Examination of Witnesses (Questions 80
MONDAY 22 APRIL 2002
80. You are not happy with that really, are
you? The United States spends three times as much, yet it has
a lower life expectancy.
(Mr Appleby) That is largely explained with the distribution
of the health benefits and so on.
81. Fine, but that is about the structure, not
about the money. I said there was nothing wrong with that, the
money was not the problem, and I agree the National Health Service
needs more money, but what I am trying to get at is the extent
to which you or Mr Wanless have so far provided the justification
for the money, this huge increase. Can I take you back to one
or two things you said a moment ago where you said you felt that
Mr Wanless had made a number of judgements, and you thought those
were properly backed up by quite a lot of statistical evidence
which is not published. Could you give some outline of what you
think it would be helpful for him to publish that he has not put
in the public domain?
(Mr Appleby) Off the top of my head, one is on the
issue of the costing out. The way they went about their task is
actually to define a new Health Service in 20 years' time, one
which has short waiting times, higher quality, better infrastructure
and so on, so in a sense they are trying to say, "This is
the Health Service we'd like, so how much is it going to cost?"
and, working backwards from that, "How much does it cost
to get down to two weeks' waiting?" I would very much like
to see how on earth they managed to cost out the massive reduction
in waiting times. In fact, I have asked Derek Wanless and his
team some of these questions. One of the issues with exercises
of this sort, which they have not addressed, is the change in
behaviour that it will create by changing the supply side. The
change in the supply side here is lots more money into the Health
Service. One of the questions you were asking me was about pay
and does the money become absorbed? It may do, because unions,
the BMA, will see lots more money going into the system, they
will perhaps want a share of it, they are obviously going to be
planning on a bigger share. That is the sort of feedback, the
reaction and the change in behaviourand there are lots
of changes in behaviour which can go on herewhich make
predicting the future very difficult indeed. So I think there
is an issue here about waiting times and the data there.
82. One last question. Do you think that the
changes in structure of which we so far have been made aware in
announcements over the past few daysand there were some
a few months agogive you confidence about the point you
have just made, that when we have improvements in structure that
will give you assurance that the increased money is going to find
its way into higher productivity?
(Mr Appleby) Yes, I think the Department of Health
and the Government in general are doing their best here to address
valid criticisms of where the money has gone and has anything
changed. Clearly things have changed. We can look at the statistics
and things have got better in certain areas of the NHS. People's
perceptions of course may be a different matter. I am pretty confident
that in five years' time we will be able to sit down and look
where the money has gone and we will see real improvements.
83. Could you give us a list of questions that
you think Mr Wanless ought to ask?
(Mr Appleby) Certainly.
Mr Tyrie: Thank you very much.
84. Particularly for our colleagues on the left-hand
side, what do you see as the social impact at the micro level
of this Budget in terms of individual measurestax credits,
means testing take-up, the redistributative effects on the poorer
sections of society?
(Professor Wilcox) The aspect of the tax credit scheme
about which I know most is the relationship with other means-tested
benefits, in particular across with the housing sector. That is
my particular area of expertise. Andrew has already commented
on the general impact of the new tax credit regime and its greater
generosity. There is one big question mark about the changes coming
in next year, however, and that is the move in the way in which
income is going to be assessed. One of the characteristics of
the current scheme (which was a characteristic of the family credit
scheme before it) is that income is assessed at six-monthly intervals
and the award of benefit is then fixed for six months. It was
part of the welfare to work strategy which said if you increase
your income during that six-month period then bully for you, you
are going in the right direction. The next time we come along
you might be floated off family credit altogether because your
income has increased so much or your income has increased a bit
and we will then adjust the family credit for the subsequent period.
We are moving now to an assessment where it is going to be assessed
at 12-monthly intervals where if there is a significant increase
in income of about £50 a week then the benefit will be reassessed
and potentially you have the scenario where the benefit is set
at one point in time, the change in circumstance does not get
picked up until the end of the year and that may well result in
a retrospective adjustment back over the previous eleven and a
half months. One of the key advantages of the tax credit regime
is that it has very much picked up on the point Andrew talked
about which is the concern families had for certainty in their
household budgets. This change in the way the benefit is assessed
is going to remove that element of certainty. The Budget Report
and the related report talks about the experience in Canada and
the experience in Australia in dealing with these issues but,
frankly, what it does not give anywhere is any good reason for
changing the current system. I am a great believer in the maxim
"if it ain't broke don't fix it." In fact, the only
real reason for making the change is to move the system in accordance
with the standard operating procedures of the Inland Revenue rather
than is it a sensible thing to do in terms of delivery of benefit.
