17 Dec 2013 : Column GC255

Grand Committee

Tuesday, 17 December 2013.

Arrangement of Business

Announcement

3.30 pm

The Deputy Chairman of Committees (Baroness Harris of Richmond): My Lords, if there is a Division in the House, the Committee will adjourn for 10 minutes.

Armed Forces and Reserve Forces (Compensation Scheme) (Consequential Provisions: Primary Legislation) (Northern Ireland) Order 2013

Motion to Consider

3.30 pm

Moved by Lord Astor of Hever

That the Grand Committee do consider the Armed Forces and Reserve Forces (Compensation Scheme) (Consequential Provisions: Primary Legislation) (Northern Ireland) Order 2013.

Relevant documents: 15th Report from the Joint Committee on Statutory Instruments.

The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever) (Con): Noble Lords may recall that I led a debate on 15 October this year, introducing this legislation specifically for those seriously injured service and ex-service personnel resident in Northern Ireland who are entitled to an Armed Forces independence payment, or AFIP. This legislation provides access to additional benefits, schemes and services, known as passported benefits. The Motion was passed by the Committee but, due to a procedural error in the progress of the statutory instrument in the other place, the legislation must be debated again before it can come into force.

Although the AFIP has been available to seriously injured service and ex-service personnel resident in Northern Ireland, the legislative changes to provide access to passported benefits have not been implemented. A second statutory instrument, amending secondary legislation, will be in place shortly. Today’s debate gives Members a second opportunity to debate this legislation. It provides access to two minor but important legislative changes in respect of carer’s allowance and the Christmas bonus.

This legislative change will ensure that those who provide invaluable support to seriously injured members of the Armed Forces in receipt of AFIP have access to carer’s allowance in Northern Ireland from the Department for Social Development. Carer’s allowance is currently £59.75 per week. This change will make provision specifically for those who devote their lives to supporting our seriously injured people, providing some financial support for doing so. It is only right that a person caring for an AFIP recipient should have

17 Dec 2013 : Column GC256

access to carer’s allowance. The provisions relating to the Christmas bonus will ensure that all recipients of AFIP automatically qualify for the tax-free, lump sum Christmas bonus of £10.

By putting in place the provisions to give AFIP recipients resident in Northern Ireland access to the additional benefits, schemes and services that are offered by other government departments, devolved Administrations and local authorities, the Government are giving them treatment equal to that offered to service personnel and veterans resident elsewhere in the UK. It is important that we address these issues, meeting the principles at the heart of the covenant across all Administrations for members of the Armed Forces and veterans who are seriously injured. I hope the Committee will therefore once again approve the order today.

Lord Empey (UUP): My Lords, the Minister will know that my interest in these matters goes back to the passage of the Armed Forces Bill in 2011, when a number of amendments were discussed in relation to ensuring that the military covenant was applied universally throughout the United Kingdom, particularly in Northern Ireland. One of the points made at that time was that many of the services that are required to be provided for soldiers, former soldiers and their families are devolved matters in different parts of the United Kingdom. The question then arose: how could the Secretary of State for Defence prepare and deliver a report to Parliament, given that he or she would not be in control of many of the services required in the regions? It was also based on the general principle that these services should be as universally available to eligible personnel throughout the UK as possible.

There are a couple of aspects to this. I understand the technical matters that the Minister has addressed, and the fact that the legislation has had to be reintroduced. However, I seek the Minister’s assurance on a couple of issues. First, the welfare issues are currently before the Northern Ireland Assembly. I have no doubt that amendments will be tabled in that Chamber. Whether they affect any of this is unclear, but sooner or later the Welfare Reform Bill will be passed in Stormont, and then we will see where that takes us. Any amendments may well involve a cost to the Northern Ireland Assembly from the block grant. I think people realise that is the case.

The issue that concerns me more than that is that the Minister is saying that the Government have received the consent of Northern Ireland Ministers from the relevant departments for these proposals. Does that mean that the Government will require a legislative consent Motion to come from the Stormont Government or the Assembly, or is there sufficient administrative flexibility for Ministers in Northern Ireland, on their own, to give the Minister and the department the assurances they seek?

The second point is one I made during the passage of the Armed Forces Bill, and I know the Minister is aware of my concern. Although the fact—if it is the case—that he has the consent of Northern Ireland Ministers is welcome, Ministers in various departments will change from time to time. Therefore, the consent of Ministers cannot be guaranteed in the long term.

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What does the Ministry of Defence do in the event of a Minister refusing his or her consent? That was a point I made during the passage of the Bill. In the short term there is no problem; however, in the long term there may well be one.

I therefore seek an assurance from the Minister that the Government will take all necessary steps, legislatively if necessary, to ensure that the services provided to injured personnel and their families will be provided throughout the United Kingdom, even if there is opposition from the local Administrations. I fear that a pattern has developed whereby we are hiding behind the Sewel convention, to the extent that it is now regarded as a shibboleth. Is Parliament devolving powers or giving them away permanently to local Administrations? That is a big issue for devolution generally.

The specific issue before us is that currently the consent of Ministers in Belfast is required. I understand that. At the moment, it appears that that consent is being given, and I am glad about that, but in the long term it might not be. I say to the Minister that when the next Armed Forces Bill is introduced, which I gather will be around 2016, I would be willing to bring forward proposals to correct any difficulties that might arise because the ministerial team in Belfast had, by then, changed. The issue that concerns me could arise—we have seen it already with the National Crime Agency, where it is not yet resolved.

I feel very strongly about this issue. The House accepted, during the passage of the Armed Forces Bill, that regardless of where they come from or live in the United Kingdom, the services provided to help former soldiers and service personnel who have served in the UK Armed Forces should be available as equally as possible. Nobody should suffer discrimination because they happen to come from a devolved region. This is Parliament’s responsibility, because the Armed Forces are an excepted matter under devolution. In my opinion, it will never be a devolved issue. Therefore, this Parliament has an overarching responsibility to see that these services are provided on an equitable basis, irrespective of where the recipient comes from. I seek the Minister’s assurances on all these matters.

Lord Rosser (Lab): My Lords, the Minister has reminded us that we debated this matter on 15 October when the order was agreed and we expressed our support for it. The Minister has explained why we have to approve the order again, and that is certainly not an issue on which I wish to dwell.

I have just a couple of brief points, since I do not intend to repeat what I said on 15 October. In responding to points I raised then, however, the Minister said that the number of,

“seriously injured service or ex-service personnel … covered by this order relating to Northern Ireland … is fewer than 20”.—[

Official Report

, 15/10/13; col. GC 213.]

I simply ask, since the order is not coming into effect on 28 October as was envisaged, whether anyone has lost out as a result, as the order itself indicates that it comes into force on the day after that on which it is made. It would be helpful if the Minister could clarify what date that is likely to be, and whether anyone has

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lost out as a result of this apparent delay in bringing the order into effect for the reasons the Minister mentioned.

Lord Astor of Hever: My Lords, I thank the two noble Lords for their contributions to the debate. I very much agree with the noble Lord, Lord Empey, that all services and benefits should be universally available throughout the United Kingdom.

Five Ministers of State for Northern Ireland provided consent for these amendments to be made. The departments are the Department for Social Development, the Department of Justice, the Department for Employment and Learning, the Department of the Environment and the Department of Health, Social Services and Public Safety. No further Northern Ireland government approval is required for this SI, but the noble Lord asked me about a possible future situation where a Minister refused consent. I am afraid that I do not have an immediate answer with me, but I undertake to write to the noble Lord on this important point.

The Deputy Chairman of Committees: My Lords, there is a Division. We will return at 3.52 pm.

3.42 pm

Sitting suspended for a Division in the House.

3.52 pm

Lord Astor of Hever: My Lords, the noble Lord asked me what impact the late implementation date would have on the access to a Christmas bonus of AFIP recipients in Northern Ireland. Although there is no legislative provision to make payment of a Christmas bonus to those individuals who have elected to receive AFIP—as the noble Lord said, there are fewer than 20 in Northern Ireland—payments have been made by the DWP to ensure that eligible seriously injured service personnel resident in Northern Ireland receive the same support as AFIP claimants in the rest of the UK and recipients of both the enhanced rates of personal independence payment, which include the Christmas bonus.

In summary, I restate the point I made when I opened this debate. The changes debated today are closely linked to the Government’s commitment to uphold the Armed Forces covenant. It is only right that we provide access to additional benefits, schemes and services to those most seriously injured, wherever they are resident in the United Kingdom. I believe that these changes will go some way to achieve this.

Motion agreed.

3.54 pm

Sitting suspended.

Smoking: E-cigarettes

Question for Short Debate

4 pm

Asked by Viscount Astor

To ask Her Majesty’s Government what is their policy on regulation of the sale, advertising and promotion of e-cigarettes.

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Viscount Astor (Con): My Lords, electronic cigarettes are tubes that simulate the effect of smoking. Some e-cigarettes contain nicotine, but importantly they do not contain tobacco. Inside an e-cigarette is a small computer chip, a lithium battery, a heating element and a cartridge filled with water containing dissolved pharmaceutical-grade nicotine. You take a puff and the heater fires up the element to around 150 degrees centigrade, which heats the liquid in the cartridge so that it can evaporate. You inhale and that gives a so-called nicotine hit. You then exhale what looks like smoke but is in fact water vapour. E-cigarettes are regarded by some as a new and dangerous nicotine habit, but by others as a successful way to quit smoking. The truth is perhaps somewhere in the middle, but it is clear that e-cigarettes are here to stay. The market is expected to grow from £1 billion this year to £10 billion over the next five years. It is unregulated at the point of sale in this country, as it is in most countries worldwide.

There has been a recent attempt by the European Commission, which introduced a draft directive, backed by this Government, to regulate electronic cigarettes as medicines, but the proposal was thrown out by the European Parliament. A majority in the European Parliament supported using a mixture of tobacco regulation, controls on promotion and the reporting of adverse reactions. I understand that negotiations are continuing right up to today, and I hope that the Minister will be able to give us notice of any progress.

The Government have encouraged e-cigarette producers voluntarily to seek a licence for their products so that they can meet standards of safety and quality and be sold on prescription. Can the Minister say how many of the companies that produce and sell e-cigarettes have signed up to the voluntary code, and how many are estimated not to have signed up? Perhaps he could also confirm what the cost of validation might be for producers complying with a medical directive. I understand that it would be more than £250,000. This would put most of the smaller suppliers out of business and hand the industry over to the large tobacco companies, thus perhaps stifling competition.

As one drives into London on the M4, one can see three new vast advertising hoardings promoting e-cigarettes. Do the Government approve of this kind of advertising, which would not be allowed for normal cigarettes? There is a difficult issue here because most e-cigarettes are made up with 5% nicotine, but some, probably 10% of the market, have no nicotine in them at all. They are, for example, cherry or bubblegum flavoured. Some look like cigarettes and some like pencils, while others look like a pipe end without a pipe. If they wanted to regulate, how would the Government regulate an e-cigarette that contains no nicotine? Indeed, is it an e-cigarette, is it a toy or is it something else?

At the moment, e-cigarettes can be sold to children. Does the Minister believe that there should be an age limit, or will we see school playgrounds full of puffing children—or perhaps I should say even more full of children puffing? If so, would it be illegal for them to puff an e-cigarette that does not contain any nicotine?

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After all, what comes out of an e-cigarette is just harmless vapour, not smoke. Most e-cigarettes are made in China, with the nicotine and other flavours mainly being manufactured there. Is there any form of inspection regime for the importation of this nicotine additive?

There is evidence from America that e-smoking is on the increase, but not necessarily that e-cigarettes are a gateway to smoking, although it is estimated that the US has around 2.5 million users. We do know that nicotine is an addictive drug, and this new invention could set some on the path to nicotine addiction, but that is nicotine in very small amounts, which is hardly harmful in comparison with the danger of and damage caused by smoking. E-cigarettes could save the lives of millions of smokers by weaning them off normal cigarettes. They are a welcome aid to smokers trying to quit; for example, those who have failed with nicotine chewing gum or the patches. The value of the health gains associated with a single successful quit attempt is very substantial, and the Government’s own Department of Health estimates it at more than £70,000.

This is the dilemma facing health experts, policymakers and regulators—and, indeed, the Minister. There is very little research on the effects of e-cigarettes. While they are definitely less harmful than normal cigarettes, they contain carcinogens and toxic chemicals, albeit in very small quantities. E-cigarettes have been described as,

“the triumph of wishful thinking over data”,

and,

“an opportunity to improve public health”.

Closer to home, ASH—Action on Smoking and Health—supports the use of licensed nicotine products as an aid to cutting down or quitting smoking, and as a substitute for smoking. They satisfy the desire to smoke, help cut down on cigarettes and, of course, eradicate the smell of stale smoke and the effect of passive smoking on anybody nearby. Most diseases associated with smoking are caused by inhaling smoke, which contains thousands of toxic chemicals. As I have said, by contrast, nicotine is relatively safe.

My final question to my noble friend the Minister is: do we have to wait until the European Commission and European Parliament finally agree—if they ever do—or can the Government introduce sensible regulations on the advertising, promotion and sale of e-cigarettes? If the Government overregulate the sale of e-cigarettes and restrict their use, they will increase the costs to health in this country and miss an opportunity to cut down on smoking.

4.06 pm

Lord Borwick (Con): My Lords, first, I declare an interest as a trustee of the British Lung Foundation. Lung disease can affect everyone but it seems to be particularly prevalent in the poorest parts of the country. Of course, heavy smoking is strongly correlated with poverty.

Tobacco is by far the largest cause of lung disease, and a very large number of people suffer debilitation and a painful death because of it. I have many friends who have spent their lives trying in vain to help people

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addicted to cigarettes, and it is understandable that they passionately hate anything to do with smoking, including e-cigarettes.

