Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 44 - 59)



  Chairman: Thank you all very much for coming.

Mr Fallon

  44. Mr Troup, can we turn to some of these micro measures? The Chancellor is removing VAT on the purchase of adult cycle helmets to encourage people to cycle more. How many more people are going to cycle as a result of that?
  (Mr Troup) There is an interesting point behind that question.

  45. Let us have the answer first.
  (Mr Troup) I was going to give you an answer, which is that of course there is no statement in the Red Book as to how many people will cycle, there is no indication in relation to child car seats as to exactly why or how many people will buy the so-called better quality seats which are allegedly easier to fit, and it does seem to me that there is a great deal of policy making by assertion in this Budget: the assertion that, because cycle helmets are a good thing (which we all agree with) and the assertion that car seats are a good thing (which we all agree with), it justifies a cut in tax on any of these things. While there may indeed be some failing here—there may be people who genuinely should be encouraged by financial means to undertake this sort of activity—there is no indication as to what sort of financial incentive is required, what sort of effect it will have and whether in fact the cost of the relief (and indeed the additional complexity it brings to the tax system) is justified in terms of the benefits. I would say that that is a criticism I have of virtually every one of the micro measures in this and indeed in many of the preceding Budgets.

  46. Andrew Dilnot, who have been the main winners in this Budget?
  (Mr Dilnot) Families with children, in particular low income families with children but almost all families with children. The families with children who have not gained have been those who are higher rate taxpayers or where there is one higher rate taxpayer. Almost all income tax payers have gained from the extension of the 10p band although it is worth noting again that roughly the poorest third of adults are too poor to pay any income tax and those income tax payers who are already facing ten per cent of their marginal income tax band gain nothing at all from the further widening of the tax band. Then of course there have been small proposed increases in spending on health and education.

  47. Apart from those who cannot ride bicycles, who will be the main losers?
  (Mr Dilnot) There are remarkably few losers from the announcement made in this Budget. If you look at the table of Budget measures it is extremely hard to find anything that will raise any money for the Government. There are two measures that will raise some money for the Government. One is policy holder information for life insurance policies; this is page 146. The other is, I am sure, small change in the tax treatment of control of foreign companies. This was a Budget which announced almost nothing but increases in public spending and reductions in taxation, although it is worth noting that there will be some changes to the tax system that will occur soon after the Budget. The most obvious is the change to the National Insurance contribution ceiling that will lead to some increases in tax payments, but those are not measures that were announced by this Budget.

  48. David Coats, the Chancellor widened the 10p band. Is that the most effective way of helping those on low incomes?
  (Mr Coats) It is not the only way but it is one way of helping people on low incomes.

  49. Is it the most effective way?
  (Mr Coats) I think taking that, combined with the working families tax credit and the proposed increase in the minimum wage, a good deal has been done for those on low incomes.

  50. I asked you whether it was the most effective way.
  (Mr Coats) It is one of the instruments at the Chancellor's disposal and we welcome the extension of the 10p band.

Mr Davey

  51. The Chancellor announced that he was spending an extra billion on the NHS, and that will be on schools. Can I ask Mr Dilnot, is he spending this amount of money and if he is where is this money coming from? Is it new money or is it underspend carried forward?
  (Mr Dilnot) If you look at page 146 of your Red Book, the second page of table A11, towards the end you will see additions to departmental expenditure limits announced for the year 2001, 2002, 2003 and 2004, that for health a little more than £300 million a year, for education over those three years, roughly a billion pounds has been added in total to each department. It is very important that we should be clear that that is over three years. You could misinterpret the Red Book as saying there is a billion pounds being added to incomes through a cut in income tax and three billion pounds being added to education and health without realising that a billion pounds' income tax cut is an annual reduction, whereas the spending on health and education needs to be divided by three. Is this new money? I think here you need to ask what has happened to total public spending. What has happened to total public spending is that it has been less in total this year than it was planned to be. It is now being planned to be less next year than it was previously planned to be. It is going to be less in the following year than it was previously planned to be and then in the last year it will be 0.1 of a billion pounds more than it was previously planned to be. Total public spending over this period is going to be lower than the Chancellor previously expected. Some of the underspend from the year we are in is going to be carried forward. The question where precisely did this money come from risks falling into the hypothecation fallacy. There is no way of saying precisely where this money came from. There was an underspend this year across a large number of departments. There is an underspend planned for next year over the previous plans. There is an intention to increase both health and education spending by about £300 million a year more than had previously been planned.