I have a related concern from that because one of the things that
has been happening in the last four or five years while the Government
has been focusing its attention on tax credits is the energies
for housing benefit reform have languished. The scheme has been
twiddled with but there have been no major reforms and the performance
has very seriously deteriorated from a point five years ago when
18 per cent of all cases were not dealt with within the present
specified time (which is 14 days for any new application) to now
when it has risen for a variety of reasons to 37 per cent. One
of the ways in which you could begin to move things back on the
housing benefit side of things, which is a significant issue in
its own right with an annual expenditure level of £11 billion,
1.5 per cent of GDP, would be to change the way in which income
is assessed there. There has been a proposal for some time to
move to these fixed six-month periods of assessment for working
households on housing benefit. That has been stymied by all the
changes under consideration for the tax credit regime, so there
are serious knock-on effects there. Secondly, the other point
about the tax credit regime is that it will ensure that people
are better off in work, particularly in areas of low and modest
housing cost. This would mean in areas of higher housing cost
if you are a tenant household, that you may still need to apply
for housing benefit as well as tax credit. That then links back
to this issue about provisional periods of assessment of up to
12 months on tax credit. The potential inter-actions between claiming
back changes of circumstances on tax credit and housing benefit
eleven and a half months downstream are, quite frankly, horrendous
in terms of their implications. The other side of the fence is
that homeowner households in higher housing cost areas will still
be worse off in work than out of work despite the tax credit because
of the way in which they may eventually get some help with their
housing costs if they are on income support but they get no help
at all if they move into employment. There is a real imbalance
in the way in which homeowner households are dealt with which
has a direct impact on tax credit because you also have a far
lower level of take-up of tax credit by homeowner households.
There is only a 50 per cent take-up rate by homeowner households
as against a 75 per cent take-up for tenant households. So there
is bundle of concerns there and it is linked together in the sense
of needing to have a better relationship between the tax credit
regime and the issue of housing costs and the way it is linked
to housing benefit.
85. As MPs we experience quite a number of people
who come into our surgeries on these very issues that you have
mentioned, the complexity of it, and the time for the benefit.
What you are suggesting could make it worse. It would be important
for us to bring that to the Chancellor's attention not necessarily
in the forum on Wednesday but at a later date. I would be grateful
if you could provide us with further information on that because
it would be beneficial to all of us. Ms O'Mahony?
(Ms O'Mahony) What was the question?
86. The social impacts of the Budget.
(Ms O'Mahony) My main area of expertise is the productivity
impacts of the Budget.
Chairman: James has a question for you
then, you should not have opened your mouth!
87. Will the R&D tax credit work?
(Ms O'Mahony) All the available academics' evidence
suggests that we will get something out of it.
(Ms O'Mahony) Some increased expenditure on R&D
which will feed into increased innovation and may result in increased
productivity to help bridge the gap because we do fall behind
our competitors in terms of the amount of R&D we spend as
a share of output.
89. Just work us through the way in which you
see the R&D tax credit working and the extent to which it
(Ms O'Mahony) I do not know the extent. The academic
research in this area gives a wide range of different values to
the extent that this will stimulate further investment.
90. When we had the small companies? R&D
tax credit introduced there was quite a useful little surge. Do
you think it will be of similar proportions?
(Ms O'Mahony) It is hard to tell because most R&D
is undertaken by large firms, so an important part of the stimulating
of innovation needs to have an R&D tax credit for large firms
so it may be greater but it is very difficult to tell at this
moment. The research suggests there would be a multiple affect
and increased R&D.
91. You think there will be a definite positive
(Ms O'Mahony) I hope so, we will have to wait and
(Mr Dilnot) To give you a rule of thumb. The cost
of this will be £400 million a year according to the Treasury.
The most optimistic one could possibly be is that R&D spending
would be higher than it otherwise would have been by, say, twice
that. That would be the absolute outer boundary of any academic
(Ms O'Mahony) 1.4 is the average number.
(Mr Dilnot) In the best of all possible worlds we
might add £1 billion to UK R&D which at the moment is
running at about £11 billion a year, so it is a very small
share of the already small share of R&D as a share of national
income in this country which might, if the wind was entirely behind,
you add 0.1 of a per cent of GDP to R&D. It is unlikely that
it is going to transform our R&D performance internationally
or in the UK nationally.
92. Was it worth doing or were there other available
measures that could have had a more significant impact on R&D
investment than this at a similar cost to the Treasury?
