undertake to write to me?
Lord McIntosh of Haringey: My Lords, I understand that a form of tacit agreement has been reached between the House of Commons and the House of Lords to the effect that we would try it out first. The Commons will then look at our experience before reaching a decision on whether to take up the proposal.
Lord King of Bridgwater: My Lords, I, too, wish to draw attention to a point I mentioned in my brief intervention, but which was not covered by the Minister in his remarks. I do not expect an answer
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today, but I should like to think that the point has been registered. It is not a party political matter; rather it derives from my experience on both sides of the problem. One of the considerations that must be taken into account is this: can the system, the organisation or the department actually handle what has been legislated for and is then to be regulated? That can add to the regulatory burden, one which can prove to be an impossible burden for the department itself.
Lord McIntosh of Haringey: My Lords, I agree entirely with the noble Lord, Lord King, although I do not believe he will be satisfied if I say that that is exactly what my noble friend Lord Macdonald is doing with the Regulatory Impact Unit in the Cabinet Office, because it is clear that setting up a structure is not the same as ensuring that it is implemented. However, I can certainly give the noble Lord an assurance that the Government are keenly aware of the problem he has raised.
4.59 p.m.
Baroness Hogg: My Lords, I am most grateful to all noble Lords who have taken part in what has been an excellent debate. It was brief and to the point, and I do not propose to spoil our timekeeping. I thank the Minister for his remarks. Personally, I thought that I had heard rather more points mentioned in the debate than he appeared to think were raised. Nonetheless it was clear that he had done his homework and his recital on the issues that are of concern to business was extremely helpful. I know he will have listened to the views that have been expressed and I hope that we will be able to move forward on some of the issues. I beg leave to withdraw the Motion for Papers.
Motion for Papers, by leave, withdrawn.

School Funding
5 p.m.
Lord Hanningfield Lord Hanningfield rose to call attention to the funding of schools; and to move for Papers.
The noble Lord said: My Lords, I am pleased to be able to introduce this debate on the funding of schools. I declare an interest as leader of Essex County Council, but more of that later.
Education is a mammoth service—more than 25,000 schools; more than 8 million schoolchildren—and if the Government get wrong the delivery of education we are all in serious trouble. The debate today will probe whether the Government have done just that.
Over the past few months we have seen a steady stream of reports suggesting a dangerous black hole in the funding of schools. That culminated on Friday with the National Association of Head Teachers describing the funding situation this year as "catastrophic".
The National Association of Head Teachers blames the Government for this disastrous funding situation. It states:
"It is very clear to us that although there are local authorities who are guilty of not passing on as much money as they should, the problem lies not with LEAs but with the Government. It has simply not put enough money into the new funding system this year".
So we have a catastrophic situation. A government flagship policy; unions talking about strike action; schools handing back their budgets. By any definition it demands to be taken seriously.
But what is the Government's reaction? According to The Times Educational Supplement the Secretary of State for Education told chief education officers that requests for more money,
"just flood straight over my head".
He went on to say,
"I don't listen to what you say quite frankly".
In the run-up to this year's NUT conference, Doug McAvoy said,
"We've not had the relationship we've got now with the Government during my time as general secretary and deputy general secretary. It's worse than anything that happened through the Thatcher years".
Rather than partnership, we have confrontation and a break-down of communications. In their flagship policy area, the Government have succeeded in alienating teachers, head teachers, chief education officers, unions, local authorities and the Local Government Association.
There is absolutely no doubt that the problems schools are facing this year are a direct result of changes that the Government have made to the funding formula. Enormous turbulence was introduced into the system as a result of the changes. The Government are absolutely responsible for the effect of this review and for its conduct and timing.
The ODPM Select Committee noted in its report on the new funding formula that, although there had been three years to work on the review,
"most of the substantive work … was carried out in the last year … The result is that many of the new formulae do not appear to be evidence-based and can be criticised for being insufficiently robust and more open to judgement than was previously the case".
In the end, the formula review had the appearance of being rushed. Local authorities had to set budgets on the basis of a settlement that was finalised only at the eleventh hour. That obviously makes budgetary planning difficult for local authorities and, as a consequence, for schools.
What of the levels of funding themselves? The first point to make is that, rather than taking money out of schools, local authorities actually put additional money in. In 2003–04, the Local Government Association estimates that local authorities will put £100 million more into schools than has been provided by the Government. This continues a trend that has seen additional investment of £4.3 billion by local authorities in schools since 1993. If the Secretary of
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State wants to take powers to pass money to schools directly, he should be aware that this additional investment will be taken out of the system.
But let us return to the head teachers' contention that the Government have simply not put enough into the system this year. According to the Local Government Association the Government's funding settlement did not take into account a number of significant pressures. For example, teachers' employers' pension increases of between 13.1 and 13.5 per cent will cost schools £50 million this year; additional national insurance contributions will take another £115 million out of the system; teachers' pay increases will account for the loss of a further £548 million; schools' inflationary pressures are worth £200 million; and the withdrawal of the Standards Fund grants will cut a further £335 million from the available funding. When one takes all of these pressures into account it is no wonder that some schools are finding themselves in difficulties. The Government have simply got their sums wrong.
On Friday, the Government published tables purporting to show that rather than a lack of central funding the problem was that money was being held up in the system by local authorities. That is quite outrageous and totally wrong. It is typical of the Government that while there is a crisis in our schools that teachers and local authorities are working hard to address, they are focused on passing the buck and spin.
My own education authority, Essex County Council, is one of the authorities identified in the Department for Education and Skills' release as withholding money from schools. That is an accusation I absolutely refute. Indeed, I find it risible, as will others who understand the funding system. Essex has an excellent track record on devolving budgets to schools. According to the DfES's own data, we delegated more cash per pupil than any other shire authority in 1999, 2000 and 2001. In 2002–03, we were the third best performers on this measure. At the same time we are the lowest spenders of any education authority in the country on central administration. I stress that we are the lowest spenders in the whole country on central administration.
The Government and not the LEA are to blame for the difficulties now being faced by schools in Essex and their hundreds of thousands of pupils. After all, the Government have imposed on Essex the worst grant settlement of any authority in the country. We lost £30 million this year. The formula changes mean that we will retain only a further £45 million as a consequence of the floor mechanism.
Turbulence and uncertainty are the future for Essex schools because our funding levels will depend on where the Secretary of State chooses to set the floor. If the floor were to be removed we would lose £45 million, which is equivalent to 11.5 per cent on the council tax. Even with the floor, we are running just to stand still and losing out in relation to all other authorities.
Three times I have mentioned in the Chamber—I still have not had an answer as to whether the Government accept this—that the increase in the total

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grant to the county council was £7 million less than the increase in our education formula funding share alone. I repeat: the money we received from the Government to pay not only for our schools but for community care, child protection, roads, the environment, waste management, libraries and so on, was £7 million less than the Government expected us to passport to schools. Our predicament was so severe that even the Government recognised it and granted an additional £1.2 million to Essex schools, about £6 per pupil.
The effect of the Government's changes to the funding mechanism and the turbulence created in the system was that some authorities—such as Birmingham—received an excess of grant over formula share approaching £40 million, whereas Essex received minus £7 million. Where is the equity in that?
Despite these difficulties we went ahead and passported. We held back £1 million because there was not enough early years demand to justify the expenditure—another government Minister told us to do so—although we still spent £1 million on early years in excess of funding from the Government. We were able to do that only by ratcheting up the council tax. It is the people of Essex, not the Government, who are paying to maintain the quality of education in our schools.
Finding that extra £7 million by itself added more than half of a percentage point to our budget and, because of the gearing effect, it added 2 percentage points to the council tax alone. Government underfunding is responsible for the crisis in our schools and government underfunding is responsible for the steep rises in council tax throughout the South East this year.
For the sake of completeness I must comment on the Government's publication of the numbers relating to allocated spend. Associating this figure with the financial crisis in schools is absurd. It is a policy agreed with our head teachers—all authorities have this underspending and most of them discuss it with their head teachers—and much of the unallocated money is due to restrictions that the Government place on the funding that we can distribute to schools. For example, a third of the unallocated money, more than £7 million, is the ICT component of the Standards Fund. It is the Government who require schools to jump through hoops before this money can be allocated to them through the LEA. It is not the LEA's fault but the Government's regulations. Ministers do not seem to understand their own regulations.
We also hold money centrally to fund in-year pupil number increases and to support the education of pupils out of school. Under the old system, we would delegate the pupil retention budget to schools and then claw back the funding where pupils had to be taken out of schools. The Government told us that we could not do that and that we should hold the money centrally.
The point is that we do this in discussion with our schools and our head teachers. Our funding system is quite transparent: we sit down with our head teachers and discuss how to delegate the money. They know that the £21 million is theirs and will be allocated to
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them as the year goes on. They do not need the money upfront, of course. That is not what the underfunding crisis is about. Schools do not pay all their hills at the start of the financial year. Let us be clear that schools are underfunded because the Government have not put in enough money. It is nothing whatever to do with the profiling of payments.
Some press releases indicate that local authorities are sitting on pots of money. That is not the case. Our finances come in, as the Minister will know, over the year. Revenue support grant and council tax income are basically paid to us monthly, not as a lump sum at the beginning of the year. We receive income from government and council tax payers over the year. We passport it and give it to schools monthly, over the year. It is not a funding problem at this moment but over the year. As I said, press releases have indicated that local authorities are sitting on money. I am afraid that that is simply one more red herring thrown up by the Government to try and avoid shouldering the responsibility for this mess.
The final irony, so far as I am concerned, is that within the figure of £21 million of unallocated funding for Essex, the Government have counted in the £1.2 million they have just given us because they recognised we were underfunded. Needless to say, the money will be passed directly to the schools as soon as we receive it from the Government.
The Office of the Deputy Prime Minister is committed to freeing up local authorities. Let us accept that proposition in good faith. The Department for Education and Skills, however, is obsessed with centralisation. It wants to micromanage inputs as well as specify outputs. In attempting to do so, it has got itself into one almighty mess.
Instead of focusing on raising standards in schools, the Secretary of State for Education and Skills has become obsessed with LEA spending profiles. It is irrelevant. The plain fact is that the Government have got their sums wrong and have not invested enough money in schools. They should stop digging now, own up to their mistakes and work with LEAs and schools to seek ways out of this situation.
If the Department for Education and Skills wants to continue down the road of centralisation, it can expect more of the same. The more it insists on taking the reins, the more it will have to be prepared to accept accountability for its failure to deliver. The Secretary of State for Health wants to do the opposite for the health service—he wants to delegate more downwards.
While the Government pay lip service to the principle of devolution, the actions of departments such as the DfES make it clear that there is only one game in town—centralisation, centralisation, centralisation.
I am grateful for the opportunity to have opened this debate. I am very concerned about the situation; I live with it in Essex every day. If we had more money to give the schools, we would love to give it to them, but a council tax increase of 16.7 per cent was high

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enough. Anything I can do to help the people of Essex I will do. I hope the Minister will say the same when she responds.
I look forward to hearing the contributions of your Lordships to this debate. I beg to move for Papers.
5.14 p.m.
Baroness Warnock: My Lords, I am extremely grateful to the noble Lord, Lord Hanningfield, for giving your Lordships' House the opportunity to debate what has manifestly become a crisis in the funding of schools. No one can open a newspaper without realising that there is a crisis. However, it is a very complex matter, and I cannot claim to understand the funding formula that is now in place.
There are conflicting stories about what has happened to the extra funding that was promised and seems to have got lost. I look forward to hearing some clarification from the Minister on this point.
I want to confine my remarks to the funding of secondary schools, where there is no doubt that teachers are to be made redundant or not be replaced, and thus the staff-student ratio will be badly affected. Who exactly is responsible for the current chaos seems to me less important than the probable consequences. How is it possible to expect more pupils to stay on at secondary school and more to go on to higher education if educational standards are allowed to drop through lack of resources? That is the real issue in this debate.
In some ways, an under-resourced secondary school system is even more disastrous than lack of funding for undergraduate teaching, because everyone has to go to school and everyone deserves proper teaching at this stage.
It has been suggested, according to accounts in the press, that a revival of the grant-maintained system is being considered. This, I suppose, is simply because the Government seem to be laying the blame for the crisis on the local education authorities—as we have heard—from whom the grant-maintained schools were virtually freed. But without a further outlay by the Treasury, this would not make matters any better. What is needed is plainly more resources, and these resources must come from somewhere. I do not believe in the least that the local education authorities are sitting on vast sums of money. It is impossible that they should be.
I would like to think that, at this moment of crisis, the Government might take a rather longer look at some of the systems for putting more resources into the secondary school system than simply shuffling more money between the local education authorities and the Treasury. I would like to think that they might at least consider mixed public and private funding, not unlike—although not exactly the same as—the direct grant system, which was abolished, as everyone knows, by the Labour Party in the 1960s. The abolition of the direct grant nearly 40 years ago was largely the work of Anthony Crosland, who was determined—I think very properly—to give the new
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comprehensive system every possible chance by stemming what he thought of as the flood of talented children into a form of the private sector. I respect his arguments and I respected him enormously as a Secretary of State for Education.
I suppose that here I must declare an interest, though not a current interest. I was headmistress for six years of a direct grant school in Oxford, and for much longer I was part of the council of the Girls' Day School Trust, all 24 of whose schools were once direct grant schools. Later, when they became independent schools, they took up as many assisted places as they could.
The great fault, in my view, of the direct grant schools was that free places were offered to children from maintained primary schools if they did well in the entrance examination, without parental means tests. In a place such as Oxford, the parents of the brightest children from maintained schools could very well have afforded fees which, in any case, could not be raised from their relatively modest level without consultation with the government department. That was the fault of the system.
The glory of the system, however, was that in addition to the free places there was a sliding scale of fees. The parents of all children who wanted to, who had been admitted to school, could apply for a means test. There were children who paid no fees—as well as the scholarship or free place children—on a sliding scale going up to children who paid the full fees. No one except the administrators at the school and in the department knew what fees other children paid. That seemed to me an enormous advantage. Of course, there were some extremely good schools in the direct grant sector. One has only to think of Bristol Grammar School, Manchester Grammar School and so on.
Crosland was right in that the principle of the direct grant schools was incompatible with the comprehensive principle on which he set so much store. As a matter of fact, the comprehensive schools were never given a full chance to show what they could do—which some of them continue to do. However, the comprehensive principle has been long abandoned.
It is hard to reconcile the theory of specialist schools with that principle, for example, although I have never really understood that theory. I have a granddaughter at a sports specialist school, which is the only accessible school in the rural area where she lives. She is keen on tennis and girls' football, but she has played neither of them in the two years that she has been in the school. I am a bit baffled by the theory of specialist schools, especially in rural areas.
It is hard to reconcile the theory of specialist schools, technical colleges and city academies with the comprehensive theory. The crucial advantage of reinventing something like the old direct grant schools is that it is a living example of public and private funding being mixed and harmonising in potential centres of excellence. As far as I know, there is only one example of such a school at present, although there

