Pensions and the Budget
23 March 2004
In a speech to the House of Commons, David Willetts delivers a damning critique of the implications of the Budget for the Department of Work & Pensions

Speech by David Willetts MP in House of Commons Budget Debate, 23rd March 2004

Mr. David Willetts (Havant) (Con): I draw the House's attention to my interests that appear in the Register of Members' Interests. I shall begin by identifying issues on which I shall disappoint the Secretary of State by agreeing with some measures in the Budget. Let me take him through one or two of the measures that I welcome. In fact, I welcome some measures that he did not even refer to in his rather thin speech.
For example, I welcome the Chancellor's final abandonment of his obsession with delivering tax credits through the payroll. Five years ago, he believed that it was essential to deliver tax credits through the payroll to transform incentives to get people into jobs. He first abandoned that with the child tax credit, and in his Budget last week, he finally abandoned it with the working tax credit as well. All that metaphysical stuff about how it was essential that these benefits be delivered through the payroll has now been abandoned, and I very much welcome that.
There was something else in the Budget that I welcomed: the simplification of the pension tax regime is an improvement on the current regime. The Chancellor again made a significant concession, but did not want to admit to it. In the face of the protests about the £1.4 million cap and its potential effect on senior managers, he has increased the value of the cap significantly for people with defined benefit schemes. However, instead of doing that in the straightforward way, by increasing the capital sum, he has introduced an ingenious formula for converting the value of a defined benefit pension into a notional sum—the one in 20 formula. No one can actually convert their capital into a pension at a rate of one to 20, but for the purposes of his cap, the Chancellor will assume that they can. To get the sort of pension that would be covered by the scheme, the calculation is that the cap is now up to £2 million, if not more, for people in defined benefit schemes. It is, of course, worth much less for people with personal pensions and defined contribution schemes. Because the Chancellor did not want to make a concession in an open and honest way, he has created a new anomaly in which his provision is more generous for defined benefit than for defined contribution schemes.
There is a third item to which I was about to give a grudging welcome. I refer to the £100 for pensioners that, admittedly, is being provided to help them out of the mess of the Chancellor's own creating—the escalation in their council tax bills. That problem has been compounded yet again by the complexity of the means-tested benefit that is supposed to help pensioners.
The take-up of council tax benefit has been declining, and more than 1 million pensioners who are entitled to it do not receive it. In fact, when the Chancellor recognised in his Budget speech the failure of means-tested benefits to help pensioners with high council tax bills and introduced a universal payment for all pensioners over 70, I wondered whether he had recognised a wider strategic point. In the words of Help the Aged:
"There would be no need for gifts like this if the government was to review its fixation with means-testing."

