Clause
19
Retail
prices
index
Mrs.
Villiers:
I beg to move amendment No. 150, in
clause 19, page 8, line 37, leave
out ‘the consent’ and insert
‘consulting’.
I
tabled this probing amendment to explore the transfer of further power
over the retail prices index from the Chancellor to the board. The
progress in the direction of transferring power is welcome, but it
would be useful for the Committee to consider whether the powers that
are retained by the Chancellor under clause 19 are necessary. We want
to probe the Government’s reasons for retaining the
Chancellor’s power to veto measures that constitute a
fundamental change in the RPI, which would be materially detrimental to
the interests of the relevant index-linked gilt-edged
securities.
Clearly,
one has to approach the matter with great caution. The Library note on
the Bill tells us that the eight gilts relevant to our discussion have
an outstanding value of some £90.8 billion. Of course, the
Opposition would not wish any measure to be put in place that would
require the Government suddenly and unexpectedly to have to repay
£90.8 billion, because that would cause significant problems in
terms of the public finances and market volatility, but the question
arises whether the retention of the Chancellor’s veto in this
context is necessary to prevent the risk from materialising. That is
why I tabled the amendment, which would essentially transform the
Chancellor’s power to veto a proposed change into a right merely
to be consulted about the change after a decision has been made by the
Bank of England and the
board.
The thrust of
the reform that the Government say that they wish to make involves
trusting the board and the National Statistician to make hugely
important, sensitive decisions that determine the flow of millions of
pounds in capital markets every day. If they can be
trusted to make other key decisions about the definition of crucial
economic indices, we are interested to hear more from the Government
about why they feel that those people cannot be trusted in total to
make the decisions on the retail prices index. The Royal Statistical
Society, for example, has said that given the importance of the RPI it
is crucial to remove it from political control. We have at least to
consider the arguments to see whether the transfer of power from the
Chancellor to the board should be
total. If the
amendment were made, there would still be a triple safeguard to prevent
an irresponsible decision that would trigger automatic redemption from
being made. Not only would the board have to be convinced that the
change was needed, but the Bank of England would have to give its view
of whether the proposal would constitute a fundamental change. Of
course, the Chancellor would also have to be
consulted.
The
Treasury Committee has considered the matter over a number of years and
it could find no other country in the world where the Executive
retained control over definitional matters in relation to the inflation
index. We should like the Government to give further justification for
why they wish to make an exception, albeit one that is now more limited
than in the past, because the Chancellor’s continuing role
involves an exception—albeit one more limited in scope than
previously. The concern is particularly significant in a month when
inflation has climbed to its highest level for 15 years. At a time of
rising inflation it is more important than ever to take measures to
rebuild the credibility of inflation indices, which many now worry do
not reflect the real cost of living. Given the pivotal importance of
inflation for economic stability and policy and for families, there is
surely an argument that the independent structures being set up in the
Bill should take over full responsibility for the definition of the RPI
and its
derivatives.
Ms
Celia Barlow (Hove) (Lab): The hon. Lady mentioned the
necessity of a safeguard. Would it not be more appropriate if that
safeguard were the Chancellor acting as an arbiter between the board
and the Bank, given that that has been his traditional responsibility
and index-linked gilts are part of our national
borrowing?
Mrs.
Villiers:
There are arguments on both sides of the debate,
which is why the amendment is probing. One of our concerns is that the
Chancellor’s role in relation to the Bank of England is not
necessarily transparent and his continued involvement could jeopardise
public trust. When decisions are taken on changes to the methodology of
the RPI, people could suspect political motivation even when there is
none. I shall come on to that point in more
detail.
The
Treasury Committee first called for the removal of the
Chancellor’s powers in relation to the RPI in 1998 and it set
out its concerns in three reports—in 1998, 2000 and July 2006.