  52. From your answer to the initial question, he has actually rolled up three years into one as he did in the first comprehensive spending review but then did not in the second spending review. You welcome the fact that he has gone back to the first way of presenting the numbers?
  (Mr Dilnot) I would certainly regret it if too much was made of a rolled-up three year figure rather like the 19 and 21 billions we have from the first comprehensive spending review.


  53. We had something to say about that in our report three years ago.
  (Mr Dilnot) Which I welcomed. I think it would be a shame if too much were made of it. I am sure not much will be made of it. I would also be disappointed were the Chancellor to imply that the move to increase in public spending of 3.7 per cent a year instead of 3.4 per cent were a great new dawn. The reason that spending is growing at 3.7 per cent a year, not 3.4 per cent, is that there was a failure to deliver on planned level of public spending in this year, so the base point is lower and so, although the planned levels of spending for future years are also lower, it is true to say that the rate of growth is higher but not necessarily the most natural way of interpreting what is going on.

Mr Davey

  54. So you are saying there was a bit of a trick, which is actually a failure to deliver on previous spending plans?
  (Mr Dilnot) I am sure there was no trick intended or even conceived. It just happens to be the case that the true statement that public spending is going to grow more quickly than was planned might be misinterpreted, saying that public spending was going to be higher than had previously been planned, and that is in fact not the case as is made very clear in the many tables in the Red Book.

  55. Why do you think the Chancellor is continually underspending his spending plans?
  (Mr Dilnot) A range of reasons. One is that debt interest payments continue to be lower than expected because of the reductions in national debt. The second is that social security spending has been lower than expected because unemployment has continued to fall. A third and a fourth are that both current and capital spending in a range of departments are under-shooting. Here there is something of a puzzle. On the capital spending side it is sometimes suggested it turned out to be very difficult to get the plans through, there were big lags and it is hard. It may be even that civil servants have forgotten after five years of almost no public spending growth how to get out there and do it. On the current spending side I confess that I am rather puzzled. Some of it may be to do with the new system of end year flexibility. The departments are now allowed to carry forward spending, so instead of having a very powerful incentive to spend all of their allocation by the end of the year they can now carry it forward if they are not quite sure what best to spend it on. I think that further investigation of precisely which departments have underspent and by how much would be worth while. We do not at the moment know which departments have underspent for the year that is about to end. Indeed, the Treasury has effectively just had to assume that there will be a certain underspend. It is as yet unable to know which department has failed to deliver.

  56. We did have two specific announcements which I will quiz you on. The Chancellor announced two funding calls for teachers' salaries and for NHS staff. Is this confirmation that the Government is having to raise wages in order to meet its targets in these two critical public services?
  (Mr Dilnot) I do not know.


  57. Does anybody else have a view?
  (Mr Weale) I certainly expect that it is. If you have a desired level of spending on education and then cannot recruit the teachers you need to deliver the spending that you want to meet your targets for class sizes or whatever, then you do have to pay more for them. Remember: there is not actually any such thing as a shortage of teachers or a shortage of nurses. It is simply a question of not wanting to pay what they cost and that is the situation that the Government has been in.

Mr Davey

  58. So you are saying that the Government does need to raise wages in these areas substantially in order to try to make sure that the NHS and schools have the staff they need?
  (Mr Weale) You said "substantially", not me, but the Government I think is starting to recognise that it does need to pay some people in the public sector more. The concern I have about policy is that at the moment it seems to be designed as a way of paying more to new recruits rather than to existing staff. We know about the labourers in the vineyard, that it is not terribly good for staff relations and eventually I suspect they will find that the sorts of measures that they are trying and adopting in order to avoid more general pay increases will not work, or at least they will not work unless the rate of growth in the economy overall slows down sharply.
  (Mr Coats) There is an element of catch-up here to the extent that salaries of some public sector workers have fallen behind their natural comparators in the private sector. People make rational choices generally speaking when they select their jobs, and the level of pay is one element that they will take into account. It is hardly surprising the Government has allocated this money as a result. On the other hand, and this is a point that Martin Weale was making too, you need to have a consistent approach to public sector pay and it would be better from the point of view of both teachers and workers in the health service if, taking the NHS as an example, there was a general reconstruction of the NHS pay system, which is subject to discussion at the moment between the Department of Health and the health service unions. The preference of health service unions would have been for that to be concluded without there being ad hoc adjustments to deal with recruitment and retention difficulties in the short term. It may be easier to resolve these things in the medium term and to put together a more sensible pay policy in the public sector.

  59. So they have not got a long term pay policy?
  (Mr Coats) I think they are developing one but they are responding to short term pressures. You can see these announcements as a response to short term pressures. That should not preclude the conclusion of a new pay system in the health service, for example.

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