Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 204 - 219)




  204. Good morning and welcome to the Committee. We are very grateful that you have taken the time to come along and help us in our inquiry on the Pre-Budget Report. I realise that one of you in particular has pressing engagements and we are very pleased and delighted that you could come along for a short time. I shall start with a general question to all of you and thereafter my colleagues will come in and we will have a question for one of you. If any of you feels that you want to add anything to that, we are delighted for you to do so. There is an awful lot to get through so it would be best if we focused our questions. What do you think are the key micro-economic policy issues which arise from the Pre-Budget Report? What are the main concerns you see arising from the Pre-Budget Report.

  (Mr Troup) I am a tax specialist rather than a micro-economist but obviously as a tax specialist I am interested in the micro measures represented by the tax system. I am pleased in a way that there was not a great deal new in the Pre-Budget Report. We do have a lot of measures which we have been notified of before or there has been a lot of detail on before. We are being given the opportunity to review those in more detail. So far as the specific measures are concerned, the Committee will know that I remain concerned at the extent to which this Government uses micro-measures through the tax system to attempt to influence social and economic behaviour and we have a continuation of those here. We have one or two new ones: proposals for reduced duty for micro-breweries is the one which springs to mind as being particularly difficult to explain away and my concern as ever is that on all of these measures no evidence has been put forward that they are going to have a particular effect and for the first time we actually have trumpeted in one of the tables the fact that there is going to be an evaluation of one of the measures which has already been introduced, company car tax reform. It seems to me this is not something which should be trumpeted, it should be absolutely routine. My overall concern is on the continuing number of micro-measures and the need for greater scrutiny and justification and evaluation of them.
  (Mr Weale) I would say that there are really three key micro issues. One is the issue of productivity and closing the productivity gap where the report quite rightly gives a lot of emphasis to the question of training. On the other hand, recent work we have been doing suggests that perhaps it is now differences in the size of the physical capital stock which are more important than skill differences in explaining the productivity shortfall. Then you have the question of incentives to work where a lot has been achieved by the Government, but as one of the tables in the report shows, there are still people facing what are effectively very high marginal tax rates, families facing tax rates of more than 60 per cent. I must say I find it quite impossible to understand why at the top end of the tax scale it should be important for incentive reasons not to have tax rates of more than 40 per cent, but at the lower end of the income scale implicit tax rates generated through the benefits system can be much larger. Then we have the question of incentives to save. Here the general impression that the report gives is that the policy is not analysed in a fully coherent way. For example, it would be interesting to know for people in various circumstances what the rate of return on savings they might expect would be, given the various pensioner credits, given the various schemes on offer, the various tax reliefs that have been granted. There is no consolidation of the effect of these measures on what it would mean for someone on, say, £20,000 a year who pays into a stakeholder pension, what sort of return he or she should expect. My concern is that on the question of incentives there is not really any global view or any clear policy.

