Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 420 - 439)

TUESDAY 11 DECEMBER 2001

RT HON GORDON BROWN, MP, MR ED BALLS, MR GUS O'DONNELL, MR NICHOLAS MACPHERSON AND MR NICHOLAS HOLGATE

  420. When you introduced the Working Families Tax Credit as a consultative measure in the PBR you did give an indication of the costs, why have you decided not to do it this time?
  (Mr Brown) The consultation has just completed. We have not been in a position to make final decisions and, therefore, final estimates. The right time to do so as a result of the completion of consultation, the absorption of all the detail of it is not in a rush a few days after the consultation completes but, as I have said in this document, in the Budget. I would think you would approve of that.

  421. Last year in your Pre-Budget Report you put out some other proposals, mainly on transport measures, which went out to consultation and there you also put the costs in. Why is it that these other measures have costs attached to them but not your Working and Child Tax Credits?
  (Mr Brown) Because the consultation has just completed. We have got to absorb what has been said and then we have got to make our decisions. It is not as if it is not explained in the Pre-Budget Report. We have explained that is what we are going to do, make our decisions in the Budget.

  422. Can I just read to you what Andrew Dilnot said about this very issue. He said "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 seem to me entirely inaccurate". Have you any response to Andrew Dilnot?
  (Mr Brown) I do not accept that. We have had a period of consultation, the consultation has meant regional visits around the country with ministers listening to what people have got to say. We have had written representations from everybody, including the Institute of Directors and the child lobby groups that are very active in this field. I have met some of the groups who are involved in this and we have said we will look at the representations and then make our decisions. It seems by far the best way of moving forward. I think you would be the first to complain if the consultation had ended a few days ago and had we announced the decision without looking at all the detail that has come in the consultation period.

  423. No-one is suggesting that you should have announced the decision, I am suggesting that you should announce some indication of the likely costs, or even a range of those costs, so that people can get a more accurate impact of the overall effect of your fiscal measures that you have announced. You have taken political credit for having announced this, indeed I think it was leaked to the press before the PBR—
  (Mr Brown) I do not think so, no.

  424. And we have not had the bill. We would like to know roughly what the bill is.
  (Mr Brown) That is a matter for discussion when we put the figures forward in the Budget. You have got to complete your consultation, and then absorb it and then make your decisions and that surely is the right way of going about things.

  425. In your Code For Fiscal Stability, which I have got here in front of me.
  (Mr Brown) Exactly.

  426. It seems to me that any reasonable person reading paragraphs 15 and 16 of this would conclude that you felt there should be three months for consultation and that three month gap would enable numbers to be published which would give some estimate of the overall impact on fiscal policy. It seems to me, as we had suspected, this Code For Fiscal Stability is not quite what it was cracked up to be.
  (Mr Brown) Quite the opposite. We say that where you cannot publish the figures because your consultation is not yet complete or whatever—

  427. It does not say that anywhere, Chancellor.
  (Mr Brown) You note in the pre-Budget if there are risks, and we have noted this in the paragraph that we have just been talking about.

  428. May I just read to you a passage in response to that point. It says the "The PBR should be consultative in nature and should include so far as is reasonably practicable proposals for any significant changes in fiscal policy, ie a fiscal stance". Do you not think it is reasonable to suppose an announcement for several billion pounds of tax credits might alter your fiscal stance?
  (Mr Brown) It might be better if you had read the whole thing out. ". . . where the fiscal impact of these decisions and circumstances cannot be quantified with reasonable accuracy by the day the projections are finalised, these in fact should be noted as specific fiscal risk" which is what I have told you we have done in the paragraph that we are talking about. I think this is based on a misunderstanding. You are assuming that the measures that we are talking about are going to be introduced in April 2002, they are not going to be introduced until April 2003, they are months away from their introduction. Therefore, to make the decision in the Budget seems to me entirely reasonable particularly since the consultation only finished a few days ago.

  429. I think the outer years of your forecast will be something that the Monetary Policy Committee will want to take an interest in in the light of the experience we have just had.
  (Mr Brown) That, of course, is a matter for the Monetary Policy Committee because, as you know, they are independent.

Chairman

  430. Chancellor you referred to the IMF paper, it is a pity we did not get it earlier, we only received it this morning. It is a very important paper. I will quote from it regarding the Child Trust Fund which says "The merits of introducing the Child Trust Fund should also be closely scrutinised in the light of the risk that it might displace savings and reduce the attractiveness of Individual Saving Account." This theme was echoed by IFS in their evidence to us where they are saying what they would regard as a comfortable level of Minimum Income Guarantee, whatever, you are establishing, this floor you are establishing will provide a disincentive to the savings in the long run. What answer do you have to those points?
  (Mr Brown) I am going to ask Mr Balls to say something about this. It is, of course, an issue on which we are asking for further consultation but can I just point out to the Committee, so that there is no discourtesy to the Committee, the IMF mission only left the country last night. We were only given the report yesterday evening and, therefore, we published it at the first available opportunity. I could not have given it to the Committee any earlier than I did. We published it within the spirit of openness and transparency as quickly as it was available and I hope the Committee will understand that.
  (Mr Balls) Just to say, Chairman, we published a first document on savings and the Savings Gateway a year ago. We published a more detailed consultation document around the time of the Budget. What we have now done is produce a further and more detailed set of questions for consultation on the Child Trust Fund because obviously, given it is something you can only introduce once and then it needs to be in operation for a number of years, the design has to be absolutely right. As for the Savings Gateway, there are a number of difficult issues which need to be sorted out to make sure it works properly and that we do not have any difficulties. That is why we have decided to have a range of pilots which will come in next year in a limited way which we can examine in detail before moving to a wider scheme. It is because we value the importance of consultation that we have taken this careful and staged approach.