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may be others, and I may be misinformed. That is the Belvedere School in Liverpool, which has some very good as well as very had comprehensive schools.
That school belongs to the Girls' Day School Trust and is supported by the generosity of Mr Peter Lampl's trust, which funds children who apply from maintained primary schools all over Liverpool and whose parents are means tested. That is a crucial difference between Mr Lampl's system and the old direct grant schools. The rest of the children's parents pay full fees, although they may also ask to be means tested and their children receive bursaries as appropriate rather than free place scholarship. The experiment seems to be working very well.
I suggest that parents who wish to pay for their children's education should be encouraged to do so. However, their children and the educational standards at such newly invented direct grant schools as I have described would greatly benefit from a proper social mix at the schools as well as their high academic ambitions.
It was the previous Conservative government's hope, as it has been the hope of this government, that industry would be a source for mixing private and public financing in secondary schools—hence the technical colleges. However, industry has not proved willing to help out in the necessary business of finding new resources for education, and it may not be in a position to do so. The Government cannot rely on that source, nor have they successfully relied on it in the past. They are far more likely to succeed in attracting more resources into secondary education by enlisting parents with moderate—not necessarily enormous—incomes, who are ambitious for their own children and for children who are less well off.
It is sometimes assumed that parents will always resent paying for children other than their own children at school. The principle of the direct grant showed that that was not so. No parents, in my experience, ever objected to the fact that they paid full fees when they knew that a large number of children paid no fees at all or paid fees on a sliding scale. The only thing that they objected to was that some children who happened to have been at maintained primary schools and whose parents were equally as well off as them—in exactly their income position—had free education. In a university town in those old days, people were reasonably well off, although they are not now. But that was the system of scholarships to which people were accustomed.
It is interesting to note that many of the big boys' public schools, starting with Eton but led by Mr Graham Able at Dulwich, are now saying that in future there will not be non-means-tested scholarships. All scholarship money will go to children who cannot afford the fees. That is a worthy and prudent move.
Parents who are academically ambitious for their children, or musically ambitious or ambitious in sports, will like the idea of schools such as I describe. They have the chance of being both socially mixed and, undoubtedly, centres of excellence. I hope that the Minister will undertake to consider not necessarily the
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scheme that I have outlined but some such way in which to mix private and public finance for secondary education.
5.27 p.m.
Lord Henley: My Lords, I start by offering my thanks to my noble friend Lord Hanningfield for introducing this debate. As we all agree, the subject is highly topical and crucially important. We know how much importance the Prime Minister himself attaches to education—"education, education, education", as he put it some years ago. As a result, we know how much importance his party attaches to it.
For that reason. I offer my commiserations to the noble Baroness, Lady Ashton, who does not seem to have attracted as much support as one would have expected on this occasion. The Benches behind her were pretty empty earlier on, although they seem to be filling up a bit, if not much. One would expect on an occasion such as this that she would have brought in a few more speakers to support the Government's case, which no doubt she will make very effectively at the end of the debate. She may make it so effectively that she finds herself transferred to the equally hot spot—the vacant spot in this House—of health spokesman. But that is a matter for other people and another day.
As my noble friend Lord Hanningfield made clear, this is a very complicated subject and it has become much more so in recent years, especially with changes to the formula. I suppose that I ought to know something of what I am talking about. I served in the 1980s as a member of a local education authority in Cumbria. In the mid-1990s I was a Minister in the Department for Education and Employment, as it was known. I continued briefly as spokesman in opposition after the 1997 election before relinquishing that honour to my noble friend Lady Blatch, who will speak for us at the end of the debate. I ought to know a little about education funding, although I never had responsibility for it in the department. However, as Lord Palmerston famously said about the Schleswig-Holstein question, he had forgotten what it was about. I have certainly forgotten what little I did know about the complexities of funding. I also imagine that—just as Lord Palmerston commented on those who went mad—the funding formula is perhaps driving Ministers and others who have to deal with it mad at this very moment. I leave that for the noble Baroness to answer in due course.
What I do know is that, last December, the School Standards Minister announced that, in 2003–04, there was, I believe, an extra £1.4 billion for local education authorities. He went on to make it pretty clear that every LEA would receive an increase of at least 3.2 per cent per pupil and that no one would lose out in real terms. The Government made quite a thing of that announcement—but they always make quite a thing of such announcements. We seem to have new announcements daily. We have heard new boasts about spending on this and spending on that. What we have slightly less of are improvements as a result of those spending increases. What we have even less of is talk about the extra burden on individuals and

1135
businesses as a result of those spending increases which I believe now amount to a sum roughly equivalent to £5,500 per household in extra taxation since 1996–97. All of that spending has gone on worthy causes such as health and education but we see relatively few improvements.
I return to education itself. We were told that there was to be the increase mentioned by my noble friend Lord Hanningfield of £1.4 billion for the LEAs. Since then—and my noble friend has put the case very strongly for Essex—we have heard not only from LEAs but from the schools themselves on what is really happening. Again and again we have heard examples of schools that have lost out and seen dramatic funding cuts. A survey of the Sunday Times top-performing 25 schools carried out by the shadow schools Minister, my colleague Graham Brady, showed that, of the 20 schools that responded, 17 face certain cuts, five of at least £100,000 and two of at least £250,000; that the anticipated range of cuts is £60,000 to £300,000; and that the average shortfall for schools able to give a figure is £155,000. We all know just how many people can be employed in a school for £155,000. Such cuts really do make quite a difference.
We have even heard from one Fiona Millar, personal assistant to the Prime Minister's wife and partner of Alastair Campbell. She could not restrain herself in her role as chairman of the governors of a north London primary school in complaining about the cuts to her school. She said:
"Although we will do our best to maintain standards, we cannot guarantee that the quality of education will not suffer. In particular, it is our most needy children who stand to lose most because we will not have the staff to provide the same level of extra support. We believe the Government has not thought through the implications of all its changes for some of the neediest schools. Parents can protest in many ways. For example, letters of protest need to be written".
That school was facing a shortfall of £127,000.
As we know, the Government responded to all the criticism by saying that the money had been held back by the local education authorities. Last Friday, I believe, a letter was sent to all LEAs and directors of education seeking detailed answers. I have seen a copy of what I presume is a fairly standard letter, with various additions for local areas, which was sent on 2nd May to the director of education of Cumbria County Council. No doubt there are similar letters, and no doubt my noble friend Lord Hanningfield has seen the one sent to the director of education in Essex County Council. My noble friend spoke about the micro-management that the Government are seeking in education and this letter seems a pretty good example of it. It presents that local authority, and no doubt other local authorities, with a whole raft of extraordinarily detailed questions.
I can assure the noble Baroness that Cumbria's local education authority is not holding back any of the money and has passed more than 100 per cent of the schools' budget on to schools. In fact, the figure is 100.6 per cent. It is the burden on the LEAs which has been increased. For example, the pay increases to which my noble friend referred amount to £445 million
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in total. Pension contributions also have been increased, amounting, I believe, to £635 million. Gordon Brown's famous increases in national insurance contributions amount to another £115 million. All of that adds up, I understand, to £1.195 billion—which goes quite a long way into the £1.4 billion that the Government have boasted about.
I think we can say that the Government's handling of the education budgets and allocations has been unsatisfactory for a number of reasons. There has been, as my noble friend put it, a great deal of tampering with and changes to the funding mechanisms which have left schools and probably some LEAs struggling to get to grips with the absurd and unnecessary complexities of the system. That has been exacerbated by the separate but unrelated funding for the Learning and Skills Council, which now, I understand, funds post-16 education. There has also been the failure of the Secretary of State and his department to warn schools well in advance of the increases which I just mentioned in national insurance contributions, pensions and teachers' pay.
I should give other examples, such as the problem with the teachers' pay progression. There has also been the Government's failure this year to fund adequately the threshold payments for teachers. As I understand it, two years ago funding was provided and about 90 per cent of teachers passed through the threshold. This year, however, the Government incorrectly calculated—I should be grateful for the noble Baroness's comments—that 60 per cent of teachers will pass through the threshold, whereas schools calculate that the figure is nearer to 100 per cent. The Government have awarded funding sufficient only for their original 60 per cent.
I turn to specific grants. There was, I believe, a grant to reduce infant class sizes to less than 30 this year. This year that grant has been subsumed into overall funding and is therefore not targeted as it should be. Some schools must therefore receive less than in previous years. If those schools have taken on classroom assistants or additional teachers to service the commensurate increases in the number of classes, they will inevitably be faced with higher staffing costs. Therefore, there must be redundancies or economies elsewhere if the financial books are to be balanced.
Finally, there is the question of whether the extra money even reached the schools. Yesterday we saw the publication of the Public Expenditure Statistical Analyses 2003, a very complicated and weighty document with which greater experts than me will perhaps eventually get to grips and make interesting discoveries. I am grateful to The Times, which has already done some of that work, for pointing out that although the Government boasted about their £1.4 billion spending increase—when in reality we have seen thousands of schools complaining about cuts—that money might not even have got through to the local authorities. According to The Times, the statistical analysis for 2003 published only yesterday shows that the DfES underspent by £1 billion. The Government are complaining that £590 million is missing from education and blaming it on local

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authorities. Perhaps it is the Department for Education that has the money and not the LEAs. Perhaps the noble Baroness will comment on what The Times business section says about the underspend in the Department for Education where spending fell more than £1 billion short of its target.
5.40 p.m.
Baroness Byford: My Lords, my main responsibilities in this House are agriculture, the environment and rural affairs. However, education is an important if not vital part of all three.
As education is not my main interest my knowledge is limited compared with that of some other noble Lords. However, I listen to the radio, watch TV, read the newspapers and my husband is chairman of governors at an inner-city primary school and a governor at a county middle school. Between them all I am subjected to a constant background hum of discontent, concern and occasional despair.
I am aware that education funds come from the Government to county and metropolitan councils. I understand that the means of calculating the amount each council receives is very complicated and that they all get different amounts according to their circumstances. That means that in 2003–04, Tower Hamlets has £5,337 per pupil whereas there is £3,354 for Milton Keynes, £3,162 for Southend, £2,990 for Poole and, at the bottom of the heap, £2,930 for Leicestershire.
I know that Tower Hamlets has enormous problems of poverty, social inadequacy and ill health but I do wonder what its education offers that, in a climate of national curriculum and national pay scales, costs £2,407 per pupil per year more than Leicestershire. I note, moreover, that in the years since 1997–98, Tower Hamlets has had a real terms increase of £1,160 per pupil compared with Leicestershire's £500. If I were a cynic. I would say that that is beginning to look like favouritism.
The consequences of those disparities will vary from place to place, from school to school and will be affected by the calibre, or lack of it, of LEA officers, head teachers, governors and other staff. In Leicester in the inner-city primary there is no funding crisis as such but there is only one parent governor out of a complement of four. The school has some 270 pupils; 17 mother tongues are spoken; 120 pupils have special educational needs; approximately 35 are children of asylum seekers and 65 per cent receive free lunches. I appreciate and understand the extra demands made in those circumstances. The school also runs a breakfast club. The children need a lot of love, care and support in addition to their educational needs.
In Leicestershire in the 11 to 14 middle school there is a deficit of over £150,000. That will mean that some teachers will not be replaced. The school has approximately 940 children. It expected 30 more and budgeted for that number. As I say, there is a huge finance problem. The LEA and the school have got together and produced a three-year plan but because there is no additional funding there is a need to
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rationalise resources—for example, staffing—and to review contracts and budget allocations. The school and the local education authority are confident that over the next three years the deficit will be cleared but the school should not have been put in that situation in the first place.
There are problems today but there are even bigger problems looming in the years ahead if funding is not sorted out. Many schools are rotting away from within. The landlords look after the structure and the externals but schools are having to make choices between resources for teaching and learning and building maintenance. Can the Minister tell us how many councils have served hygiene warnings on local schools, especially in relation to the state of repair and decorative order of kitchens and washrooms?
One of the costs of running a school is resources and nowadays they are expensive. The National Grid for Learning has helped equip most schools with computers, interactive white boards, access to the Internet and administrative and curriculum software. My worry—I believe that I am not alone—is what will happen in two or three years' time when all of this comes up for renewal? Software and service packages are not likely to fall in price. Indeed, some software manufacturers sell licences which involve schools in updating at the behest of the maker and being required to upgrade the computers needed to run the upgraded programmes.
Some noble Lords will know of my interest in broadband, particularly in rural areas. Depending on how it is installed it may be capital expensive with low running costs or capital acceptable but with high running costs.
Lord Graham of Edmonton: My Lords, I am grateful to the noble Baroness for giving way. Like other members of her party who have spoken, the noble Baroness sincerely and genuinely reiterates the constant theme that more money needs to be spent on education, especially secondary education, to iron out some of the anomalies. Will the noble Baroness tell us how that would be achieved as her party has pledged to cut public expenditure by 20 per cent?
Baroness Byford: My Lords, I thank the noble Lord for his intervention. I shall let my colleague on the Front Bench respond to that point. I speak as a Back-Bencher, not as a Front Bench spokesman That obviously makes a difference. But my interpretation of the matter is very clear. It is not always a question of what money is available but rather of how it is used. I believe that at the moment it is not being used to best advantage. I say to the noble Lord, Lord Graham, that the school I mentioned is examining the way in which it operates to see whether it can save money. However, it is not simply a question of money although money is obviously a dominant factor as regards a school being able to work successfully. However, I shall leave the more detailed response on that point to my colleague on the Front Bench.
I have raised, and will continue to raise, the issue of broadband. As I say, depending on how it is installed it may be capital expensive with low running costs or

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capital acceptable but with higher running costs. Can the Minister tell us how many LEAs have gone down the latter route? There is a difference between the two routes.
Funding problems lead inevitably to cost saving schemes, reallocation of duties and task reduction. I was surprised and alarmed to hear that fire risk self-assessment is now a standard part of modern governance in schools. A group of governors and the head teacher sit round and simply fill in a form designed to highlight areas in the school which may be a source of risk either of starting a conflagration or of injuring staff or pupils in the event of one. Is that really something that they should be doing? Are they adequately trained? I am assured that the form is simple and that the task is easy but there are many aspects of fire hazard which are not even touched upon. Does the Minister support that delegation? In the event of a major fire with one or more fatalities and some serious injuries, will the Minister assure the House that governors, schools and head teachers cannot be held responsible in any way? At the moment I believe that they can.
The Government are increasingly passing even more responsibilities to hard working, unpaid governors who do their best to ensure a safe environment for our children. Does the Minister appreciate the great responsibility which is being given to them? Is she content that schools will be able to attract and keep governors in the future?
Like a previous speaker I touch briefly on the question of supply teachers. Increasingly schools are spending many thousands of pounds on supply teachers when regular teachers are absent. What are the Government doing about that? Will the Minister give the House some figures with regard to supply teachers?
I thank my noble friend Lord Hanningfield for giving us the opportunity to debate funding in schools. Before the noble Lord, Lord Graham, leaves the Chamber perhaps he will be interested to hear—as other noble Lords have said—that this Government claimed that for them "education, education, education" was a real priority. I put it more strongly than the noble Lord, Lord Henley. How disappointed the Minister must be that there is not one spokesman on the Labour Benches in this debate, and nor is there one from the Liberal Benches; I exclude the winding-up speeches. Last week, on 29th April, there was a debate in another place with no speaker from either party. Has "education, education, education" lost top slot? Perhaps noble Lords on those Benches realise that the Government are not achieving what they set out to achieve.
Before I finish, I would like to pay my tribute and thanks to all those who work within our schools. Teachers are obviously key to the success, but thousands of other workers all play their part. The one thing for which they all hope is financial stability. As other noble Lords have said, confidence in that has been shattered. Teachers are considering striking, as my noble friend Lord Hanningfield said. The
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Government accuse the local authorities, but I believe that the funding arrangements are inadequate or, at best, unfair.
Who picks up the underfunding? The local authorities, of course, which send it on to us, the council tax payers. Enough is enough. A likely disaster faces us. Perhaps that is why speakers are absent from other Benches. I do not wish to make a political issue of that, but I think that means that noble Lords from those Benches either do not appreciate that there is a dire crisis in the funding of schools, or accept it and feel that they can do nothing more. At best, the Government's priorities are not being fulfilled.
I have spoken of two schools particularly. As I said at the beginning, funding is not purely the problem at the inner-city school of Leicester, which has adequate funding. However, some of the other schools are really struggling. To be faced with a deficit of £150,000 with that number of pupils is indeed unacceptable.
I would like to thank again my noble friend Lord Hanningfield for giving us the opportunity to debate the subject, and I look forward to the Minister's response.
Lord Graham of Edmonton: My Lords, this is not the first time that the noble Baroness and I have crossed swords on her drawing the attention of the House to the absence of Labour Members in certain debates. I assure her that there will be occasions in future when the Opposition Benches will be empty of speakers. I would not dream of drawing attention to the fact that that indicates that Opposition Members are not interested. The pot should not call the kettle black.
Baroness Byford: My Lords, the noble Lord and I have had debates across the Chamber on the subject, usually when debating housing and circumstances for poor families or families in need. He accepted, quite rightly, that there were only a few speakers from our Benches, but there were at least some speakers. Today there is no speaker from the Government Back Benches.
5.53 p.m.
The Lord Bishop of Chelmsford: My Lords, it is a particular pleasure in my last few weeks as Bishop of Chelmsford to contribute to a debate introduced by the noble Lord, Lord Hanningfield, who shares an interest in a considerable part of the same patch as I do. I warmly welcome his bringing this important debate to your Lordship's House, rooted as it is in his long experience of public service in Essex. He has argued trenchantly in support of our county.
In many ways, local education authorities have a difficult task. In all the various celebrations last year, their centenary went almost unnoticed. Perhaps that is not surprising. They are ground between the upper millstone of central government and the nether millstone of schools. No longer do either central government or schools see the money that they administer as the local authority's money. Central government sees the money as the Treasury's money