When I visited the Consumer Electronics Show in Las Vegas, which I think is the largest trade exhibition in the world, in January this year, I saw about 200 Chinese manufacturers of e-cigarettes open for business. There is a tide of these things coming. They were the most common new product at the show after iPhone cases. One could wish that they would just go away, but of course they will not. So I congratulate my noble friend Lord Astor on opening this debate. Many people have been wishing e-cigarettes away; this is a useful chance to debate them.

People are addicted to nicotine but it is the tar that kills them. This seems well established. However, part of the addiction to cigarettes is not just the chemical nicotine but the handling of a cigarette, the sociability and the feel of it. Certainly, e-cigarettes provide a substitute for some of these sensations. They seem a reasonable and less dangerous product than conventional cigarettes.

The trouble is that we are fighting the battle against the killer tobacco on three fronts: on cost, by increasing consumption taxes; with education at earlier stages to ensure those likely to start smoking, namely teenagers, are aware of the risks involved; and by making cigarettes abnormal, by keeping them locked behind shutters at the supermarket and with other proposals such as plain packaging. It seems that the third front, denormalisation, is at least as powerful as the other two. The concern is that e-cigarettes can undo a lot of the good work that has been done to make smoking an unusual habit and smokers akin to pariahs. If it is okay to smoke e-cigarettes, will it become okay to smoke normal ones again? Will users ever kick the habit of enjoying nicotine and holding a cigarette?

Another important question must be addressed: what are e-cigarettes? Do they contain just nicotine and vapour, or anything else at all? This seems to call for regulation as a simple product, to ensure quality. Will my noble friend the Minister encourage his department to sponsor some research into the effects of nicotine alone? It is said to be dangerous to those with a heart problem or to pregnant women, but the truth is that there has not been enough research on the subject to be sure.

It is important to understand how e-cigarettes are changing the behaviour of smokers of conventional cigarettes. ASH has reported that as many as 1.3 million people occasionally use e-cigarettes and that 400,000 people are using e-cigarettes in total or partial replacement of normal cigarettes. That is great news.

The danger people spot is that children might become more likely to take up normal cigarettes after trying e-cigarettes. We cannot tell if that is so, because there has been not been any research on it, but logic suggests otherwise. Teenagers smoke cigarettes to look cool, and e-cigarettes are not cool—they are about giving up an addiction. No teenager wants to look as though they are giving up something: they want to look as though they have no problems.

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According to research from the Institute of Economic Affairs from July 2013:

“Far from acting as a gateway to smoking, all the evidence indicates that e-cigarettes are a gateway from smoking”.

Evidence from ASH supports that statement. Indeed, the fact that 400,000 people have given up cigarettes is great news, and if we concentrate on that, we should say that there should be no real restriction on the sale or advertising of e-cigarettes. If they are mainly used by existing smokers as a way of quitting, we could even do good by giving them away to smokers.

If we are to have any regulation, it should be of the quality of the contents alone: restricting the ingredients to nicotine; ensuring damaging toxins are kept out of them; and not allowing flavoured e-cigarettes specifically designed to attract children, such as bubblegum e-cigarettes or such like.

In choosing today for this short debate, my noble friend Lord Astor has shown a downright astonishing ability to predict the future, because a provisional deal was reached last night in Brussels between MEPs and national Governments on a new tobacco products directive. Martin Callanan MEP has said that this directive will take the majority of e-cigarettes off the market. It would restrict all but the weaker e-cigarettes, even though smokers who are considering using e-cigarettes to break their addiction tend to begin on stronger e-cigarettes and gradually reduce their usage. Making stronger e-cigarettes harder to come by will encourage smokers to stay on tobacco. Among the points made in the draft directive, paragraph 3.7 states that its purpose is to stop the situation whereby,

“more people—unaware of the content and effects of these products—inadvertently develop a nicotine addiction”.

The idea that somebody will inadvertently become addicted without the help of the EU seems rather unlikely.

Finally, I pose a conundrum for the Minister. If we go ahead with plain packaging for cigarettes—which are actually illustrated with lurid photographs of health problems—do we allow e-cigarettes to be sold in similar packages if the manufacturer wants to? That is something that the great Sherlock Holmes might perhaps describe as a “three pipe problem”.

4.13 pm

Viscount Ridley (Con): My Lords, I congratulate my noble friend Lord Astor, on securing this debate. It is an issue of much greater importance than the sparse attendance might imply and one that is growing in importance. I have no interest to declare in electronic cigarettes: I dislike smoking and have never done it. I have only once tried a puff on an e-cigarette, which did nothing for me. I am interested in this issue as a counterproductive application of the precautionary principle. I should say that I am indebted to Ian Gregory of Centaurus Communications for some of the facts and figures that I will cite shortly.

There are, at the moment, about 1 million people in this country using electronic cigarettes, and there has been an eightfold increase in the past year in the number of people using them to try to quit smoking. Already, 15% of ex-smokers have tried them, and they have overtaken nicotine patches and other approaches

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to become the top method of quitting in a very short time. The majority of those who use electronic cigarettes to try to quit smoking say that they are successful.

Here we have a technology that is clearly saving lives on a huge scale. If only 10% of the 1 million users in the country are successful in quitting, that would save £7 billion, according to the Department of Health figures given in answer to my Written Question last month, which suggest that the health benefits of each attempt to quit are £74,000. In that Answer, Minister said that,

“a policy of licensing e-cigarettes would have to create very few additional successful quit attempts for the benefits to justify its costs”.—[

Official Report

, 18/11/13; col.

WA172

.]

But who thinks that licensing will create extra quit attempts? By adding to the cost of e-cigarettes, by reducing advertising and by unglamorising them, it is far more likely that licensing will create fewer quit attempts. Will the Minister therefore confirm that, by the same token, a policy of licensing e-cigarettes would have to reduce quit attempts by a very small number for that policy to be a mistake?

Nicotine patches are also used to reduce smoking and they have been medicinally regulated, but there has been extraordinarily little innovation in them and low take-up over the years. Does the Minister agree with the report by Professor Peter Hajek in the Lancet earlier this year, which said that the 30-year failure of nicotine patches demonstrated how the expense and delays caused by medicinal regulation can stifle innovation? Does my noble friend also agree with analysts from Wells Fargo who this month said that if e-cigarette innovation is stifled,

“this could dramatically slow down conversion from combustible cigarettes”?

We should try a thought experiment. Let us divide the country in two. In one half—let us call it east Germany for the sake of argument—we regulate e-cigarettes as medicines, ban their use in public places, restrict advertising, ban the sale of refillable versions, and ban the sale of e-cigarettes stronger than 20 milligrams per millilitre. In the other half, which we will call west Germany, we leave them as consumer products, properly regulated as such, allow them to be advertised as glamorous, allow them on trains and in pubs, allow the sale of refills, allow the sale of flavoured ones, and allow stronger products. In which of these two parts of the country would smoking fall fastest? It is blindingly obvious that the east would see higher prices—and prices are a serious deterrent to attempts to quit smoking because many of the people who smoke are poorer than the average. We would see less product innovation, slower growth of e-cigarette use and more people going back to real cigarettes because of their inability to get hold of the type, flavour and strength that they wanted. Therefore, more people would quit smoking in the western half of the country.

What are the drawbacks of such a policy? There is a risk of harm from electronic cigarettes, as we have heard. How big is that risk? The Minister confirmed to me in a Written Answer earlier this year that the best evidence suggests that they are 1,000 times less dangerous than cigarettes. The MHRA impact assessment

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says that the decision on whether to regulate e-cigarettes should be based on the harm that they do. Yet that very impact statement says that,

“any risk is likely to be very small”,

that there is,

“an absence of empirical evidence”

and “no direct clinical evidence”, that “the picture is unclear”, and—my favourite quote—states:

“Unfortunately, we have no evidence”,

of harm.

There is said to be a risk of children taking up e-cigarettes and then turning to real cigarettes. Just think about that for a second. For every child who goes from cigarettes to electronic cigarettes, there would there have to be 1,000 going the other way, from e-cigarettes to cigarettes, for this to do any net harm. The evidence suggests, as my noble friend Lord Borwick has said, that the gateway is the other way. Some 20% of 15 year-olds smoke, and evidence from ASH and a study in Oklahoma suggests strongly that when young people use electronic cigarettes they do so to quit, just like adults do.

If we are to take a precautionary approach to the risks of nicotine, will the Minister consider regulating aubergines as medicines? They also contain nicotine. If you eat 10 grams of aubergine, which you easily could with a plateful of moussaka, you will absorb the same amount of nicotine as if you shared a room with a cigarette smoker for three hours. It is not an insignificant quantity. That is data from the New England Journal of Medicine in 1993. If we are worried about unknown and small risks, can the Minister explain to me why, as Professor Hajek, put it, more dangerous chemicals, such as bleach, rely on packaging and common sense rather than on medicinal licensing?

There has been approximately an 8% reduction in the use of tobacco in Europe in the past year. The tobacco companies are worried. A big part of that reduction seems to be because of the rapid take-up of electronic cigarettes. They are facing their Kodak moment—the moment when their whole technology is replaced by a rival technology that, in this case, is 1,000 times safer. Does my noble friend think that there may be a connection between the rise of electronic cigarettes, the rapid decline in tobacco sales and the enthusiasm of tobacco companies for the medicinal regulation of electronic cigarettes?

It is not just big tobacco; big pharma has shown significant interest in the regulation of electronic cigarettes. That is not surprising because they are, again, a rival to patch products and other nicotine replacement therapies. Perhaps more surprising is that much of the medical establishment is in favour of medicinal regulation. I never thought I would live to see the BMA and the tobacco industry on the same side of an argument. The BMA says that electronic cigarettes cannot be considered a lower-risk option, but this completely flies in the face of the evidence. As we have heard already, electronic cigarettes are 1,000 times safer. The BMA says that it is worried about passive vaping, the renormalising of smoking and the use of electronic cigarettes as a gateway to smoking. The excellent

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charity Sense About Science, to which I am proud to be an adviser, has asked the BMA for evidence to support those assertions. I must say that there is a strong suspicion that the only reason the medical establishment wants to see these things regulated as medicines is because it cannot bear to see the commercial sector achieving more in a year in terms of getting people off cigarettes than the public sector has achieved in 10. Instead of talking about regulating this product, should we not be talking about encouraging it, promoting it and letting people vape indoors if they want to—in pubs, on trains and in football grounds—specifically so that they are tempted to vape instead of smoke? That would be of enormous benefit to them and to the country as a whole.

I end by asking specifically in relation to the agreement that, as we heard from my noble friend Lord Borwick, was agreed last night, what its impact will be on what is happening, and in particular on advertising. As I understand it, under the agreement reached yesterday, it will be possible for the advertising of these things to be banned as if they were cigarettes. What is the justification for that, given the proportionality and the evidence that they will actually save lives rather than harm them?

4.22 pm

Lord Hunt of Kings Heath (Lab): My Lords, first, I apologise to the Committee for being a little late for the start of the debate. I welcome this debate and I congratulate the noble Viscount, Lord Astor, on allowing us to discuss a very interesting subject. I am sure that we are all looking forward to the noble Earl’s response to the many questions that have been put to him.

With more than 100,000 people dying from smoking-related diseases across Britain every year, it is clear that we need to do all we can to support people to give up smoking and discourage young people from taking it up in the first place. One thing I am convinced about is that e-cigarettes have the potential to provide a significant boost to public health. I understand that the National Institute for Health and Care Excellence supports the use of nicotine-containing products such as e-cigarettes to aid smokers in cutting down on tobacco. As we have heard, an estimated 400,000 people across the UK have already switched from smoking to e-cigarettes.

I noted the comments of the noble Viscount, Lord Ridley, on the risks of regulation, and I agree with him that it is important that regulation does not stifle innovation. On the other hand, as with any new and fast-emerging product, some additional safeguards may be needed to cover any gaps in our existing consumer regulations. I want to ask the noble Earl, Lord Howe, about this. Does he consider that the medicinal regulation of e-cigarettes would put a lot of the current e-cigarette companies out of business? The noble Earl is of course very well acquainted with the work of the MHRA, issues to do with the regulation of medicines and, indeed, herbal medicines, which may be relevant in this context. I wonder if any work has been done to estimate the cost of regulation for these products.

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For instance, I imagine that a dossier has to be produced with scientific evidence to show the efficacy and safety of these products. I wonder whether the noble Lord has an estimate of the cost of this, and whether that would inhibit many of the small companies in this market from being able to carry on in business when this is introduced. I support regulation that is light-touch and permissive rather than restrictive.

As the noble Viscount has said, the regulation of e-cigarettes has been debated as part of the EU trilogue negotiations on the tobacco products directive. Can the noble Earl inform the Committee of the progress of those negotiations? I understand that they are scheduled to end in the coming weeks, and an update would be appreciated, as would some sense of the timeline between agreement within Europe and the implementation of this proposed directive.

As the noble Lord, Lord Borwick, has commented, e-cigarettes have clearly been very successful in encouraging smokers to quit and to use e-cigarettes instead. He posed the question of whether there are circumstances in which e-cigarettes could be a passport to tobacco smoking. I think he talked about teenagers in particular, implying that some of the marketing approaches of the e-cigarette manufacturers might provide a cool image to young people, who would take up e-cigarettes and then be tempted to go on to tobacco products. I do not know whether the noble Lord, Lord Borwick, saw the complaints made about an advert for e-cigarettes screened by ITV on 3 December during “I’m a Celebrity”, which appeared to show a woman talking about oral sex, while at the end of the advert it was revealed to be a reference to e-cigarettes. The question I put to the noble Earl is: how do we ensure that e-cigarette manufacturers are not able to advertise in such a way as to make e-cigarettes attractive to young people who would not ordinarily have come to smoking, so that they act as a passport to tobacco smoking?

If the noble Earl can reassure us that regulation can be light-touch, that the process of being regulated as a medicinal product will not be overbearing, and that there can be appropriate controls on advertising, then we should welcome the impact of e-cigarettes, because the evidence is clear that they have helped a lot of people come off tobacco smoking. Surely, in the end, that is to be welcomed?

