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AMENDMENT OF THE LAW

Conservative Members have spoken about the burden of taxation—that is how they regard it—but I regard taxation as the price that society pays for civilisation. Taxation is the Government’s key instrument for delivering social justice. Taxation is not only certain in life, but necessary. It is needed to bring about the equality upon which any cohesive society must be based. On that view, equality does not undermine liberty—it undergirds it. I therefore look to the Budget to use fiscal policy to redistribute wealth and create social cohesion. The Chancellor’s proposals to take a further 250,000 children out of poverty do that, and I welcome them. I also welcome the rise in the winter fuel allowances for the elderly for the same reason. The background to this Budget is clearly in the United States of America. Some 63,000 jobs were lost there in January alone, and the word ““recession”” is now being spoken quite openly in American boardrooms. The Federal Reserve has already cut interest rates by 1.75 per cent since last summer, and on Friday it pumped $200 billion of liquidity into the financial markets. The US sub-prime market was based on such liquidity, and I echo the sentiments of the right hon. Member for Hitchin and Harpenden (Mr. Lilley) and the hon. Member for Beckenham (Mrs. Lait) on that point. It was based on liquidity within and between lending institutions. When that liquidity dried up, it was no longer possible to bring in more debt at the bottom of the pyramid, and the turning point in the market was reached. But liquidity is not an answer on its own. It is capable only of masking a bad business model for a time, not of curing it. The sub-prime market was a bad business model, for the reasons that hon. Members have outlined. It was aimed at people who should never have been drawn into such a level of debt. My right hon. Friend the Member for West Dunbartonshire (John McFall), the Chairman of the Treasury Committee, discussed Northern Rock and the FSA’s role as regulator. I wish to make some broader remarks about regulators and credit rating agencies and draw some lessons for other sectors of the economy, such as the utilities sector. UK utility regulators have trusted in credit ratings. Their use of ratings was always a misuse, but now it flies in the face of increasing evidence that they can be dangerously wrong. Northern Rock, of course, is a prime example of that. Regulators have allowed increasing debt at a time when the impact of global warming is causing severe financial shocks to utility companies. The regulators’ reliance on credit ratings now looks dangerous and out of date. The UK’s economic regulators have a legal duty to secure licence holders’ ability to finance their activities. That duty has been viewed as a need to check, inter alia, that companies are not over-leveraged, which regulators have achieved by requiring a combination of investment-grade credit ratings and a secure ring fence around the regulated legal entities. Two major problems with that approach have emerged: the first is with the credibility of credit ratings and the second is with the stability that the ring fence can create. Rating agencies have made a series of systematic errors in many of the world’s major industry groupings. The list of those affected in this decade alone is staggering: in power and energy, it included the independent power producer sector from 2001 to 2004; in telecoms and media, it has included major telecoms companies such as WorldCom. It has also included financial institutions such as Northern Rock, and of course property, with the US sub-prime sector. It is also at least arguable that the regulators are abusing credit ratings. The rating agency Fitch Ratings defines a BBB rating as indicating that"““there are currently expectations of low credit risk.””" Note the use of the word ““currently””. The rating agencies clearly use a probabilistic approach and state that ratings are not immutable, whereas the leveraged financing structures allowed by regulators may stand for 25 years. The credit rating downgrade of some monoline insurers who guarantee junior debt in many securitisations highlights the degree of systematic change possible, even in a relatively short time frame. There has been a strong and coherent argument supporting leveraged financing structures in utilities: high leverage focuses management attention on delivering tight budgets and reduces the cost of capital, thereby allowing lower tariffs. The corollary to that is that it may also reduce flexibility, and we need to heed that warning. Decision making by utilities dealing with the crisis should not involve seeking permission from creditors to spend money. Given typical restrictions in leveraged finance agreements, circumstances in which that is exactly what would be required are perfectly plausible. Last summer saw widespread and devastating floods across many parts of the UK affecting all types of infrastructure, including utilities. Fortunately, the utilities affected, such as Severn Trent Water and Central Networks in the midlands and CE Electric in the north-east, are owned by well capitalised holding companies. Severn Trent Water alone reported costs of between £25 million and £35 million to respond to the floods. It is increasingly important that utility companies are able to withstand a financial shock. Global warming is causing freak weather, and the financial flexibility required by utilities has to be increased if they are to be able to respond immediately and effectively to the type of incidents that we have seen in this country. Regulators have powers to impose cash lock-ups on licensed utilities and to apply for a special administration if a company cannot finance its activities, but both courses of action are problematic. A cash lock-up can be imposed, but