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and wants to see it handed on to schools; schools see it as their own money and, quite naturally, want to have as much of it as they can. No wonder local government is ground line.
But it seems that the Government have taken on an almost impossible task this year as well. For many years, as noble Lords will recognise, schools and local authorities in parts of the country far distant from London have complained that the funding formula has seemed to benefit schools in London and the South East at their expense. The formula was ripe for refinement, perhaps even for scrapping and starting again. In any change there are likely to be winners as well as losers. Nor would it be surprising if a great noise of protest was heard from the losers and not overwhelmed by the deafening silence from the winners. That is human nature.
The Minister and her colleagues may regret, however, that the change eventually took place at a time when the upward pressure on teachers' salaries, pension contributions and national insurance costs was so great. Some indication of the current situation is that independent schools seem to be planning to increase fees to parents on average by at least 12 per cent, more than the total increase in government allocations for school budgets.
The Church of England has a very substantial stake in the educational system throughout this country, with a quarter of all primary schools and a comparatively small but growing number of secondary schools. I must therefore speak from beyond the experience of the county of Essex and the east London boroughs in my diocese. But before I do, I should like to express my own delight that a secondary school in Chelmsford, Rainsford High School, is this autumn to be reopened as the new St Peter's Church of England arts college. That development has arisen from the diocese's good partnership with the local authority.
For the Church of England, the partnership with local government in education is as important as the vital partnership with central government. That is not a matter of lip service but of practical action, and it is equally true in other dioceses and with other local authorities. That is why, 10 or 15 years ago, diocesan directors of education were often seen on school platforms explaining to parents' meetings why they supported maintaining a funding arrangement through the local authority.
Noble Lords will remember that that was a time of uncertainty for local education authorities regarding their role and their future. Now there are clear expectations of them and no doubt about their role in school improvement and other connected services. There should be no doubt therefore as to the funding that they need for that work. On the other hand, schools deserve a clearer picture and straightforward expectation of the funding that they hope to receive. They should be able to plan forward for more than one year and to know where they are. If, as it seems, the Government have indicated an intention to look again at direct school funding, I hope that our partners in
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local government no longer see that proposal as a direct assault on their integrity. On behalf of these Benches, I would welcome that exploration.
Finally, I hope that the current debate in and around schools about funding does not put at risk the prize of remodelling the school workforce. Incidentally, that is not language with which I feel comfortable, but it is the language that the Government use for a goal that we support. Teaching will not be undermined by increasing support staff in schools; rather it will be enhanced. I have seen far too many teachers demoralised by too much bureaucracy and the demands of unsupportive parents. They need all the help they can receive. We want to see the teaching profession increasingly recognised for what is—immensely significant for our country and its future, and immensely honourable.
6 p.m.
Baroness Seccombe: My Lords, I thank my noble friend Lord Hanningfield for allowing us to debate this issue. It is not only topical, but disturbing and vital to practically everyone in this country. Whether we are parents, grandparents or members of the general public, we all have a vested interest in the nation's children having the best possible education.
It does seem very odd that a Government who came to power with the slogan—and we have it again—"education, education, education", should have got it so wrong and landed themselves in such difficulty. I suspect that there are two main reasons: first, the never-ending thousands of directives initiated over the past six years by various Secretaries of State, so that no one knows whether they are coming or going, making life much complicated; secondly, this Government are so hooked on always exaggerating a story that they find themselves wound up in the spinning network to such an extent that even they do not know what is happening outside the department. The same money has been announced over and over again, and triple accounting has been the order of the day. In the end, no one has a clue how much extra funding has been given to schools. As a result of this fiasco, everyone has lost confidence, is suspicious of every announcement and thinks, to quote a saying, "What a fine mess we are in now!".
Government intervention over how councils spend their money and the very real problem that many authorities face under the new funding formula have not only been confusing to councils but have left schools lurching from crisis to crisis. The Government just do not seem to have learnt that you cannot control from the centre; life is not like that and the result is only too plain to see.
The fundamental necessity for any head teacher is the knowledge that there are sufficient funds to employ the required staff to man all the departments, so that they are able to nurture the children and so achieve the best possible results for the pupils in their care. If heads do not have confidence in their financial future, it must be impossible to function efficiently. Therefore, it is not surprising that we hear of head teachers facing the

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sacking of staff. Many feel that they have now had enough and are under such pressure that they are contemplating resigning their posts.
The Government appear to refuse to recognise the full impact of their actions in such matters as raising the national insurance contribution and the vast sums required to fund the pensions black hole. Both of these, together with teachers' complicated pay awards, will be ongoing burdens as the Chancellor of the Exchequer continues to drain pensions funds of £5 billion each and every year, and no doubt the national insurance contribution will increase year by year. That will be a massive extra expense on public services. These escalating costs are real taxes on jobs; and I am afraid that sacking is how they will have to be paid for unless the Secretary of State and the Chancellor make the required funds available.
This past week has seen some bizarre events; and some say that timing is everything. First, just two days before the local elections, the newspapers reported that on Friday the Secretary of State would name and shame the councils which had failed to pass on the money to schools—The Times even quoted a leaked document which actually names some councils on the list. However, later in the week the Secretary of State said that it was not about naming and shaming but only to highlight the situation for discussion.
Ministers appear to be very complacent and wish to shift the blame on to LEAs. Sir Jeremy Beecham of the Local Government Association said:
"Local councils are not holding back millions of pounds. Much of these funds are being allocated to a range of educational needs and some are due to be distributed later in the year".
Councils are obliged by government to withhold sufficient funds for the considerable number of initiatives so ordered by the DfES and it does appear that there are just insufficient funds since the assessment which took place earlier this year—an assessment which resulted in enormous sums of money being transferred from southern areas to those in the North, and happily for some Ministers, to the advantage of schools in their constituencies.
I was very amused and indeed delighted to see that the Secretary of State is now actively considering reviving grant-maintained schools. It is reported that he considers it an error to have abolished them. I only wish that he had thought so at the time. It would give some form of comfort to those of us who fought so hard for their retention in the first education Bill that new Labour brought before this House in 1998. Grant-maintained schools were most successful and the initiatives that emerged were exciting and inspirational. Head teachers took opportunities to develop and generate ideas. The 1998 Act deprived them of their independence and so, frustratingly, much was lost when the dead hand of government took over.
I conclude on an optimistic note. It takes courage to change your mind in the way we understand the Secretary of State to be thinking; but what could be better than for all heads to be given the freedom to take their schools forward without all the interference and
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bureaucracy that stems from centralisation? Such action would give huge numbers of people great pleasure and would really benefit future generations of our children.
6.6 p.m.
Baroness Cumberlege: My Lords, I begin by declaring an interest. I chair two panels which recommend the level of county councillors' remuneration. Like other noble Lords, I thank my noble friend Lord Hanningfield for securing this debate, which is not only very interesting but important. After all, children make up 16 per cent of the population but 100 per cent of our future.
There can be few who are more concerned than the noble Baroness, Lady Ashton, who carries huge responsibilities, and the nation's aspirations. It is a perverse parent who does not want his or her child to receive the very best education, and a perverse school that does not want its pupils to succeed. In addition, every government want to provide enough money for every child to optimise his or her potential. But the current position, where schools are distraught, local education authorities betrayed and the Government angry, does nothing to improve the quality of education.
As I understand it, the genesis of the current problem lies in the September 2000 finance Green Paper, Modernising Local Government. This promised reform of the local government finance system was intended to produce a simple "plan based" system as opposed to a formulaic one. But Ministers were overwhelmed by a barrage of opposition from many quarters and dropped the idea of a plan based system. As my noble friend Lord Hanningfield said, the work on the new formula then started late. The policy was delayed and options for consultation were not published until July last year.
The Department of the Deputy Prime Minister was thrown by the delay, allowing the Department for Education and Skills to devise its own grant formula and protection arrangements.
In December, the local government finance proposals were at last published. They were of unprecedented complexity and lacked the background information which would enable local government to work out the implications. Far from producing a system that was simpler, fairer and more transparent—as was promised—they produced a system that was more complicated, unfair and totally opaque. Even the DfES seems to have problems understanding its own system. As John Crase wrote in the Guardian yesterday,
"The reason Miliband cannot put his finger on the missing £500m is because there is no missing £500m. It was a chimera all along".
None of us would dispute that the national amount of money for education is probably just about enough. The problem is that the formula inevitably creates winners and losers at local level. The Government set a floor, or minimum, of 3.2 per cent for every LEA, but that, as I shall explain later, has significant drawbacks.

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The DfES damping arrangements operate on per-pupil funding and are entirely separate from the overall ODPM floors and ceilings which operate in the central government grant. That further complicates the picture in that the two dampened systems are not internally consistent. The problem is made worse by two further technicalities in that some authorities are affected by the results of the census, affecting ODPM damping, but that does not change pupil numbers or DfES damping. Consequently resource equalisation does not affect education's formula spending share but it does distort the distribution of overall grant.
As the right reverend Prelate the Bishop of Chelmsford has said, because of all these interacting factors, winners and losers were produced. Some authorities are rightly complaining that they do not have enough grant to passport the extra money into schools. Responding to that impossible situation of their own making, Ministers have tried to introduce a number of quick fixes. They include an additional London grant of £11 million, but that is not targeted at passporting problems, so it has only helped some of those London boroughs in difficulty. Ministers have realised that because of movements between formula and specific grants—another significant complexity in the system—some education authorities have not had the education floor increase of 3.2 per cent funding per pupil. That is because loss of standards funds were not taken into account in the DfES protection arrangements. In March of this year Ministers, realising that the position was untenable, found another £28 million for 36 local education authorities to correct the problem and ensure that all authorities had the minimum of 3.2 per cent per pupil.
Despite all those attempts to fix the problem many authorities and schools are still rightly complaining. Even if the education protection system is working, which it is not for many local authorities, individual schools may have budget problems for three reasons. First, Learning and Skills Council funding for sixth forms is at about the right level for LEAs but its distribution is very different, creating another set of winners and losers. Secondly, some schools have had more standards funds than others, so loss of these will affect them more. Indeed my own LEA has decided to restore the two Standards Fund Grants in spite of the Government's actions, and that will safeguard some teachers' jobs. As a consequence, we council tax payers have the highest county council increase of any in the country. I do not resent it—much. It shows the courage and commitment of East Sussex to education, but it is a council that has a declared policy of low council taxation. What I do resent is that my council has been forced to set aside its policy in order to bail out the Government's incompetence. As a council tax payer my increase of 19.6 per cent does nothing to improve the quality of education, nothing to develop, innovate or create projects within the curriculum, but is simply to maintain the status quo and to save us from the consequences of an inept government. Thirdly, changes in pupil numbers will always going be a significant problem for some schools. Many, perhaps most primary schools, face falling pupil numbers, so it
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is difficult in those LEAs to protect the budgets of all schools. A loss of 20 pupils could equate with at least one teacher, but since all classes have to be kept, savings are difficult to achieve.
In the light of these problems—serious problems when we consider that a child has only one opportunity for pre-adult education—it is foolish and unhelpful to portray the LEAs as the villains of the piece. Not only does it damage the important partnership between government and local authorities, but because the Government's figures cannot be trusted it reduces the Government's overall credibility. Even when I was a county and a district councillor we were making hard choices but there was a feeling that both national and local government were working towards the common good. Our priorities were just that—our priorities; not a remote bureaucracy that had no understanding or feeling, imposing its will on us, the locally-elected members who were trying to respond to our local electorates.
This year in East Sussex our position is similar to that of Essex, which we have already heard about from my noble friend Lord Hanningfield. East Sussex has received an extra £10 million in its overall grant to cover all county council services. The Government's "passporting" target required an increase in schools' expenditure alone of £12.6 million. I am not very good at maths but even I can see that that is a nonsense. Initially the council was accused of holding on to the money but it seems to me right that a modest (13 per cent should be held as a contingency to cover costs such as places in special schools which arise during the year; salary protections where there are major changes in schools; free school meals; running costs of temporary accommodation installed during the year and so on. A further £1.3 million has yet to be allocated with the full agreement of schools and their governing bodies to cover other contingencies such as support for newly qualified teachers, infant class downsizing and so on. That is a prudent policy which even the Chancellor should applaud. The Minister will know that that is the way LEAs have always worked in that the Government themselves phase their allocations throughout the year.
In conclusion, this is not the first government to recognise the complexity of schools funding but after six years there are no signs of radical change. The cry "education, education, education" was great. We are now inspired. We know the priority. We see the path. We have heard the cry, but all campaigns are won by the quality of the people on the ground doing the work and the logistics involved. Will the Government change tack? Will they trust teachers, encourage, listen and concentrate on those rather boring technicalities that are the Government's responsibility and can be done by them alone? Will they learn the lessons of grant-maintained schools, as my noble friend Lady Seccombe has said, and fund each school directly by a simple, transparent and fair national funding system? Will they support LEAs in their difficult task, recognising that greater autonomy goes hand in hand

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with innovation, creativity and increased quality, and that blaming and shaming does nothing but demoralise and ensure a downward spiral?
On a more positive note, what plans do the Government have to sort out the problem so that next year schools, governors and parents do not endure a repetition of the same shambolic situation?
6.18 p.m.
Baroness Sharp of Guildford: My Lords, I thank the noble Lord, Lord Hanningfield, for introducing this debate so ably and for giving us an opportunity to debate this important issue, which seems to have arisen relatively suddenly, although, as has been pointed out, there have been a number of pointers going in that direction for some while.
The substantial black hole that has opened up in school budgets poses real problems for the Government, LEAs and schools. In this debate, we have heard many of the reasons why that black hole emerged. Those reasons fall into three categories. Of the extra money that the Government allowed for the financial year 2003–04, which I believe was approximately £1,500 million, they did not allow fully for the increase in employers' pension fund contributions, or for the increase in national insurance, or fully for the increase in teachers' pay, or for supplements in the performance-related pay scheme, or fully for the withdrawal of the standards fund.
On top of that, it appears, through discussions with schools, that a number of other issues have arisen. One of them is that, given the recruitment and retention issues that schools have faced, they were anxious to keep rather than to lose staff and there has been what might be called a creep in terms of pay scales. Many staff are now moving on to the upper end of the performance-related pay scales. A problem in that regard is that while 75 per cent of the actual cost, the basic pay cost, is still currently met by the Government—therein lies a problem further down the road—that is not true with regard to national insurance contributions or pension contributions. Schools are therefore having to find larger sums to meet such costs.
Other costs arise, partly as a result of legislation that we passed in this House. For example, many schools must meet costs from the Special Educational Needs and Disability Act for equipment and necessary changes to buildings. They, too, must be funded from the annual budget rather than from special funds.
In my discussions with a local school, another issue that came up was insurance. The cost of insurance at the school rose from £17,000 a year to £28,000 a year; that is an increase of £11,000 in one year, which is a fairly substantial increase. In itself, perhaps it is not so substantial, compared with the school's budget, which is getting on for £1 million. Nevertheless, it is an extra cost that must be met from somewhere and is difficult to cope with. As the noble Baroness, Lady
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Cumberlege, said, there have been changes in funding for sixth forms, which have helped some and hindered others.
On top of all that, at the LEA level, has come the redistribution of funding through the Office of the Deputy Prime Minister. As the noble Lord, Lord Hanningfield, and the noble Baroness, Lady Cumberlege, said, problems of turbulence and uncertainty have arisen. There are clearly some losers and some gainers and, as always, the losers are screaming and the gainers are not. That has posed real problems and it has not solved some of the more fundamental problems that we face in this country. I refer to the sheer opacity of local government funding, the fact that there is no transparency and the fact that the voter cannot understand where accountability lies.
We want to resolve that crisis. The Government have, as many noble Lords have said, pointed at their favourite Aunt Sally, local education authorities. The Harry Potter of the education world, the schools Minister, David Miliband, wrote what many regard as an aggressive and offensive letter to local education authorities making it clear that, in his eyes, the fault lies with them and with no one else.
When reading the detail of the 18-page press release issued by the noble Baroness's department, time and again one comes to the conclusion that LEAs have, on the whole, been doing precisely what they were told. Last year, we passed that splendid Act, in which we made it clear that money must be passported through to schools. So far as I can see, most LEAs have been doing that.
I shall give an example that I know in detail. Like other noble Lords, I went to my local LEA and said, "What has been happening to your budget?". Surrey has one of the bigger budgets—it is one of the bigger LEAs. Its total budget for education is £456 million, of which £409 million was passported straight to the schools, leaving £47 million. Of that £47 million, which has not yet been passed on to schools, the largest item is £21 million for transport. The next largest item is £8 million for youth services, which the Government were keen for local authorities to improve. I for one am delighted about that and would like more money rather than less to be spent on youth services. Another £8 million was put aside for school improvement activities, which, again, is part of the Government's programme. There is £4 million extra for special educational needs support. Yet the Secretary of State criticises local authorities for putting too much on one side for special educational needs support. At the same time, the Audit Commission published a report that said that, by and large, LEAs are not spending enough on special educational needs. One is sometimes left rather perplexed by all of this. Surrey for one is not doing anything wrong; I applaud the fact that it put some extra money on one side for special educational needs support.
As with many other LEAs, Surrey is spending above SSA by £3 million this year—I believe that only 19 out of 148 spent below the SSA. It is doing so despite the

