Examination of witnesses (Questions 44
- 59)
TUESDAY 13 MARCH 2001
MS KATE
BARKER, MR
DAVID COATS,
MR ANDREW
DILNOT, MR
EDWARD TROUP
and MR MARTIN
WEALE
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.
Chairman
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.
Chairman
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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