Select Committee on Treasury Second Report


    (a)  We now know that the ONS preliminary estimate for GDP growth for the first quarter 2002 was only 0.1 per cent, making the Chancellor's forecast of 2-2.5 per cent for the full year look on the high side. Though ONS growth figures are frequently subject to subsequent revision, we are concerned that the Chancellor's Budget may already be based on over-optimistic projections. Whether the Treasury's growth forecasts are achievable remains to be seen, and we note the view that they are perhaps optimistic given the considerable uncertainties facing the global economy at the present time. In this context, we note that growth in 2001 was at the bottom of the opportunity range forecast by the Chancellor at the time of the 2001 Budget. (Paragraph 10).

    (b)  The imbalances between net trade and domestic demand, and in particular strong consumption growth, may present a challenge to the stability of the UK economy, and we encourage policymakers to remain alert to those risks (paragraph 13).

    (c)  Although the Budget raises additional revenue from direct taxation from 2003 onwards, we note that the Treasury admits to considerable uncertainty about the outlook for consumption. We are therefore not entirely sure of the grounds on which the Treasury claims that consumption will slow. Consequently, we are not clear that the Budget makes any significant contribution to correcting the imbalances in the economy (paragraph 15).

    (d)  We agree with the Treasury that it is dangerous to assume productivity improvements, and that any change to their assumption of productivity growth should be based on strong and undisputable evidence in order to avoid the mistakes of the past (paragraph 19).

    (e)  We remain concerned about UK productivity which has lagged behind that of the United States. We agree with the Budget's aim to increase the rate of growth of productivity and recommend that the effectiveness of the various measures included in the Budget for this purpose should be closely monitored and reported on in future Pre-Budget Reports and Budget Statements (paragraph 21).

    (f)  Given the critical importance of economic growth assumptions to the Budget arithmetic we believe that in the interests of transparency the Treasury should have published the document Trend Growth: Recent developments and Prospects in advance of the Budget Statement. This Committee and the rest of the House of Commons could then have scrutinised it. We therefore recommend that there should be publication of similarly important technical changes in advance of Budgets and the Pre-Budget Reports. We also recommend that the timing of future changes to the trend growth rate and other key assumptions underpinning the growth and public finance forecasts is such that a common basis can be used for both the Pre-Budget Report and the Budget itself (paragraph 22).

    (g)  If the less cautious assumptions adopted in Budget 2002 are maintained, it may be advisable for the Treasury to maintain a budget strategy which allows for a continued projection of surpluses on the current budget balance, in order to ensure that the fiscal rules are still met in the event of GDP growth being significantly weaker than expected. (Paragraph 24).

    (h)  In addition, there is the issue of off-balance sheet finance. The accumulated future PFI and PPP commitments amount to £43.5 billion, a proportion of which represents contingent liabilities. We recommend that the Red Book should include an annual estimate of these contingent liabilities (paragraph 27).

    (i)  If specific spending figures are to be committed on a five year basis, we want to see that complete period covered by the Treasury's published medium-term fiscal projections. Given the significance of the additional spending on the NHS, the Chancellor should have published at the time of the Budget, the borrowing requirement for the final year 2007-08. (Paragraph 28).

    (j)  We note that the change in trend growth rate assumed in the Pre-Budget Report and the Budget would not, however, lead to a breach of the fiscal rules, even if the trend growth rate turned out to be at the lower level of the Pre-Budget Report (paragraph 30).

    (k)  The latest projections of the public finances are further from a strict interpretation of the Stability and Growth Pact than those Treasury projections submitted to the EU in December 2001. We share the Government's view that the Stability and Growth Pact should be reformed to take account of issues such as the economic cycle, debt sustainability and the accounting for investment expenditure. We urge the Government to work with other Member States to find agreement on the definition and interpretation of the Stability and Growth Pact as soon as possible (paragraph 33).

    (l)  However, we remain concerned that some departments seem to be experiencing difficulties in delivering on the Government's agenda of increasing public sector investment, and that under-spending has been significant in some departments. We believe that the comparison of departmental spending with planned intentions should be reviewed quarterly in the process outlined to us by the Chancellor. We also welcome the Treasury's acceptance that the relevant quarterly figures will be made available to the Treasury Committee. (Paragraph 38).

    (m)  On the issue of underspending, and of the matching of money to reforms, promised by the Chancellor, for SR2002, it remains far from clear what sanctions are proposed and how they might be implemented (paragraph 39).

    (n)  The proposed increases in NICs for employees and the self-employed will deliver a tax increase to those groups that is very similar to a 1 per cent increase in the rates of income tax. However, unlike increases in income tax, increases in NICs will not affect pensioners and those living off unearned income, who benefit from the insurance provided by the National Health Service, and may be in a position to make a contribution. We think that the Treasury has, as yet, failed to make the case for choosing a method of revenue raising (higher employer and employee national insurance contributions)which excludes well-off pensioners and people living comfortably off unearned income from making a contribution to higher NHS spending. (Paragraph 54).

    (o)  While the upper earnings and profits limits for employees and the self-employed were uprated in the Budget, they will not apply to the 1 per cent increase in NICs. To insist, therefore, that the Upper Earnings ceiling remains intact seems to us mere sophistry. We note this departure from previous practice which could be viewed as a move of the national insurance contribution system towards that of general taxation (paragraph 55).

    (p)  The House will shortly be asked to consider legislation to implement the new NIC arrangements. We recommend that it should be framed in such a way that further primary legislation will be required before the rate of charge above the upper earnings limit can be increased (paragraph 56).

    (q)  We expect full details of the take-up of the new Tax Credits to be published when the information is available (paragraph 60).

    (r)  We welcome measures that make work pay, and would encourage the Government to keep the issue of high marginal rates under close review in the light of projected substantial increase in the projections for 2003-04. (Paragraph 63).

    (s)  We welcome the fact that, within the context of a tax raising Budget, the budget measures are broadly re distributive from those on higher incomes to those on low incomes (paragraph 64).

    (t)  The Chancellor has clearly reneged on his previous view that lower NICs can promote employment. (Paragraph 68).

    (u)  We particularly deplore this lack of consultation with foreign banks in London (paragraph  72).

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