Mr. Geoffrey Robinson (Coventry, North-West) (Lab): While the hon. Gentleman is in the unusual mood of agreeing with the Government, does he agree with them, and me, that at this time of heightened terrorism in the world, we need maximum defences on all fronts to combat it? Does he agree with his own party, which has announced a freeze on defence expenditure in cash terms? If so, which element would he cut at this terrible time?
Mr. Willetts: The hon. Gentleman ought to be aware of the distinction between outputs and inputs. We are committed to efficiency in the public services—the Prime Minister used to talk about that in the old days. My right hon. Friend the Member for West Dorset (Mr. Letwin) has not made a specific statement on defence spending, but we are committed overall to ensuring the efficient delivery of public services.
My attempt to find common ground with the Government on the Budget does not seem have to have met much of a welcome.
Mr. Willetts: I was going to move on to some criticisms of the Budget, but of course I shall give way to the Secretary of State.
Mr. Smith: The hon. Gentleman made a point about inputs and outputs in response to my hon. Friend the Member for Coventry, North-West (Mr. Robinson), but will he give us a clear yes or no answer? Is it the policy of those on the Conservative Front Bench to keep defence spending flat in cash terms?
Mr. Willetts: My right hon. Friend the Member for West Dorset set out our public spending plans clearly in his statement a few weeks ago. He set out the areas in which we would be able to increase spending in real terms—on health and education—and outlined an overall framework for total public expenditure. However, he did not make a statement specifically on the defence budget.
On pensions, I am afraid that I found the Budget sadly lacking. The Chancellor failed yet again to recognise the scale of the crisis in funded pensions. Just about everyone recognises that we cannot carry on with more and more pensioners on means-tested benefits, and the erosion of funded pensions. Everyone from the Adam Smith Institute to Mr. Alan Pickering recognises that the way forward is to reform benefits so as to reverse the spread of means-testing and to produce new incentives to save, so that people are encouraged to build up more funded occupational pensions. Under this Government, the country is heading in the opposite direction, with more means-testing and a decline in funded pension savings, and nothing in the Budget will reverse that trend.
The Chancellor is being optimistic in assuming that corporation tax receipts will increase to the extent suggested by table C8 of the Red Book—the light reading to which we have all been turning in the midnight hour. He assumes that corporation tax receipts will increase from £28.7 billion this year to £34.8 billion next year. It would be interesting to hear why he believes that there will be such an extraordinary recovery in corporation tax receipts, given that many companies will have to put more money into their pension funds to rescue them from the effects of the £5 billion tax that the Chancellor has imposed on them.
There was nothing in the Budget on wind-ups. We wanted it to include measures to tackle the problems facing the 60,000 people who had hoped that after the collapse of their pensions and the disappearance of their hopes for a decent retirement, the Government would examine ways of assisting them out of serious financial distress. Several rumours went round. For example, the Chancellor was reported to be interested in a proposal made by the right hon. Member for Birkenhead (Mr. Field), in which we have also been interested, to use some of the unclaimed assets held by building societies and banks to set up a fund to help people in such circumstances. We read that the Chancellor is targeting the unclaimed assets, but, sadly, not to help with the problem of pension wind-ups. There could be no better use of the unclaimed assets than in helping to tackle that problem, and it will be a great pity if the Chancellor takes money from the unclaimed assets, but does not use it for that purpose.
I now turn to what the Government are doing to encourage saving, because not a word on that subject passed the Chancellor's lips throughout his statement. He has not referred to saving in his last two Budgets; in fact, he has been attacking saving. He has attacked the form of savings that many people have been using, and that the Secretary of State previously encouraged people to take out.
Let me quote what the Secretary of State said in a debate on the subject in 2002, when a Conservative Member asked him a question about individual savings accounts. Asked what vehicle he would recommend people to save with and how he would encourage people to save, he replied:
"The hon. Lady specifically asked what we could offer to younger people to ensure that they were saving, and I quite reasonably pointed to ISAs".

He recommended ISAs. He added:

"The answer is the ISA, a more flexible vehicle which is attracting more savings, especially from younger people."—[Official Report, 2 July 2002; Vol. 388, c. 103.]

The Budget, however, represents an attack on the ISA. There has been an abolition of tax credits on ISA dividends, and a cut in the size of equity ISAs from £7,000 to £5,000. The cash mini-ISA will also be cut from £3,000 to £1,000. Does the Secretary of State stand by the advice that he would have given a young person 18 months ago, in the light of the depredations that the Chancellor has made in the specific form of saving in which the right hon. Gentleman was trying to encourage people to participate?
Let me also ask the Secretary of State about his welfare-to-work initiatives. As he knows, when I am not reading the fine print of the Chancellor's Red Book, I plough through the Department for Work and Pensions' evaluations of its welfare-to-work schemes. Ministers always come to the House to announce new programmes, but they never admit to the House what their evaluations show about the performance of existing programmes. If Ministers take any account of what used to be called evidence-based policies—they used to be proud of those—why does the Secretary of State not explain the latest research report to the House?
The report, published last month, is entitled "Evaluation of Lone Parent Work Focused Interviews: Final findings from administrative data analysis"; it is a light read if ever there was one. It says on page 12:
"The introduction of Lone Parent Work Focused Interviews"—

the Jobcentre Plus stuff that the Secretary of State has just been talking about again—
"brought no detectable change in exit rates from"
income support
"for eligible new or repeat claimants".

