John McDonnell
John Redwood's speech to Parliament on Pensions
Mr. John Redwood (Wokingham): I have declared my interest in the Register,and in the course of my remarks I shall draw on some of my experiencesbefore I became a Member, as a director in charge of investment researchand a pension fund manager in charge of considerable funds in the City.That experience seems very relevant as current events unfold.As I listened to the Secretary of State's remarks, I found it curious thatthe man who has just managed to get out ahead of the private financeinitiative and public- private partnership disasters that are likely toimplode in the Treasury-under the rigged accounting that the Governmentare going in for-should be given the rather difficult task of picking upthe unfolding pensions crisis so nimbly left to him by his predecessor. Icongratulate the Secretary of State; I admire him for many reasons, butthis challenge will prove extremely difficult. It may concentrate his mindto realise that if he fails, he will be off, like his predecessor, to tryto sort out the railways, which will prove an even more difficult task forthe Administration.
Mr. Peter Viggers (Gosport): Not only would the right hon. Gentleman be incharge of sorting out the railways, he would also have to sort out the airtraffic control system, having previously told the Labour party conferencethat our air was not for sale.
Mr. Redwood: My hon. Friend is right. That is one of the PPPs that willcause continuing hassle and will call into question some of the accountingtechniques.
The Secretary of State used curious arguments. He said that the lowsavings rate was a sign of great success in our economy. He seemed toimply that when we had higher savings rates and people were making muchbetter provision for their retirement and other events in their lives,that was a great failure. I would rather swap our failure-higher savingsrates-for his success. Extending his argument, if we took 20 per cent. offhis salary-as the Government took 20 per cent. off the dividends goinginto pension funds-the Secretary of State would feel richer. It would notfeel like that to anyone else, but that is the topsy-turvy world of theSecretary of State's economics, which seem to invert everything known tothe rest of us.
The Secretary of State also told us that the dividend tax had beenextremely good for British businesses; it had been wonderful to take someof their money away and that was one reason they were investing far moremoney. If that is the way to attain higher investment targets and raiseproductivity, why do not the Government take even more money away fromcompanies?
Opposition Members are shaking their heads-they know that the Secretary ofState's argument was fatuous. The Government have made a series of taxraids on pension funds and companies and they have suddenly woken up tothe awful fact that the money is running out. There simply will not beenough money to pay all the promises, meet all the expectations and pay all the bills that theGovernment blandly assumed would be paid and met by the private sector,despite their tax policies.
Let us consider some of the figures. As some of my colleagues had to pointout to the Government, the £5,000 million is £5,000 million a yeardeliberately removed from pension funds by the Government-money that thefunds could otherwise have invested. Worse than that, the removal of thatmoney must have an impact on the value of all the shares held in theportfolios of those pension funds. That is why I intervened to ask theSecretary of State a simple question: if the Government decide to take£5,000 million away from companies, will that lead to share prices risingor falling?
Everyone outside the House-with or without investment experience-couldgive the Secretary of State the answer. I will give him the answer-basedon 15 years' experience at senior level in a leading investment house: allthings being equal, it will lead to lower share prices. That is exactlywhat has happened in recent years as the full consequences of the dividendtax have worked through in investment markets in Britain.
When the tax was imposed, companies were expensively rated. For example,if we take a modest rating of 16 times below the market average reached asthe market rose, we would expect £80,000 million to be wiped off shares inBritain as a direct result of imposing a tax of £5,000 million a year oncompany profits and dividends. A similar figure is reached by acalculation based on dividend yields. I am sure that colleagues understandhow the arithmetic would work.
I have consulted people outside who have told me that my figures wererather modest. Many people would expect £100 billion or more to be wipedoff share prices as a direct result of the £5,000 million tax. There is adouble whammy for the pension fund; it is short of the income to reinvestand the capital value of its underlying assets is falling.
The Government made the extraordinary decision-the Chancellor of theExchequer again-to impose a substantial tax on telephone companies thatwanted to remain in business and continue to develop the mobile telephonythat is so important to their future. The Government worked out such aclever system that they managed to relieve the leading telephone companiesin Britain of £22,500 million. Does the Secretary of State think thattaking away £22,500 million would make those companies stronger or weaker?Will it lead them to invest more or less? Will it be good or bad for theirshare prices? Drawing again on my past experience, I can give theSecretary of State the clear answer that he was unable to offer the House:it is bound to lead to a sharp reduction in the share prices of thosecompanies.
These matters are important, because when the Chancellor imposed that tax,those companies were extremely popular with investors and pension funds inthe City, which had massive positions in leading companies such asVodafone and British Telecom. The share prices of those companies havefallen far more sharply and devastatingly than the market averages, partlybecause of the Chancellor's clumsy intervention and the deliberatereduction in shareholder value that he created.
If that £22,500 million-a one-off amount-is spread over a five-year periodand we apply a multiple well below that on which telecoms were thenselling on the stock market, we would expect their shares to fall by atleast £90 billion, as a direct result of the £22.5 billion being removedfrom their coffers. What happened in practice? Overall, share prices fellby much more than that. At its peak value, Vodafone was worth more than£240 billion in the stock market; pension funds had very large positionsin that company. Today, it is worth about £60,000 million. About £180billion was wiped off the shareholder value of Vodafone, some of which isdirectly attributable to the decision of Her Majesty's Government to liftso much money off the company.
The situation was similar for British Telecom, which also held a large andfavoured position in many pension funds; it reached a peak value of about£100 billion. Today, the value of BT and mm02, a spin-off of the company,is about £26 billion. About £74 billion has been wiped off the value ofBT. Again, part of that is the direct result of that very expensive taximposed by the Government.