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fact that we, along with many other LEAs in the South, have just undergone a council tax increase of nearly 20 per cent.
The conclusion that has been reached by many noble Lords, and to which I have come, is that LEAs are not in this case to blame. Who then is to blame? Are the schools to blame? No, certainly not. Expectations were built up by the Government of a substantial real terms increase. Now that they have done their sums for next year, the money is just not there. Some schools—perhaps the lucky ones—have reserves. The National Association of Schoolmasters and Union of Women Teachers was very upset about the degree to which schools have built up reserves. Nevertheless, those schools with reserves currently have a buffer against the vagaries of the funding mechanisms that have hit them. They are the lucky ones. The problem that arises is that many schools must conclude with deficit budgets unless something is done by 31st May, when all of these matters must be decided. There is a real problem that must be solved.
The conclusion that one comes to is that, like it or not, the DIES and the Office of the Deputy Prime Minister together got their sums wrong. There is a serious problem. That suggests that the DfES does not understand the full complexities of local government finance; but very few people do.
We should look forward and recognise that this issue can and may well arise again in subsequent years. The new workload agreement will appear later this year. There is just not enough money in the system to fund it; the Government want to carry it forward. Coming down the line is the question of the full funding of performance-related pay. Once again, that must involve a major transfer of funds from central government to local authorities and on to schools. There are real problems in that regard.
What can be done about this? The DIES got its sums wrong and schools, through no fault of their own, are running substantial deficits and must lay off staff unless some rapid relief can be found. In the short run, I have three ideas for some rapid relief that the DIES might find. In agriculture there is such a thing as red diesel. The noble Baroness, Lady Byford, knows all about it. One of the largest items that is not on the schools budget in Surrey is transport costs. That is also true of other authorities. Currently, much of those transport costs are the costs of duty paid to the Government, which are taken from LEAs. The Government may refund those duties to the LEAs or pray that in aid. One of the reasons for having school transport is to stop children being taken to school in private cars. We are anxious that children use public transport. One may call it green diesel instead of red diesel.
The school teachers superannuation scheme is a pay-as-you-go scheme and not a funded scheme, despite the fact that increased contributions have been called for. It is perfectly feasible for the Government to say that for this year those extra employers' contributions need not be paid. Why not consider that as a way of relieving the budgets of local authorities in
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the short term? If there are to be retirements, perhaps it would be wise for the Government to reopen the national early retirement scheme.
The noble Baroness, Lady Cumberlege, mentioned that primary school rolls are falling and in the next few years that will roll on to secondary schools. Perhaps we shall have to consider early retirement and a nationally funded scheme rather than one that has to be met by local authorities. That is another idea that perhaps could be considered.
In the long run it seems to me that something more serious needs to be done. We on these Benches do not follow the route of the noble Baronesses, Lady Warnock and Lady Seccombe. We do not believe that the right route is grant maintained schools or direct grant schools. We believe in a system of education and we believe that there need to be links between primary and secondary schools. Also secondary schools need to work together. Therefore, we believe that local education authorities should co-ordinate at the local level. It is absurd to think that the Government could run the 25,000 schools in this country. I recall a previous Secretary of State for Education saying that if there were no local education authorities they would have to be invented.
Local education authorities in this country have a proud tradition of running schools and running them well. We need to reinforce those local education authorities. Indeed we need to reinforce the whole of local government, to devolve responsibilities down and to have a taxation system whereby what is raised locally funds local services so that people can see clearly that the one is linked to the other, rather than a system whereby the Treasury dictates who may spend what. There is such opacity that people vote in local government elections protesting about a council tax which has largely been imposed by central government and which has nothing to do with local services whatever.
We on these Benches would like to restore the power of local education authorities rather than to take power further away from them. We want a funding system that is transparent, clear and gives the taxpayers some idea of the services that are provided for them.
6.33 p.m.
Baroness Blatch: My Lords, this is an important debate. I am grateful to my noble friend Lord Hanningfield for initiating it. An important theme has come through all the contributions. My noble friend Lord Hanningfield gave some fairly impressive statistics from his own authority, Essex, but such a story could be repeated by many authorities all over the country.
There is no doubt that there is a crisis, not only in the funding system, but also in the trust that people place in the Government and particularly in the Ministers of the department. The insensitivity of Ministers to the level of frustration, even anger, over the handling of this year's settlement is palpable. I do not want noble Lords to take my word for it because

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the Minister opposite will say, "You would say that, wouldn't you?". The Prime Minister himself, unlike the departmental Ministers, has to be fair, accepting that there are problems for particular schools in particular local education authority areas.
Fiona Millar, the partner of the Prime Minister's aide, Alastair Campbell, and a very New Labour lady, spoke out bravely as chairman of school governors in support of Gospel Oak Primary School. In her letter to parents—I quote a different part of that letter—she wrote:
"The Government has changed the way it allocates block grants to councils and has moved money from the South East to the North. We believe the Government has not thought through the implications of all changes for some of the neediest schools. We will have to cut our spending on resources drastically".
A recent Select Committee report dated 17th December 2002. commenting on the development work for the new funding formula, reads:
"The result is that many of the new formulae do not appear to be evidence-based and can be criticised for being insufficiently robust and more open to judgment than was previously the case".
The report describes the system as "confusing".
At the Secondary Heads Conference, John Dunford told the Secretary of State that schools across the country were stunned by budget allocations that left many schools with large deficits. A head teacher, Michael Chapman, speaking for heads in East Yorkshire, told the conference:
"In the last 12 years, this is far and away the worst budget settlement that I have had to manage as a head teacher".
On 4th April The Times quoted David Hart of the NAHT as saying:
"We are facing the ultimate absurdity of being required to recruit extra teachers and support staff to deliver the changes to teachers contracts, while at the same time schools are talking about redundancies. We are parties to this agreement but we have come to the conclusion that if the Government can't deliver on the funding that it promised, then we are entitled to say we can't agree to these changes".
I could go on quoting teachers, governors, parents, teacher unions and others, but I shall cite only one more criticism of this year's settlement, that of the department itself. In a leaked memo, sent between the Department for Education and Skills and No. 10 Downing Street, the scope of the Government's deception and incompetence has been revealed.
As an aside I hope that Ministers, who have to date accused local government, will not now turn their fire on to officials. Whatever the role of officials in all this may be, Ministers are responsible for the decisions that they make in their department and they are also responsible for the public relations that accompany those decisions.
The leaked memo seen by the Times Educational Supplement shows that the record investment in education promised by the Chancellor last year is no more than a mirage. The memo also shows for the first time that Ministers accept that councils are not solely to blame. Even if all the additional money intended were passed to schools, rises in teachers' pay, national insurance and pension costs, among many other
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pressures, mean that they would receive an average increase of just £26 per pupil this year. That represents barely 1 per cent, which contrasts sharply with a promise made by Ministers of an increase after inflation of 3.2 per cent at least for each local education authority. However, as reported by the Times Educational Supplement from the leaked memo, the 3.2 per cent floor is a little less than schools would need to meet all the pressures that they face.
Mr Miliband and the Secretary of State are guilty of building up expectations; they are guilty of spinning this settlement announcement into a gross distortion; they are guilty of pointing the finger of blame at local education authorities and schools; and they are guilty of dashing the hopes of so many in our schools by wilful deception. Consider the behaviour of a Secretary of State for Education, who says, when addressing the Association of Chief Education Officers—this has been quoted before in the debate—that directing more money towards schools would not solve their problems and that any such request,
"just floods straight over my head".
He added:
"I do not listen to what you say quite frankly".
I can do no better than to quote the leader in the Times Educational Supplement of 2nd May, which stated:
"Even by the Department for Education and Skills's own account, the way the Government has managed to turn supposedly record rises in school funding into a shambolic crisis is astonishing. Ministers' attempts to shift the blame to local authorities are somewhat undermined by the memo the department sent to 10 Downing Street. This shows that the much vaunted £2.7 billion increase is largely illusory".
Such an admission of culpability by the department, albeit in private, will come as little comfort to those staff in our schools who will lose their jobs or to the pupils who will face larger class sizes or even a shorter school week.
Certainly the Secretary of State and Mr Miliband have been in denial over this issue during endless public appearances, placing the blame on virtually anyone passing Sanctuary Buildings. Their performances compared well with the Iraqi information Minister for misinformation; except that they were not as enjoyable.
The letter to heads from schools' Minister, David Miliband, late last year guaranteeing an across-the-board rise in funding raised expectations that were unlikely ever fully to be met. Misunderstandings could have been avoided if Mr Miliband had taken more care with the drafting of that correspondence. The letter ignored two basic issues: first, that increases in the education formula spending share do not necessarily translate into increases in council grant; secondly, that a major part of many schools' overall funding—namely, the Standards Fund—was being cut. The new formula devised by the Government for funding local authorities effectively redistributed funds around the country—mainly from the south of England to the north.

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The overall reduction in the Standards Fund impacts especially severely on councils funded on or near the floor, because they receive no compensating increase in general council grant—a point made extremely well by my noble friend Lady Cumberlege. The lumpy nature of Standards Fund applications and the implications for schools as Standards Fund categories come and go is not a new phenomenon but, when combined with other financial pressures, it means that some schools will experience levels of financial hardship well beyond the norm.
Although the department deleted several Standards Fund grants in 2003–04, the burdens placed on schools previously receiving those grants remain. Although new Standards Fund initiatives have been introduced, schools are not always eligible for, for example, Excellence In Cities grants.
Secondly, as I said, the fact that an increase in the EFSS is not necessarily translated into a corresponding increase in council grant does not appear to have been understood by the Government; neither does the effect of changes in grant distribution. Some councils are even being told to pass extra funds to schools greater than the total increase given to the council for all services—a point made by my noble friend Lord Hanningfield. From what I have heard about meetings with the schools Minister, Mr Miliband, to discuss school funding with local authorities, his lack of technical understanding of how the funding system works did not exactly generate confidence and served only to highlight the level of incompetence displayed by Ministers.
To turn to another aspect of budgeting, many councils are obliged to pay teachers at inner London rates, yet feel that that is not fully reflected in their revenue support grant. Also, the flat rate nature of the school standards grant is recognised to discriminate against London and parts of the South East because of the higher costs in London and the surrounding counties, so increasing the proportion of funding by that means helps only to exacerbate the problem.
As many people have said, the cost pressures on schools have not been fully met. There is a shortfall in employers' superannuation contributions of £50 million; we know that national insurance contributions are £115 million. The teachers' pay increase of 2.9 per cent, which, when aggregated, is in fact 3.25 per cent, taking into account the London area, totals £548 million. There are other inflationary issues, including non-pay cost increases and support staff pay. The withdrawal of the Standards Fund is of course part of the equation.
There is also the cost of integrating the changes to teachers' contracts and additional costs resulting from the recent special educational needs Act. The Autistic Society, whose Autism Awareness Week is next week, states in its most recent press release:
"the present funding crisis facing UK schools is causing serious concern".
Rather than accept and acknowledge the inherent weaknesses in the system, together with the impact of those financial burdens, the Government decided to
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blame local education authorities for the crisis, alleging that they had somehow conspired to withhold £500 million from schools, in a cynical piece of political buck-passing. The Minister may deny that, because such a denial is true of her personally, but her colleagues in another place are on record as having blamed local authorities, so they cannot be defended. Not only were certain LEAs named and shamed, but the Secretary of State for Education, no doubt wanting to live up to his "bruiser" image, made a thinly veiled threat that local authorities would be removed from the education system altogether.
Ministers' role in the process has been central. They really must accept more responsibility. As requested, local authorities have told the Government that they will be spending £100 million above the Government's provision for schools. The Secretary of State insisted on approving every council's schools budget before it was allowed to set its council tax.
I shall use Wandsworth as an example. Wandsworth has been accused of holding back £4.1 million. That breaks down into £3.5 million from the Standards Fund and £600,000 for newly-qualified teachers and special educational needs. Rightly, it says that the key issue is that the academic and financial years do not coincide. That has two major implications for funding of schools. Some funding, notably some Standards Fund grant, is allocated on the basis of the academic year. Standards funding is allocated on the basis of a school's needs on an academic-year-by-academic-year basis, as it always has been.
It is misleading in the extreme to say that Wandsworth is holding back the 7/12ths of the financial year 2003–04 funding that corresponds to the 2003–04 academic year—September to April 2004—because it will not know where it should be allocated until the new school circumstances are known in September. What is it supposed to do? Schools are used to that. If the Secretary of State wants Wandsworth, or any other LEA, to allocate everything on 1st April, it can of course do that, but the effect will be to freeze the allocation on the basis of the needs of academic year 2002–03, rather than on the basis of the needs of the academic year 2003–04.
There is £600,000 that has been held back for support to newly-qualified teachers and special educational needs—the former because education authorities do not know until later on in the year which schools will be appointing newly-qualified teachers; the latter to fund youngsters who receive statements during the course of the year. Of course, again, the authorities could allocate the money to schools now—perhaps on a guesswork basis as to where the statements may arise—but how would they provide the extra help needed for youngsters statemented later in the year?
Similarly, in Wandsworth, 5/12ths of the ethnic minority achievement grant is also allocated now; the rest in September. As the noble Baroness knows, the issue of special educational needs is important. Wandsworth says that this year it has increased provision for SEN by 18 per cent, although the inner