4.28 pm

The Parliamentary Under-Secretary of State, Department of Health (Earl Howe) (Con): My Lords, I thank my noble friend Lord Astor for securing this important and highly topical debate.

As we have heard, e-cigarettes are nicotine-containing devices that work by atomising a nicotine solution which is then breathed in as a vapour by the user. E-cigarettes claim to deliver nicotine to the user without the toxins and carcinogens found in tobacco smoke. They do not involve any combustion and do not produce smoke. E-cigarettes are a very recent innovation. They are available in various shapes and sizes, as we have heard, and many are designed to both look and feel like conventional cigarettes. Some even incorporate a light at the end of the device that glows when the product is being used, to replicate a cigarette. Today,

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they are marketed as a cheaper and healthier alternative to smoking tobacco. However, e-cigarette manufacturers have avoided directly suggesting that their products are smoking cessation aids, as making such claims would subject their products to regulation as medicines.

I turn to whether e-cigarettes are safe to use. When we compare the use of e-cigarettes to smoking of tobacco, the Department of Health is confidently able to say that e-cigarettes are likely to be much safer to use. That does not mean that e-cigarettes are safe to use; it probably says more about how enormously unsafe it is to smoke tobacco. Nevertheless, the safety of e-cigarettes is yet to be fully established. Given how novel these products are, we need to see much more evidence about their safety, especially regarding the use of e-cigarettes over a long period.

At present, e-cigarettes are sold without any product-specific controls relating to quality and safety in use, or specific provisions on advertising and promotion. There are general product safety provisions that apply to these products, but they are not designed for these sorts of product and are not fit for this purpose. We also must keep in mind that nicotine itself is not only highly addictive but can be highly toxic. Electronic cigarettes are not risk-free. Known and reported health risks include acute effects on lung function, possible pneumonia and other risks related to poor product quality.

My noble friend Lord Astor made reference to Action on Smoking and Health. ASH says that there is significant variation in device effectiveness, nicotine delivery and cartridge nicotine content, both between and sometimes within product brands. ASH cites research that suggests the presence of toxins, released in low concentrations, from the vaporisation process involving certain e-cigarette cartridges. It cites other research that concluded that e-cigarettes have a low toxicity profile, are well tolerated and are associated only with mild adverse effects.

As we have heard during this debate, the e-cigarette market is growing rapidly. More than 300 companies are estimated to be importing or supplying e-cigarettes in the United Kingdom. The e-cigarette market in the UK is estimated to be worth in excess of £100 million, and we know that across the world the tobacco industry is becoming increasingly involved. There is little doubt that awareness of e-cigarettes has increased quickly through advertising and promotion of these products. It has been said that e-cigarettes are being promoted in similar ways to how cigarettes were promoted before we introduced a comprehensive ban on tobacco advertising in this country. I am sure that I am not alone in noticing the vast amount of promotion for e-cigarettes in my local convenience store, or the representatives of e-cigarette companies in shopping malls or outside train stations promoting their products.

The University College London smoking toolkit study is a national study of smoking and smoking cessation in England. The most recent data from the survey suggest that electronic cigarette use by tobacco smokers has increased from around 2% in 2011 to around 14% in August 2013. If this trend were reflected across the UK, it would translate to around 1.4 million

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smokers who have used electronic cigarettes. There is little evidence to suggest that non-smokers are becoming attracted to using e-cigarettes.

My noble friend Lord Borwick asked about the behaviour of children and young people. ASH commissioned research into the use of e-cigarettes by young people and found that, in Great Britain in 2013, 95% of 11 to 14 year-olds and 90% of 16 to 18 year-olds have never used e-cigarettes. Among young people, e-cigarette use appears to be confined to those who have already tried smoking. Nevertheless, we remain concerned that e-cigarettes could quickly become popular with young people, particularly if they continue to be vigorously advertised and promoted. We are also very aware of concerns expressed that e-cigarettes could act as gateway products for young people into smoking, and will continue to watch the evidence closely.

The Government recognised in the tobacco control plan for England that smokers are harmed by the tar and toxins in tobacco smoke, not necessarily by the nicotine to which they are addicted. There is no way of avoiding these deadly toxins if you inhale smoke from burning tobacco.

Earlier this year, the National Institute for Health and Care Excellence published public health guidance on harm-reduction approaches to smoking. The noble Lord, Lord Hunt, asked about this. NICE recommends the use of licensed medicines only. The guidance suggests that while the best way to reduce smoking illness and death is to encourage smokers to quit completely, there are other ways of reducing the harm from smoking, even though this may involve the continued use of nicotine. If someone does not want to, is not ready to or is unable to stop smoking in one step, the guidance suggests that licensed nicotine replacement therapies could be of use.

My noble friend Lord Borwick asked about the possibility of sponsoring research in this area. We already know quite a lot about the safety profile of nicotine and its use in cutting down and quitting. The evidence we have is that these products are used mainly to cut down and quit.

My noble friend Lord Ridley called for clearer evidence of effectiveness. The problem is that there is not good evidence of effectiveness. These products are not magic bullets, in other words, but even at this stage we feel that we want to exploit the potential that we see in them. He referred to aubergines as potential medicines. I think he would agree with me that people do not eat aubergines in the expectation that that will help them to quit smoking. Clearly, whatever remedy we encourage has to be effective in its ability to cut down and quit the habit of smoking.

There is potentially a place for e-cigarettes within a harm-reduction approach to public health, but only if they meet the requirements set out in the public health guidance; that is, if they are licensed medicines. I would expect that the NHS and health professionals would also only recommend the use of e-cigarettes that are licensed as medicines. My noble friend Lord Astor asked whether we envisaged e-cigarettes being sold on prescription. We want effective products to be widely available, not just on prescription but in general sale outlets such as supermarkets and corner shops.

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The noble Lord, Lord Hunt, asked how much it would cost an e-cigarette manufacturer to get a medicines licence. The impact assessment that we published estimated that the annualised cost to a single UK e-cigarette importer for complying with medicines regulation ranged from £87,000 to £266,000.

I am particularly grateful to my noble friend Lord Astor for securing this debate because it provides me with the opportunity to explain to your Lordships the action that is under way to regulate e-cigarettes. As the Chief Medical Officer for England has said, since more and more people are using e-cigarettes, it is only right that these products are properly regulated to be safe and work effectively.

A European tobacco products directive was proposed late last year and is now in its final stages of negotiation in Brussels. I can tell noble Lords that no deal has yet been reached in the discussions but the Government hope that agreement might be reached shortly. I reassure your Lordships that the United Kingdom has been active during these negotiations, as we believe that the proposed tobacco products directive will benefit public health and help to reduce the number of young people who take up smoking in the UK.

From the outset, it was envisaged that e-cigarettes would be regulated within the proposed directive. Protecting and promoting public health has always been our starting point, and we want safe and effective nicotine-containing products that can help smokers cut down and quit. The Government took the view that proportionate medicines regulation was the best way to deliver that objective.

Viscount Astor: Does my noble friend consider that e-cigarettes that contain no nicotine at all but contain other flavours will or should come under the tobacco directive?

Earl Howe: My Lords, that is probably the hardest question that my noble friend has asked me during this debate. My answer is that we certainly need to give careful consideration to that issue, which is about products that have the appearance of e-cigarettes but contain no nicotine. We would need to look at how common those products are or are becoming. Frankly, that work has yet to be done, but I am grateful to him for raising the issue.

I was speaking about our approach to the regulation of e-cigarettes, saying that we felt that proportionate medicines regulation was the best way forward. Nevertheless, we must consider carefully the views that have been forthcoming, including from the European Parliament, that there are alternative approaches to the regulation of e-cigarettes. Moving forward, the Government will want to be satisfied that the directive can deliver the right checks and balances on e-cigarettes. It is important to underscore the fact that there is a wide consensus across the European Commission, the European Parliament and European member states that additional regulatory safeguards are needed for this relatively new category of product. We are listening carefully to the genuine debate about how best to take this forward in the directive.

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There is also emerging consensus that the advertising of e-cigarettes needs to be controlled. Options for doing so as part of the proposed European directive are under negotiation. In addition, the Committee of Advertising Practice, which writes and maintains the UK advertising codes that are then administered by the Advertising Standards Authority, announced in October that it intends to develop new rules to give clarity to advertisers and to ensure that e-cigarettes are promoted responsibly. It is considering running a public consultation on this issue early in the new year.

The Government’s priority during negotiations is to secure a directive that will reduce as far as possible how attractive e-cigarettes are to young people and closely to monitor the development of this market. When the directive has been settled, we will undertake an analysis to consider whether further action could be taken on a domestic basis, in particular to protect young people from e-cigarettes that contain nicotine. We also need to give further consideration to my noble friend’s question about non-nicotine-containing products, as I mentioned.

Regardless of how e-cigarettes are regulated within the proposed directive, we will still encourage the manufacturers of these products voluntarily to seek medicines licences for their e-cigarettes, so that they can be made available to support smokers to quit in the same way as other forms of nicotine replacement therapy, such as gum and patches. These e-cigarettes could be recommended for use in reducing harm, in accordance with the recently published public health guidelines.

Viscount Ridley: Has my noble friend taken on board the point that both I and the noble Lord, Lord Hunt, raised about the risk of regulation stifling innovation? By stifling innovation and slowing down the rate of take-up of these things, regulation could kill more people by preventing their coming off tobacco cigarettes.

Earl Howe: I most certainly have taken that point on board. I am grateful to my noble friend, who I hope will take some encouragement from what I said about our wish to see take-up of effective products. However, we need to be cautious about allowing products to flood the market that purport to contain certain quantities of nicotine and to deliver them safely but in fact do not. The safety and efficacy of these products are particularly important and we need to look at that.

EU: Financial Transaction Tax (EUC Report)

Question for Short Debate

4.45 pm

Asked by Lord Harrison

To ask Her Majesty’s Government what assessment they have made of the Report of the European Union Committee Financial Transaction Tax: Alive and Deadly (7th Report, HL Paper 86).

Lord Harrison (Lab): My Lords, I am delighted to introduce the new EU Committee report, Financial Transaction Tax: Alive and Deadly. I thank fellow

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members of the Sub-Committee on Economic and Financial Affairs, which undertook this inquiry, for the contributions they will make today, and other distinguished Members of the House.

This is an update report on the Commission’s contentious proposals for a financial transaction tax, following on from our March 2012 report, Towards a Financial Transaction Tax?. That report found the Commission’s proposals seriously wanting, and likely to fail the five objectives that the Commission had set itself. We contended then that there was a significant threat of relocation of financial activity outside the EU as well as the City of London, were the FTT to go live. You would have imagined that we would have rejoiced when the proposals for such an EU-wide FTT later ran into the sand—far from it. Let me explain.

In June 2012, a breakaway group of 11 member states, led by France and Germany, announced their intention to proceed with an FTT under the enhanced co-operation procedure, whereby nine or more member states can take a proposal forward without binding those who do not wish to participate. The UK Government made clear, with my committee’s support, that they would not participate. However, we were deeply alarmed that the proposal could nevertheless have a serious detrimental impact on the UK. We grew even more agitated when the Council vote approving use of the enhanced co-operation procedure went ahead without a text having been published—a veritable case of buying a pig in a poke.

Three weeks later, on 14 February 2013, the Commission did indeed publish its detailed proposal, but the revised version included new and disturbing anti-avoidance provisions, including the significant issuance principle. When we took evidence from Commission official Manfred Bergmann in March 2013, he told us, to our open-mouthed astonishment, that there would be no legal obligation on UK authorities to collect the new tax. This contradicted our view that the United Kingdom could indeed be obliged to collect the tax on behalf of participating member states under the EU regime, which requires all member states to assist each other in the recovery of tax. In our view, the proposal failed to meet the key criterion for enhanced co-operation, which requires that any proposal must respect the competences, rights and obligations of all non-participating member states.

We urged the Government to launch a legal challenge against the proposal. The Government belatedly took our advice, and in April this year challenged the use of enhanced co-operation. In the mean time, we asked the Commission to provide urgent clarification of the feared legal obligation that the United Kingdom authorities would have to collect the tax. This, the Commission signally failed to do for a full six months.

Later, a leaked Council Legal Service opinion concluded that the deemed establishment principle, on which the proposal was based, did not comply with the treaty requirements for enhanced co-operation on several grounds: notably, that it would represent extraterritorial taxation; it could discriminate to the detriment of other parties caught by the deemed establishment principle; it failed to respect the competence

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of non-participating member states; it would distort competition; and, finally, it would inhibit the free movement of capital.

In light of these significant developments, we undertook this short update inquiry, taking evidence from Heinz Zourek, Director-General, Taxation and Customs Union, European Commission. Our findings are clear: in our view, the Commission has failed to demonstrate that it has taken full account of the interests of non-participating member states. The Commission confessed that it had brought forward a deliberately contentious proposal with the studied intention of challenging participating member states to excise those elements they found inimical—an unworthy and divisive tactic. Moreover, it undermines the Commission’s obligations to defend the interests of all member states and throws into doubt use of the enhanced co-operation tool in the future—a significant by-product of this study. In contrast, we found the Council Legal Service opinion highly persuasive. It demonstrates in concrete terms how the proposal would breach European Union law in respect of the integrity of the single market. Moreover, we jib at the Commission’s artificial distinction between imposing the financial transaction tax and the collection of the tax from member states.

We published our report last week but already events have moved on. Media reports emerged that the Commission had finally produced a legal reply to the Council Legal Service. In addition, the Financial Times last week reported a compromise proposal emerging from the Lithuanian presidency, seeking to limit the tax’s broad scope while still retaining the element of restraining the impact on high-frequency trading. However, we understand that the compromise did not address key issues of extraterritoriality or the dubious legality of the tax. What update can the Minister give us on these negotiations? Does he predict, as we do, that the political weight behind the FTT—often misunderstood in this country—means that a proposal will nevertheless emerge in some shape or form? What efforts is he making to ensure that the potential damaging effect of such a tax is limited not only for the United Kingdom and other non-participants but, indeed, for all European Union member states?