It has had no effect. Why does the Secretary of State keep on churning out new initiatives that endlessly require further extension of compulsory interviews, when his own evidence shows that most of them have had no discernable effect? That is the challenge to which he needs to respond.
Mr. Barry Gardiner (Brent, North) (Lab): The hon. Gentleman has just suggested that it is important to review recent documentation and assess it properly. Would he therefore care to review the statement by the shadow Chancellor on 16 February, in which he said that there should be a "zero per cent. growth" in the defence and Home Office budgets? Would he care to compare that with the view of the shadow Defence Secretary, who said that that would be a savage cut? Which is it? Is the shadow Chancellor going to cut the defence budget or the Home Office budget?
Mr. Willetts: I have already clearly explained what my right hon. Friend the shadow Chancellor said in his statement on our public expenditure plans. We can see from the Secretary of State's brief speech, and from interventions, that the Government do not have a programme to reform public services, to tackle the crisis in our pensions or to avert the tax rises that would be inevitable if they were in office for a third term. Instead, we have spin, spin, spin from the Government.
Mr. Webb: Before he was interrupted, the hon. Gentleman was saying that the Government's programmes to get lone parents off welfare to work had been unsuccessful. To fill the hole in his pensions policies he aims to save £400 million a year by getting lone parents with secondary school-age children back into work. What research evidence makes him think that he can raise £400 million by doing that?
Mr. Willetts: We have clear evidence that when lone parents are older and their children are of secondary school age, for them to go out to work is in the best interests of the children, as outcomes for them are better We know from the introduction of jobseeker's allowance that nothing beats a simple, clear requirement that people should actively seek work. The Government have skirted that issue ever since they took office, but we would address it directly with our reform. That is the difference, and it is an important one.
I turn to the main activity in which the Chancellor has been engaged in his Budget, and in which he has engaged again today—
Mr. Patrick McLoughlin (West Derbyshire) (Con): Before my hon. Friend moves on, will he say something more about savings, the issue that he has just addressed? It is disturbing that people are not being encouraged to save. Why, despite all the words used by the Chancellor in the past, are there no measures to encourage saving in the Budget?
Mr. Willetts: My hon. Friend is right. We have just about the lowest savings ratio on record, and the Red Book shows that there is no prospect of improvement. The Budget documents show the savings ratio as 5.25 per cent. in 2003, 5 per cent. in 2004 and 5.5 per cent. in 2005–06. Those are historically low levels. The savings ratio under this Government has fallen from the 10 per cent. that they inherited from us to approximately 5 per cent. now. There are no measures in the Budget to do anything to reverse that. The average savings ratio since 1997 is lower than it was during our period in office, and that serious problem needs to be tackled.
I shall challenge the Chancellor on the new sport in which he is engaged— fox hunting. He wishes to shoot our fox; that was the spin put on the Budget. We were told that that was its purpose: it had nothing to do with improving the performance of the British economy or avoiding future tax increases, but was all to do with shooting our fox. The Chancellor is engaged in an activity more redolent of my hon. Friend the Member for Mid-Sussex (Mr. Soames) than of Labour Members, but they are all engaged in fox hunting.
Let us get on the trail and see whether, by suddenly discovering the importance of reducing the overhead costs of government, they have carried out the brilliant political manoeuvre that they think they have. For years, the Chancellor has denied that there is a problem with waste and inefficiency; it is Opposition Members who have pressed for action on the problem of waste and inefficiency in our public services. Now, the Chancellor takes great pride in turning up and announcing in the Budget that he has suddenly realised that there is a great problem with waste, overhead costs and excessive numbers of civil servants, which he is going to reduce.
Will the Secretary of State for Work and Pensions provide a little more information about the announcements that were made? On the day of the Budget, he announced that he would reduce the number of civil servants, and said on the radio:
"I haven't ruled out the possibility of some compulsory redundancies."

The Chancellor said in his Budget statement that

"the Secretary for Work and Pensions is announcing today for his Department a gross reduction of 40,000 staff posts, a redeployment of 10,000 posts to new priorities, and thus an overall reduction over four years of 30,000 posts."—[Official Report, 17 March 2004; Vol. 419, c. 331.]
That is what many civil servants heard on their radios, but we know what the Government think about such sudden announcements of redundancies, as the Secretary of State for Trade and Industry said:

"I am not prepared to have our workers hear on the radio that they will lose their jobs or find that they have already lost their jobs through a text message."—[Official Report, 14 January 2004; Vol. 416, c. 822.]

The Secretary of State for Trade and Industry is so het up about such announcements that she will penalise employers who do such appalling things. The Government have introduced legislation to fine employers who announce redundancies without proper consultation, and she said:

"I want these changes to lead to a 'no surprise' culture"—

the Chancellor has not caught up with that, has he?—

"where employers and employees discuss common ground and find solutions to mutual problems. I want to see an end to the climate where people only hear about job losses from the media over their breakfast."