if a company has no cash at the time it will still not have immediate access to funds, and special administration is not straightforward. An administrator’s duties in some areas conflict with those of a regulator: an administrator is appointed by a court and has a duty to a company’s creditors, whereas regulators have duties regarding customers, such as the economic delivery of services and, of course, the security of supply. Our regulators all have access to significant investment banking and capital markets expertise. The increasingly prevalent model of leveraged finance—both Norweb and Southern Water were subjects of leveraged acquisition at the end of last year—covers a range of water, electricity and gas companies. There is now sufficient evidence that credit ratings are not a suitable method for regulators to discharge their duty to ensure that companies can finance their licensed activities to justify a move to a more bespoke approach. High debt levels have helped to keep tariffs low, but low tariffs are not more important than keeping the lights on and the water flowing. I hope that we will apply the lessons learned from the events in the sub-prime market and our experience of Northern Rock to a wider range of service sectors in this country. If we do not, similar problems could arise in future. In 1993, the first Labour suggestion that non-doms should be taxed on their worldwide income was made. At the time, I ran a company of general average adjusters in the City, and I well remember the concern that that suggestion caused in the shipping world and the financial services sector. I took a delegation to meet my good friend Paul Boateng, now our high commissioner in South Africa but at that time our shadow Minister with responsibility for banking and finance, to point out that the potential loss to the economy was greater than the potential gain. I am glad to say that he and the shadow Chancellor drew back from the suggestion. Looking at the figures now, it is clear to me that estimates vary—well celebrated fag packets have been used in the calculations. There are figures suggesting that between £4.5 billion and £7.5 billion is contributed to the country in revenue by non-doms. Estimates of further spending into the UK economy range as high as £16 billion. One of the principles of taxation was expounded by John Rawls in 1973 in his great work, ““A Theory of Justice””—the maximin principle: one does not do anything without ensuring that it will improve the lot of those who are worst off in society. The point of taxing non-doms must be that more revenue will be gained than will be lost from the off-putting effect of the revenue-raising measure. It has not been shown that that will happen as a result of the moves made in the pre-Budget review. I am extremely pleased that the Chancellor appears to have backed off from a number of suggestions that would have been quite wrong and improper, and that would have violated the maximin principle. They would have actually caused a net loss to the Treasury overall. I welcome the fact that income and gains in offshore trusts will be taxed only when they are remitted to the UK, even if they come from UK assets, and the fact that children will not pay the £30,000 charge. It would be better if the £30,000 charge were per family, rather than per adult in a family. The £30,000 charge should be creditable against foreign tax. That is significant when it comes to dealing with workers from American companies in the UK, and with regard to the risk of double taxation. There has been talk today of a flight of non-doms. It is important to recognise that owing to turbulence in financial markets, what has been going on in the sub-prime market in the US, and the situation as regards liquidity, debt markets across the globe are contracting, as are credit markets. All those in the City working for big American or overseas banks face a contraction, too. There is already a flight—an exodus—and it is due not to anything that the Chancellor proposed in the pre-Budget report, or anything that he is proposing now, but to that contraction in the market, which is the result of what has been going on in the sub-prime and other sectors in the United States. I welcome the change to the position regarding art works brought into the UK for public display or repair and restoration; they will face no new taxation. I also welcome the fact that people with unremitted offshore incomes and gains of under £2,000 are exempt from the charge and the changes to personal allowances. The biggest problem with opening the Pandora’s box of reassessing the position of non-doms is that non-doms bring revenues and expertise to the country, and form the epicentre—the honey-pot—of the shipping world, the legal world and the financial world in the UK. We do not want to lose all that that brings into the City of London, and the revenues that flow from that, which are used for the benefit of the rest of the country. Treasury officials’ valuations of how much a measure relating to non-doms would bring in are between £500 million and £800 million. That is nonsense, and it has to be seen as nonsense. The introduction of such a measure was rejected by Margaret Thatcher, by Labour in opposition, and, at first, by Labour in government. Why has Pandora’s box now been opened? It is because the Opposition came up with a proposal for a simple £25,000 levy on non-doms, and officials in the Treasury thought, ““That gives us cover to see whether a Labour Chancellor will go for such a measure.”” The real problem is uncertainty. To raise the issue is to open Pandora’s box. People need certainty in their tax planning. International businesses need certainty and clarity in that regard. In view of the position of the two parties, people will not be clear about whether they should locate in London and continue to bring their expertise and finances here.