(Mr Troup) Can I answer a slightly different question
and then come back to that. We need to be careful when we look
at whatever numbers come out of the next few years. Obviously
there will the deadweight, the group who are going to do R&D
who will do it anyway. There is also re-labelling. At the moment
businesses' revenue expenditure (ie, not their capital expenditure)
which is eligible for R&D relief for which they do not need
to claim specifically because they will normally get it as a deduction
anyway as a business expense. By giving them a 125 per cent reduction
for R&D expenditure, you are encouraging businesses to re-label
existing expenditure into the R&D category. It seems to me
that what is measured as R&D may well increase. The question
which will have to be asked is is this really additional R&D
or is this simply re-labelling by companies of expenditure which
they are already incurring as R&D in order to get 125 per
rather than the 100 per cent they get at the moment. To come back
to the question could they do it in another way, an awful lot
of the £400 million is going to businesses who are already
undertaking R&D. If there needs to be some public support
for R&D, there is a choice in R&D principally between
should it be paid for by the state, should the state encourage
more institutions and universities to undertake R&D, or should
we leave it to the private sector to do it on its own. That is
the choice and not so much how a tax credit is structured. If
the Government really want to spend £400 million on a tax
credit this is probably the least silly way to do itand
some of the other proposals were very sillybut the choice
is really should we do it through the tax system at all.
93. One of the experiences of ourselves as MPs
is when companies come in as investment (and we welcome that as
everyone does) we find somewhere down the line when there is economic
recession that because it is the branch end of the company that
the first to go is that company. In the light of the R&D tax
is it more likely that companies will remain here or will they
still go abroad? Does it make any difference to that?
(Mr Troup) It certainly will encourage companies to
locate more of their mobile R&D expenditure in the UK. When
you say companies come here, there is a difference between a company
moving itself lock, stock and barrel and closing down its UK subsidiary
or setting up a UK subsidiary, on the one hand, which is quite
a radical decision which does not take place very often, and the
marginal decision as to whether additional expenditure or the
new reduction in expenditure should take place in one country
or another. It seems to me this is clearly going to encourage
more mobile R&D to take place in the UK. The company that
has got a business here is likely to be more encouraged to do
business here than in a jurisdiction where it gets a lower tax
94. Would you have done it if you had been Chancellor?
(Mr Troup) It comes back to a question I would apply
to all of the tax reliefs this Government has introduced and continues
to introduce which is what is the evidence that there is some
market failing? Do we think that some economic instrument will
cure that market failing? Do we think that the tax system is that
economic instrument? Even if we do think that, do we think that
introducing a tax measure will not have second order effectsdeadweight,
distortions, complexitieswhich actually make it worthwhile?
I have yet to see a tax relief (with one exception which was the
reduction of duty on unleaded fuel) that has not failed one of
those tests. I would almost certainly say not but that is because
of my experience. You only have to look at what happened to the
film tax relief, introduced in 1997 at a cost of £15 million
which is now up to £360 million of which £295 million
was admitted to be abuse, to see what happens when you introduce
a tax measure in order to encourage one activity or another.
95. What is the likely overall impact of the
new measures in the Budget on North Sea oil taxation and the abolition
(Mr Dilnot) We do not really know yet. We do not know,
the Chancellor may or may not know, somebody else may or may not
know. We have been told about the measure that will occur.
96. At a cost of £1 billion.
(Mr Dilnot) We have been told there will be consultation.
We have been told that royalties may go. We do not know. I think
it is worth expressing some anxiety that changes were announced
yesterday without consultation. Some years ago consultation was
set in place and then a decision made not to take account of the
fullness of that consultation because there was a feeling there
was no revenue to take out. Now we had some changes announced
without consultation and we are going to have some consultation
on some more change. There was not, as far as I am aware, discussion
of this set of issues in the pre-Budget report last November so
one does rather feel some frustration about the consultative process
that is being used in this area. I do not think it is very helpful
to speculate about what will happen next because I think one thing
of which we can be sure is we do not know.
97. I am just looking at Table A1, Page 155,
where the Chancellor feels confident enough to forecast that.
(Mr Troup) There are one or two other things in that
table that he is confident about which one might ask questions.
98. What are they?
(Mr Troup) The one that leapt out at me was the oil
fraud strategy which is predicted to yield £550 million in
three years' time. If you turn through to the relevant measure
(which is quite hard to find) you will find the principal measure
is substituting the change in colour of red diesel from red to
yellow to make it more difficult to mix with Irish green diesel
to fool people into thinking it is brown properly taxed diesel.
I have to say that Customs & Excise have a pretty dismal record
in estimating what the yield of anti-fraud measures will be and
I think one has to look at the numbers here with some scepticism.
99. What we are told is this is a really good
(Mr Dilnot) And I am sure no member of Customs &
Excise staff is colour blind!