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London average is higher than that, so it now needs a clear steer from the Secretary of State—does he really want Wandsworth to cut funding for special educational needs to delegate more money to mainstream schools?
This is certainly a crisis made in Whitehall, not in the town hall. The reality is redundancies, resignations and a real possibility that the teachers' workload agreement will not be realised. Indeed, the National Association of Head Teachers has rightly expressed concern about the Government's boast about the generosity of a settlement for the coming two financial years. The Government themselves have accounted for almost all of this year's increase—in national insurance contributions, pensions, pay awards, and incremental pay. But they have not included—and almost totally disregarded—class size reforms, the implementation of the workload agreement, special educational needs reforms and the effects of two major changes to the way in which schools are funded.
I return to the Times Educational Supplement leader of 2nd May, which referred to the changes. It states:
"The DIES is not responsible for all of this. But it apparently went along with—
the Office of the Deputy Prime Minister—
"without bothering to investigate the effects at school level. Only now has it woken up to the realisation that there is worse to come. Next year the fuller costs of the workload agreement begin to bite. But the department now says even more money will have to be found just to stand still and avoid 'large numbers of losers'.
None of this can have enhanced the Treasury's confidence in the DfES. The truculence of Charles Clarke when first confronted by complaints about funding probably stemmed from the ignorance and complacency displayed by his department. This incompetence even outstripped that shown at the DIES last year over A-level reforms. At this rate, David Miliband, implicated in both of these blunders and responsible for the workload agreement, will need more than friends at Number 10 if he hopes to survive in office".
The funding increases for education, for which schools are exhorted to be grateful, have been soaked up by the Government's own actions and policies. Billions are held back every year by the department. Record numbers of centrally controlled initiatives are spawned, many to no benefit, and largely at the expense of core funding for schools. New burdens such as Learning and Skills Councils, admissions forums and schools forums all pre-empt monies that could be spent more wisely at local level. Time prevents me from completing a sorry catalogue of fund-wasting projects. We are within the time allocated for this debate. I have no doubt whatever that the Minister will also use the time wisely.
The important message is not the quantum of funding, as pointed out by the noble Lord, Lord—
Lord Graham of Edmonton: Graham.
Baroness Blatch: My Lords, I was going to call him Lord Ted. The noble Lord, Lord Graham of Edmonton, is in his place. The important message is that central funding and centrally controlled funding should form a greater proportion of schools' core
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funding. Convert the burgeoning of national bureaucracy into funds for schools. Abolish the command-and-control system. I can say categorically at this Dispatch Box that we have no plans as a party to reduce expenditure by 20 per cent. But we believe that there is enormous scope within the system to convert money spent on bureaucracy and unnecessary projects to put into front-line services. That is where our energies will be spent.
The Government promised simplicity, transparency and fairness. They have failed on all counts. The level of anger and frustration in our schools shown by staff, parents and governors is considerable. Teachers feel betrayed. Greater honesty, a little humility and even an apology would not go amiss.
6.52 p.m.
Lord Graham of Edmonton: Go on, sock it to them!
The Parliamentary Under-Secretary of State, Department for Education and Skills (Baroness Ashton of Upholland): My Lords, I am grateful to my noble friend "Lord Ted" for his comment. I thank the noble Lord, Lord Hanningfield, for securing the debate. I am very aware of the strength of feeling about the issue that has arisen since we announced the settlement for 2003–04. I accept, as the noble Baroness, Lady Blatch, would expect me to, that there are problems in schools and that we need to look for ways to resolve them. I understand the particular interest of the noble Lord, Lord Hanningfield, in his role as leader of Essex County Council. I recognise how the arrangements are affecting schools in Essex.
I am grateful to the noble Lord, Lord Henley, for offering me a change of role. Perhaps I can look forward to debating foundation hospitals with noble Lords. But I can assure him of my sanity, or at least I hope I can. It is always a delight when the noble Baroness, Lady Byford, participates in debates. The noble Baroness is eminently qualified to participate, as are all noble Lords, in this important discussion.
As noble Lords have said, it is a year of change for the schools funding system. I say to the noble Baroness, Lady Cumberlege, that it has been a year of radical change. The local government funding formula has changed. There have been significant changes in the balance between central and local discretion. There has been an end to some ring-fencing of central grants by central government. We are not micromanaging, as the noble Lord, Lord Hanningfield, said, but looking to develop that relationship. Many local authorities and schools have criticised ring-fencing for a long time. There have been changes to the distribution of the money.
There has been a significant drive by the Government to encourage three-year budgets for schools of the type that the noble Baroness, Lady Byford, mentioned, in the context of schools which, I recognise, have fluctuating pupil numbers and related issues to deal with. I agree with all noble Lords that, as schools begin to plan, it is important for their confidence and planning that they have as much notice

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as possible of the three-year horizon. That view is widely shared in your Lordships' House and, perhaps even more importantly, in schools and education authorities.
In response to the noble Baronesses, Lady Warnock and Lady Seccombe, my right honourable friend does not propose a return to grant-maintained schools. Eminent though our press reports can be—I can perhaps speak with some authority on the subject—not all journalists get everything right all the time.
In response to the noble Lord, Lord Henley, the important issue is performance in schools and delivery. Noble Lords have heard me speak often on the quality of education that we have. I agree with the noble Lord that it is very important that we see the results of our expenditure. I believe that the rise in standards in primary and secondary education are a testimony to that. I know that noble Lords will want to join me in supporting what the noble Baroness, Lady Byford, said about the absolute importance and value that we must all place on our teaching profession. In response to the noble Baroness, Lady Cumberlege, I do trust teachers. They almost perform miracles every day on behalf of our children.
I wish to try to shed some light on some of the issues raised. I apologise now if any noble Lord feels that I have not done that as adequately as I might in the time I have. I give my usual assurance that I shall write to any noble Lord who feels that I have not adequately answered any point. I am very conscious, given the knowledge and experience around the House, that many noble Lords have had long experience of funding issues both in local and central government. I listened with great interest to the noble Baroness, Lady Cumberlege, who gave an exposition of the history of the issues surrounding local government finance, and to many noble Lords, not least the noble Lord, Lord Hanningfield, who has personal experience of dealing with the issue at local authority level. I pay tribute to all that experience. I am humble in the remarks that I make in your Lordships' House.
It is universally accepted that there has been an increase in revenue funding for schools. All the teacher conferences recognise that we were talking about an increase of the order of £2.6 billion. In that context, there is no mirage. We agree that that has happened. It is an increase of 11.6 per cent, which is £250 million more than the pressures that we calculated from pay, pensions, national insurance and the ending of grants. We calculate that nationally those pressures represent an increase in costs of 10.5 per cent.
I could describe those figures in many different ways. I shall give one other example to try to convey the information as simply as I can. The education formula spending share for 2003–04 has increased by 6.5 per cent, or 5.2 per cent per pupil. Noble Lords will know that there are different ways of looking at the figures. That is sometimes one of the difficulties. Those figures are in addition to compensation of £586 million for the hulk of the pension contribution increase and £500 million of grant funding transferred into general funding in 2003–04. The school standards direct grant
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is increasing by almost £150 million in 2003–04. I wish to make clear to the noble Baroness, Lady Blatch, that we did not promise an increase after inflation of 3.2 per cent. We promised an increase in cash of 3.2 per cent after taking account of the transfer of funds to pensions and for specific grants. I hope that teat has clarified the position.
As noble Lords indicated, we have listened to representations from education authorities and schools. We recognise that the combination of a low increase in education formula spending share, coupled with a reduction in the grants through the Standards Fund, would lead to low budget increases for some schools. For that reason, we announced an additional grant of £28 million to ensure that the effective increase in education funding for all education authorities and their schools between 2002–03 and 2003–04 is no less than 3.2 per cent. The noble Lord, Lord Hanningfield, said that in Essex the figures were 3.02 per cent, I think, supplemented by £1,162,000 to bring the total to 3.2 per cent.
Taking those factors into account, 36 local education authorities received a share of that additional money. They are now at the level of 3.2 per cent per pupil for every local education authority. We have set as a condition to the allocation of the money that it must be passed on in full to schools. But it is for each local education authority to use its judgment and local knowledge to decide how much funding individual schools should receive.
The majority of education authorities have received more than the 3.2 per cent minimum increase. But I recognise what noble Lords have been saying about the issues for authorities who feel that the increases need to be considered in the context of what is happening in individual schools. I shall discuss that matter further in a moment.
I think that the noble Baroness, Lady Cumberlege, implied that the London costs did not include authorities that were on the floor because of the ODPM grant floor, as opposed to the DIES grant floor of 3.2 per cent. I checked with officials, and I can say that we have added those authorities to the list of those who received the £11 million.
Baroness Blatch: My Lords, we must be certain about this. It is important that the figure of 3.2 per cent is properly understood. If schools have lost substantial sums of standards grant and are given an increase of 3.2 per cent on what they had last year, will that be a 3.2 per cent cash increase on top of what would have been their budget last time, including standards grant, or does the standards grant, in many cases, invalidate the 3.2 per cent?
Baroness Ashton of Upholland: My Lords, I shall try to explain by going through the figures one more time for the noble Baroness and others. I hope that that will help.
We took the pensions, the class size grant and the nursery education grant. The total was £986 million. That was paid out before we sorted out the floors and

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ceilings, which, as noble Lords are aware, are between 3.2 and 7 per cent. Because of the £400 million changes in the other grant—I think that that was the point that the noble Baroness was making—what happened in some areas was that schools that had received more money in direct grants received less. That was where the £28 million came in. As a consequence, some local authorities slipped below the 3.2 per cent level. The £28 million was the amount required to bring everybody back to the 3.2 per cent level in the light of the way in which the allocation of the grants had affected funding. I hope that that clarifies the situation for the noble Baroness.
Noble Lords rightly raised the issue of special educational needs. I want to make a couple of points about that. To the noble Baroness, Lady Sharp of Guildford, I say that the schools access initiative is partly a contribution towards making sure that schools can manage the changes that have resulted from legislation. There is no criticism from my right honourable friend the Secretary of State. We can see how important it is, as the noble Baroness, Lady Blatch, said, to support those of our children who have special educational needs. I am also aware that next week is autism awareness week. I spoke to the All-Party Group on Autism yesterday and made the point that we will recognise the needs in the work that I will do as Minister responsible for special educational needs in the coming months.
When considering funding, we must ensure that we are clear about what funding is retained at the centre—rightly, I hasten to add—to ensure that children can be funded at special schools or that funding is available for low incidence special educational needs and so on, as well as funding that will, perhaps, go into schools but of which schools are not yet aware. That is an important element of the thinking that is going on.
Noble Lords will not be surprised to hear that I shall not dwell too much on the question of funding in Essex per se, although I have information for the noble Lord, Lord Hanningfield. The noble Lord covered many of the issues, but I want him to be aware that I have considered the matter carefully. In that context, I say to the right reverend Prelate the Bishop of Chelmsford that I was delighted to hear of the partnership between the Church of England and Essex County Council. I am sure that noble Lords will agree with me that Chelmsford will miss the right reverend Prelate's contribution. I gather that this is his final week of duty in your Lordships' House. We can all agree that we shall be the poorer when he goes.
Noble Lords: Hear, hear.
Baroness Ashton of Upholland: My Lords, the noble Baroness, Lady Byford, mentioned capital. Capital has increased, since 1996–97, from £700 million to £3.8 billion this year. By 2005–06, it will be £5 billion. That is important. Noble Lords will know from their experience how necessary it is to ensure that our buildings are fit for purpose in a developing and changing world. I am proud that we have invested so much in capital expenditure and continue to do so.
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The noble Baroness raised specific issues about hygiene orders and fire risks. I apologise for not being able to answer those questions now, but I agree with her about the critical importance of the role of governors and the need to ensure that we have as many governors as possible. I ask any noble Lord here present who is not a governor to become one promptly. I shall write to the noble Baroness on the specific issues that she raised.
I share the noble Baroness's commitment to ICT in schools. I have a passion for broadband, and I recognise its value and importance, particularly to rural communities. On behalf of the department, I can say that we fully understand that we have an ongoing commitment that must be sustained. I am sure that noble Lords opposite will agree. We must ensure that that commitment to ICT in schools and to broadband continues.
The noble Lord, Lord Henley, raised the question of supply teachers. I struggled to get the figures for this year, but the latest figures that I have show that supply teacher numbers are falling, partly, as noble Lords will be aware from my comments last week, because teacher numbers are rising.
The noble Baroness, Lady Sharp of Guildford, and the noble Lord, Lord Henley, talked about performance-related pay and the commitment to the threshold. We must be clear about what the Government are doing in that area. We continue to fund 100 per cent of the cost of teachers passing through the threshold. We continue to fund those who have already gone through the threshold. We have said that we have a pot of money—£210 million this year—that is available for teachers who will go through the threshold and go onwards and upwards through the spine. We anticipate that, as with any other performance-related pay, schools will make decisions and will, this year, reward teachers who, they feel, need to continue on that way. We do not anticipate that that will be 100 per cent of teachers. I mean no criticism of teachers: that is simply a recognition of the way in which performance-related pay works and the way in which we approached it. I hope that that answers that question.
I want to spend a few minutes—I hope that I am using time wisely, as the noble Baroness, Lady Blatch, put it—talking about the critical issue of the role of local government. The noble Baroness, Lady Blatch, said that she felt that there had been overt criticism of local government. That is not how I interpret what we have tried to do. It is not about criticising local government; it is about recognising that there is a partnership between central and local government aimed at ensuring that we have adequate funding in schools. To the noble Lord, Lord Henley, I say that it is the Section 52 statements that tell us about the situation in schools—the list was published on Friday—and not press reports, however eminent.

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I accept that, in many cases, there are good reasons for the way in which local authorities handle their expenditure. We do not say that there are not good reasons for some of the ways in which money is held back by local authorities.
Lord Hanningfield: My Lords, the Minister used the words "held back". I repeat what I said earlier: we get the money in monthly instalments over the year, and we agree with our head teachers a formula for distributing it over the year. It is particularly offensive to say that we were holding back £20 million. We have not got the £20 million, and we have agreed with our head teachers how it will go to them. It was a big mistake to publish that last week. I am sure that it is the same in Birmingham, Kent or any other authority that does it: we agree a formula with our head teachers, and the money comes to us monthly.
The use of the words "held back", when we have agreed a process, has misled the public. Many people have asked me, "What are you doing with that money?". We have not got it. Will the Minister comment on that and, perhaps, correct it?
Baroness Ashton of Upholland: My Lords, if I have offended the noble Lord, I apologise unreservedly. I meant that, when we got the Section 52 returns, it was interesting to see that, in the local authority structure, there was quite a variation in different parts of the expenditure and in the amount of money within the local authority. I meant no offence to the noble Lord, and I apologise if there was any.
For the noble Lord's benefit, I shall go through some of the interesting things that we found. I say that they are "interesting", not that they are wrong. That is important. Our purpose is to understand the issues so that, working with local authority partners, we can resolve them. Nineteen local education authorities appear not to be passporting the full increase in their schools formula funding share into their schools budget. Eight of those said that they would. That means that £23 million that we understood would go into schools has not yet done so.
Most local education authorities—125—are increasing funding for their centrally funded pupil provision faster than they increase the funding for individual schools. In total, schools are getting £235 million less than a proportionate share of the increased resources.
There are big variations in the increases that local education authorities are making in their central funding for special educational needs. Forty-five education authorities have increased funding in this area by more than 30 per cent while 33 LEAs have increased their spending by only 5 per cent or less. These increases may be justified by local circumstances but will have an impact on schools' budgets, and we need to understand that.
Half of local authorities have increased their spending on educating pupils outside school—for example, at pupil referral units—by 30 per cent or more. Again, that has an impact. I do not criticise it, I
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simply say that it has an impact. Forty per cent of authorities are planning to spend more than £1 million from revenue budgets on capital spending at a time as I have explained to your Lordships' House already—when there is increasing funding from central government, and it continues to rise.
Over two-thirds of LEAs are holding hack more than £100,000 for contingency purposes. This amounts to approximately £64 million across the country. Again, it is important that we understand what is happening. A total of £533 million which LEAs have specifically earmarked for individual school budgets had not been allocated at the point that we received their statutory statements. Again, we need to understand that.
Finally, within many LEAs there are big budget differences in what is happening for individual schools. This means that in some education authorities schools are getting funding increases of 10 percentage points more than other schools in the same authority.
Against that backdrop, the Government think that it is legitimate for the department to be asking LEAs questions about their spending decisions which reflect what I said within the eight issues I set out. We want to work with education authorities and asked them to point to the steps that they intend to take to avoid any needless redundancies of staff to cover funding issues. We expect replies by 12th May.
In the light of that information, the Government will consider what changes might be made regarding funding arrangements for 2004–05. It is essential that we get a full understanding with LEAs about the decisions they have made and the impact those decisions have had on schools. Then we can look for a way forward, taking full account—I repeat, full account—of the views of education authorities and schools.
I am very grateful for all the analyses that I shall take away from this debate. I recognise that I shall run over on time, but I should like to refer to two or three points on the Standards Fund raised by noble Lords. The purpose of what we have done with the Standards Fund is to increase the control that schools and local authorities have had over how they manage their budgets.
The noble Lord, Lord Hanningfield, raised specifically the matter of the £7 million for the ICT Standard Fund and I should like to speak to this point. I believe that we have already said, but I want to place it on record with the noble Lord, Lord Hanningfield, and other noble Lords, that we shall work with education authorities to help them get all the money allocated. If that requires changes to the rules of the Standards Fund we are very willing to look at that. I shall take away the particular point raised by the noble Lord, Lord Hanningfield, about ICT and I shall ask the department to look at it at once. I hope that the noble Lord will take some comfort from that.
I do not believe that we have had a rushed change; we have had a very significant change to a number of the ways in which we produce the formula. Noble Lords will know that the formula is designed to bring