  431. You are conscious of this charge of disincentive for savings?
  (Mr Balls) That is exactly the kind of issue which we are looking at in the second round of consultation on the Child Trust Fund.

Dr Palmer

  432. Chancellor, will the new exemptions from Stamp Duty in deprived areas not simply be pocketed rather than passed on to reduce the cost of buying a home?
  (Mr Brown) It is an attempt to get greater economic activity in areas which have traditionally had far less activity in the housing market and the business sales market related to property. We will have to see the effects of it over a period of time. I think it will make a difference, it will encourage people to develop in these areas, but we will have to review the evidence after a period of time.

  433. Given that houses under £60,000 do not pay Stamp Duty at the moment, do you have any estimate of the proportion of houses in these disadvantaged areas which will be affected by the scheme?[8]

  (Mr Brown) I think it will be quite a high proportion but we will send you a note on that.

  434. Thank you.
  (Mr Brown) Obviously you are dealing with a large number of small areas which are eligible for this but I do want to emphasise that first of all this is a measure not just related to houses, it is related to commercial properties. We are going to produce further measures on this in the Budget because they will have to be legislated in the Finance Bill. The measures in relation to Stamp Duty are only one of a number of measures to try and resurrect activity in some of those areas which have had high unemployment and too little activity for too long. It is based on the principle that it is economic activity that holds the key to the future of these areas. We have, for example, reduced VAT on conversions in some of these areas from business premises to flats and everything else. We have also got higher allowances for cleaning up areas that have been derelict and we are trying to work through the local agencies which are trying to regenerate these areas. The Community Investment Tax Credit is another part of this where we are helping with a tax credit to encourage new enterprise in these areas. There is going to be a New Community Venture Capital Fund which I think will be coming at about £40 million which charities as well as business companies and Government are contributing to, so it is part of a package of measures designed to regenerate some of the areas in our country which for too long have been neglected.

  435. Declaring an interest as an MP whose constituency is generously prosperous but has deprived areas, do you agree that as a general objective of public policy in this type of area that we ought to be targeting it down to ward level rather than larger areas?
  (Mr Brown) I think there is a balance to be struck, obviously, between the simplicity of doing large areas and the need for targeting because in some cities such as London, they are side by side with very deprived areas and very prosperous areas so we have to get the balance right. We have tried to do that in the way that we have formulated the Stamp Duty exemption but obviously we will review this over a period of time.

  436. Moving on to the Savings Gateway, we discussed it with Mr Holgate last week and there was a little bit of uncertainty, one of the questions was whether it would offer a pound for pound matching for any saving, Mr Holgate said, well, he was not sure that had actually been decided. He was asked then whether he was reigning in the Secretary of State and he said he would not do that. Can you clarify, Chancellor, will there be a pound for pound matching?
  (Mr Brown) The consultation is continuing on that, we have not made final decisions.

  437. Are you worried that the Savings Gateway may lead to unscrupulous lenders targeting, for example, to access the 100 per cent return and, if so, what measures can you take to avoid this?
  (Mr Brown) This is an issue we will have to take account of when we are making our final decisions but perhaps Mr Holgate will want to add to his answer.
  (Mr Holgate) Yes. There are several features of the scheme which, I think, will mitigate the risk. But I would not pretend, given how unscrupulous loan sharks are, that anything will avoid them entirely. The first point is that people will only be expected to save small monthly amounts of up to £25 so there will be quite a lot of shoe leather costs in undermining that. Second, there is a lock in of the matching funds to maturity of the fund, which means there will be at least 40 months before the saver realises any gains, so again there is quite a lot of working capital that will be tied up. There is also, of course, going to be education and information to be provided through the Savings Gateway which will reinforce the point that savings should be a regular and sustainable habit. This draws on evidence from the US IDA programmes which show the effectiveness of financial education. Then we are also planning to build in flexibility to the Savings Gateway so that savers can take payment holidays without the loss of potential matching which will reduce, again, the incentives for them to have to borrow in order to maintain a regular flow of payments into the Gateway. Finally, as I did say last week, obviously this is something that we will be hoping to learn more about from the pilots. I think you can see there are a number of attributes there which make it more difficult to undermine than it might otherwise have been.

  438. Thank you for that amplification. A final question: do you feel, Chancellor, that it is realistic to expect the Savings Gateway to actually change individuals' savings behaviour and develop a regular savings habit beyond the £1,000 limit given the way that really many of our constituents are struggling to make ends meet at all? Can we reasonably hope that this is going to happen?
  (Mr Brown) The evidence that I think is useful in this, as Mr Holgate said, is from the United States where there has been the testing of these matched savings schemes in pilots for Individual Development Accounts. They have helped lower income individuals save. I think the latest findings show if you can combine the financial incentives that we are talking about with education about the merits and the benefits of savings with institutional support through the creation of savings accounts that are targeted at lower income groups then you can overcome the obstacles to saving that are clearly a problem and something that we as a Government ought to be doing some more about. That is why the evidence from the United States and the common sense approach says if you can combine the incentives with other measures that encourage savings then you might be able to make a difference, and we believe we can.

Chairman

  439. Chancellor, you have helpfully promised a number of Members notes this morning, can you ensure that your officials send them either to myself or to the Clerk so that all the Members benefit from that.
  (Mr Brown) Yes. They will be addressed properly and sent.


8   See Ev 65. Back


 
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