What, then, is the Chancellor up to, announcing redundancies in this way?
Mr. Stephen Pound (Ealing, North) (Lab): Like many honest citizens, I was immensely impressed by a recent photo opportunity involving the Leader of the Opposition in which great phalanxes of cardboard cut-outs wearing bowler hats symbolising imminently redundant civil servants were paraded for the cameras. Would the hon. Gentleman disassociate himself from that?
Mr. Willetts: That was a recruitment freeze. We know how to do these things properly, which is the point that we are making—but I am afraid that the Government do not. The Secretary of State for Work and Pensions has the defence that the announcement was not new. The Chancellor did not say so, but that is what we have discovered. I have been digging in the departmental spending plans, and in the latest annual report the Secretary of State said:
"The strategic aim is to reduce the Department's workforce from just 131,000 whole-time equivalents in post at April 2003"—

the figure is about the same now—

"to around 112,000 by March 2006 as the benefits of a significant programme of change and modernisation are realised."

That is what the Government were going to do 18 months ago, but we now know that those plans date back as far as 2002, which is when savings were first announced. What have they been doing in the two years since they first announced that 18,000 jobs were to be cut? A departmental spokesman was asked how many of those 18,000 job losses had been implemented since 2002, and she replied:

"That 18,000 was only a proposal."

The cut was "only a proposal", so the Government have not done anything about it. The Secretary of State must tell us why we should believe him this time when he claims that he is going to do something about it. He says that the savings are all due to the miraculous use of IT, but I warn him that his Department's record on saving money and staff through the effortless and efficient introduction of IT system leaves something to be desired.
The new computers at the Child Support Agency are still not working. Are we going to save money in that way? Will we make savings with the computers that delivered the new child tax credits so smoothly? The national insurance recording system did not send out any notification to people telling them to pay their voluntary national insurance contributions. Will the superb efficiency of that IT system be the means by which money is saved? The Government do not know how they are going to save the money, which is why for the past two years they have been announcing 18,000 staff reductions, yet have not achieved a single one.
Mr. Salmond: I have been listening closely to this part of the hon. Gentleman's speech, and I am still not clear whether those on the Tory Front Bench think the Minister is sacking too few civil servants, or too many.
Mr. Willetts: We want an efficient civil service, and I believe that it is possible to reduce staff numbers in the Department for Work and Pensions. Let me tell the hon. Gentleman, and Ministers, how it can be done. The only real way is not through gimmicks, proposals from which no action follows, or empty hopes based on IT systems. The only way is to reform the benefits system. That is how to save money. I shall give the hon. Gentleman some figures.
The average weekly administrative cost of delivering a payment of income support—one of those complicated means-tested benefits that the Chancellor loves so much—is £4.20. The administrative cost of delivering the basic state pension per week is 55p. The cost is hardly more than one tenth, if instead of complicated means-tested benefits, straightforward and simple benefits are paid through the basic state pension. The reason why the Chancellor cannot deliver savings is that he is always making the benefits system more complicated and spreading means-tested benefits. If he reformed the benefits system as we propose, it would indeed be possible to make savings. One makes savings by making tough decisions on the reform of benefits.
I should like the Secretary of State to explain to the House why we should believe that this time, Ministers will be able to save money on the overhead costs of government, when we know from their own evidence how they have failed before. I have the targets that they set in 2000 for "modernising welfare delivery". The aim was to
"introduce an improved, integrated modern service for delivering benefits".

Those were their 2000 objectives. What happened?
One target was to
"reduce the average cost of processing retirement pension claims and maintaining the caseload by 20 per cent."

The response was that the Department would not meet that target. Another target was to
"reduce the average cost of processing Minimum Income Guarantee claims".

The outcome was that the Department would not meet that target, either. The Department also aimed to

"ensure that 90 per cent. of MIG claims are processed within 13 days".

The outcome was that the Department would not meet that target.
The Government have failed to meet their targets in the past. There is no evidence that they have taken the measures necessary to deliver the targets they have now set. The only way to do that is by serious reform of benefits. The only way to save money on the overhead costs of government is to engage in a serious process of public service reform. There is nothing about that in the Budget. That is why the Budget fails to rise to the challenge of the growing costs of government. That is why the Opposition have the correct approach and Ministers do not.