The move to answer the Committee’s concern has been slow in
coming. Clear tensions have emerged in the current RPI regime, which
splits responsibility between the National Statistician and the
Chancellor. Under the current rules, the National
Statistician is responsible for the methodology used to compile the
index, while the Chancellor covers its scope and definition. That split responsibility
caused concern when a move was made in February 2004 to incorporate
hedonic regression methods of quality adjustment for a limited set of
goods. It was intended to adjust more accurately for the impact of
quality changes in the price of certain foods. There was a problem with
communication, which again goes to the issue of trust. The ONS covered
the matter briefly in its standard monthly press release; on the same
day the Treasury issued a press release announcing that the National
Statistician had made changes to the methodology of the RPI and that
the Bank of England had indicated that they did not represent a
fundamental change to the index. The debt management office had given
holders of gilts early warning of the prospective changes, but that did
not seem to filter through to a wider audience. The Statistics
Commission criticised the way in which the news was disclosed and said
that the ONS should have issued a separate press release to warn people
of the changes and separate the decision from the
Chancellor.
Such
problems will clearly be mitigated by clause 11, but similar
communication difficulties might arise in relation to the residual
functions that the clause leaves with the Chancellor. There is an
important lesson on credibility to be learned from the hedonics
controversy. In examining it, the Statistics Commission noted that
disquiet had been expressed that the change had been politically
motivated, which was the problem I referred to in response to the
intervention by the hon. Member for Hove. The commission noted that
there had been speculation whether the developments flowing from the
shift to hedonics had been released in small packages to avoid
triggering gilt redemption
clauses.
I must make
it clear that the commission concluded that the changes were not
politically motivated and that they were objectively justifiable, but
that the Chancellor’s continuing role had led some to look for
political motives behind the change. It concluded that more
transparency and information was required to reassure the public about
the governance of the RPI. It went on to
state:
“We
believe that there is a strong case for going further than this and
looking again at the Chancellor’s special role in respect of the
RPI.
The Commission is
not persuaded that there is public benefit in treating the RPI
differently from other key
statistics.
We believe
that this tends to undermine confidence that the construction of the
index is handled in an impartial
way.
It is therefore
also likely to have presentational disadvantages through the suspicion
it engenders.
In
short, the current arrangements create the worst of all possible
outcomes.”
What concerns
me—I would like to hear the Minister’s views—is
the suspicion that changes to the index are politically motivated. That
suspicion was identified by the commission as a source of concern and
it could persist, even with the limited powers retained by the
Chancellor.
The
suspicion could be fuelled by the position of the RPI advisory
committee. For many years, that committee of learned experts played a
role as a guardian of the RPI. The committee provided a degree
of transparency and independence in a system where the Chancellor had a
unique role in relation to a hugely important index. However, that
transparency has been lost since the current Chancellor took over at
No. 11 because the committee has not met. It can only be convened at
the request of the Chancellor and he has chosen not to do so. That is one of the reasons why
disquiet has been and continues to be expressed at the
Chancellor’s role in relation to RPI, even if the changes go
through. It would be interesting to hear the Minister confirm that the
committee has not met since 1994, and it would be useful if he
clarified whether he envisages a continuing role for the committee in
dealing with the problems and the concerns about the
Chancellor’s role in relation to RPI. Will it continue, for
example, as an adviser to the board or the National Statistician,
rather than to the
Chancellor?
In
conclusion, the Committee will be well aware that even the smallest
changes to the index can save the Chancellor many millions of pounds in
benefit and interest payments. It is vital that we get the RPI
arrangements absolutely right, which is why the Opposition are seeking
a degree of further clarification from the Minister about how the
residual powers retained for the Chancellor will work and how they can
be
justified.
The
Chairman:
Before I call Rob Marris, for the convenience of
Members it may be helpful to say that I do not allow to intend a
separate debate on clause stand part. Members wishing to speak on this
subject may therefore want to join the debate on amendment No.
150.
Rob
Marris:
Were the amendment not a probing
one, I would certainly urge my colleagues to vote against it if it were
to be pressed. On a minor level, it is not properly worded because it
should have removed the word “of” as well, but on a more
major level, the amendment is completely potty. It is potty for some of
the reasons adverted to, but not made absolutely clear by the hon.
Member for Chipping Barnet in a very long speech. The matter dates back
to about the year of the hon. Lady’s birth. Many older members
of the Committee will remember, during the run on the pound and
subsequent devaluation in 1967, the phrase used by the then Prime
Minister, Harold Wilson: “the gnomes of Zurich”. As a
result, legislation was passed in 1968 for index-linked gilts. The
index linking is important and it carried on until 2002.