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a fairer system of funding; to recognise the need to provide funding for every pupil in this country regardless of where they are; and to take into account the issues that confront our children who are greatly disadvantaged in our areas where, for example, transport costs are very high and to ensure that we have dealt with those issues.
I say to the noble Baroness, Lady Byford, that the reason why Tower Hamlets receives more funding than Leicestershire is that when we looked at the additional costs of funding for some of our most deprived pupils we recognised that we needed to put more money into Tower Hamlets where we have many deprived pupils but also, within the fairer funding formula, to recognise the needs of all local authorities.
Baroness Byford: My Lords, I am grateful to the Minister for that comment. I no longer have my figures, but my query was that obviously it is a substantial figure. I was trying to question more acutely the reason why there was such a difference in funding. As I explained, in the two schools which I gave as examples, I suspect that the inner school in Leicester has as many if not more problems than the school in Tower Hamlets. Obviously, that is why I raised the issue; it was a significant difference.
Baroness Ashton of Upholland: My Lords, I am grateful to the noble Baroness for that clarification. Of course, within the overall education authority the issue of how many pupils are in need of additional support will be the factor. Perhaps the noble Baroness will agree with me that in a sense we are not comparing like with like in quite the same way. That is why it has been important to have the formula for ensuring that the basic amount payable for all pupils is the same and to then recognise areas of great deprivation; to recognise areas where costs are very high—which has been the other side of that equation—and to ensure we understand that; and, as I have said before and other noble Lords have raised, to look at issues of transport.
If the noble Baroness, Lady Byford, would like more information, I shall send her a fuller reply. Essentially, that is what we were trying to do by using more up to date information, recognising that the information, which I think is from 1991, is out of date in terms of where our children are and the needs and support they require.
As I said to the noble Baronesses, Lady Byford and Lady Sharp. I recognise the issues of transport and those are built in. I shall pass on the idea of the red diesel. Of course, as noble Lords would expect me to say, from these Benches I am delighted that it is red.
Therefore, within the context of a funding formula designed to deliver for every pupil a similar amount of money and to look at the issues that face education authorities in terms of deprivation, high costs and transport, I believe that this funding formula is a significant contribution and a much better formula than that we had before. I recognise the problems within the schools. We are committed to working with our partners in local government to resolve that, not
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only for this year, but to look at the issues for future years in the context of budgets that can be for three years ahead.
I am also very conscious of the role of school forums. I dug out some of the debates we had in your Lordships' House about the value or otherwise of these bodies. As we have said to a great number of schools all over the country, I urge that school forums are used exactly as we wanted them to be. The noble Lord, Lord Hanningfield, said—I am sure that he is right—that school forums are the opportunity for transparency which is critical in all local education authorities. I believe that that is an important contribution.
This Government are committed to education, education, education. We are committed to rising investment in schools; that will remain a priority. The noble Baroness, Lady Cumberlege, put it very well: children are 100 per cent of our future.
Baroness Cumberlege: My Lords, just before the noble Baroness sits down, perhaps I may ask whether this is the formula that will be used for next year's allocations or is she telling us that during the coming year it will be refined and changed so that we do not have the same shambolic situation we have at the moment?
Baroness Ashton of Upholland: My Lords, what I am saying is that my right honourable friend is extremely keen to work with his partners in local government and to look at precisely what is happening. Part of that is understanding why we have the variations that we do. As I said, there are significant variations between schools which are of great interest. He is committed to looking at the implications of that and, in particular—as I said to the noble Lord, Lord Hanningfield—at the Standards Fund issues, and at anything which might be done. I cannot commit him to saying that that means he will change the formula or anything of that nature, merely that he wants to ensure that as we move into this formula these concerns have been addressed.
7.17 p.m.
Lord Hanningfield: My Lords, I thank the Minister for that very comprehensive and courteous reply. It has been a debate with a lot of questions and I am sure that we shall have a great many more debates about education funding during the coming months. I was pleased to hear the Minister say that the Secretary of State wants to work with the departments in local government.
We shall certainly return to this issue but I should like to thank all noble Lords who participated in this debate, particularly the right reverend Prelate the Bishop of Chelmsford who is making his last appearance in the House of Lords. I thank all participants. I beg leave to withdraw the Motion for Papers.
Motion for Papers, by leave, withdrawn.

Regulatory Reform (Sugar Beet Research and Education) Order 2003
7.20 p.m.
The Parliamentary Under-Secretary of State, Department of Environment, Food and Rural Affairs (Lord Whitty)The Parliamentary Under-Secretary of State, Department of Environment, Food and Rural Affairs (Lord Whitty) rose to move, That the draft regulatory reform order laid before the House on 17th March be approved [17th Report from the Regulatory Reform Committee].
The noble Lord said: My Lords, probably the most remarkable thing about this order is that it is the first from the Department for Environment, Food and Rural Affairs to be brought forward under the Regulatory Reform Act 2001.
The order will repeal Section 68 of the Food Act 1984 and ends government involvement in research and education in the sugar beet sector. The industry welcomes this measure, which will give it complete control over its research and education programme.
In December 1998, following a consultation exercise, the Government announced that they would begin a phased withdrawal from sugar beet research and education and that the NFU, which represents all beet growers, and British Sugar would set up new industry-run research and education arrangements. The legal requirement placed on the Minister to draw up an annual research and education programme would remain until Section 68 could be repealed. The phased withdrawal has gone smoothly and only the repeal of Section 68 itself now remains.
Because the proposal to repeal Section 68 was drawn up prior to the introduction of the procedure for regulatory reform orders, it was not framed as a regulatory reform order and, as a consequence, the consultation process adopted by DEFRA does not reflect exactly the Cabinet Office guidelines. Nevertheless, the department has demonstrated to the satisfaction of both the Select Committee on Delegated Powers and Regulatory Reform and the corresponding committee in another place that the consultation exercise carried out in 1998 fully satisfied the requirements of the 2001 Act.
The Delegated Powers and Regulatory Reform Committee concluded that the proposal to repeal Section 68 of the Food Act was an appropriate use of the powers under the Regulatory Reform Act and would have the effect of reducing a burden on the sugar beet industry. I thank the members of that committee for the time they spent scrutinising the proposal and for recommending it to the House.
The committee in another place also considered that the proposal would remove a legal burden—it is a small one, but it is significant for members of the sugar beet industry—and would not create or impose any new burdens. The order was unanimously approved in another place. I commend the order to the House.
Moved, That the draft regulatory reform order laid before the House on 17th March be approved [17th Report from the Regulatory Reform Committee].—(Lord Whitty.)
Baroness Byford: My Lords, I thank the Minister for presenting this order to the House. As he explained, in future the sugar beet industry will carry out its own education and research functions. I understand that no representations were made to DEFRA during the period set out in Section 7 of the 2001 Act. Therefore, we obviously support the order.
In paragraph 10 of its 13th report the House of Commons Regulatory Reform Committee concluded:
"While we consider that the Department is correct to conclude that the proposals would remove a burden, we do not support the analysis used by the Department in reaching its conclusions".
I was slightly surprised by that comment. Can the Minister explain, first, whether his department has reflected on it? Secondly, what method of analysis was used and objected to? Lastly, was the acceptability of the method adopted queried by anyone in advance of its use? At present we can judge the position only in regard to the report itself. If the Minister is unable to respond tonight, I should be grateful if he would write to me.
Paragraph 11 explains the department's thinking, saying that two burdens on the industry will be removed. Paragraph 12 disputes that there is a double burden, while paragraph 13 makes it plain that the committee does not support either of the department's arguments in this regard. While we support the order before us, certain comments were made in the report of the House of Commons Regulatory Reform Committee which have caused me to raise my eyebrows. That is why I am putting these questions to the Minister.
Thereafter, the committee had no real criticisms; indeed, paragraph 22 states that the consultation had been "adequate". However, how the committee could have concluded that the consultation was adequate if it was not convinced of the methodology employed, I am not quite sure. In paragraph 31 the committee concludes:
"On the evidence before us, it appears that the proposals would be likely to result in substantial savings to the sugar beet industry".
I am sure that all noble Lords who take an interest in this sector will say, "Thank goodness for that and we welcome the order".
The 2002–03 17th report from the House of Lords committee concludes that it is appropriate for this proposal to be made under the aegis of the Regulatory Reform Act 2001.
Having made those few comments, we accept the statutory instrument. However, we are anxious to ensure that, in the future, all sugar beet growers should be included in consultation exercises and thus kept in touch with any changes that might take place. The report makes the comment that the NFU acts on behalf of all sugar beet growers, which I acknowledge.

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However, it is important to realise that certain sugar beet growers may not necessarily be members of the NFU.
Lord Livsey of Talgarth: My Lords, many of the points that I intended to raise have already been covered. However, I wish to make one or two additional remarks. As the noble Baroness has pointed out, it is clear that the House of Commons Regulatory Reform Committee was concerned about the position of small producers who are not members of the NFU. That is quite an important point and I wonder whether the Minister is himself satisfied on that aspect of the order. However, as has been pointed out both by the noble Baroness and the noble Lord, it appears that the committee is satisfied that a regulatory burden would be lifted as a result of the order. I, too, pay tribute to the committee, which appears to have undertaken a good deal of searching work in its approach to the examination of the order.
The Select Committee of the House of Lords is also satisfied with the fact that the burden will be lifted, as is the British sugar beet industry.
I should like to make one or two additional points. Apparently, the current levy stands at 12p per adjusted tonne of sugar beet and is subject to review. I think that I am right to assume that those arrangements will stand and that the industry will contribute in this way. However, if that is not the case, then I should like to be told.
The British Beet Research Organisation is preparing a research programme which in future will not burden the growers, although they will be involved in certain discussions about it. I have visited the Broom's Barn research station and I was impressed by the research being undertaken. I assume that the station will tender for future research and will continue to carry it out, if the powers-that-be are satisfied.
It was interesting to note that, from the educational point of view, beet growers receive a research magazine four times a year. They are given advance warning of issues such as aphids and spraying dates in relation to aphids causing damage. The magazine also ensures that growers are kept up to date on technological developments. All that is worthwhile to ensure an efficient and effective sugar beet industry. Certainly, if the industry is satisfied that the regulatory burdens have been lifted, as are the relevant committees of both Houses, then we, too, are well satisfied that this a right and proper order to be brought before the House.
Lord Whitty: My Lords, I am grateful for the support for the order expressed by the two opposition Front Benches. In regard to the present arrangements for research, perhaps I may say in response to the question put to me by the noble Lord, Lord Livsey, that the statutory levy ended in April 2000 as a result of the phasing-out process. Since then the industry has funded its own research programmes and a levy is attached to that. In a sense that is not a matter for me or for the House, but I can confirm that the industry
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funds the British Beet Research Organisation, paid for by the growers and by British Sugar. It is an independent, industry-based organisation which has taken on some of the work previously done under the former arrangements.
All this order seeks to remove is the outstanding residual requirement for the Minister to produce a programme of research, along with the requirement for the industry to participate in the drawing-up of that programme. The financial side has already been passed to an industry-based body.
Both the noble Baroness and the noble Lord raised the issue of representation of growers by the NFU. The sugar beet industry has certain slightly centralised arrangements because business between the growers and British Sugar—which is, in effect, the only customer—is negotiated via the NFU. In that context, the NFU represents all sugar beet growers. So it is slightly different from other circumstances where the union or trade association may have many growers outside; in sugar beet the NFU represents everyone, whether or not they are members. Although the committee expressed concerns about the point, it concluded that the consultation was adequate.
The committee questioned the two elements of Section 68, one of which imposes a burden on the industry, while the other imposes primarily a burden on the Minister. It felt that our analysis that we were dealing with them separately—and therefore claiming, in effect, that we were initiating two measures of deregulatory reform—was pushing our luck a little far. Nevertheless the committee agreed with the conclusions and the overall message that this is a deregulatory measure which removes a time and administrative burden from the industry and supported it.
As I said, because of the time position, the committee accepted the form of consultation, albeit that it was not entirely in line with what is now laid down for the regulatory reform order process. Although the wording is queried, the committee felt that our conclusions and methods were right, even though it would have preferred us to reach those conclusions through a different approach. There is not a huge argument between ourselves and the committee and the industry supports the order.
On Question, Motion agreed to.

Friendly Societies
7.31 p.m.
Lord Naseby Lord Naseby rose to ask Her Majesty's Government what future they see for friendly societies.
The noble Lord said: My Lords, I declare an interest as chairman of the Children's Mutual, formerly known as the Tunbridge Wells Equitable Friendly Society, which was founded in the last century.
Your Lordships may wonder why I have sought a debate after the Budget. I have done so because it seems to me to be a good time to reflect on the Budget and to look forward—I hope without it being seen as

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special pleading. My hope is for a considered, nonpartisan debate, because friendly societies and the work that they do are welcomed across the whole political spectrum.
Who are we? Currently there are 64 friendly societies within the membership of the Association of Friendly Societies, which makes up the vast bulk of friendly societies. They manage the investments of about 6 million people, with funds under management of about £17 billion. They are all mutual organisations with no shareholders, therefore saving at least 10 per cent of funds which would normally go to shareholders. As I have said, a good many of them were set up 120 years ago, or maybe even as long as 150 years ago.
They were originally set up to encourage self-help and personal responsibility and to enable people with limited resources to improve their economic status. I emphasise "limited resources" because, as I shall highlight later, it represents the key difference of a friendly society.
We see ourselves today as filling the gap between the micro-credit solutions offered by the community-based credit unions and the many commercial providers who have abandoned the less-well off sector—the most recent being, perhaps, the sorry case of AMP and, in particular, the Pearl, which many of us will have known from a previous incarnation as working very closely with the less affluent in society.
Let me paint a brief picture of four typical societies. There is a group of societies that we call "affinity societies", an example of which is the Police Mutual Assurance Society. It operates exclusively within the police forces, for both uniformed officers and the civilians who work in the Police Service. It has 160,000-plus members, principally police constables and police sergeants—people at that kind of level—earning between £23,000 and £25,000, who typically take out policies of between £8 per month and an average policy of about £12.50 per month. That is one section of the friendly society movement.
Then we have the big boys. The Liverpool Victoria Friendly Society—the biggest of the lot—has been in existence for more than 150 years. It offers a wide range of products directly, owns a number of subsidiary companies and cross-sells between the two. It, too, has many members with premium plans of between £9.50 and £12.50 a month.
There are a number of small groups, a typical example of which would be the Druids Sheffield Friendly Society. It is a small society, established in 1858, which helps its members in times of adversity and provides savings for their future. It offers a wide range of products and operates through a voluntary lodge secretary system working in a local community. These societies allow policies with premiums of £4.50 a month—in effect, £50 per year.
So those are three examples of the different kinds of societies. In my own society, the Children's Mutual, we would term ourselves as a specialist niche player. We have some 300,000 members. As the Government know, we have ownership of the trademark the "Baby
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Bond". Last year we were voted by the IFAs as worthy of two five-star awards for performance—and the highest award is five stars.
Even more importantly, we were voted service provider of the year, beating all the large pies such as Standard Life, Aviva and Legal and General—so much for those who allege that friendly societies are small, inefficient organisations. We were very proud to earn that award.
What are we about? We are about savings—a fairly key issue with a savings ratio as low as 4.9 per cent at the moment. The movement takes savings very seriously. That is why the movement welcomed the Government's proposals on the Child Trust Fund. We gave the Government public support in that respect and I was very happy to be associated with that public support.
We have welcomed in principle the Sandler concept. Indeed, we have sent the Treasury a long and considered response. It highlighted the question of who exactly are the targets for Sandler products, because the currently stated target of 29 million people is too broad, too diverse and too many. It is our belief that the Government should concentrate on the less well-off, because they are the people who need help and who need to be persuaded to save.
Who are they? As a movement, we believe that they are people in the income bracket of somewhere between £13,500 and £25,000. If we are correct, what right do we as a movement have to claim that we can reach or serve these families? We make the claim because there are no other organisations which play such an important role in delivering financial inclusion as friendly societies. We are the only financial organisations which will take an average premium of £11 per month and make it work through the tax exempt savings regime.
For example, with ISAs, more than 75 per cent of products have a minimum monthly payment of £50. Even insurance ISAs with a £1,000 cap have an average of £34.50. The average tax exempt premium is 80 per cent less than that for an investment ISA and 70 per cent less than an insurance ISA.
As an aside, it is interesting to note that while public life insurance companies are able to offer tax exempt policies for their own customers by forming a friendly society, not one of them, to my knowledge, has ever done so.
Some would argue that we are not efficient; that we do not give good value and that we are lacking in enterprise. I have already said that my own society won the service provider of the year award, but we are not alone. As polarisation rules have been eased—I thank the FSA for easing them—so societies have expanded distribution. The Family Assurance Friendly Society has built up a link with the Abbey National; Homeowners has built up a link with Bounty; and we at the Children's Mutual have built up a link with Boots.
Our persistency is better than the life industry, whose average after four years on sales through IFAs is 81.9 per cent—in other words, two out of 10 people