I should warn the Minister that we do not let the Government off scot-free either. While we welcomed their legal challenge, we are frustrated that it took so long for them to sit up and take notice of the repeated, and increasingly admonitory, warnings that we have spelt out in no fewer than 12 letters to his ministerial colleagues over the past 18 months. What update can he give us on the progress of the Government’s legal challenge? When does he expect the Court of Justice to reach a decision? What assurances can he give us that the Government are taking the proposal, and its potential implications for the City of London, the United Kingdom and, indeed, the entire European Union, seriously? Are the Government engaging positively in negotiations in Brussels as they unfold, especially with other non-participating member states?

The financial transaction tax is a real and present danger to the City of London, Europe’s premier global financial centre, and to all of us who derive pensions and savings from its teeming financial activities.

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4.55 pm

Lord Vallance of Tummel (LD): My Lords, I simply want to reinforce one specific point that has just been made by the noble Lord, Lord Harrison. Our report raises an important issue concerning the deployment of the enhanced co-operation procedure itself. The FTT case is only the third time the procedure has been used since it came into being in 1999, but it could well become more commonplace in a future where different groups of EU nations wish to take different courses, or proceed more quickly than others.

In the FTT case, the use of the procedure has left a bad taste in the mouth. When it was put to the vote last January, I imagine that, in abstaining, our Government naively assumed that the terms of the tax to be adopted would mirror those the Commission had already put forward and which had failed to find favour with many states, including the UK. But as the noble Lord, Lord Harrison, has said, the proposal the Commission advanced only three weeks later was significantly different, not least in its assertion of the twin principles of “deemed establishment” and “issuance”. That combination of principles could clearly have a major impact on financial institutions in non-participating and third-party countries which could not have been foreseen at the time of the vote.

It seems unlikely that the Commission was entirely unaware of the principles and their potential impact when the vote took place. Was this a matter of oversight or deviousness on the part of the Commission and sponsoring countries? Who knows? However, one can imagine that had the boot been on the other foot and a principal sponsor had been the UK, tales of Albion’s traditional perfidy would have been doing the rounds in the corridors of Brussels. This has not been one of the European Union’s finest hours and I say so sadly, as a strong supporter.

As to the lessons for the future, whatever the outcome of the FTT proposal, the enhanced co-operation procedure needs to be tidied up, made more robust and be seen to be fair. Put simply, all significant cards need to be face-up on the table when a vote is taken to adopt it. Ideally, a fully fledged scheme should be worked up and open to scrutiny before a vote is taken, accompanied by a thorough impact assessment that distinguishes between participating and non-participating countries, and with an analysis of any extra-territorial consequences. Without a reformed approach along these lines, what could be a useful and effective procedure will simply fall into disrepute. That is not in the interests of the European Union or its member states and I hope that, when the dust has settled on the specific FTT issue, the Government will take the initiative in calling for reform of the enhanced co-operation procedure itself.

4.58 pm

Lord Dear (CB): My Lords, I congratulate the noble Lord, Lord Harrison, on securing this debate. My contribution, like that of others, will necessarily be short and I will take a broad brush to this issue. I am a member of the EU Select Committee and of the Economic and Financial Affairs Sub-Committee, which conducted this inquiry. I think I speak for all of us

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when I say that we considered the financial transaction tax looking for a kernel of benefit to this country, and we looked for a scintilla of logic behind the imposition of the tax. What we found, it is fair to say, was instead a desire to generate revenue quickly and to punish the financial institutions that it was thought had landed the whole of Europe—indeed, perhaps the whole world —into the sort of financial difficulties that we now experience.

That certainly ignored the issue of extraterritoriality. It also seemed to ignore the legitimacy of the tax itself and the tax’s impact on the financial markets, particularly, for example, on high-frequency trading. The consequences, as the noble Lord, Lord Harrison, has said, would include damage to the City: if the tax comes into being, it will almost certainly drive business away to places such as New York, Hong Kong and Singapore. Then there is the impact, as has already been said, on the 17 non-participating states and perhaps even on the whole of the EU. To put it another way, enhanced co-operation, on this occasion at least, seems to be the minority dictating to the majority, to the detriment of all.

We were disappointed by the slow take-up by Her Majesty’s Government, as has already been said, and by the sanguine approach adopted by the EU, which was typified in the evidence that was given to us on 19 March by Manfred Bergmann, the director of indirect taxation and tax administration at the EU— DG TAXUD is the acronym. Mr Bergmann seemed to take a particularly benign view of what would happen, and his evidence on the impact of the issuance principle, so far as it applied to non-participating states, was surprising. We welcomed the fact that the Council’s own legal service gave an opinion which, according to our report, said that,

“the deemed establishment principle does not comply with the Treaty requirements for enhanced cooperation”.

It listed a number of grounds, but perhaps the most important was the fact that the tax, if it comes into being,

“would exceed the norms of customary international law in respect of extraterritorial taxation”.

Her Majesty’s Government, as we have already been told, are now making a legal challenge—seeking an opinion of their own, if you like. I suppose one could say that is better late than never. Indeed, the timetable for that is already a matter of record in your Lordships’ Chamber.

In conclusion, I simply ask the Minister whether there is any chance at all that, if the result of the Government’s legal challenge reflects the advice of the Council Legal Service, the Government will adopt a more robust stance so far as the FTT is concerned, to the benefit of the whole country and, indeed, the whole of Europe.

5.02 pm

Lord Hamilton of Epsom (Con): My Lords, one of the reasons given for the introduction of the financial transaction tax is to punish the banks. This is a populist idea into which, I am afraid, our Government have also fallen. We do not want to punish the banks,

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we want to punish the bankers. The problem is that the bankers have all now gone, taking with them their bonuses and severance pay, and we are left with the banks, which we want to rebuild and whose balance sheets we want to get stronger. Instead, we impose levies on them and ask them for better borrowing ratios and to build up their reserves. When they are trying to do this, as well as dealing with a loan book that is looking a bit dodgy, we then complain bitterly that they are not lending to small and medium-sized enterprises. I am afraid that you cannot have it all ways round and we have to do something to encourage our banks to strengthen their balance sheets rather than tax them, which is of course what we would be doing with the financial transaction tax.

This morning we were debating in our committee what the priorities were for the EU. One of the areas identified was tackling the serious problem of unemployment, which looks to be structural in the EU today, and in particular the very high levels of youth unemployment. So what do we do? We introduce the financial transaction tax, which seems to be coming down the road and, according to an impact assessment conducted by the Commission, will cost 1.76% of gross domestic product in the EU and 500,000 jobs. Since then, the Commission has said, “No, that is not accurate”. Okay, I will take half of that: perhaps we will see GDP depressed by 0.85% and it will cost only 250,000 jobs. That is all right then, isn’t it? It will cost a fortune and do everything to counter the objectives of the EU such as bringing down unemployment—it will actually increase unemployment. This is the extraordinary way that this Commission operates.

Many of your Lordships have been to Brussels. Do we ever hear the people in the Commission talking about how they will make the EU more competitive and how they will deal with the challenges from the global marketplace? No, they are always talking about themselves and as if the EU was the centre of the universe, which to an increasing extent it is not. The EU is facing up to a diminishing share of world trade as time progresses, and it is time that it started to look outwards rather than inwards, and work out how it will face these challenges. The impact assessment thoroughly analysed that a lot of this business will be pushed abroad, and that is why it will cost so many jobs.

We then questioned the gentleman from the Directorate General of Taxation and Customs Union, did we not? We asked him, “What are you going to do about getting these other stock exchanges and so on to collect this tax?”. “Oh”, he said, “We are going to incentivise them to collect this money”. We said, “Really? How are we going to do that?”. He said, “We will allow them to keep the interest on the tax that they have collected for six months”. What world is this so-called intelligent man living in? Does he really think that the United States will collect taxes for foreign countries? It is quite unbelievable, and this is the real problem behind all this. I cannot imagine why anyone would want to stay in the EU, and I am glad that we will have an opportunity to get out of it in 2017.

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5.06 pm

Lord Carter of Coles (Lab): My Lords, I congratulate my noble friend Lord Harrison on securing this debate. Like the noble Lord, Lord Dear, I take a wide view of this but want to focus on a couple of issues around the Treasury’s response, globalisation and the unreality of the course being proposed. We would all like to see a financial transaction tax that spans the globe, but it is totally impractical, as is such a tax that is driven by 11 members of the EU. The tax is too small and incomprehensible in how it will run.

We have heard the various arguments around specific concerns but we need to look at the unintended consequences of domestic legislation in a global financial world in which we have often seen ingenuity outrunning regulation. It is the lot of this market that it is ingenious and finds ways around things. As a precedent, we need only look at what happened in Europe in the 1960s, when the famous Regulation Q from the United States drove business offshore; it just shifted and created the Eurodollar market in the UK. It was a great achievement, and it is on that that London’s success is based. It is therefore rather strange that we are looking and not learning from those sorts of lessons. Inevitably, this activity will be driven offshore, and it will take with it jobs, data centres and all those things because these people need to be near the source of the power that drives it. The market will go to Hong Kong, Singapore and New York.

While other noble Lords have dealt with issues of enhanced co-operation and so on, I should like to focus on the issue before the Treasury. As our report shows, despite repeatedly calling the attention of the Treasury to the threats posed by the FTT, it was only in May that we had recognition of the issue and the concession that significant economic impact would result. I normally have a high opinion of Her Majesty’s Treasury but I have to say that on this occasion it was rather like the proverbial dog watching television: it could see it but did not get it. I hope now that the Treasury has got it because, unless there is an understanding of the consequences of the FTT, we will be in a serious place.

We should now look forward. One of the great successes of Britain in the post-war era was its re-emergence as the great centre of finance. That was driven by the Eurodollar. It is rather ironic that the people who drove it forward were, in fact, Harold Wilson and Lord Cromer. They understood the prize to be won, grasped it and created what now is a major source of national wealth. It would be slightly ironic if this market-friendly Government were unable to moderate or prevent the FTT. It would be interesting to hear from the Minister how we are going to preserve our place as the leading financial centre of the world.

5.09 pm

The Earl of Caithness (Con): My Lords, a policy conceived in revenge, born under the enhanced co-operation procedure and nurtured on envy, is a sad and frightening prospect. The FTT is such a policy, and unfortunately it is alive and deadly, as our report states.

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Our report savages the proposal for the FTT. We are by no means alone: a recent report by Oxera for Marex Spectron reckoned that the FTT would destroy more sources of revenue than it would create public funding: it will cost more than it receives. Deutsches Aktieninstitut is also heavily critical of the FTT. It says that,

“the burden of the FTT as proposed by the European Commission amounts to between 5.0 and 7.3 billion euros annually for private households and non-financial companies in Germany”.

The Corporation of London has also been very critical and reckoned that the impact of the FTT would be higher for non-participating member states than for participating ones. We have to remember that the non-participating ones are in the majority. There will be further reports in the new year, and I have no doubt every one will be critical.

The attitude and behaviour of the Government has been commented on. It saddens me that my former department, the Treasury, has not improved its procedures. It was very slow to react in the first place. With hindsight, I remember we were not very quick in responding to ERM as we should have done. I thought lessons had been learnt. I have been on the committee since the first report was published, and I have noticed how almost offhand the correspondence has been. Since the change of Minister that has improved, and I ask my noble friend to make sure that that improvement continues, because it is vital that the Government listen to and work with the committee, rather than against us.

As for the Commission, there is not much left to say. I, too, sat open-mouthed at the evidence we took in Brussels from Mr Zourek. It was unbelievable, thoroughly unconvincing, almost unreal and not something I had ever expected to hear from the Commission.

Can my noble friend say something about the timing for the resolution of differences between the Commission and the Council’s legal opinion? That is important. Furthermore, is there a timing for, and any more information on, the resolution of our objection, and when will the objection by Luxembourg, on the same grounds as that of UK, be heard? Will it be at the same time as ours?

5.13 pm

Viscount Brookeborough (CB): My Lords, we are, as you see, very critical of the proposed FTT, for the reasons laid out in both reports, that of March 2012 and now this one.

I, too, have never seen such criticism of a Government’s response to an inquiry as can be found in paragraphs 12 to 20. I asked the Minister to explain why such a detailed and well researched report from a parliamentary committee was treated in such a dismissive way for so long. The lack of recognition and acceptance of the issues raised at the time have left us where we are now, and it is an example of the UK’s lack of engagement on what may become EU policy.

This brings me to the perceived attitude of our Government to the EU. All too often, we are prepared to say that our main interest is the single market and

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we are far too negative about most other things when we should not be. For example, regardless of whether we stay in the EU, amend the treaties, or get out, the success of the eurozone is important, not only to us but to the rest of the world. Suffice to say, a little more diplomacy, and less barracking from the sidelines, would not go amiss. Government ambitions for their future in the EU may be difficult, or even impossible, to achieve currently. However, that makes its lack of engagement in such issues as the FTT even more inappropriate. The adoption or otherwise of this tax will not sink the EU, but we could have had much more influence on what is now happening.

I wish to comment on this tax from the perspective of the majority of our citizens, who, like me, are lay people as far as finance is concerned. This is a direct tax and a bad precedent, not only on businesses but on individuals, which will affect most financial transactions, not only for the millions who own or trade shares but for those who have pensions. Almost everyone will be affected directly or indirectly. This is the thin end of the wedge, the slippery slope: a direct tax on individuals. Even worse, it is 11 countries attempting to tax individuals—nationals of countries outside their group and their own jurisdiction—entirely against their will and with no democratic mandate.

