Examination of Witnesses (Questions 204
THURSDAY 6 DECEMBER 2001
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.
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
(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 incomethat is true of any tax funded schemewhere
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
(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 onewe are
raising more tax in order to do somethingmay 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.
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.
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
Mr Ruffley: The EU average argument has
been begun by the Government not by this Committee.
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.