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lapse. Ours in the friendly society movement is 92 per cent, so less than one out of 10 lapse. Our reduction in yield for "with profit" policies across all years is better. The industry average for 10 years is 2.8 per cent; for mutuals it is 2.7 per cent. For 25 years the industry average is 1.4 per cent and for mutuals it is 11 per cent. If I were to break out the friendly societies' figures alone, they would be even better.
Just as an aside, as a typical example, a £25 per month with-profits endowment policy over the past 18 years is producing, in our society, £12,431, compared with a building society investment of £8,396 and an average managed unit trust of £9,361. So much for those journalists who allege high charges and poor performance.
Some will ask whether we really get to the less well-off. Some very interesting recent work has been done for the biggest friendly society, Liverpool Victoria, by Financial Acorn. Your Lordships will know that the Acorn work is a segmentation that is recognised across all sections of society as sophisticated and thorough. If anything, friendly societies might have thought that Liverpool Victoria might be a little more middle-class. But when it comes to moderate and inactive savers, who make up 48.8 per cent of the population, ISAs account for only 38 per cent and Liverpool Victoria's policyholders make up 52.5 per cent, so they are skewed to the less well-off. There is plenty more evidence from Professor Yarrow and others.
So much for the past. What of the future? The movement was delighted when the friendly societies were mentioned in the Chancellor's statement on the Child Trust Fund and that a decision had been made to have an open market. We continue to welcome that and the work that has been done. Yes, we are relatively small players. We give good returns, we are pretty efficient and we know what makes the less affluent tick. Whatever Sandler says, we know tax exempt works, as it has built into it an incentive. This group, of all groups, looks for value for money and response to incentives. One has only to ask any supermarket about this group to know whether it responds to incentives.
There were rumours that because of Sandler recommending that qualifying policies should go, tax exempt would have to go too, albeit as an unintentional side effect. Thankfully, the Government listened to the friendly societies' predicament and tax exempt is still with us, for it is vital to the movement. We have also taken the precaution of checking with the European Commission whether it sees any problems with the current tax-exempt status, and it confirms that it does not.
I suggest that if the Government are truly concerned with the less affluent, defined as those with an income of less than £25,000, and if they want the Child Trust Fund to be a success, they should listen to successful players—not just the big boys, who say they will operate within a 1 per cent regime, and then later withdraw. Indeed, we have an example with CAT
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standards mortgages today, where the biggest operators decided to withdraw. Some would call that predatory pricing.
Savings is such an important area. People tell us that they need disciplined savings. They need some advice, and advice costs money. The Government have said the Sandler recommendations will be considered further within a framework of ongoing regulatory change. Would the Minister be able to throw any light on the timetable for this consideration? When does he expect proposals to be drawn up? I do not necessarily expect an answer tonight, and would be grateful if he could write to me in due course.
Finally, we, the friendly society movement, take our job seriously. I submit that our responses to consultation papers are some of the very best the Government will receive and so, too, for the FSA—the latest being DP 19. The Government should listen to us and consult with us, for we have much to offer. Together we can achieve success. If they leave us sidelined or, at worst, undermined or so constrained that we cannot make a profit, I submit that they do a grave disservice to the less affluent, our 6 million members and our successful heritage.
7.44 p.m.
Lord Graham of Edmonton: My Lords, it is my pleasure and privilege to follow the noble Lord. Lord Naseby. I have never heard such a well prepared case, delivered so modestly—and, at times, slightly defensively. There is nothing to be defensive about. I come to this debate with my experience on a horse from the same stable. The stable is called mutuality and the horse that I ride very proudly is the Cooperative movement and many others too, as I shall mention. I hope that tonight we will provide the Minister with an opportunity of giving the House the benefit of his thinking.
To my knowledge, the Government have done not only as much as they could but a great deal more than some might have believed they were capable of in supporting the concept of mutuality. My good friend in another place, Gareth Thomas, produced a Bill which had the universal approval of all parties, changing legislation going back a long time. The noble Lord constantly referred to a timescale of about 150 years. The Rochdale pioneers were credited with the first successful co-operative venture in 1844—again, about 150 years ago. At the beginning and middle of the 19th century, the needs of the people produced a number of aids and comforts such as friendly societies, the Co-operative movement, trade unions, the Church and many others. Tonight we have heard the case for self-help and financial prudence on a modest scale.
The noble Lord pointed out that in the totality of the global reaches of the Chancellor, the mutual sector might be regarded as small beer. I speak as a consultant to the Co-operative Group which people know as the CWS and which is the national central federal body. Until last year, I was the chairman of the United Kingdom Co-operative Council. Within the co-operative movement there has been a renaissance

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and a recognition that the Co-op, which is a successful trader, is not just a shop on the corner but a concept and an idea capable of being applied in many ways.
The credit union movement, which deserves a mention, is not a poor man's bank; it is not there to keep the poor person out of debt. It is a thriving financial organisation. Many of the manifestations of how it operates go back to the friendly society movement, the Co-operative moment, and others.
We are celebrating a success, because we are still here. We are still alive. Many organisations have gone under—they have been absorbed, taken over, the funds have been diddled. We know the history. But when we talk about friendly societies and mutuality, we are celebrating something which has been a great credit not just to governments or one particular party—your Lordships will know that I do not make party or political points.
My background is the Co-op movement. I had lunch today with a person I had never seen before who comes from Newcastle upon Tyne, my home town. As we were reminiscing, I said, "Do you remember Newgate Street?" which was the headquarters of the Newcastle Co-op. She said, "Yes, I got all my shoes there". I said, "I know how you got your shoes". She asked, "How?" I said, "Your mam went down four times a year and drew the dividend, then she went straight down to the shoe department and the family was shod. She bought shirts and other things as well".
The savings of the working-class movement of Newcastle, which was no different from anywhere else, were the accrued dividends earned on their purchases. They did not have any spare money to put in £1 or £2 a month or even a year, but they knew that every quarter they would have £4 or £5 in dividends, which was their life savings. That was their nest egg. The Co-op movement has a great deal to be grateful for, as do the people of this country, for the way in which it bred in ordinary people the need to make provision. Friendly societies have given a respectable face to a movement of which we should all be greatly proud.
Another of my interests is as a patron to the benevolent section of the Ancient Order of Foresters. That is a friendly society that is undergoing great change, as most such bodies are, under the Financial Services Authority's manipulations. It is struggling and surviving. When I think what ordinary people are doing for themselves, I think of my good friends, Bert and Rita Overington, who run the Ancient Order of Forester's court, which is called Edmonton Pride. Every year, they distribute thousands of pounds to charities, which rely on gifts from people—from anyone. The country is well endowed with the Bert and Rita Overingtons of this world, who give an enormous amount of time and do it professionally.
At one time, friendly societies, Co-op societies and others were in danger of being managed by people who were not well trained and not up to date. Those days have gone. I respect very much the record of the friendly society with which the noble Lord, Lord Naseby, is associated. It must give him a great deal of pleasure to give us the story that he told us
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tonight, which may be atypical but is a good story about what can be done by a well trained, well managed, professionally organised business of that kind. So I say, thank you very much.
On Friday this week, my noble friend Lord Carter will introduce the Second Reading of a Bill that deals with the application of the Co-operative idea following the Industrial and Provident Societies (Amendment) Act. The Minister has a good story to tell about the way in which the mass movement with which I am associated has been treated by this Government previously.
When I became associated with the movement, I picked up the phrase, "The Co-op movement never made a millionaire but it never made a pauper". People did not join those movements to get rich—and certainly not to get rich quick. They trusted the good sense of the people in charge, many of whom were not professional at the start but were honest and had integrity. They gradually built up a reputation and kept good men and women around them. One thing that the friendly societies and Co-ops and others do is provide a training ground in democracy for ordinary men and women who otherwise may not have had the opportunity to demonstrate that they are articulate and able to manage affairs in one way or another.
The movement that was formed by the conditions of the early part of the 19th century, and which continues to survive, has made a valiant contribution. I was fascinated to hear the noble Lord proudly tell us of the achievements of the movement and of some of its problems and possible easements that might come. The Minister will satisfy this audience and the audience outside by reassuring us, in the context of trying to keep all the balls in the air, that friendly societies are well supported and constantly thought of. He will serve the movement well if he tells us that there is a place, in the enormous changes that have taken place, for the kind of people whom we represent. We represent organisations, but we represent people as well. I am grateful to the noble Lord for asking for this debate tonight.
7.54 p.m.
Lord Stewartby: My Lords, I begin by thanking my noble friend for giving us the opportunity to debate this subject. I, along with the noble Lord, Lord Graham, congratulate him on the comprehensive and effective way in which he opened the proceedings. He covered most or all of the important points, and I would not want merely to repeat what he said, but I have a long-standing interest in friendly societies.
During the 1980s, when I was a Treasury Minister, I was responsible for legislation relating to financial mutuals, which predominantly meant the building societies but also included credit unions and friendly societies. On a number of occasions, I had to consider the implications of other legislation or changes for those bodies. That is something that successive governments have done, and I welcome the reaction of

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the present Government in the past few months to the representations made to them about friendly societies and tax-exempt savings plans.
I came to appreciate the friendly societies from a number of aspects. My noble friend Lord Naseby quoted all the statistics, which are quite remarkable. Many of those bodies are not large, but if one aggregates their resources—their income each year approaches £2 billion—the sums are not insignificant. They are even more significant given that they are largely the product of a great range of policies spread among persons of very limited financial resources, in small packets. That is the aspect that is so important.
Friendly societies provide an opening to those on lower incomes, who have sometimes been described as "marginal savers". There is a distinct market here. It is not simply a question of the financial quantum. Some people are wary of the larger financial businesses—not only of banks but even of building societies. The whole ethos of the friendly society movement, like other mutuals, which as we have heard were established 100 or 200 years ago, is that they have a more direct connection with those whom they serve, to the extent of door-to-door collecting and calling. Such things would make no sense to a modern bank or a large building society, but they are the essence of mutuals. There is no doubt that friendly societies reach a lot of people through those means who otherwise would not be reached at all. It is a distinctive market.
Several of the societies accept subscriptions of less than £10 a month, which would not be on the radar for bigger financial institutions, as they are not geared to cope with a very large number of very small amounts. It is extremely important that people who want to contribute at that level can do so with organisations in which they feel confidence and which they trust.
I do not mean the phrase to be in any sense pejorative when I say that there is a financial underclass. We do not wish them to become disconnected from the rest of the community. It is terribly important that such opportunities should be available to them, and they may graduate to something larger as time goes on. That can be illustrated by the fact that monthly subscriptions to tax-exempt savings plans, which are limited to £25 a month to obtain the tax relief, are far lower than contributions to financial ISAs, to which the average contribution is three or four times higher. I think that that demonstrates that there is a body of people who want to save, and who will save if they can, but who cannot readily make the initial jump straight into the larger financial institutions. That is where friendly societies not only have a very important part to play but are likely to continue to have that part for a long time to come.
In his review of long-term savings and investment, Mr Sandler said:
"the use of tax mechanisms to increase aggregate savings levels is undesirable and likely to be ineffective".
I think that in this respect he was wrong. I believe that if it was not for the friendly societies and these tax-exempt savings plans, there would be nowhere for
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those people to go. To that extent, and it is not a very large amount of money, I think that they are important. Not only do they increase the aggregate; they increase it in a particularly valuable way through participation by those who would otherwise not be able to save at all.
Despite some of the criticisms occasionally made of friendly societies, they are a very valuable part of the financial scene. People have criticised them for their performance, but in today's climate the performance of plenty of financial institutions can be criticised. When investment markets have generally been so weak, it is partly a question of forces beyond their control. Sometimes they are criticised for their level of charges. However, when one has very small policies, the percentage charge tends to be a bit higher. There is a minimum cost of running these things. I do not think that it is a fair criticism to say that that is a disadvantage of friendly societies. It is inherent in the structure.
In what we have to accept is now an age of high-tech business and sophisticated financial services, the friendly societies may seem a bit of an anomaly. However, I think that in many aspects of British life—in our constitution, our business and our society—there is room for a few anomalies as long as there is a good case for them. I think that the case for friendly societies, and the case for the continuance of friendly societies, is very strong. Many of those who use them would without them not save at all. I think that that itself is an overwhelming argument.
8.3 p.m.
Baroness Maddock: My Lords, like other noble Lords who have spoken I am very grateful to the noble Lord, Lord Naseby, for introducing this debate. Indeed, he and I are both officers of the All-Party Parliamentary Group for Building Societies and Mutuals. In opening, he said that he did not want us to be particularly partisan. I do not know whether it is my political training or what, but I always like to try to explain where I am coming from philosophically. I hope that I will not be too partisan in doing that.
In researching, I realised that our party has a constitution, to which we have not only a preamble but a shortened preamble that we all carry round on our cards. The longer preamble contains a sentence which I think describes where we come from. It states:
"We want to see democracy, participation and the co-operative principle in industry and commerce within a competitive environment in which the state allows the market to operate freely where possible but intervenes where necessary".
I then read some of the history of developing thought in the Liberal Party and came across an interesting point which predates even my time in the party. In the 1950s, there was a group in which Jo Grimond was very prominent called the Unservile State Group. It was not officially affiliated with the Liberal Party, but it had some interesting members, some of whom have been or are still Members of this House. In 1953, it included Jo Grimond; Elliott Dodds; Richard Wainwright—whom some noble Lords may have known, although he did not become

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a Member of this place; Nancy Seear—Lady Seear, whom some noble Lords knew very well; Russell Johnston, now Lord Russell-Johnston; and William Wallace, who also sits on our Benches.
One way in which they sought to develop party policy was to emphasise the value of co-operation and mutuality. Although I think that that probably was not developed very thoroughly in following years, in recent years we have looked at how provision can be made other than totally by the state or totally by business. Our recent party conferences have examined the role of public services and developed that theme. I am therefore totally supportive of many of the comments made tonight. We have had a very good exposition of the success of friendly societies in the modern world.
Friendly societies have a very proud history. I read a claim somewhere that that history goes back to Roman times. I do not know whether that is true, but the first relevant Act of Parliament, on the relief of friendly societies, was passed in 1793. As has been said, friendly societies have stood the test of time and have even survived the introduction of the welfare state. Many of the ideas for the welfare state came from Beveridge, but I do not think that he envisaged that it would be developed in quite the collectivist way that it has.
One of the important features of the movement—which the noble Lords, Lord Naseby and Lord Graham, have pointed out—is its diversity. Organisations such as Liverpool Victoria have more than 1 million members and thousands of employees. Some of the other organisations, however, have no full-time staff and a membership of well under 100. The noble Lord, Lord Naseby, also pointed out the variety of financial products provided by those organisations. It is particularly interesting how many of them have been able to keep up in terms of performance with very big modern organisations. The noble Lord gave us a very clear indication of that.
In this day and age we often discuss how we can involve people in society in terms of voting and so on. Democracy forms an important part of friendly societies. They have a richness of democratic involvement that goes beyond their accountability to their members. For example, societies permit members to take part in decision-making on the basis of one member one vote. That has become a non-partisan phenomenon now although it was partisan at one time. Some societies have a body of delegates who are mandated to vote on behalf of the full membership. Even in small societies all members have an equal vote. I particularly commend that. It is in marked contrast to the concentration of power in other organisations, particularly plcs. I believe that the delegate form of governance permits greater hands-on involvement on the part of members in the operational management of friendly societies. That is very different from the role of shareholders in plcs. I understand that some societies also hold delegate meetings on a regular basis. That is another way of enhancing democratic involvement.
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As has already been pointed out, friendly societies are mutual organisations with no shareholders. Thus, the members are the principal stakeholders. Therefore, there is not the potential for a conflict of interest between the respective needs of shareholders for profit and members for value and service. In the event of a demutualisation the assets of a society would be distributed among the membership.
As has already been said, the core heritage of a great many friendly societies is rooted among the less affluent sectors of society. However, I understand that some members of professional groups go down the friendly society route. I understand that a certain society limits its membership to dentists. However, in the main, friendly societies have a particular strength in respect of their competencies in serving the less well off, as the noble Lord, Lord Stewartby, said. But unfortunately—I believe that the noble Lord, Lord Stewartby, touched on this—regulation has acted as a force to lessen the role played by a number of societies with poorer people. The noble Lord. Lord Stewartby, pointed out that some people go and collect premiums, but that is not always economic in this day and age. I hope that the Minister will comment on that point when he replies to the debate.
Traditionally the membership of friendly societies has encompassed a wide range of social classes. Many regard them as providing a valuable social service in encouraging saving and self-reliance on the part of people who might not otherwise save. They have thereby resulted in an increase in the amount of money that is put into savings.
I do not know whether noble Lords listened to a programme on Radio 4 this morning about debt. Debt is a huge problem among those young people who do not have the habit of saving. According to that programme men in their twenties are more indebted than women of that age. These days we often discuss the level of national debt. The habit of saving was much more prominent when I was younger. We should do all we can to safeguard friendly societies as they encourage people to save.
Savings in a friendly society have the benefit of tax exemption. I shall be a little partisan now as I understand that in the 1984 Budget Nigel Lawson reduced the maximum of tax exempt savings. Then the relevant sum was £9 a month. However, as the noble Lord, Lord Stewartby, pointed out, the relevant sum now is £25 a month. In retrospect that presented societies in large part as providers of savings and insurance to the poor. However, the wide membership spread still exists, especially in respect of savings for children. The Government recognise that. The noble Lord, Lord Naseby, spoke eloquently of the role his society has played in that area. The Government have tried to persuade people that saving is a good thing and have tried to help people to encourage children to save. Recent changes—PEPS. TESSAs and so on—have not actually encouraged people in the same way in which friendly societies encourage them to save.
As is obvious from my comments, I certainly believe that friendly societies have a unique contribution to make in facilitating what I will call financial inclusion.

