Examination of Witnesses (Questions 48
MONDAY 22 APRIL 2002
48. Good afternoon, everyone, and welcome to
this second session into the microeconomic issues. Could I ask
you to introduce yourselves for the sake of the record, please,
starting with Professor Wilcox?
(Professor Wilcox) Steve Wilcox, from the University
of York, representing the Joseph Rowntree Foundation.
(Ms O'Mahoney) Mary O'Mahony, from the National Institute
of Economic and Social Research.
(Mr Appleby) John Appleby, Director of Health Systems
at the King's Fund.
(Mr Troup) Edward Troup, Head of Tax Strategy, Simmons
(Mr Dilnot) Andrew Dilnot, from the Institute for
49. Thank you very much. We are hoping to get
through our session by six o'clock. We are rather depleted with
our Members, and we need three for a quorum, so I think we have
six o'clock as a target. With that in mind, we shall try to get
through everything, if possible. Could I start by putting a few
points to you, and please do not feel that you all have to answer
every question. The Chancellor's personal tax measures were littered
throughout the Budget. Can I then ask, are there any measures
in the Budget designed to simplify the income tax regime, particularly
for those subject to the self-assessment system? Who would like
to answer that?
(Mr Troup) No.
50. You would not like to answer it, rather
than that there is nothing?
(Mr Troup) There is nothing that I can say.
51. I think I have read a few of your comments
at the weekend.
(Mr Troup) Yes, broadly.
52. Could you expand on them just a little?
(Mr Troup) Yes, just to say that leaving aside the
question of the choice of what taxes are to be raised, of how
much tax is to be raised in this Budget, it seems to me, having
made the decision on what appears to be to raise substantial tax
from business and a rather lesser amount from the personal sector,
that the Chancellor has gone about it in an extraordinarily abstruse
way by, as we all know, raising National Insurance on both employers
and employees and then giving it back in various other ways, as
well as raising it elsewhere. I think my choice of raising tax
would not have been to raise it substantially from business in
the first place, and even if it were, I would not have done it
in this way. If complexity were the criterion of deciding how
to do it, that is certainly not the right way of doing it.
(Mr Dilnot) I have thought of a possible simplifying
measure: the twentieth in the list on table 1.2 on page 14over-indexation
of age-related allowances for ages 65 to 74. So I think it is
just possible that we could say that that measure, by taking some
people out of the tax regime, could be seen as simplifying income
tax, but it is not one of the central measures of the Chancellor's
53. I think we shall go on from that to National
Insurance contributions. The effect of changing the rate rather
than income tax is, as you said, Mr Troup, that the burden would
fall on those in employment. Are the Budget proposals to increase
the National Insurance contribution rates rather than income tax
going to ensure that the burden is "spread as widely and
as fairly as possible" as the Treasury seeks?
(Mr Dilnot) As far as the employee contribution is
concerned first, the increase of 1 per cent in the employee's
class one contribution and the increase of 1 per cent in the self-employed
contribution, alongside the removal of the cap for that, delivers
a tax increase which is very, very close to being identical to
an increase of 1 per cent in the 10 per cent, 22 per cent and
40 per cent rates of income tax. There are only two ways in which
it differs. It differs in that the richest third of retired people
who do pay income tax will not pay this, and it differs in that
those able to live off unearned income will not pay this, but
will pay income tax. I think it is a reasonable presumption that
for most forms of public spending one might want to give better-off
pensioners and those living off unearned income the opportunity
to serve through paying tax. I cannot see what coherent strategy
for raising tax can be met by these National Insurance employee
changes, that could not equally have been met by 1 per cent increases
in all the rates of income tax. The effect is very similar on
the groups that are excludednot groups that I think it
is easy to imagine reasons for excluding. Of course, the employer's
is slightly different. The increase of 1 per cent in the employer's
rate in the long run will have almost identical economic effects
to an increase of 1 per cent in all of the main income tax rates,
but in the short run will have a differential impact; in particular
it will have an impact on corporate cashflow. Overall, these are
changes that raise very much what would have been raised by about
a 2 per cent increase in all income tax rates. The overall long-term
impact will be very similar to that. The only group that will
escape that are pensioners and those living on unearned income.
54. So you are suggesting it could have been
(Mr Dilnot) It could have been done differently.
55. Now on to tax credits. I know you have had
a lot to say on that, Andrew, over the years. Taking the Child
Tax Credit and the Working Tax Credit which replaces the Working
Families' Tax Credit and the Childcare Tax Credit introduced in
1999, what improvements do you think will result from the introduction
of the new tax credits? Are they just adding to the complexity
of the system? Do you think they will have any positive effects
on the take-up?
(Mr Dilnot) They are certainly not just adding to
the complexity of the system, because they are also adding £2½
billion, so I think the very least that can be said for the tax
credits is that they are increasing expenditure on one of the
Government's key target groups. Most of that £2½ billion
is going to low-ish paid families with children, or, rather, low-ish
income families with children, and some of the largest gains are
not going to them, the families with children in work, they are
going to the families with children out of work. It is a consequence
of the levelling up associated with the Child Tax Credits that
some of the biggest gains go to those out of the labour market.