When a nation taxes its population, the Government must have a mandate and justify the purpose of doing so in a budget. There is no mandate or legal basis for this daylight robbery. Even worse than that, it is most inappropriate at present. I ask the Minister what the Government will do to ensure that this country and our citizens will not be adversely affected. I will just have time to address this if I borrow a little of the time of the noble Lord, Lord Flight. Box 1 of our report gives the objectives—I will not read them all—as laid out. On objective (a), as far as I am aware, there is currently no fragmentation to worry about. Objective (b) talks about the costs of the recent crisis. None of what we are talking about, or the bank resolution fund—which we are not talking about today, but which is important—refers to the current crisis and the cost. It is all about the future. Objective (c) adds:

“To create appropriate disincentives for transactions which do not enhance the efficiency of the financial markets and thus trigger overinvestment in activities which are not welfare enhancing”.

That is the woolliest rubbish of which one could possibly conceive. How on earth is an inert tax going to differentiate between actions which may not be welfare enhancing? That is absolutely ridiculous. Luckily, one other objective was dropped: namely, a new revenue stream that could gradually displace national contributions. Does anybody in this Room or anywhere else think that our contributions will ever be reduced by anything?

5.17 pm

Lord Davies of Stamford (Lab): My Lords, I start by congratulating my colleagues, who did 90% of the work on this report before I joined the committee, on having done some sound work and having revealed, way ahead of the Commission or the Government realising it, the impact on non-participating states of this proposal.

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By the way, the Government’s position is quite absurd. Most reasonable, sensible people litigate only when they feel very strongly about something. If they feel strongly about something they are given the opportunity to vote on, they vote against. This Government succeeded in abstaining and then in starting litigation. Their credibility is pretty small.

In my brief time, I will summarise in four propositions what I feel about this proposal, about which I do not take as tragic a view as many of my colleagues. The first proposition is that all taxes are unpopular. Any new tax produces an outcry, sometimes hysterical, from those who are going to be, or might be, impacted. One has to keep one’s cool against that noise.

Secondly, all taxes have perverse economic consequences. I say to the noble Lord, Lord Hamilton, that all taxes, as a first-order effect, reduce GDP because they reduce demand. Whether they ultimately have a negative effect on a net basis depends on how that money is spent by the taxing authority. However, direct taxes are enormously dangerous because they impact directly on incentives to work, to save, to take risks, to set up enterprises and to invest. On the other hand, indirect consumption taxes have the effect of impacting most, by definition, on people with the highest consumption ratios—in other words, the poorest people in society—so they are very unfair. The financial transaction tax has neither of those two disadvantages. If you implemented it around the world, it might be pretty close to being an ideal tax.

Thirdly, contrary to what you might expect theoretically, tax arbitrage, or displacement of financial markets in response to taxation, is actually much less effective and efficient than you might suppose, for a whole host of reasons. One is that people always want to trade in the deepest markets. If you move out of the most liquid, deepest markets, you will find that you are operating against wider spreads, which will more than compensate for any avoidance of tax. That is particularly true if, as in this case, a tax is 10 basis points.

The main reason why the market in trading in UK equities has not moved into derivatives, contracts for difference, the option market and so forth is because people would be paying for much greater spreads than they would be gaining on the stamp duty tax—that tax, of course, is 50 basis points. There are other reasons why there is not so much displacement as you might expect, one of which is the time zone problem, another of which is that financial markets, particularly clearing houses and their principal customers—the major banks—do not like cutting across major tax authorities. They are particularly terrified of the IRS, of course, but they do not want to have an argument with any major tax authority, including, in this case, the Fisc or the Finanzamt. They do not want to have an argument with the Inland Revenue, which is why, when they set up American depositary receipt markets in New York in British equities, the American banks concerned have always paid the stamp duty at the front end on an advance basis: I think it is something like 200 basis points. They have accepted that although I do not think that obligation could ever be enforced in a court of law. Perhaps the Minister will confirm this.

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Finally, the report argues that this tax will impact in practice on a lot of investors, both retail and wholesale, and on a lot of residents—institutional and otherwise, corporate and otherwise—in this country, even though we do not participate in it. If we get none of the benefits because we do not receive any receipts from the tax, of course, and the benefits of displacement from other markets where they are participating directly in the tax are much less than anticipated, there may well come a time when the equation is such that it would be worth our while to join in the tax and join in sharing in the proceeds. This is a matter which we need—if the tax comes in at all—to keep permanently under review.

5.21 pm

Lord Kerr of Kinlochard (CB): I would like to reassure the Minister that we support the Government’s present position. It was the abstention that surprised us, not the litigation. We were rather keen on the idea of litigation.

We have been disappointed by the disdain with which the Government have dismissed our concerns down the years. I was disappointed in 2012 when the Minister wrote to us, saying:

“We are sceptical whether other Member States will agree to a … sub EU-27 … FTT or that it would work. If they decide to go ahead with a EU17 FTT, it may not necessarily be bad for the UK because: UK may gain market share … and … the impact on the UK may be no different from that on other international financial centres outside the euro area such as New York or Hong Kong”.

Really? New York and Hong Kong are not subject to the mutual assistance directive; we are. New York and Hong Kong would not collect this tax, as the noble Lord, Lord Hamilton, pointed out. They would be laughing all the way to the bank. The true cost of the financial transaction tax—if it comes in—would be the transactions displaced, which would migrate offshore, out of the whole of the EU, including away from London. It is a pernicious proposal.

I was disappointed when the Government, in explaining why they abstained rather than opposed the idea of an FTT at 11, told us in Mr Clark’s letter this year that,

“the Government attaches great importance to the principle of tax sovereignty, and therefore believes other member states should be free to set their own tax policies … We also recognise that introduction of a FTT is of great importance to several of the participating member states. Voting against the authorising proposal, rather than abstaining, could have undermined these messages”.

I think that is completely absurd. I entirely agree with the doctrine of the principle of tax sovereignty, but that means that member states are entitled to impose whatever taxes they like in their own countries provided they do not discriminate against other member states and do not damage the interests of other member states. However, it does not mean that they are entitled to impose a tax that damages us because we have to collect it at no benefit to our Exchequer but at great damage to our markets. That is an absurd reading of tax sovereignty. It shows a defensive Treasury that is refusing to get out there, argue proactively and build alliances. After all, 17 member states are not going to implement this tax. Had we approached them and argued the EU interest, and argued that EU markets,

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including their markets as well as ours, would be damaged by this tax, I do not believe that it would have been impossible to block it. I think that the Government now agree, because they are litigating, that it is a highly undesirable measure.

I draw four short morals from this sad story. First, it is almost always a mistake to say, “Roll out the red carpet, let them do as they like, the business will come to London”. That was Boris Johnson’s position. As usual, he got completely the wrong end of the stick. Sadly, the Government seem to have held on to the wrong end of the stick for some considerable time.

Secondly, as the noble Lord, Lord Vallance, said, the enhanced co-operation procedure is a new procedure. Case law is being developed. It will take some time to construct sensible ground rules for ensuring that Articles 326 and 327 are respected. I suggest three rules: first, the substantive proposal must be on the table before the procedural decision is taken, as was suggested by the noble Lord, Lord Vallance; secondly, the Commission and the Council secretariat must ensure that any subsequent amendments do not introduce detriment to non-participants; and thirdly, the overall EU interest must be respected at all times by all the institutions, including the Commission, which must not allow itself to become the secretariat of a subset of member states.

Lastly, we know that the Treasury is short-staffed and short on EU expertise. It is all the more sensible, therefore, to listen to the expertise available in this House and stop dismissing our reports with delay and disdain. I know that the Minister will not do that.

5.26 pm

Lord Liddle (Lab): My Lords, I declare an interest as the chair of the Policy Network think tank, which produced the report for the City of London Corporation on the future of financial services in Europe. It is available on our website and includes reference to the financial transaction tax.

The Opposition applaud this debate. We agree with what my noble friend Lord Harrison said. He posed a number of relevant questions to the Government and the Minister that need to be answered. A rethink of the financial transaction tax is probably under way in Brussels at the moment. I remember, as a naive young man, reading the article by the Nobel laureate James Tobin which first proposed a version of the financial transaction tax and being very impressed by it. However, it was always clear that it was a very difficult proposal. It would certainly be difficult to make it work unless there was a transatlantic agreement—in the modern world, it may not be possible to do it even then.

Enhanced co-operation raises hugely difficult issues in this area. Under the treaty, enhanced co-operation can go ahead only where it does not do damage to the member states that are not taking part. Therefore, the Government were right in this case to mount a legal challenge. I am not normally of the view that one should conduct one’s engagement in the European Union by mounting legal challenges—negotiation is much better—but in this case, where enhanced

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co-operation was being pushed ahead in a way that was detrimental to other member states, they were right to take the matter to court.

Anyone who has talked to people on the ground knows that this proposal has run into great difficulties, that many of the member states that initially supported it are having very serious second thoughts and that it is almost certain that the Commission proposals will be heavily revised. We do not know what the outcome of that will be, but the existing proposal looks pretty dead in the water.

However, noble Lords have to take into account the extremely strong feeling on the continent—and in this country—that it was the financial sector that caused the crisis and it is the financial sector that has to pay for the consequences of its irresponsibility. Of course, that is not an argument for a financial transaction tax but that is the principle on which a lot of the political momentum behind this proposal is based. It is linked to the idea that when things go wrong in future there should be bail-ins, not bailouts, and is intended to provide revenues for dealing with bank resolution in the future.

In Britain we have raised taxes on the financial sector. The bank levy is now going to be £3 billion by 2018-19, and stamp duty will be a similar amount. So £6 billion a year, more than we raise in wine duty, vehicle excise duty and inheritance tax, will come from specific taxes on the financial sector. We should talk to our partners about much more effective ways of taxing the financial sector across the Union and get rid of this unfortunate enhanced co-operation proposal.

5.30 pm

Lord Newby (LD): My Lords, I am extremely grateful to the noble Lord, Lord Harrison, for introducing the report, and to all noble Lords who have spoken. I think that all bar a couple of members of the committee have participated in the debate or are here. I therefore feel that I am giving evidence to the committee rather than making a speech to the Grand Committee, which makes the challenge all the more formidable. As one would have expected from the committee, the document is thorough and well researched, and is bound, as previous reports on this subject have been, to help colour perceptions and debate in Brussels and across the EU, where sometimes the reports of your Lordships’ EU Committee are read more carefully than they are in the UK.

The committee’s report makes a number of points with which the Government strongly agree. First, the committee expresses strong misgivings about the legality of the FTT proposal. Obviously, the Government share those misgivings and that is why we have taken the case to the European Court of Justice. As the committee notes, of particular concern to the UK is the extraterritorial impact of the so-called residence principle, which, for example, would bring into scope of the tax a UK pension fund buying UK government bonds from the London branch of a bank headquartered in Frankfurt. This is, in our view, an infringement of the provisions of the treaty designed to protect the position of non-participating member states under enhanced co-operation, and that is at the heart of our challenge to the proposal.

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That brings me on to the second point that your Lordships’ committee discussed and which has been raised this afternoon: the credibility of enhanced co-operation as a way of doing business at all. The committee makes the perfectly valid point that there is a real risk of harm to the credibility of enhanced co-operation as a tool in the future because of the way that it has been operated in this case. We agree that there has been a triple failure: in bringing forward this legislation in undue haste; in paying insufficient regard to the views of non-participating member states; and in failing to support the proposal with a sufficiently thorough impact analysis—a point tellingly made by the noble Lord, Lord Hamilton. We completely agree with the committee that, particularly if this tool is to be more frequently used, it must command the confidence of all member states. Indeed, this is the very point that the Government have been making to Council colleagues during these negotiations.

The conditions that govern the use of enhanced co-operation are set out in the treaty in quite high-level terms, which makes it important during these early uses of enhanced co-operation that the right precedents are set in order to give the kind of confidence that we believe all member states need if it is to be used more frequently. Like the committee, we do not believe that this has been a helpful precedent in that respect. The conditions set out by the noble Lords, Lord Vallance and Lord Kerr, about the future use of the procedure seem eminently sensible.

The third concern, rightly highlighted by the committee, is that it is highly unclear how the tax will be collected, and what collection obligations are implied for non-participating member states. What is clear, as the committee points out, is that the UK will be required to fulfil any obligations it incurs under the mutual assistance in recovery directive. For that reason, as the committee acknowledges in its report, we have included in our legal challenge the ground that an FTT would impose collection costs on non-participating member states that should properly, under the terms of the treaty, be fully borne by the participating member states.

However, there is a theme in the report on which I cannot agree with the committee: the suggestion that the Government have been in any way complacent in relation to the risks of an FTT. The Government made their concerns about an FTT clear from the outset. In November 2011 the Chancellor highlighted the serious problems with the Commission’s original proposal to other member states, and indeed UK-led opposition to what was on the table resulted in that proposal being dropped.

It was obvious then that the proposal had not gone away, and the Government were very soon considering, and indeed taking legal advice on, the implications for the UK of an FTT under enhanced co-operation. When Council authorisation for enhanced co-operation was sought at ECOFIN this January, we tabled a statement to the minutes of the meeting recording our serious reservations about the legality of the authorising decision. The report acknowledges the Government’s point that it would not have made a difference to a

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vote if we had voted against the decision, rather than abstained, but argues that we should have sought support for a blocking vote.

Lord Kerr of Kinlochard: It is certainly true that the report quotes the Government’s view, but I do not think that we shared the Government’s view or acknowledged it as being correct. The view of the committee was that it was a pity that the Government had not been out seeking allies against the tax.

Lord Newby: My Lords, we will probably have to agree to disagree on this. As the previous Financial Secretary pointed out in the correspondence that the noble Lord, Lord Kerr, quoted, it was clear from discussions that took place in the lead-up to the ECOFIN meeting that a qualifying majority of member states was prepared to support the authorising decision. Moreover, abstention had no bearing on the prospects for our subsequent legal challenge. The noble Lord, Lord Kerr, talks about building alliances, an issue that arose when we last discussed this matter, but we have to accept, as the noble Lord, Lord Liddle, pointed out, the strength of the political will across much of the EU to introduce this tax. The UK standing up to say, “We are going to vote against it” would not have affected that. It is inconceivable that this would not have gone ahead at that meeting, whatever we had done.

