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Lord Campbell of Alloway: My Lords, the Minister rightly said that the Prime Minister has not yet pronounced upon the economy. May I respectfully ask him this: is it not about time that he did so, with inflation beginning to rise, the strong pound crippling our export industry and other aspects of which all noble Lords in this House are well aware?
Lord McIntosh of Haringey: My Lords, I am not sure that I know what the Prime Minister is going to say about the economy, but I know that this afternoon the Chancellor of the Exchequer is responding to Questions about the interest rate rise announced by the Bank of England this morning. He will be saying that the Bank of England has agreed with him that we should prevent a return to the cycle of boom and bust and inflationary pressures on the economy which, despite persistent warnings, the previous Government failed to tackle and which must now be brought under control.
Lord Mackay of Ardbrecknish: My Lords, can the Minister assure us that the Prime Minister's opinions were delivered more quickly than the noble Lord's original Answer to the House this afternoon? How does the creation of jobs square with the Budget which has put up inflation, and which will put up inflation by 0.8 per cent. of 1 per cent? And how does it square with another one quarter per cent. increase in interest rates, all of which will have adverse effects on jobs and job creation?
Lord McIntosh of Haringey: My Lords, I am not sure that I have ever been criticised before for speaking too slowly. I had always thought that it was the other way around. The point about the Budget--this is recognised and agreed by the Bank of England, as the noble Lord will see if he reads its press release of this afternoon--is that the Bank agrees that the Budget has had a contractionary effect, but it believes that further adjustment is required. I should point out that there is a difference between short-term changes in interest rates and fine tuning the economy, which is the responsibility of the Bank of England, and the long-term strategy for reducing the fiscal deficit to rebalance the economy, which is the responsibility of the Government.
Lord Peyton of Yeovil: My Lords, I return to the second answer which the Minister was good enough to give me. Will the noble Lord accept our sympathy that someone should have inserted into his papers--obviously unknown to him--a copy of one of the speeches that he made during the election campaign?
Lord Burnham: My Lords, I am glad to hear the Minister's confidence about the long term, but what steps will Her Majesty's Government take on behalf of pensioners to remedy the fact that the average yield of the £300 billion-worth of pension funds in UK shares will now drop from an average of 4 per cent. yield to an average of 3.2 per cent.? Further, can the Minister give an estimate of the number of schemes which, as a result of the actions of her right honourable friend the Chancellor of the Exchequer, will fall into deficit, laying particular emphasis on local government pension schemes?
Baroness Hollis of Heigham: My Lords, I should have thought that what matters is the total return to pension funds, including the capital growth of the companies whose shares are held. Since 1992 the yield from UK equities has been some 107 per cent.--it has more than doubled--and about three-quarters of that growth has been capital gain, not dividend yield. Had the tax credit not been in existence for those years, the total gain would still have been over 100 per cent.--indeed, it would have been 100.4 per cent. even without the distortion of the tax credit.
The second point raised by the noble Lord related to the number of schemes that will be affected. We do not yet know that, but it is right to remind the House that at the moment about half of all schemes are in surplus and are enjoying a full or partial holiday. Something like £50 billion-worth of assets are currently held in surplus in pension funds.
The noble Lord's third point related to the effect on local authorities. It is nonsense to suggest--there has been some speculation in the press--that council taxes are about to rise. Although the loss of tax credits will have some impact on the income of local authority pension funds, the extent to which those changes feed through to local authority budgets will depend on the
Lord Marsh: My Lords, does the Minister accept that many people who respect the great contribution that she has made to this House on the subject of pensions will be saddened and surprised by the answer that she has just given and her defence of an outrage? Does the noble Baroness accept that pension funds are concerned primarily with yield and not capital gain, which is the main reason why many fund managers will withdraw investments from companies when dividends cease to be paid or are reduced? Further, does she accept that it is a three-pronged abomination in that not only does it take £5 billion out of pension funds--the late Mr. Maxwell, whether he has gone up or down, must be laughing--but it also has a deleterious effect on the solvency of existing schemes, including the 50 per cent. that are already insolvent? Does the noble Baroness also agree that the impact on gilt yields is bound to have another deleterious effect on those who are forced to put their pension funds into annuities? I am surprised that the noble Baroness can remain in office and defend this monstrosity.
Baroness Hollis of Heigham: My Lords, I expect the National Association of Pension Funds to talk up the problems effected by this change, but I do not expect that from someone with the experience of the noble Lord, Lord Marsh. I am sure that many noble Lords agree, including the late financial adviser to the previous Chancellor, Kenneth Clarke, in his recent article, that the abolition of tax credit is a change long overdue, "whose time has come." The effect of this tax distortion in this country over the years has produced greater reliance on dividend yield than capital growth. The noble Lord does not need me to tell him that in the late 1970s in the UK and its closest analogue the United States--most European funds do not have funded private pension schemes analogous to the UK--2 per cent. of GDP went into dividends. Today, 3 per cent. of US GDP goes into dividends and the figure for the UK is 6 per cent. As a result, this country has not had the investment in economic health and growth that it should. That was what the Budget was designed to alter. Together with the reduction of corporation tax by 2 per cent. we believe that we will have a sound economy on which the ultimate health of pension funds rests.
Lord Carter: My Lords, at a convenient moment after 3.30 p.m. my noble friend Lord Gilbert will, with the leave of the House, repeat a Statement that is to be made in another place on Bosnia: indicted war criminals.
It may be for the convenience of the House to know that, subject to the progress of business, the House will rise for the Summer Recess on Thursday 31st July. I am not yet able to announce the date when the House will return, but I shall inform your Lordships as soon as it is known. The House will sit at 11 a.m. on Thursday, 31st July.
The Lord Chancellor (Lord Irvine of Lairg): My Lords, I beg leave to introduce a Bill to amend Section 12 of the Magistrates' Courts Act 1980; to make further provision in relation to certain criminal proceedings in magistrates' courts about the proof of previous convictions and orders; and for connected purposes. I beg to move that this Bill be now read a first time.
Baroness Symons of Vernham Dean: My Lords, I beg to introduce a Bill to enable effect to be given to certain provisions of the Comprehensive Nuclear-Test-Ban Treaty adopted in New York on 10th September 1996 and the Protocol to that Treaty; and for connected purposes. I beg to move that this Bill be now read a first time.