  205. I know that is an issue which has been dear to your heart over the last few months.
  (Mr Dilnot) Can I start with the two now renamed tax credits, the things which we once thought were going to be known as the Integrated Child Credit and Employment Tax Credit and we now know are going to be known as the Working Tax Credit and the Child Tax Credit. I am sure nobody in the Committee would dream of confusing the Child Tax Credit with the Children's Tax Credit or the Child Care Tax Credit because such naivety would be remarkable. My understanding is that Members of Parliament are going to be asked to vote on a second reading of the Bill introducing these two policies at some point in the next few days. These are policies which are supposed to tackle child poverty and disincentives to work. At the moment the Government have not seen fit to give any estimates of the cost or indication of the levels or precise structures of these benefits. It seems to me astonishing that Parliament or indeed the public can be asked to take a view as to whether these measures will effectively tackle poverty and work incentives when we do not know what they will be. The response that final levels need to be set in the Budget seems to me entirely inadequate. When the Government announced the proposed introduction of the Working Families Tax Credit some years ago, at the time of the initial announcement some indicative figures were given from which it was possible to deduce costs, likely impact on poverty, likely impact on work incentives and when the measure was finally introduced it was more generous than when it was first announced. It really does seem to me very hard to have a proper consultation process in the absence of this kind of detail. It is something I find very disappointing indeed. We now do have much more detail on the pensioner credits and it does make a good deal of sense. There is still a huge question as a result of this about the Government's overall strategy with respect to pensions, in particular the status of the second state pension, given that we now have a pension credit to be introduced and a minimum income guaranteed to rise in line with earnings. This is something to which I think you need to come back. Finally on asset based welfare, there it is good to see the so-called savings gateway and child trust fund are going to be consulted on more widely, pilots are going to be introduced. I would pick up on something Martin Weale said that in the case of the savings gateway in particular the idea that the Government should introduce a new savings regime for some of those on low incomes with such a high potential rate of return does mean that the interaction of that with the stakeholder pension is extremely delicate. I found it hard to imagine how any financial adviser could give as best advice to somebody who might at any time be entitled to a savings gateway the idea that such a person should take out a stakeholder pension. I think you would always be better off keeping the money, putting it into a savings gateway with a matching 100 per cent rate of return and then if you wanted a pension taking it out and putting it into a stakeholder pension. As Martin suggested, the interaction between the many measures which now potentially affect savings does need to be taken more seriously.

Mr Laws

  206. The Wanless report. If you were to boil down the conclusions of Mr Wanless into a couple of sentences, it might be that he has concluded that we seem to have the best funding system out of all the countries he looked at, it is just that we have ended up with the worst outcomes in terms of health performance. Do you think there is a tension between those two apparent conclusions?
  (Mr Dilnot) Not necessarily, because we spend rather less than almost any comparable country, as has also been part of the debate. It is quite conceivable that we might have a very good funding system, but not spend enough and therefore have worse outcomes. We do not have worse outcomes across the board. It is possible that an essentially single free at the point of use producer led system may be the cheapest way of doing things. It may be that we have simply not been putting enough money in. There is not necessarily tension there, although there may be some tensions.

  207. Do you think there are characteristics of the type of system we have, the publicly funded system, which are likely to mean that it would lead to us as a country dedicating fewer resources to health than we might do if we had either more private provision or a social assurance based system where there was a clearer link between contributions and health benefits?
  (Mr Dilnot) Yes, there are some characteristics. The principal one is that in a system which is not primarily driven by consumers, and that is the kind of system we have now, you do not have the potential market failure of consumers demanding and producers supplying things which on basic clinical need may not make a great deal of sense and this is a market where consumers are very unlikely ever to have anything like full information. I have a lawyer sitting next to me. One might characterise the market for legal services being one where by and large people go to experts, the individual consumer knows nothing about what is required or very little, so we have to trust the lawyers and the caricature is that on occasion lawyers will find ways of doing things which while done beautifully match and generate significant fees. We have regulatory systems to avoid that getting out of control. That is always going to be a problem in a private market with asymmetric information. You might think that health was such a thing. So where there is more consumer driving of activity you tend to see greater expenditure and we see that across the whole developed world: where there is more of a consumer role spending tends to be higher.

  208. In some of the continental European countries they seem to have a more social insurance based system which has higher expenditure on health and apparently much better outcomes. The Chancellor has started this "debate" but seems to have closed it at the same time. Do you think there ought to be a serious debate in this country before we go down the track he is inviting us to about the possibilities of a more social insurance based system in the UK?
  (Mr Dilnot) I am sure there should be a serious debate. My own view about the phrase social insurance is that it has been used to describe so many things which are so radically different that it has become a bit like tax and benefit integration, a phrase so fraught that it has become meaningless. Social insurance has been used to describe the post-war British social security system, which was essentially a poll tax funding flat rate benefits, and also continental European pension regimes which were much closer to public sector running what mimicked the private sector, pensions being paid for out of contributions and mimicking the original distribution of income. What people have in mind when they talk about social insurance health schemes is a scheme where contributions are related to income—that is true of any tax funded scheme—where there is something which looks a bit like a separated fund with varying relationships to the rest of the tax and spending regime, but importantly where there is somehow a bit more choice for consumers and I do not think the choice for consumers is really something which relates much to social insurance. I think it relates to whether you choose to give consumers choice. Giving consumers choice will by and large increase costs, but probably increase consumer satisfaction. We need to have a serious debate about all these kinds of options, but I would strongly counsel that we try to avoid the use of phrases to describe particular systems because they vary too much for that to be very helpful.