Lord Harrison: Perhaps the Minister can be helpful. The committee has made that point time and again. Would it be useful if the Minister demonstrated the activity of the Government in Brussels in talking to other member states: what canvassing they did and with whom they spoke? We would like to see the ocular proof of the Government’s enthusiasm to block this tax.

Lord Newby: My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

Lord Davies of Stamford: My Lords, I put it to the Minister that the Government’s position is completely absurd. He is saying that the Government did not vote against this proposal because they thought they had a majority against them. Any democratic institution would break down if no one bothered to vote because they thought that at any one time there might be a majority against them. If the Government really felt strongly about something, so strongly that they were

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prepared to litigate, which is a much more provocative thing to do because it would put at risk all sorts of good will, the least they could have done would have been to have voted against it when they had the opportunity to do so. By not doing so, they lost a great deal of credibility.

Lord Newby: As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.

Lord Kerr of Kinlochard: I am sorry to interrupt the Minister again, but from all I hear, I do not think that there was a campaign with a ministerial delegation and a City delegation visiting capitals other than the 11 arguing the damage to their markets and ours—the overall EU market—which would result from the FTT. If I am wrong about that and such a delegation did go out to Europe, I will withdraw my criticism.

I believe that Policy Network is right when, in its report this week to the City of London Corporation, it states that there is an urgent need to:

“Upgrade the UK’s presence and leadership in Brussels by building up close ties with like-minded member states. Moving from a reactive to a preventive and agenda-setting position seems particularly paramount in that respect”.

I hope that the Minister will at least agree with that.

Lord Newby: My Lords, I completely agree with it.

Viscount Brookeborough: Perhaps I may ask a simple question. I think the Minister said that the majority of politicians in Europe wanted this tax and therefore it would be difficult. Can he explain how 11 out of the total of the member states comes out as a majority?

Lord Newby: I apologise if I said that. What I meant to say was that there was not a qualified majority against the proposal. There was not a sufficient weight to prevent the proposal going through. I think that that was borne out by what happened at the relevant Council meeting.

Lord Kerr of Kinlochard: My Lords—

Lord Newby: My Lords, I have 12 minutes, of which I have used 11, and I have not answered a single substantive question posed by noble Lords. It is just possible that I might do so if I am allowed to respond to some of the points that have been raised.

I was asked where matters stand in terms of discussions in the Council. A Lithuanian document was produced last week which I think has been rather mischaracterised as to its significance. It is a short document and I have it with me. It was discussed briefly at last Thursday’s working group, but many participants were reluctant to discuss it, taking the view that the technical discussions should not run ahead of and potentially prejudice the more substantive discussions, so consideration of it was limited. There has been no substantive breakthrough

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in the negotiations recently, largely because of the situation in Germany. As noble Lords will be aware, the German coalition deal has now been ratified and we expect more progress in the new year.

The noble Earl, Lord Caithness, asked about the timing of the resolution of the difference between the Council and the Commission legal opinions. The conflicting opinions of the Commission and Council legal services were discussed by the 12 December working group and it is now for the Council members and the 11 participating member states to weigh these as they begin to consider a compromise proposal. We are not aware of any challenge from Luxembourg.

On the timing of the legal challenge, we have exchanged written arguments with the Council. Several member states and other eligible parties have intervened. Written proceedings will come to a close in January, and it is then down to the court. But, as noble Lords will be aware, oral proceedings would ordinarily take place after written proceedings close.

On the argument that has repeatedly been made about our engaging positively with other member states, the UK has been closely engaged with these negotiations from the start. We have held numerous meetings with other member states about the FTT. UK officials are closely engaged in the Council working groups, of which there have been five, including submitting detailed written technical questions to the committee. It simply is not the case that we have not been and will not continue to be fully engaged.

I have gone over my time, for which I apologise. I thank the noble Lord, Lord Harrison, and members of the committee again for the report, and for generating what has been, as usual, an extremely stimulating debate.

Lord Harrison: I apologise; the noble Lord’s comments have provoked a number of interventions. Can he promise the Committee that he will write to us on those many questions which he was eager to answer, and give us full and ample replies to those which he was not able to reach?

Lord Newby: I would be delighted to do so.

Barnett Formula

Question for Short Debate

5.47 pm

Asked by Lord Shipley

To ask Her Majesty’s Government what plans they have to review the Barnett Formula in the light of the Local Government Association’s recommendation that it be replaced with a new needs-based funding model.

Lord Shipley (LD): My Lords, I first declare my vice-presidency of the Local Government Association, and I thank noble Lords taking part in this debate for their contributions.

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I have asked to discuss the Barnett formula today for three reasons: first, because the debate that will take place over the next few months prior to the referendum on Scottish independence in September will cause the Barnett formula to be under close public scrutiny; secondly, because of the rising demand across England for devolved powers from Whitehall similar to those available to the devolved Administrations of Scotland, Wales and Northern Ireland; and thirdly, because public spending cuts in England are making people in England question why the Barnett formula exists. That is of course a question that the noble Lord, Lord Barnett, has himself asked many times. Indeed, it is unclear why it has been left alone for a generation, why it is so out of date and why it allocates more money to the devolved Administrations per capita than it does to England.

The Barnett formula was devised as a temporary measure to resolve problems over the funding allocations between England, Scotland, Northern Ireland and Wales ahead of the 1979 referendum on Scottish devolution. Many things have changed since the formula was created. As the Local Government Association chairman, Sir Merrick Cockell, said recently, it is “a historic relic”. He is right, because it has locked inequalities into its system of distribution. The consequence is that in terms of identifiable public spending by country and region, all three of the devolved Administrations have higher public spending per head of population than that of any English region, including London. The Office for National Statistics says that in 2011-12, Scotland received £10,088 per head, Wales £9,740, Northern Ireland £10,623 and England just £8,491; those are the latest available figures. It is very hard to justify England doing so relatively badly, not least because of the claim, sometimes correct, that public services in Scotland are better than in England. There is a rising tide of opinion in England that tax revenue is being raised in England but is then diverted from England to be spent in Scotland on higher standards of public services. However, that is not entirely true: the tax raised in England is actually raised in London. Furthermore, if the formula did not exist and if Scotland was independent, tax revenues from oil would broadly make up for the loss because 90% of the oil would be in Scottish waters.

A Select Committee of this House reviewed the Barnett formula in 2009. It pointed out that the formula was used to allocate over half the total public expenditure in Scotland, Wales and Northern Ireland. It also pointed out that although the annual increment in funds is made on the basis of recent population figures, the baseline, accumulated over the past 30 years, does not reflect today’s population in the devolved Administrations. It is therefore out of date and takes no account of the relative needs of any of the devolved Administrations. The Select Committee recommended a UK funding commission—which seems to me to be an extremely good idea—that would identify a small number of need indicators and oversee the transition to a new system of block grant made over between three and seven years. It has not happened, of course, but I would submit that it cannot be delayed for long.

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I turn now to the rising demand for devolved powers in England. The recent London Finance Commission report, Raising the Capital, results from London’s boroughs and regional government looking closely at the issues of taxation and finance in the wider south-east region with a view to considering a Barnett formula-style settlement for the capital. That is welcome, except for one thing. I am increasingly aware of a rising tide of opinion in London that it should keep more of the taxes it raises. The implications of this are potentially very serious for the rest of the UK, which is why we need to think very hard, as a United Kingdom, about where taxes are raised and from whom, about what levels of public spending should apply in each part of the UK, and about a system in which need is the basis for distribution.

This debate now goes further than just London. The Core Cities Group, representing Birmingham, Bristol, Leeds, Liverpool, Manchester, Newcastle, Nottingham and Sheffield, is calling for a suite of fiscal reforms for England’s larger cities. The aim is the devolution of property tax revenue streams, including council tax, stamp duty, land tax and business rates, with the ability to reform those taxes while retaining prudential rules for borrowing similar to recent changes in Scotland through the Scotland Act and as now proposed for Wales. The aim would be to generate funding to stimulate economic growth according to local needs, allowing cities to raise sustained investment for vital infrastructure projects. These proposals would be cost-neutral at the point of devolution, with no additional money being sought from the national pot beyond that which the core cities already receive, along with the ability to raise new local taxes. Such reforms would give practical effect to the ambition of the coalition Government to promote “radical devolution”. Together, the English core cities and London represent more than half of the UK economy and almost half the population, but they control only around 5% of the taxes raised in their areas. Empowered cities could join up public services and reduce dependency on London, which takes me to the current state of local government finances in England.

Last week’s Autumn Statement exempted local government from the further reductions that were applied to Whitehall departments. These measures are welcome. However, some council services are in serious difficulty, particularly because those councils more dependent on central grant cannot raise large sums through council tax and other fees and charges. Central grants for local government are to be cut by 43% by 2015-16, and there will be a funding gap of more than £15 billion by the end of the decade if things go on as they are. That takes me to the issue of fairness.

The way the Barnett formula is calculated is widely acknowledged to give more to Scotland and Northern Ireland compared with their relative needs, and less to England and Wales than their relative needs would justify, by more than £4 billion a year. This is unsustainable. Governments have consistently said over many years that they will not review the Barnett formula and, in the case of this Government, not until the public finances are stabilised. I understand the Government’s

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predicament. I do not argue that Scotland should necessarily get less because I believe in a funding system based upon a needs assessment, but I do argue that Wales and the constituent parts of England should be treated equally and empowered to create more of their own tax income.

As an example, Birmingham has called for a single funding pot at the city region level for local authority spending, health, and for expenditure by the Department for Work and Pensions. Savings are there to be made by reducing duplication. If the referendum next September in Scotland is in favour of independence the Barnett formula will be abolished. If there is a no vote there will inevitably be a debate about yet further devolution beyond the Scotland Act, and I personally would welcome that. When that debate happens there will be a rising demand for the fiscal and political devolution offered to Scotland also to be available in England, with a system of allocation based on needs. Now is the time to act and to set up the UK funding commission proposed by the Select Committee of your Lordships’ House four years ago. We should create a place-based system of finance in England. This could be based on the governance that has developed locally—combined authorities, health and well-being boards, joint committees, local enterprise partnerships and so on. We should give local government and their partner organisations the power to allow individual areas to shape public services and investment, and to incentivise local growth by devolving powers on taxes and spending to suit local needs beyond the 50% permitted from growth in business rates.

In conclusion, it is important that we are not divisive. We should learn from the wealth of evidence on this issue and have a mature discussion as a United Kingdom on how devolution can drive growth and a bigger local tax base, as well as on how resources can be allocated more fairly on the basis of need. In the mean time, as we await the local government settlement tomorrow, it will not be enough for the Government yet again to push this issue into the long grass.

5.57 pm

The Duke of Montrose (Con): My Lords, I thank my noble friend Lord Shipley for introducing this topic and for giving us such interesting views on a new form of local government that certainly contains many elements.

As he said, it is of course most understandable that devolved Administrations and local government are all looking harder at the way funding from central government is divided up. All are facing much-reduced budgets and the actual cuts relate considerably to the application of the Barnett formula. Until the last election the Scottish Government revelled in the fact that their block grant increased by two and a quarter times to nearly £29 billion. The two years of the current Administration has seen this cut so far by £589 million. My right honourable friend the Chancellor of the Exchequer on 29 June, in Hansard at col. 306, seemed to estimate that the block grant in the current year would be only £26 billion. Perhaps the Minister can tell the Committee if this is still the figure that would apply.

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Similar cuts are of course being felt across all Administrations. As my noble friend Lord Shipley was saying, there have been many calls for a needs-based approach to be used in a new calculation—to the extent that many in the public now think that this occurs under the Barnett formula; but of course this is not true. There is some evidence that it was considered in the early days under what was known as the Goschen formula, which was replaced in 1979. The arguments will have been used by Scottish Secretaries of State and others to obtain funding, but the approach has not been part of the Barnett formula.

The needs-based approach was certainly central to the recommendations of the report referred to by the noble Lord, Lord Shipley, which your Lordships’ committee produced in July 2009 and which was firmly rejected by the Government. It now appears that the issue has been taken up by the more recent Holtham commission. It would be interesting to know whether its needs-based formula was the same as that put forward by your Lordships’ report, but this development has meant that people are now beginning to put figures on the disparities that it has thrown up, and local government is taking much greater interest.

Of course, there is a great deal of rethinking going on, both in administration and on the financial front. The Scottish Government are having to juggle three scenarios: the cuts to their previous budget envisaged by the Chancellor using Barnett; their own proposals for a totally independent country, where we are not in the least clear as to what funding will be available under a great many headings; and the wholly new settlement promised by the implementation of Part 3 of the Scotland Act 2012, where the Scottish Government will be raising half the taxation required for their domestic budget. Of course, this will still be governed by the overall size of the estimate of what is due under the block grant.

Given the complications that all this envisages, it is quite easily understood that there is not much sympathy from that quarter for any further adjustments. If the Minister cannot give a positive response to the noble Lord, Lord Shipley, perhaps parties should think about whether this is something that should be in their election manifestos.

6.01 pm

Lord Jones (Lab): My Lords, I thank the noble Lord, Lord Shipley, for initiating this debate, and his succinct address.

Were he alive, Lord Roberts of Conwy would be here today. As a long-standing ministerial and opposition opponent of his, I think that his contribution to Wales’s public life was magnificent. He was more than ever loyal to Wales’s local government units, and his journey from the Methodist manse of Ynys Môn to high rank here in your Lordships’ House is a fine essay in giving good public service. Wyn Roberts built more roads than the Romans ever did, and he built schools and hospitals. He was a fine man.

As I see it, the background to the Barnett formula was the consequence of three beleaguered Administrations of which I was a member, led first by Prime Minister Harold Wilson and then by Prime Minister James

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Callaghan. The latter Administration was sustained by a Lib-Lab pact of a kind. In those crisis years, as he was addressing the complex algebra of local government finance, the noble Lord, Lord Barnett, knew that the IMF was kicking in the doors of the Treasury, that the British manufacturing smokestacks were falling down by the day, that the OPEC nations had trebled—indeed, quadrupled—the price of oil, and that a fearful inflation was raging, some 27% year-on-year in 1975. That also triggered off what is now called in shorthand trade union militancy.

