Select Committee on Treasury Minutes of Evidence

Memorandum submitted by HM Treasury


  At the 11 December 2001 hearing of the Treasury select committee, Mr. Tyrie asked whether, given the greater uncertainty surrounding economic forecasts, the Treasury should have widened the opportunity range of its own forecast.

  The projections for GDP growth and its components produced by HM Treasury and published alongside the Pre-Budget Report are presented as opportunity ranges. These ranges do not represent general forecast uncertainties: key forecast risks are examined in the Pre-Budget Report document and average errors on past forecasts are shown in Table A9. Rather the opportunity ranges represent alternative views about the supply side performance of the UK economy.

  Since November 1999[9], these opportunity ranges have been anchored around the Government's neutral view of the trend rate of GDP growth over the medium term of 2½ per cent a year. This neutral assumption is based on a careful consideration of the evidence on UK economic performance, including clear signs of a decline in the sustainable rate of unemployment. The lower and upper ends of the opportunity ranges are based on 2¼ and 2¾ per cent trend growth respectively.

  Projections for GDP growth at the low end of the opportunity ranges are intended to be deliberately cautious, and make no allowance for any improvement in the supply side performance of the UK economy over recent years. This deliberately prudent and cautious approach underpins the projections of the public finances set out in Annex B of the Pre-Budget Report. The upper end of the opportunity ranges illustrates the potential for stronger non-inflationary growth based on the Government's policies to raise productivity and to increase the labour supply.

  Within the range of outcomes for GDP growth, the forecast path for inflation is assumed to be invariant. This is a highly stylised assumption that is made for the illustrative purpose of focusing on the real benefits of lower wager pressure. It amounts to assuming that the supply side benefits show up quickly in employment and output, abstracting from transitional adjustment through wages and prices. In practice, lower wage pressures would be likely for a time to show up partly in lower inflation before the full effects on employment and output came through.

  Ratios of demand components to GDP are also assumed to be largely invariant within the forecast ranges for GDP growth. This stylisation is based on the assumption that factors affecting the NAIRU (and employment) are unlikely to have much effect on the sustainable real wage, which is mainly determined by productivity. In this case, income and expenditure shares in GDP would tend not to vary much within the forecast ranges for GDP growth.


  At the Treasury select committee hearing of 11 December 2001, Mr Ruffley asked what the revenues would be from abolishing the upper earning limit on employee National Insurance contributions and from aligning the upper earnings limit with the higher income tax band.

  Primary Class 1 contributions B contributions paid by employees—are payable at 10 per cent of earnings between the Primary Threshold (PT) and Upper Earnings Limit (UEL). The UEL for 2001-02 is £575 per week, and for 2002-03 £585 per week.

  The full-year yield from removing the upper earnings limit on National Insurance contributions is estimated to be £3¼ billion in 2002-03.

  For 2002-03, the alignment of the upper earnings limit with the higher income tax band is estimated to yield £830 million.


  At the 11 December hearing, Mr. Beard asked for the reasons behind the change, between the Budget and the Pre-Budget Report forecasts, in the figure for real growth in general government consumption for 2001 (PBR table A9, page 160: 3 per cent; FSBR table B6, page 174: 43 per cent).

  The difference between these two figures is mainly explained by changes to the deflator for general government consumption. Outturns for the government consumption deflator for the first three quarters of 2001 have shown stronger year-on-year increases than expected in the Budget forecast.

  Forecast consumption for 2001, in current year prices, is £0.2 billion higher than at the Budget. However, upward revisions to the data for the first three quarters of 2000 result in slightly lower overall annual growth. In current year prices, forecast growth in government consumption is 7.7 per cent in the Pre-Budget Report forecast as compared with 8.1 per cent in the Budget forecast.


  At the 4 December hearing, Mr Fallon sought clarification on the size of the NHS underspend. A figure of £44.0 billion published at the time of Budget 2001 was quoted as relating to NHS expenditure in 2000-01. This figure is from table C13 of the Financial Statement & Budget Report 2001 (published in March 2001) and actually represented the Department of Health, including the NHS, resource budget.