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That is a buzzword, but it is important that everyone in society has a place where they can be included in the financial world. The Government have given significant attention to credit unions and their potential for addressing financial exclusion, which is very welcome. I think that they are beginning to realise the potential of the friendly societies, whose role is as important in a different way in ensuring that all people have access to financial institutions that suit them and their situation.
As I said, I am particularly attracted to friendly societies because of their democratic and communal nature. I hope that we will hear more from the Minister on the Government's view on the future of friendly societies. I think that the noble Lord, Lord Naseby, referred to the fact that a submission was made on the Budget about the role of friendly societies, particularly in terms of making child trust funds work. I hope that we will hear from the Minister that the Government have even better plans for their role. Once again, I thank the noble Lord, Lord Naseby, for the opportunity to take part in this interesting debate.
8.15 p.m.
Lord Higgins: My Lords, I join all those who have congratulated my noble friend Lord Naseby on introducing the debate on friendly societies this evening. He did so in fairly wide terms, which gives us an opportunity to discuss the various issues that arise. Everyone who has spoken has referred to the historical foundations of the friendly society movement, not least the noble Lord, Lord Graham of Edmonton, who referred to other mutual help institutions such as the Co-op. I agree with him, certainly as regards that institution. It is a more forward-looking institution than is sometimes supposed. There has certainly been widespread support for the friendly society movement, as there was in another place, where an Early-Day Motion was tabled a short time ago.
The debate is essentially about savings, which are of course crucial so far as macro-economic demand management is concerned. All else being equal, as economists are inclined to say, it is true that if we have more savings, we can have less taxation for any given economic situation. We need to put the debate into the general context of savings and the state of the economy, even though the friendly societies make a unique and rather unusual contribution to the problems.
At present, the Chancellor would be rather upset if there were suddenly a vast increase in savings overnight and a vast reduction in spending. The economy has been kept going in recent times very largely by the extent to which there has been an increase in consumption. None the less, the long-term balance between savings and borrowing is very important. As the noble Baroness, Lady Maddock, pointed out a moment or two ago, the increase in personal indebtedness as against personal savings is a cause for concern at present.
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Also a cause of concern is the decline in the savings ratio. I raised the matter with the Minister a short time ago, pointing out that since 1997 the savings ratio had virtually halved. Since then it has almost reached record low levels. He was inclined to talk in terms of averages, but the reality is that there has been a massive decline in the savings ratio. That is a matter in which the contribution made by friendly societies in increasing savings—I will come to the issue of whether they do so in a moment—is important.
The reason behind the savings ratio is well known. Much of it is related to savings so far as pensions are concerned. There really is a big problem, particularly, as my noble friend said, for those at the lower end of the income scale, because of the way in which the minimum income guarantee introduced by the Government is uprated with earnings. One really needs to save a very large amount now towards a pension if one is to get enough from those savings to float above the means-tested level. A short time ago, my honourable friend in another place, David Willetts, estimated that people would have to save something like 142,000 as a couple to float themselves above the minimum income guarantee level.
Such problems have had a severe effect on savings. It makes it all the more important to concentrate on savings other than for pensions, which is effectively what friendly societies do. When people's savings mature, they could invest the money and use it for a pension; but generally speaking, it is not what those who save with friendly societies do. They generally use it as an emergency reserve, to finance school fees, for disability and so on. So it is important to extend the scope of non-pension savings. My noble friends have all stressed strongly the way in which this relates to those on lower incomes.
Almost all speakers have mentioned the relationship to the Chancellor's new proposals for child trust funds—so-called baby bonds—and to the so-called savings gateway. It would be helpful if the Minister could give us some idea of how important he thinks the role of friendly societies is likely to be in the operation of those funds, given that overall the Chancellor has agreed that there should be an open market option as regards both funds.
I must say in passing that I have some doubts about the means-testing aspect of the proposals. A number of groups, including the Institute for Fiscal Studies, have expressed concern. It is argued that when a product continues from birth right through to age 18, a means-tested answer by the family in the first three years of a child's life may be vastly different from what it will be when the child is 18.
Both products are very complicated. It has been suggested that some typical families might have to go through 18 different means tests before it can be calculated whether or not they meet the requirements. Means-testing and complexity are hallmarks of anything that the present Chancellor introduces.
Nevertheless, because of the personal contact referred to by the noble Baroness, Lady Maddock, friendly societies may be in a better position to explain

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the complexities in this area to those on low incomes than an ordinary plc provider, which probably does not have the degree of personal contact to which the noble Lord, Lord Graham, and others drew attention.
The question of personal contact is important, as is the extent to which friendly societies provide an opportunity for those who are, as it were, financially excluded—the Early Day Motion even goes into detail about which category of financial persons they are—to take up a product that is not provided by any other organisation.
Against that background, we suddenly have a dash of cold water in the form of the Sandler report. It effectively comes up with two conclusions and a recommendation. It states that,
"the use of tax mechanisms to increase aggregate savings levels is undesirable and likely to be ineffective",
and that.
"governments should avoid introducing new tax-based savings incentives if their aim is to increase aggregate savings levels".
The report goes on to say:
"the concept of the qualifying life savings policy should be abolished for new business".
It looks as though that argument has been extended to so-called tax-exempt savings provided by friendly societies. It would be helpful if the Minister would give an indication of whether the Government feel that the arguments put forward by Sandler are relevant to friendly societies.
It is arguable that withdrawing an existing tax concession may have a different effect from introducing one, or even keeping it the same. It may be that if the abolition of the tax benefits to that very low income group were to reduce significantly the number of friendly societies—some figures have suggested that they might be cut by 50 per cent—it would mean that people at that low level did not have any alternative provider to which they could turn. It has been pointed out, for example, that the minimum contribution to an ISA in an ordinary company provision is likely to be much higher than that provided by friendly societies.
I take the point made by my noble friend Lord Stewartby, who suggested that friendly societies are inefficient. I think that he was arguing that in the nature of things if one is carrying out an operation involving very small amounts of money then there are real diseconomies of scale. Consequently one can be very efficient but the problem of higher costs is in the nature of the product. That is part of the reason why the other providers do not come into this market.
It can at least be argued that if there were a substantial reduction in the number of friendly societies as a result of the proposals made by Sandler being extended to them, one could find that the opportunity for saving by those on lower incomes was no longer available. To that extent the total amount of savings may be reduced. Sandler argues that the tax incentive has a redistributive effect rather than a savings-creating effect, but it is not at all clear whether there is anywhere else to go for those who are saving through this measure. Would the Minister kindly indicate whether he shares that view?
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This has been a fascinating debate. The basic theme that has run through it is that friendly societies are historic but not anachronistic. They make a substantial contribution to the level of savings. They provide a service to those who otherwise might not find any such service available. To that extent it is important that they should be given due consideration, as it appears has been done by government Ministers in taking their views into account, and as has been forcefully expressed both by my noble friend Lord Naseby and everyone else who has spoken in this debate. Of course there are both sides to the argument. However, on balance it is important that the Government should take these arguments into account, particularly against the background of the new products that they are proposing.
8.28 p.m.
Lord McIntosh of Haringey: My Lords, the noble Lord, Lord Naseby, asked in his excellent opening speech for a constructive debate. His contribution was certainly constructive and I hope that he will agree that all other contributions have been constructive. I hope that I will not break that mould, because we share two fundamental principles with the friendly societies movement, if I may call it that: first, the principle of mutuality, which has been the subject of virtually every speech, and secondly the principle of encouraging savings, in particular for less well-off people. The Government's view is that mutual organisations can foster greater trust among their members acting in their collective interest. As the noble Baroness, Lady Maddock, said, they provide a structure of democratic accountability. So we are committed to the principle of mutual organisations. Indeed, I must declare an interest, which I have previously declared. I have most of my financial business with Sun Life of Canada and Scottish Widows, both of which went in for demutualisation. On both occasions I voted against that and benefited from it.
The Government have changed the legislation for certain mutual organisations to ensure that any decision to convert them to company form is taken only with the active participation of membership. We want a competitive marketplace offering choice for consumers. As I hope to show, friendly societies and mutual societies more generally have a role to play.
I turn to the issue of encouraging savings, particularly for the less well-off. The noble Lord, Lord Higgins, rightly said that the savings ratio has been in decline and that we would wish generally to encourage an increase in the savings ratio but not, as he implied, at all stages of the economic cycle and certainly not on the basis that an increase in the savings ratio is an unalloyed good. There are advantages and disadvantages in changes in the balance between savings and consumption. I put that as neutrally as I can.
On the mutual sector more widely, we are supporting other mutual organisations. On Friday, we will support a Bill that the noble Lord, Lord Carter, is introducing to modernise the legislation on industrial and provident societies. We have introduced

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legislative reforms for building societies and credit unions. As the noble Lord, Lord Graham, knows, we have always been very supportive of the Cooperative movement.
We welcome the contribution that friendly societies in particular make, as has been said throughout this debate, to increase choice and competition. In the Financial Services and Markets Act, we introduced an independent ombudsman and a single financial services compensation scheme, which should increase confidence in potential members of friendly societies. The noble Baroness, Lady Maddock, seemed to suggest that there was some inhibition in the regulation of friendly societies. I cannot think of any way in which there has been. The transfer from the registrar of friendly societies to the Financial Services Authority has been pretty seamless. I am glad to notice that the noble Lord, Lord Naseby, indicates agreement with that. The FSA is required to consult and to undertake cost/benefit analysis, and it has indeed been consulting with the friendly society movement.
On tax exempt savings as a whole—I recognise their importance to the friendly society movement—tax exemption on premium life insurance policies means that income and gains that are referable to those policies are not taxed in the hands of the society. That exemption is unique to friendly societies. The amount of tax levied on non-friendly societies that provide insurance ISAs, for example, will be pretty minimal. It is common that where tax exempt policies are sold as qualifying policies, neither the society nor the policyholder pays tax. That has been an important element for friendly societies.
That brings me to Sandler. The Sandler report asked us to look again at the abolition of qualifying life insurance policies on the basis that they are a distortion and an unjustified additional complexity in the savings tax system; that they benefit mainly higher rate tax payers; and that there appears no justification for savings with a life-insurance element to be tax-advantaged over other forms of saving. We are certainly in favour of minimising distortions. We have talked with the mutual industry as a whole about the Sandler proposals and they put it to us that we should look at those tax proposals in the wider context of other tax issues including the market for insurance and other pooled investment products, such as unit trusts. We agree with that. We have decided to consider those recommendations within a wider framework. That will take account of regulatory change and other developments such as corporation tax reform. So this is not a short-term matter.
The noble Lord, Lord Naseby, asked for the timetable. We are considering the scope of that consideration, but I can assure him that we shall include the effect on friendly societies, on their tax exempt savings plans and on the savings of the less well off in general. We shall also, of course, listen to the friendly societies movement on that.
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The noble Lord, Lord Higgins, asked about the Sandler recommendation, abolishing qualifying life insurance policies. Many friendly societies sell qualifying life insurance policies. If the Sandler recommendation were to be implemented, that would automatically affect friendly societies. That is why we have not implemented it, but we are looking at it in this wider context. We do not want to pre-empt that review.
We are also committed to helping the less well off. We have specific policies that have been referred to in debate, including ISAs, the Saving Gateway and the Child Trust Fund. I am encouraged to learn, not least from the noble Lord, Lord Naseby, himself, of the close involvement of friendly societies in the Child Trust Fund and in Saving Gateways. Their experience in that area is invaluable. We believe that friendly societies have a huge opportunity to benefit from those new developments.
I turn to the government initiatives to develop the saving habit, starting with ISAs. It has been claimed by some politically motivated people—not tonight, of course—that ISAs have been disappointing. Since 1999 £105 billion pounds have been subscribed to ISAs. That is 14 million people, which is one in four adults: and that is 6 million more than held a TESSA or a PEP by 1998 to 1999. They are starting to change habits. One in five ISA holders are from lower income groups, compared with one in seven TESSA or PEP holders. The number of young people with ISAs is larger. About 10 friendly societies offer insurance ISAs and that is about 5 per cent of the ISA market. There is scope for the movement to develop and to market the ISA product.
Referring to the society of the noble Lord, Lord Naseby, I recognise that ISAs are available to adults only, which is why I now turn to the Child Trust Fund.
Lord Higgins: My Lords, I apologise if I appear to be politically motivated in any way. Does the Minister believe that the move as regards ISAs will be favourably or unfavourably affected by the withdrawal of the tax credit proposal by the Chancellor?
Lord McIntosh of Haringey: My Lords, the tax credit proposal is the 10 per cent tax credit, which is the last vestige of payable tax credits that were dealt with in 1997. It is a transitional measure until April 2004 and it gives investors an opportunity to adjust their portfolios. The amounts of money are very small indeed. The average tax credit per investor is only £25. That is the amount that we are talking about. I do not believe that there is a significant effect on the viability of ISAs.
I turn to the Child Trust Fund. That will provide an initial government endowment of £250—£500 for the poorest families. We are now engaged in detailed discussions including with the friendly societies. We expect the Child Trust Fund accounts to be available by 2005. We acknowledge that the Tunbridge Wells society and Children's Mutual gazumped us with the

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words "Baby Bond". I believe that it has the copyright. That will be respected. We certainly welcome the fact that it is involved. I was asked whether the bonds were not likely to be too complex. We are consulting on that, too, of course, but if we are to work towards saving by less-well-off people, it is essential that they should be targeted, which means a means test.
The savings gateway also has potential for friendly societies, because it will support saving by low-income groups. We shall conduct pilots to get the detail right, but there will be an opportunity for low-income individuals to save up to £375, which the Government will match pound for pound. When I hear my noble friend Lord Graham talking about the "divi" and the Co-op and when I hear about the history of the friendly society movement, it all has a familiar ring, does it not?
I thank the noble Lord, Lord Naseby, and all those who have taken part in the debate, for the opportunity to discuss the friendly society movement. I hope that
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the noble Lord will agree that the Government's response has been constructive. The friendly society movement has always well, for more than 200 years—played an important part in the spectrum of savings offerings to people in this country. It has already played an important part in the establishment of the Child Trust Fund.
The noble Baroness, Lady Maddock, asked me, in the terms of the Question, how we see the future of friendly societies. We hope that the movement continues its strong tradition, demonstrated over two centuries, of successfully adapting to changing environments and offering new or valued products to maintain its appeal to existing members and to attract new ones. The point is: they have been around for a very long time and they are still here. Long may that continue.
House adjourned at eighteen minutes before nine o'clock.