I will give the following brief vision of how the noble Lord coped as Chief Secretary. You would find him in the Members’ Dining Room in another place with his great friend, the noble Lord, Lord Sheldon, and he coped by opening a half-bottle of House of Commons champagne. He then went back to the Treasury that little bit better in his morale. It was from these fires in British governance that the Barnett formula arose, as it were, metaphorically so, from the political loins of the noble Lord, Lord Barnett. My one observation is to be careful for what you wish if you are a Welshman in governance, particularly in Wales. Whatever the outcome of the Scottish constitutional debate, Barnett will come to the fore in all our deliberations and arguably shall be in the manifestos of the great political parties. That is for certain.

My caution is this. Roughly speaking, per head of the population in England the sum of money per citizen is exceeded in Scotland by £1,400; and in my own country, Wales, by some £800. I have spent only 43 years here in Westminster, and I am concerned that when Whitehall mandarins have their monthly meetings they may be tempted to consider how they may be able to get rid of the responsibility as it affects the Celtic fringes. I therefore feel that before one advances one should know precisely what the outcome is. That is what the noble Lord, Lord Barnett, always did; he was an accountant by profession. I offer again the sight of the noble Lord quaffing his half-bottle of Commons champagne before going back to address problems of great crisis.

6.06 pm

Baroness Bakewell of Hardington Mandeville (LD): Like my noble friend Lord Shipley, I believe that the Barnett formula is fundamentally unfair and I will relate this to adult social care. As we have heard, this is an out-of-date formula for allocating resources across the UK.

The Local Government Association estimates that allocating funding on a needs-based formula would potentially increase public spending in England by £4.1 billion. This would make a huge difference to services currently stretched to their limit. There would be a decrease in Scotland and Northern Ireland. Government figures already show Scotland as overfunded. In a recent report, the Treasury said that since 1998,

“public spending per person in Scotland has been around 10 per cent higher than the UK”.

In the current climate, this is simply unsustainable.

This unfairness is understood by most people in England. In 2012, the Future of England survey indicated that 52% of those surveyed felt that Scotland received

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more than its fair share of funding; this was up from 24% in 2002. What implications does this have for the adult social care system, which in England is underfunded? Over the past three years, budgets have reduced by 20%. There is a growing gap between the demand for social care and the resources invested in it. The Government are not providing councils with enough funding to deliver the care people need. An additional £400 million a year is needed to maintain the same level of service, excluding inflation.

In Somerset, a secondary school which covers an area of 600 square miles transports children to and from their homes, an expensive and large logistical exercise. Delivering dignified and appropriate care to their elderly relatives in the same area is much more challenging when often the assessment is for only 20 minutes of care and the drive to the next client is 30 minutes away. The solution is to reshape local health and social care systems and invest in community-based services. These will alleviate pressure on the acute sector. The Government have acknowledged this with the Care Bill and duties on councils to provide or arrange services that prevent, delay or reduce needs.

Reforms require proper resourcing. If the funding arrangements across the UK were fairer, more could be invested in the English social care system and preventive community care services, with reduced spending on expensive A&E acute services. People will rightly see the current distribution as unfair and look at comparisons in local services received north and south of the border. The English and Scottish social care systems are different. There is different legislation, and there are different entitlements and progress on integrating health and social care. Scotland is the only part of the United Kingdom to introduce free personal care where the full costs are covered by the state. In England, the plan is to cap costs. That is a major difference. In effect, English taxpayers, through the Barnett formula, are subsidising a level of care to which they themselves do not have access.

I am pleased that we have had the opportunity today to debate this issue and I agree with my noble friend Lord Shipley that it is right that the Barnett arrangements, agreed as a temporary measure in 1979, should be reviewed. Very few people consider 34 years as temporary. To question Barnett is not to question the future of Scotland in our union. Instead, this debate is about the question of basic fairness across the UK. I therefore call on the Government to set out their plans for making a constitutional settlement fair for all.

6.10 pm

Baroness Eaton (Con): My Lords, I also declare an interest as a vice-president of the Local Government Association, of which I am a former chairman, and I want to add my thanks to the noble Lord, Lord Shipley, for initiating this important debate. I strongly support the recommendation made by the Local Government Association that the Barnett formula should be scrapped, and I call on the Treasury to start evaluating the alternatives. As we have heard, figures from the United Kingdom Government highlight that Scotland is overfunded. The noble Lord, Lord Shipley,

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has made the case as to why the formula is unfair and I support his call for the return of the £4 billion to England that he referred to so strongly. This is imperative at a time when money is desperately needed for all public services, including for adult social care which we have heard about so ably from the noble Baroness, Lady Bakewell.

Basic fairness is not just about the money, important as that is. It is also about devolution from Whitehall to local government in England. This will give people a greater say in their public services and a more meaningful reason to vote in local elections. Recent polling by Ipsos MORI showed that 79% of people trust their council, whereas only 11% trust central Government. English councils are delivering for their communities and the Barnett formula should reflect that.

I would now like to turn very briefly to how the Government can deliver devolution across the United Kingdom in a way that is fair to England, Wales, Scotland, and Northern Ireland. As we have heard already in today’s debate, Her Majesty’s Government need to ensure that money is distributed fairly across the four countries. Having reformed the Barnett formula, HM Government should aim to implement the informative recommendations made in the document produced by the Local Government Association entitled Rewiring Public Services. They would make sure that the benefits of devolution are felt across England, and this could be achieved by, first, adopting five-year funding settlements for local government across the lifetime of a Parliament. Progress towards this goal was made in the Autumn Statement, which announced that local public services will get the same long-term indicative financial statements as central Government.

Secondly, money should be shared more fairly around England by taking financial distribution out of the hands of Ministers and replacing it with an agreement across English local government. Thirdly, local government should be given wider revenue-raising powers, and fourthly, developing a market in municipal bonds that gives local government access to alternative forms of finance.

Local government in England is currently dealing with unprecedented reductions to its funding. Core funding will have been cut by 43% across the lifetime of this Parliament. There is, as the noble Lord, Lord Shipley, has said, a projected £15 billion funding gap by 2019-20 that councils must close in order to meet their legal responsibility to balance the books. The size of the challenge is so great that tinkering at the margins will not be enough. Without radical change in the way funding is distributed across the UK, we risk a situation where services in England that the public care deeply about will start to fail. Bold, imaginative action and political leadership are required to restore financial stability. It is time for a fairer deal for England and English councils.

6.15 pm

Lord Bradshaw (LD): In his reply, I would like the Minister to address the point that if any reform—which he may or may not agree to—is to be worth while, the work on structuring it has to begin now. Elections are

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coming along and it is most unlikely that people will put forward radical solutions before an election. If you wait until after the election takes place, you are five years from the next, and action has got to be a very early priority for the next Government.

Other noble Lords have explained how this money is needed and I will not spend time talking about that. The previous speech indicated that bold action is necessary, but bold action rarely comes very late on in a Parliament, so I do not expect it to happen immediately. However, I do expect a real attempt—cross-party agreement would be achievable—at a proper in-depth examination of the issues which have been revealed. I do not know how such a thing can be set up or how independent it can be but I urge the Minister to really look forward and give us some hope that things are going to get better. Everybody knows that local government services in many places are on the point of breakdown. As these cuts continue for the next two years, it is going to get very serious indeed, and politicians, at the next election or immediately afterwards, have to come up with some convincing formula about how this is going to be tackled.

It is no good talking about how the Barnett formula has served us well—that is really a lot of nonsense. It was a short-term measure set up to get through a difficult election period. However, that does not mean there is any justification for letting this hang on—it is time for new and radical thought, into which local government has a really good input. I commend that to the Minister and would like to hear in his reply what he intends to do about it.

6.18 pm

Lord Wigley (PC): My Lords, I thank the noble Lord, Lord Shipley, for facilitating this debate. I identified with many of the points that he made. I also join the noble Lord, Lord Jones, in his comments about the late Wyn Roberts, whom we all miss very much.

I am glad this opportunity has arisen to comment on the LGA’s submission on the Barnett formula in the context of the Autumn Statement. There is only time to make a few benchmark points today, but it is worth noting that the LGA is working on alternative funding proposals, which will be published, I believe, next summer. I welcome that, although I hope they will consult both the WLGA and the devolved Government in Wales in taking that forward. The implication is that there should be mechanisms for distributing resources according to need within England as well as within the UK.

Noble Lords will be aware of the grave dissatisfaction that has existed in Wales for many years with regard to the inequity of the Barnett formula. The report of the Select Committee on the Barnett Formula in the House of Lords in the 2008-09 Session,

“concluded that the Barnett Formula should no longer be used to determine annual increases in the block grant for the United Kingdom’s devolved administrations”.

It added the pertinent comment:

“The Barnett Formula also takes no account of the relative needs of any of the devolved administrations”.

The Holtham commission, which investigated these matters in Wales, produced two assessments. The first,

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on the basis of the formula used within England to distribute resources, estimated that Wales was underfunded in 2010-11 by some £300 million. The second independent assessment identified a £400 million shortfall. The Silk commission, which reported on possible changes to the financial powers of the National Assembly, agreed with Holtham in its analysis. The Holtham commission set out, as an alternative to the Barnett formula, parameters for a needs-based formula which included the number of children, the number of older people, ethnicity, income poverty, prevalence of ill health and sparsity of population.

The conclusions of the House of Lords Select Committee to which I referred spelt out as parameters the age structure of the population, low income, ill health and disability, and economic weakness. To that extent, the House of Lords Select Committee, the Holtham report and the Silk commission were moving in the same direction. The LGA in its paper recognised the significance of looking at,

“the total identifiable public spending”,

and states:

“Scotland is overfunded by £4.4 bn”,

although this appears to be on the basis of Scotland’s fiscal and macroeconomic position, not on the basis of any detailed analysis of Scotland’s needs, which seems perverse.

Of course, if Scotland votes for independence it will fund the entirety of its services from taxation raised by the Scottish Government. Independence, to that extent, would bring to an end any feeling, rightly or wrongly, that Scotland is being overfunded at the expense of England. Perhaps Scottish independence will solve the problem that is bugging some colleagues here today. I do not suppose that they would support a yes vote, however.

Whereas the LGA in its paper purports to represent councils in England and Wales, it pitches its arguments solely in the context of England. It opens with the words:

“English communities are being short-changed by as much as £4.1 billion a year”.

It makes no reference in its text to the fact that Wales also is being underfunded on that basis and, presumably on the LGA’s own logic, should be receiving £300 million or £400 million a year more to put this right. Here I must note that the WLGA, which represents Welsh local authorities, while supporting the LGA’s call for a needs-based formula, has said that it,

“certainly cannot support the idea of decimating Scottish local government expenditure to achieve this, or having the entirety of any redistribution of funding to be spent solely in England on social care”.

Is the decimation of Scottish local government the alternative that Scotland faces if it votes no next September?

In conclusion, I very much support the thrust of the LGA’s approach, although the details need much further consideration. I hope, however, that all UK parties will make a pledge in their manifestos for the 2015 election to introduce a needs-based formula for distribution of resources.

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The Duke of Montrose: From the study that the noble Lord has made, perhaps I may ask him whether the shortfall that the LGA was talking about is based purely on equality of distribution, or took into account the Holtham needs-based formula.

Lord Wigley: The table that was published, which I do not have time to go into in detail, referred to, “Identifiable public sector expenditure”, which is a different concept from that which is attributed by Barnett or needs analysis in its own right.

6.23 pm

Lord Teverson (LD): My Lords, I note that the noble Lord, Lord Wigley, asked that political parties include a needs-based formula in their manifestos. I somehow suspect that they will not be on the front pages or among the first six pledges—or three or however many pledges we choose—because this is one those subjects that has become all too difficult, which is why this temporary situation has lasted for three decades. It certainly needs to be changed but, having said that, what is the difference that such a change would make in England? It would be an extra 4%, which I am sure would be very much welcomed by local authorities but is not a big difference. It is rather an obscure issue for the electorate, which does not make it any less important, but most people would probably interpret it as something to do with the financing of one of the more obscure London boroughs, rather than attribute it to one of our noble colleagues here.

I should like to move on and ask: what should really be done if the situation gets a little more difficult? A needs-based formula would certainly be better. I am slightly sceptical about an independent commission but the European Union manages rather objectively to distribute structural funds, so it may be that this sort of thing can happen even within a political environment. Two areas are even more important than this, one of which is the rural/urban divide that, unfortunately, my Government have so far not been able to mend much, if at all, during their period in office. I remind noble Lords that rural areas pay higher tax bills, get some 52% less in government grants, and have fewer public services because they are more difficult to deliver there. That is one of the fundamental areas, which, if we keep a similar form of local government finance to what we have now, needs to be fixed very quickly and thoroughly.

The other area that has been mentioned by other noble Lords, which is equally if not more important, is that we need to do something far more basic than changing the Barnett formula: we need to increase substantially the taxation that is raised locally. Rather than mess around with the Barnett formula, we need to start to implement a much greater degree of localism. Clearly, we have got rid of a lot of ring-fencing over the past few years. We have got rid of capping, although we have replaced that with other ways of restraining local expenditure. We have taken away barriers stopping local authorities from raising revenues in all sorts of ways. I welcome that, which came from one of the Government’s early initiatives under localism. However,

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over the medium term we need to move financing from 5% towards 20%, and hopefully in the longer term far higher, so that we have much more local accountability and democracy, and better local decision-making. Within Europe we are the most centralised state as far as taxation is concerned, certainly among the major states. That needs to change. We need to change the rural/urban divide. If we can do all that, then I would support my noble friend Lord Shipley in changing the Barnett formula as well.

6.26 pm

The Earl of Mar and Kellie (LD): My Lords, I will speak briefly in the gap.