  The other figure quoted of £42.8 billion, which was published in table B16 of the Pre-Budget Report 2001 (November 2001), related to the resource budget for the NHS only and not for the wider Department of Health.

  The comparison between the two figures is therefore not meaningful, as one relates to the Department of Health as a whole, including the NHS, while the other is for the NHS alone.

  The provisional Department of Health underspend, including the NHS, for 2000-01 is £692 million in resource terms (in cash terms the provisional underspend was £514 million). Over one third of this sum was a planned contingency to meet costs falling in the current financial year. The total underspend has been carried forward and is being used on provision of health care in this financial year.


  At the 11 December hearing, Mr Laws inquired into the decline in revenue from capital gains tax. The Pre-Budget Report notes that capital gains tax receipts are projected to yield £2.9 billion in 2001-02 and £1.8 billion in 2002-03. This difference of £1.1 billion breaks down as follows:

    —  about £0.9 billion as a result of lower forecast equity prices B these are expected to be lower in 2001-02 than in 2000-01 and this will impact on receipts in 2002-03; and

    —  about £0.2 billion as a result of the higher costs of taper relief arising from the maturing of the taper.

  It should be noted that the cost of tax reliefs are broad estimates and may have a wide margin of error.

  The Pre-Budget Report also published the estimated cost of the change to the capital gains tax business assets taper announced in Productivity in the UK: Enterprise and the Productivity Challenge (June 2001). The estimated cost of this measure, which has been taken account of in the published projections of capital gains tax receipts referred to above, is in £million:



  At the 11 December hearing, Ms. Mountford inquired into the success of pension provision. Latest figures from the Association of British Insurers, released on 7 January 2002, suggest that 304,750 employers had designated a stakeholder pension provider for their employees by the end of November 2001.


  At the 11 December hearing, Dr Palmer asked whether there was any estimate available for the proportion of homes in disadvantaged areas affected by this scheme. From 30 November 2001, all property sales, assignments of existing leases and premiums on new leases up to a price of £150,000, in almost 2,000 disadvantaged areas throughout the UK, have been exempt from stamp duty. The measure is designed to stimulate disadvantaged areas by attracting development and encouraging the purchase of residential and commercial property by individuals and businesses. It arose out of the Report in June 1999 of the Urban Task Force chaired by Lord Rogers and is part of a package of fiscal measures to help regenerate Britain's cities.

  Subject to negotiations with the European Union for approval as State Aid, a second stage of the reform is expected to start in 2002. The £150,000 limit will be raised significantly, or stamp duty abolished, for all transfers of non-residential property in the qualifying areas. Legislation to distinguish residential and non-residential property for the purpose of the exemption will be introduced in Budget 2002.

  The table below provides estimates of property transactions throughout the UK for 2001-02.

  On the assumption that transactions in disadvantaged areas broadly reflect the national trend, it is estimated that 45 per cent of residential transactions and 43 per cent of all transactions will benefit from the exemption as it currently stands.


(THOUSANDS, 2001-02)

Price band (consideration)
Up to £60k
£500k +
Stamp duty rate
Residential transactions
Commercial transactions
Percentage of residential transactions between £60k and £150k = 45
Percentage of all transactions between £60k and £150k = 43


  This note expands upon evidence given by Mr Nicholas Holgate, Director of Welfare reform, at the 4 December hearing of the Treasury select committee. The issue was raised of whether people on low incomes would be targeted by unscrupulous lenders, offering a loan to allow them to take advantage of the matching funds offered by the Saving Gateway. Mr. Holgate undertook to provide the Committee with a note setting out the Government's response.