Labour
Members, if not Opposition Members, will remember that the under the
Conservative Governments who were in office for two thirds of the
period between the passing of the 1968 Act and the changes of 2002, and
in particular under the Government of John Major, the national debt
doubled. Under the present Government, until very recently, we have
been paying it off. The national debt is considerably lower than the
one we inherited in 1997, and unlike the situation under the
Conservative Government, we have something to show for it.
What would
happen if the amendment were to be passed? It would take the matter of
redemption out of the hands of any Government. The hon. Lady adverted
to one point but did not make it entirely clear. At this point, I shall
refer to the explanatory notes, which will please all hon. Members.
Stockholders, if there is a change in the RPI calculation, have the
right to require the Government to redeem the stock. That is
the£90 billion in the Library note to which the hon.
Lady referred. That could happen overnight under the terms of those
gilts, and it would have, as the explanatory notes put it: “a significant impact on financial
markets and potentially on public finances.”
If 90 billion quid became repayable by
the Treasury overnight, it would have to rush off to the money markets
to try to borrow another £90 billion, which would cause chaos
and be most undesirable. That is why, as the Bill is worded and in
contradistinction to the amendment, and because of the delicate nature
of that power and the overhang from previous years of Conservative
borrowing, it leaves the matter ultimately with the Chancellor of the
Exchequer. Given that the stocks are due for redemption between 2009
and 2030 and that the hon. Member for Tatton (Mr. Osborne)
hopes—vainly—to be Chancellor of the Exchequer during
that period, I say to the hon. Lady that I suspect her hon. Friend
would be absolutely horrified if such an amendment was
accepted.
6
pm
Mrs.
Villiers:
The hon. Gentleman refers to the point at which
the relevant securities will be redeemed. Is there an argument for some
kind of limitation on the Chancellor’s residual role, to ensure
that it comes to an end when the relevant gilts are no longer in
existence?
Rob
Marris:
That could be, but it is not until 2030. Few here
today will still be Members of the House
then.
Mrs.
Villiers:
We should bear in mind that statistics Bills
come round only once every 60 years.
Rob
Marris:
They may come round more frequently, as all good
things do, under a Labour Government.
It goes on to 2030; we do not
need to worry about introducing a sunset clause. It would be completely
potty if the amendment were to get anywhere near causing a vote, and I
suspect that the shadow Chancellor would
agree.
Dr.
Cable:
I do not want to speak to the amendment; I have a
question about the clause. It may stem from ignorance on my part. I can
understand why it is important to have a clause on the index of
inflation; it is probably the most crucial of all economic indicators.
It links to so many other things, including benefit indexation and
index-linked gilts.
My question relates to the fact
that we have two measures of inflation—the CPI and the RPI. The
CPI is no less important because it is the indicator that the Bank of
England uses when setting interest rates. It is therefore just as
important as the RPI. Why is there no comparable statement of the
process safeguarding the integrity and the independence of CPI
calculations?
The answer in part is that the CPI is a European index, and people no
doubt place their trust in the Commission as the ultimate repository of
statistical honesty, and we do not need a European index to be embodied
in British legislation. However, it is a practical
point. The CPI is currently being reviewed in order to take account of
the fact that it does not capture housing costs. There is some
discussion about the fact that the CPI might be adapted separately for
the UK in order to capture housing costs ahead of any change made by
EUROSTAT. Who safeguards the process by which the CPI, as well as the
RPI, is compiled? Has it been omitted from legislation for good reasons
or simply because no one thought it was necessary to do so? It is not a
challenge to the provisions of the clause; it is simply a question
about the thinking behind its drafting.
John
Healey:
Let me start by thanking the hon. Member for
Chipping Barnet for the welcome that she gave to the
Chancellor’s transferring his essential powers over the RPI to
the board. I know that the Treasury Committee and others have followed
it closely and encouraged my right hon. Friend to do so for some time.
I am glad that we can do so. We will have the right provisions to
protect essential public finance interests and the stability of the
financial markets, as I shall explain later.