So if your sole objective was tackling child poverty, then this
will certainly allocate money to some of those groups. The impact
on take-up, in the short term at least, is likely to be unwelcome.
We know that when new benefits are introduced, the take-up of
those benefits is low in the short run. When Family Credit was
introduced in the late 1980s, in its early period the take-up
seemed to be as low as 25 per cent; it rose very significantly
over the following ten years. When the Working Families' Tax Credit
was introduced, we know the take-up rate was not very high to
start with, and we can see now it is not much more than60 per
cent. I think we can be sure that the take-up of the Child Tax
Credit, when it begins, will be lower than we hope it will be
after a few years' time. There are some aspects of the way it
will be administered that will be beneficial for take-up, in particular
having a fairly wide margin for error on the estimate of income
that is used and having a relatively infrequent means test. Those
things may be positive. The fact of having a benefit that can
be carried from unemployment into work may ease that transition.
We know that for families with children the risk and uncertainty
associated with what will happen to their benefit incomes as they
go from unemployment into work can be a disincentive for the labour
market. So certainly one can see some positives in this. There
will be some dislocation when it is introduced, and it is worth
saying that the number of people facing a very high marginal tax
rate, the multiple withdrawal rate, will rise significantly as
a consequence of this very large further extension of means testing.
If means testing is the route you are going down, I think that
56. We now have it being extended to individuals
with incomes up to £58,000. What is the economic rationale
for doing that? Is it sound?
(Mr Dilnot) My own sense is that £58,000 is a
bit of a red herring, so the thing that is available to families
on incomes up to £58,000 is really a replacement of the income
tax Married Couple's Allowance which was turned into a child-related
tax credit. The income tax allowances had always gone all the
way up the income distribution. When it was turned into a children-related
tax credit, the cutoff was where either of the parents were higher-rate
tax payers, so that was beneficial to incomes above £58,000.
The rationale for the current proposal is simply to take that
piece of support for children through the tax system away from
the very highest earnerswe are talking about a very small
number of people. I think there is an additional debate about
whether that tapering away should necessarily occur precisely
there. It is interesting to ask what social welfare function would
give that as the optimum, but I do not think the £58,000
is relatively material. I think that more important is that the
main means-tested element of the Child Tax Credit can be received
by people with incomes in the low twenties of thousands of pounds
if they have any children. That is a necessary consequence of
the increased generosity at the bottom and a slight reduction
in the overall taper rate of the credit that preceded it.
57. Now a question for Mr Troup, before I hand
over to my colleague James Plaskitt. The new tax credits will
be awarded on the basis of income. Is this going to undermine
the concept of individual assessment in the tax system? The Chancellor
estimated that 90 per cent of families will benefit from the change.
(Mr Troup) Yes. I do think that we need a clear statement
of policy in relation to the taxable unit. There is quite a lot
of logic in choosing the household as the taxable unit, as is
the case in the United States, but we made a policy decision over
ten years ago to move to the individual. That is sustainable so
long as the tax system and the benefits system are kept reasonably
apart, because it is only really for the benefits system that
you need to look at household means, for obvious reasons, because
you cannot have a non-earning spouse of a high earner claiming
benefits on the basis that he or she is low income. So long as
the population that receives benefits is relatively low, it is
sustainable to have a single assessment for tax and a household
assessment for benefits. By moving effectively the benefits system,
the tax credits system, much further up the income scale, the
tensions between the household assessment for benefits, tax credits,
and the single assessment for tax become more apparent. It seems
to me, having taken in what must beI am not sure precisely
what the percentage figure isa very high percentage of
the earning population, the tension, into tax credits, that the
time is ready for a policy decision as to whether we should abandon
single assessment and go back to, or go to, a complete system
of household assessment for tax purposes. I think again there
is tension in the way the Government is moving without a clear
statement of what the policy direction or their ultimate aim is
58. Can I turn to the NHS and direct a question
to Mr Appleby. The Budget comes up with 7.4 per cent real growth
for the National Health Service budget for each of the next five
or six years. In your view, is that enough to keep the ten-year
plan on track?
(Mr Appleby) Sorry, by "the ten-year plan"
you mean what?
59. The NHS ten-year plan launched in 2000.
(Mr Appleby) It is interesting, I was thinking really
that we need to read the Budget and the Chancellor's statement
in conjunction with obviously the report from Derek Wanless and
also a report out subsequently to the Budget from the Secretary
of State for Health, which expands on delivering the NHS plan
as a strategy and actually adds some new things. So the plan has
been expanded, in a sense. Whether this 7.4 per cent real growth
is enough, frankly, is anybody's guess. The figures that Derek
Wanless has come up with7.4 per cent on average over the
next five yearswere their judgement of, in a sense, the
maximum the NHS could effectively spend and efficiently spend,
given that there are capacity constraints, you cannot magic doctors
and nurses off the shelf. So Wanless is not too keen to suggest
that the largest figure possible will get the NHS coping. To answer
your exact question, it is very hard to say.