  209. If you were in a situation where you had citizenship of no country, and you were landing from the moon and somebody asked which country you wanted to go to in order to have the best health system, given that you might have to pay a bit more if you go to Germany or the United States and that was the only factor in your decision, which country would you settle for?
  (Mr Dilnot) I should have to add another factor. I should want to know how rich I was. That is crucially important. The key issue becomes one of redistribution. If I were affluent, then I might be very happy to go to the United States. The United States has extremely good quality of care for very serious illness and their cancer recovery rates are almost second to none.

  210. Average male earnings.
  (Mr Dilnot) That would make me an unusual person. In that case I do not know because the honest answer is that it is not the people in the middle for whom there is the most difference. It would be the people at either ends of the income distribution, where the difference between schemes across countries will make the largest difference.

  211. You and other commentators and the Chancellor to some extent have foreshadowed the possibility of tax rises in order to fund higher health spending and perhaps that spending is likely to go up faster than the growth of the economy. You are primarily an economist, not a politician. You have enough experience now to know the way that politicians' minds work and how they look at tax and other issues. You have commented on it for a tremendously long period of time. If you were advising the Chancellor in the run-up to the March Budget and the Budget in 2003 perhaps when he is going to have to take these decisions, what recommendations would you give him about which taxes you would increase in order to fund higher health and other spending?
  (Mr Dilnot) Were the Chancellor to want to raise more money, the first question I should ask him is if certain tax changes were the optimal way of cutting revenue when you wanted to cut revenue, one of which certainly was cutting the basic rate of income tax, why is it not the optimal way of raising money when you want to raise income tax? That is a question which could also have been asked of the last administration. The last Conservative administration presided over very significant reductions in the basic rate of income tax and then when it came to raising tax it chose other, by and large very different, ways. My guess is the Chancellor, were he to wish to raise tax, would not think of raising the basic rate of income tax.

  212. If you accept the constraints that he has put upon himself, what would you then recommend?
  (Mr Dilnot) I would tell him that there certainly are still ways of raising money through changing income tax: I could think of restricting the value of the personal allowance to the basic rate; there is scope for raising extra money from National Insurance contributions by changing the rate or by changing the structure. Those would be the obvious places to start thinking.
  (Mr Troup) One point on tax changes which is something which has come out in debate although the Chancellor did not mention it specifically, is the issue of a potentially hypothecated tax. I do agree with what I believe to be the Chancellor's position on this that a truly hypothecated tax is completely inappropriate for this or any other method of spending simply because if you truly hypothecate a tax so that there is a Health Service tax, you lose control of the spending. If the tax yields more than you expect you spend more than you may feel is the appropriate level. Conversely, if there is a shortfall in the tax central government inevitably has to make good that shortfall from other tax revenues. So a truly hypothecated tax is never the right way to fund anything, but a notionally hypothecated one—we are raising more tax in order to do something—may have some political merit as justification for a tax rise.


  213. So a truly hypothecated tax depends on the state of the economy.
  (Mr Troup) Yes, it depends on the state of the economy.

Mr Beard

  214. What is the difference between a hypothecated tax and social insurance?
  (Mr Troup) What you mean by social insurance is quite hard to define. If you mean an insurance where people pay specifically for the health care they get, then is put to a central provider or a series of decentralised providers, that is somewhat different in concept from paying a tax to general government revenue, where government is taking responsibility for providing the health care free at the point of use to the users. The implications of true social insurance is that if you do not pay you do not get. That is not the Health Service we are trying to fund.