I was a member of the Select Committee which recommended moving from the Barnett formula to needs assessment. However, the first thing we learnt from the evidence was that the Barnett formula is extremely simple to operate, which was a bonus for the Treasury, which knew immediately how much was to be allocated to Scotland, Wales and Northern Ireland.

We learnt from the evidence that England and Scotland are pretty similar in terms of needs, while Wales has a disproportionate number of ill people and Northern Ireland a disproportionate number of young people. We also learnt, as I sincerely believe, that Wales misses out under the current arithmetic of the Barnett formula. In Scotland the Barnett formula is seen as a bribe to stay.

A more valid reason, and in my view the only possible justification, for the £1,600 per person additional spend in Scotland is that the tax take from Scotland does not include the oil and gas revenues, because these are allocated to the slightly fictitious area called the United Kingdom continental shelf, not to Scotland.

Ultimately, any perceived proposed reduction in the Barnett formula is a gift to the yes campaign and the possibility of Scotland becoming a better democracy. It was a great disappointment that there was no White Paper from the no campaign, one with a title something like “The Better Governance of Scotland”.

I understand that the three major parties still have no idea what they would like to deliver for Scotland; they need to work that out. They all talk about more devolution, but I wonder how much more can be devolved before eating into what I call the four pillars of reservation: microeconomics and taxation, the welfare system, foreign policy, and defence. The solution for a better United Kingdom is never going to be described in the party election manifestos, so there is more work to be done on this.

Noble Lords should not read anything into the fact that I am speaking from this side of the Committee—I have always done so since the Grand Committee came into effect. We were allowed to sit anywhere, and I like to see the whites of the Minister’s eyes.

6.30 pm

Lord Kennedy of Southwark (Lab): My Lords, like other noble Lords who have spoken, I place on record my thanks to the noble Lord, Lord Shipley, for initiating this Question for Short Debate in the light of the

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Local Government Association’s recommendation that the Barnett formula is replaced with a new needs-based funding model.

The Barnett formula is often discussed in your Lordships’ House and I hope that, in his response to the debate, the noble Lord, Lord Newby, will give us a bit more information than we were able to get in an exchange at Question Time, and address some of the points I am going to make about the funding of local government in England and Wales. Like all noble Lords, I am aware that the formula which bears the name of my noble friend Lord Barnett was devised when he was Chief Secretary to the Treasury and has been used for more than 30 years to allocate more than half of total public expenditure in Scotland, Wales and Northern Ireland.

The Barnett formula has been criticised on a number of grounds. It has been argued, among other things, that, because of its focus on population, it fails to recognise higher levels of poverty. In this debate it is useful to look at what has happened to local government in England and Wales in recent years, and in particular since 2010. We have a picture of local government that has been described by the Prime Minister as,

“officially the most efficient part of the public sector”.

However, his Government have made bigger and earlier cuts to local government than to any other part of the public sector. Their actions have been criticised right across local government and real inequalities and unfairness have crept into the system. I still find it shocking, when I look at the figures, to see that they highlight the West Oxfordshire District Council, the local authority that covers the Prime Minister’s constituency, which is ranked in the multiple indices of deprivation at 316—with one being the most deprived and 325 being the least deprived—and which is actually getting an increase of 3.1% in its spending power. Meanwhile, other local authorities such as Hastings on the south coast and Burnley in the north-west, which are ranked 19th and 11th respectively in the same indices, are facing the maximum cut in their spending power in 2013-14, which equates to a reduction of 8.8%. I agree very much with the comments made by the noble Lord, Lord Shipley, regarding the difficulties in which some local authorities find themselves.

It is also shocking to note that the 10 most deprived local authorities in England will lose six times the amount of spending power per head of the population when compared with the 10 least deprived local authorities by 2014-15, when compared with 2010-11. The noble Lord, Lord Shipley, also referred to the calls for further devolution of powers and fiscal reforms in England. I very much agree with his comments about the core cities.

Will the noble Lord, Lord Newby, address in his response the points that the Local Government Association are calling for, to which the noble Baroness, Lady Eaton, referred, including five-year funding settlements across the public sector to give more certainty to local government? That is a sensible idea. Will he also address the point about the distribution of funds in England being taken out of the hands of Ministers and replaced with an agreement across English local government? The current arrangements are opaque

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and, as with the figures I highlighted earlier, people struggle to understand them and how they are arrived at. They just demonstrate unfairness in the process—a process which disadvantages people living in our most deprived areas and communities. I very much agree with the noble Baroness, Lady Eaton, that the devolution of further power to local government in England is a good thing. Like her, I have also noted the MORI polling which shows that 79% of people trust their local council, whereas only 11% trust central government. I shall not comment further on that; I leave it there.

This debate has to address the issues around spending in our most deprived communities. How do we ensure that no matter whether you are living in a deprived part of Glasgow, a deprived mining village in south Wales or on a council estate in Southwark, central, devolved and local government provide the funding that helps you improve the situation in which you and your community find yourselves, whether through the provision of better housing, better schools, the means to get the skills and training you need to get a job to provide for your family, or to look after yourself in your old age as your needs change?

The noble Duke, the Duke of Montrose, made a number of important points to which I hope the noble Lord, Lord Newby, will respond. I again thank the noble Lord, Lord Shipley, for initiating this debate and look forward to the response of the noble Lord, Lord Newby.

6.34 pm

Lord Newby (LD): My Lords, this is an important subject and I am grateful to the noble Lord, Lord Shipley, for giving us the opportunity to debate it this afternoon, and for all the contributions that have been made.

For what is essentially a mathematical equation, the Barnett formula retains the capacity to generate considerable passion and debate, as we have demonstrated today. Clearly, noble Lords are aware of the formula’s origins in the late 1970s. The Government of the day decided at the time of the devolution Acts in 1998 to retain the block grant and Barnett formula arrangements for determining the budgets of the devolved Administrations. The noble Lord, Lord Jones, gave us some gory details of the state of the British economy at the time but also of the extremely civilised way in which the noble Lord, Lord Barnett, grappled with them. I am sorry that there is only water on offer to the Committee this afternoon.

Successive Governments have taken the view that while the Barnett formula may not be perfect, a persuasive case has yet to be put that an obvious alternative exists that would simultaneously satisfy the devolved Administrations in Northern Ireland, Scotland and Wales and all the other bodies competing for funding from the Government—not least Whitehall departments and local authorities. While it clearly is not perfect, the Barnett formula has proven to be a relatively transparent, durable, robust and fair method of calculating changes in budgets for the devolved Administrations since devolution. It operates at a high level, based on population shares and changes to spending by comparable UK departments. Despite a considerable element of

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transparency, once you look into it in any detail, it does feature certain aspects of the Schleswig-Holstein problem and at the margin gets extremely complicated.

Since today’s debate was prompted by the Local Government Association’s concerns about the formula, I stress that the Government understand the concerns of English local authorities. That is why in the Autumn Statement we recognised concerns about the administration of the new homes bonus by giving that back directly to local authorities, exempted local authorities from any further reductions in annual revenue budgets to assist them in freezing council tax in 2014-15 and 2015-16, and made additional funding available to support housing and other infrastructure development.

I will make a number of general comments now and come back to some of the specific comments under the headings England, Scotland and Wales respectively. The Government are reluctant to join those who call for a rapid demolition of the funding architecture for the devolved Administrations but we recognise that there is a range of valid views on alternatives. Changes to the devolution settlements already legislated for in relation to Scotland and in prospect for Wales are increasing the levels of accountability and flexibility the devolved Administrations will have in future over their own fiscal position.

6.37 pm

Sitting suspended for a Division in the House.

6.47 pm

Lord Newby: My Lords, as I was saying, changes to the devolution settlements already legislated for in relation to Scotland, and in prospect for Wales, are increasing the levels of accountability and flexibility the devolved Administrations there will have in future over their own fiscal position. That has been warmly welcomed in both those parts of the United Kingdom. Similarly, in England, the Government have already initiated an historic shift of power to local areas by removing ring-fences from £7 billion of local government funding and giving councils the ability to retain 50% of the business rates they collect; I will come back to that in a moment.

At least one other noble Lord has referred to the House of Lords Select Committee in 2009, which concluded that, despite some shortcomings,

“the advantages of the Barnett Formula—simplicity, stability and the absence of ring-fencing—are important and should be maintained whatever the future methods of allocating funds to the devolved administrations”.

While we recognise the concerns expressed about the formula, as made clear in our programme for Government, this Government’s priorities remain that we deal with the deficit, bring debt down, and build on the growth we are beginning to see demonstrated right across the UK. There are therefore no plans to review the formula in this Parliament.

I move on to the English, Scottish and Welsh contributions to the debate in turn. The noble Lord, Lord Shipley, made a powerful argument for more devolution within England and greater autonomy for the core cities, and London in particular. I have

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considerable sympathy with that. I was very much involved in plans for regional government during the previous Administration. My preference would have been to have powerful regions as counterpoints to, to a certain extent, Scotland and Wales. However, that vision of how we might manage affairs in England rather crumbled to dust.

It is interesting to note how the core cities have stepped up to the plate and are coming up with a number of innovative proposals, to some of which the noble Lord referred, to enable greater devolution to them. However, the problem with the core cities approach to devolution goes to the point made by my noble friend Lord Teverson, which is that they have the mass and momentum to take devolution forward, but if you are not careful, that will leave a lot of the rest of the country behind. It is difficult to see how to get some kind of uniformity of approach if the cities themselves take a huge leading role.

I agree completely with the need to develop further the place-based approach to financing local government. Although this may be a little pessimistic, it is one of the relatively rare innovations in public policy which I think has been an unambiguous success. I hope very much that we press on with it because not only does it give the flexibility that enables considerable efficiencies to be driven forward, it also gives local authorities a greater sense of their own destiny, which is important if they are to flourish in the medium term.

As part of his argument, the noble Lord, Lord Shipley, discussed the inequality in per head allocations between England and the devolved Administrations. There are, of course, very considerable differences between the regions of England. As he knows, the north-east has higher public spending per head than, for example, does Wales. There are obvious reasons for that, but it is worth pointing out that England differs considerably in the level of expenditure per head that it enjoys at the moment.

My noble friend Lady Bakewell was one of a number of noble Lords to set out the straightforward English case for a review of the formula as proposed by the LGA. I understand absolutely why she feels so strongly about it. She talked particularly about adult social care. As she will be aware, the Government are making enough funding available to ensure that local authorities do not need to reduce the level of social care services that they are providing through to 2015-16, and the range of reforms we are introducing are all aimed at allowing local authorities to do more in order to deliver better outcomes, including the new £3.8 billion health and social care integration pool. That is another example of taking an integrated approach rather than a silo-based one which, whatever is done with the Barnett formula, is very important.

My noble friend Lord Bradshaw enjoined the Government to start working on how we might replace the Barnett formula and suggested that we might adopt a cross-party attempt to do so. I suspect that that would be quite tricky between now and the next election, and I think that the most he can realistically

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hope for is a clear statement in each of the manifestos on how the parties plan to deal with this issue in the next Parliament.

The noble Baroness, Lady Eaton, pointed out the extent to which the Government are moving towards at least some of the LGA proposals, not least in terms of long-term indicative financial statements. That is a very welcome move, particularly because it has taken so long to do it. We are sometimes pretty reticent about claiming progress when we make it, but that is something which local authorities have been asking for for a long time, and there is real movement.

The noble Lord, Lord Teverson, as I have mentioned, talked about the rural/urban divide. He basically said that we should not get too obsessed by Barnett, but should worry about the whole raft of issues. I have a lot of sympathy with him on that.

The noble Lord, Lord Kennedy, made a point about the funding in West Oxfordshire. The only thing I would say about funding for any local authority area is that, if the Barnett formula has elements of the Schleswig-Holstein problem, local government funding allocations in England are vastly more complicated than Schleswig-Holstein ever was. Despite there being allegedly objective formulae for determining that, I have always found it difficult to get from the formulae to the actual results; no doubt that is my inability.

The noble Duke, the Duke of Montrose, asked us to confirm a number of figures in relation to Scotland. I believe that they are correct, but if I am wrong I will write to him. He asked whether the Scottish Government’s current block grant absorbed the cuts. The cuts to devolved Administration budgets have tended to be proportionately smaller than those to Whitehall departments, but that is due to the comparability factor built into Barnett: specifically, the protection to English health and school budgets.

The noble Lord, Lord Wigley, discussed the challenges in Wales in this area, and talked not least about the Holtham commission, which was an extremely thorough piece of work and demonstrated one approach to an alternative needs-based formula to Barnett. Clearly, it is not absolutely straightforward to get from where we are now to a needs-based approach which everybody agrees is the optimal way forward, but I pay tribute to the Holtham commission for its work.

Finally, on the complications of making comparisons, several noble Lords, including the noble Lord, Lord Wigley, referred to the public expenditure statistical analysis figures on per capita expenditure. It is worth clarifying that these are not simply devolved Administration budgets. They include some bits of UK-wide expenditure, not least welfare. One must take that into account when looking at the comparability.

I know that I will not have been able to completely satisfy my noble friend Lord Shipley and other noble Lords, but I hope that I have been able to demonstrate that we are alive to the issues and are moving towards greater place-based delivery for England, which will help local authorities deal with the challenges that they face. I am extremely grateful to my noble friend Lord Shipley for initiating the debate.

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Lord Kennedy of Southwark: My Lords, in response to the point about the funding formulas in West Oxfordshire, I agree that it is very complicated stuff. Is there anything that the Minister or his department could provide to Members so that we may understand it further? If we have debates saying that this council got this and that council got that, it makes it more complicated. Some of the figures seem very unfair. If we understood how it was funded and more of what was behind that, maybe we would see a different picture.

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Lord Newby: My Lords, there is to be a Statement before the Commons rises for Christmas about the funding for the next financial year, which will give the noble Lord’s colleagues in the other place, if not necessarily here, the chance to ask a lot of detailed questions about that. Perhaps it is a subject for another debate in your Lordships’ House.

Committee adjourned at 6.59 pm.