Essentially, the hon. Member
for Chipping Barnet invites me to explain the peculiarity of the
UK’s debt market, which lies behind the role that we propose for
the Chancellor. As the Committee knows, all giltsare issued
under a prospectus, and in the UK the prospectus of certain
index-linked gilts contains the right for the holders of those gilts to
redeem them early at par, or face value, under certain circumstances
relating to changes in the construction of the retail prices
index.
The hon. Lady
said that it seems that no other country has such provisions as those
that we propose. That is because the prospectuses for index-linked
gilts issued in other countries do not contain the obligation for the
Governments of those countries to redeem those gilts in such specific
circumstances.
Were
the clause to be triggered at a time when gilts were trading below face
value, there could be real and severe consequences to the financial and
debt markets and to public finances, as my hon. Friend the Member for
Wolverhampton, South-West has pointed out. That is why clause 19
provides that before the board makes any changes to the RPI it must
consult not the Chancellor but the Bank of England about whether the
change constitutes a fundamental change in the index that would be
materially detrimental to the interests of the holders of the relevant
index-linked gilts—in other words, whether it is likely to
trigger the clause in those prospectuses. If, and only if, the Bank of
England is of the opinion that the change would be materially
detrimental, the board must obtain the Chancellor’s consent to
that change. Should the Bank determine that the change is not
fundamental or materially detrimental to the holders of certain
index-linked gilts, the Chancellor will play no part in making any
proposed changes.
The hon. Lady’s amendment
proposes that in the narrow and specifically defined circumstances that
I have just mentioned, consultation with the Chancellor would be
required rather than consent. I do not accept the amendment—I
hope that she will accept my argument—because it does not
provide adequate protection against the possible consequences for the
public finances or the severe disruption of an orderly gilts and wider
financial market.
I
want to give an indication of the scale of the potential consequences.
This is hypothetical, but nevertheless we might find circumstances in
which it could be the case. If the Government had to redeem the
index-linked gilts, that would lead to large-scale refinancing of up to
£91 billion of additional and unplanned gilts. To put that in
perspective, it is three times the average annual gilt issue, which
stands at about £31 billion. There could also be real fiscal
costs, as the hon. Lady will appreciate, principally because it is
likely that new gilts would need to be issued at higher yields than
those being replaced. That could lead, we calculate, to additional
fiscal costs of up to an average of £0.9 billion a year for the
financial years through to 2030-31. That is why it is crucial that the
Chancellor, as the Minister who is democratically accountable in the
end for public finances, retains the ability to prevent such a
potentially costly event. Its possible impact under the circumstances
set out in the Bill is on the public finances and the financial
markets, not on statistics. It is right, therefore, that the Chancellor
should make the final decision rather than the board.
That is not to say that we
would expect the role of the Chancellor to be triggered. The Bank of
England has not assessed any of the changes to the RPI since 1997 as
fundamental and materially detrimental to the holders of the relevant
index-linked gilts. Accordingly, even if the provision had been in
place since 1997, the Chancellor’s role would never have been
triggered.
There was
an exchange between the hon. Lady and my hon. Friend the Member for
Wolverhampton, South-West about the use of a sunset clause. Although
there is not a sunset clause in clause 19, all the gilts to which it
refers are due to expire in 2030 so there is de facto an automatic end
to the point at which the Chancellor’s role and consent would be
required. In relation to the question posed by the hon. Member for
Twickenham, it is necessary to have a clause not because the RPI is
somehow a statistic that is first among equals and more important than
the others but because of the matter of redemption rights in certain
index-linked gilts that attach specifically to the retail prices index.
That is the purpose of the clause and the reason for it and the
safeguards. The hon. Lady said that this is a probing amendment. I hope
that she has probed far enough and will accept the unamended
clause.
Mrs.
Villiers:
The Minister’s comments are useful, as
was this discussion. I do not propose to press the amendments to a
vote, but I emphasise that the RPI advisory committee could play an
important role in enhancing transparency in this whole process, and I
remind the Minister of my comments on that. I beg to ask leave to
withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Clause
19 ordered to stand part of the Bill.
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