  The first, and potentially most significant, design feature of the Gateway will be the restriction on withdrawal of matching funds until account maturity. As the latest consultation document sets out, participants in the Saving Gateway will be able to access their own contributions at short notice (which means that they need not borrow from elsewhere if they need a source of funds) but will not receive the Government's matching contributions until the account matures.

  Account maturity will occur after a total of £1,000 has been deposited B which, with a maximum monthly contribution of £25 will take a minimum of 40 months—or five years from the opening of the account, whichever is the sooner. Therefore, any unscrupulous lender wishing to take advantage of Saving Gateway participants will have to tie up their "working capital" for between 40 and 60 months before receiving a return. This is likely to be unattractive to them: this point was confirmed by attendees at a recent seminar on the Saving Gateway.

  The second main feature of the Saving Gateway will be the integration of education, to build financial skills and capacity. Evidence from Individual Development Accounts (IDA) in the United States shows that mandatory financial education has a marked effect in increasing the levels of saving of individual participants. Anecdotal, but widespread, evidence shows savers reporting that they "came for the matching funds, but stayed for the education."

  Many IDA participants started the programme in significant debt, and for these individuals, debt reduction and credit repair have been the priority for education. This has been one of the successes of these schemes, allowing people to reduce the burden of low incomes and debt that has hindered their ability to think beyond the short-term to longer-term opportunities that they will be able to secure through saving sustainably for themselves.

  As Mr. Holgate said to the Committee, all of these proposals represent the Government's latest thinking on ways to tackle the problem of borrowing to save. We will be using the opportunity provided by the pilots to test the operation of these features of the account, and evaluate their efficacy in practice, as well as continuing to think about new ways to limit the problem to a minimum.


  At their hearing on 4 December with HM Treasury officials, the Treasury select committee asked for "as full a report as possible" on the Government's approach to tackling fraud in a number of areas of indirect tax. The two papers published alongside the Pre-Budget Report, Tackling Indirect Tax Fraud and Measuring Indirect Tax Fraud, are intended to provide a comprehensive report on the Government's estimates of the levels of fraud, the strategies for tackling it and the results achieved to date. Copies of these papers are available in the House of Commons library and on the HM Customs website (

  The Committee also asked specifically about: (i) the Government's estimates of VAT missing trader fraud for 2001-02 onwards; and (ii) the impact of VAT missing trader fraud on the VAT revenue forecast.

  In response to (i), estimates of missing trader fraud cannot be produced for the current financial year because the data sources used to make estimates of this type of fraud only become available several months after the end of the financial year in question. As made clear in Paragraph 2.4 of the Tackling Indirect Tax Fraud paper, the Government sees no value in publishing premature estimates which are not as robust as possible and which would, therefore, give an inaccurate baseline against which to measure fraud trends or the performance of anti-fraud strategies.

  However, the Government also described its strategy for tackling VAT missing trader fraud, introduced in September 2000, the objective of which was to halve the revenue losses from this type of fraud by 2003-04. If successful, it follows that this strategy would reduce the revenue loss from this type of fraud to at least £0.75-£1.15 billion by 2003-04.

  In response to (ii), fiscal projections for VAT are based on current receipts and changes in the level of consumers' expenditure. The key assumptions underlying all fiscal projections are audited by the National Audit Office under the three year rolling review. The key assumption for the VAT projections is that the ratio of VAT to consumption falls by 0.05 percentage points a year. The assumptions underlying the VAT projections were last audited by the NAO in November 2000.


  In answer to Mr Cousins' queries on 4 December, I refer the committee to the Department for Work and Pensions document on the long-term costs of the Pension Credit, attached for convenience, which gives illustrative projections of the future cost and coverage of the Pension Credit under various assumptions.


  At the hearing with officials on 4 December, Mr Cousins asked whether two women who lived together and drew separate pensions would be assessed for the Pension Credit separately; whether two men would be; and whether a brother and sister would be. Mr Holgate replied that he thought they would all be assessed separately. This is indeed the case.

January 2002

9   Pre-Budget Report, HM Treasury, November 1999. Back

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