Mr Ruffley

  215. A final question on health. Definitions of EU average. Where do you stand on that? Weighted, unweighted, including the UK, excluding the UK.
  (Mr Dilnot) There are at least six ways you might try to do this. It is up to the Prime Minister to say what his target is. If he says his target is eight per cent of GDP, that happens to be the unweighted EU average excluding the UK in 1998. That may not be a very good measure of the amount of money which on average is being spent on European citizens' health care in 2005-06. It is very unlikely to be; averages are very funny things.

  216. What do you think would be the most appropriate or is it a matter of purely personal taste?
  (Mr Dilnot) If you were to ask me what is the best way of getting some sense of the average spend per person in Europe, then you certainly want a weighted average. An unweighted average means that if we were either to merge a large and a small country or split one large country we could have a big effect on the average. So if you want a sense of what is being spent within Europe per person then a weighted average makes the most sense, but an unweighted average is the simplest thing to calculate. In the end the only thing that matters is what quality of health care and what quantity of health care spending we want in this country and all we can learn from Europe is something about what those countries are spending at the moment. I do not think we should be bound by what is going on elsewhere.

  217. One question on the IFS analysis. Have you come up with a cash figure for what the Government will need to be raising extra per year to meet any of the definitions you have seen Government Ministers or officials use? If you understand a certain methodology has been used by the Government have you done any calculations on what the cash figure would be to meet that number by 2005-06?
  (Mr Dilnot) Yes, I can get you a number of £10 billion a year; I can get you a number of £1 billion a year; I can get you a number significantly more than £10 billion a year. The differences are weighted versus unweighted and assumptions about what you think has been happening to the rest of Europe since 1998 which is the latest year for which we have uniform data available. I really do not think it takes you very far.
  (Mr Weale) Although in general I am keen to look at things in value terms and not simply look across key indicators, we do have to allow for the fact that the costs of the staff may be rather different in different countries. I would pay rather more attention to the number of doctors per person, number of nurses per person than to precise percentages. In the United States it is generally believed and I think it is the case that doctors are generally very highly paid and that means if you want the same number of doctors you have to devote a higher proportion of your income to health care. Of course if they are more highly paid they may do a better job, but I would look at the quantities as well. If we are talking about bringing the UK to the European average, obviously Europe includes the UK and therefore raising the UK towards the average also raises the European average.

  Mr Ruffley: The witnesses seem to think we are asking stupid questions on this. It was the Government who decided to go down this route in presenting health spending, but those are very useful answers.


  218. I do not think the witnesses think we are asking stupid questions.
  (Mr Weale) I am sorry, I had not meant to give that impression.

  Mr Ruffley: The EU average argument has been begun by the Government not by this Committee.

Mr Beard

  219. Four years ago the Government announced their intention to improve the trend rate of growth of productivity. Do you think they are succeeding? When would be a fair point to judge whether this policy is succeeding or not?
  (Mr Weale) At the moment it has to be said that the policy does not look as though it is succeeding. I am afraid I do not have figures and the problem with measuring productivity is that if you look at any particular year, the numbers are rather noisy, so it is better to look at averages over a number of periods. If I look at growth in output per hour worked between 1995 and 1999, so that is two years of the four-year period you mentioned, then in the United States growth in output per hour worked grew by 1.92 per cent, in Germany it grew by 1.98 per cent, in the United Kingdom by only 1.37 per cent which is slightly ahead of France and Japan. The productivity growth rate in the second half of the 1990s was slow by comparison with the 1980s and the first half of the 1990s. Of course it has to be said that one of the factors behind this was the big increase in employment and that that is an economic success. It is likely that that sort of increase in employment would be associated with lower growth in productivity, but that said, the growth in productivity is still disappointingly low. The year 2000 was a good year as the Pre-Budget Report makes out. Since then, because of the cyclical slowdown in the economy, things have not done so well. I must say I would want to look at something like a ten-year period before I could be reasonably certain that I was getting a good picture. Equally I would say that Britain's productivity position has been disappointing for the whole of the twentieth century and I think it is a mistake to create expectations that that situation could rapidly be improved.

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