Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 20-39)

CHILD TRUST FUNDS

12 NOVEMBER 2003

  Q20  Mr Plaskitt: Are you telling us that incentives within this scheme which would encourage its use for that purpose are being ruled out?

  Mr Holgate: I would not rule them out 100%, and I will offer you an example. It is not inconceivable, depending on how the scheme progresses, depending on people's contributions into the Child Trust Fund and the quantum of money available there, that the private sector might say something to 18-year-olds along the lines of, "We know you have this money available. Here is something which we think is a very good investment for young people, or at some later age, and we are going to give you a discount if you buy". They may see that the economics of it might work out for them. So it would not surprise me if providers of goods and services did not see some gain to trying to latch onto the emergence of fully-fledged Child Trust Funds, when the first cohorts or later cohorts reach 18. It is possible that some such linkage would be made. However, I think that it is much more likely to be either one of private sector initiative or one of an incentive of some kind. What we are very adamantly against, for the reasons I set out earlier, is a prohibition on this or that kind of spending.

  Q21  Mr Plaskitt: But you have not ruled out an incentive?

  Mr Holgate: We have not ruled out some kind of benign encouragement—yes.

  Chairman: That would turn it into a Child Tuition Fund, would it not?

  Q22  Mr Ruffley: Mr Holgate, obviously your figures show that those children who have parents and relatives who want to kick in money and make regular contributions will be better off. Is it not the case that these proposals benefit proportionately the financially literate middle-class children?

  Mr Holgate: I think I probably dispute that.

  Q23  Mr Ruffley: Why?

  Mr Holgate: Because if you wish to save on behalf of your children, you can do so anyway and you can do so to the extent that you can put aside money, such that if you do not achieve more than £100 income a year then that is fine. At current interest rates I suppose that is of the order of £3,000.

  Q24  Mr Ruffley: Everything over that is taxable, is it not, and this is not?

  Mr Holgate: That is right.

  Q25  Mr Ruffley: So this is a tax break that is not otherwise available.

  Mr Holgate: That is true, but you have to—

  Q26  Mr Ruffley: For financially literate middle-class parents who are not getting that tax break at the moment. Is that not the case?

  Mr Holgate: Only if you are prepared to put aside something of the order of £4,200 a year to make that use of it.

  Q27  Mr Ruffley: Exactly. You make my point rather well. I think that we are in agreement so far. You have answered the question in the affirmative that financially literate middle-class people, making contributions of that magnitude, will be getting a tax break under these proposals that they do not currently enjoy. That is correct, is it not?

  Mr Holgate: Yes, I think that is right.

  Q28  Mr Ruffley: What is the deadweight cost of these proposals?

  Mr Holgate: I think that it is extremely small.

  Q29  Mr Ruffley: Why is it extremely small?

  Mr Holgate: Because if you go back to the table to which I was referring earlier when I said that the median savings of someone aged 25 or below were zero, you find that at the 75th percentile their savings are a princely £400. It is extremely unlikely that you will find anyone—apart from inheritances where other forms of tax avoidance or tax management come into play—you will find a remarkably small number of people who will make any significant tax saving out of this.

  Q30  Mr Ruffley: Could the Revenue speak to that, because if the £1,200, the full amount, is kicked in by a lot of rather wealthy people you are actually giving a tax break to people who do not need it? Is that not the case?

  Ms Rookes: You may well be to start with, but I think—

  Q31  Mr Ruffley: You might well be to start with?

  Ms Rookes: I would come back to what I said earlier. We want to put these children who are in low-income families, who do not have as much to start life with, in a better position. We want to educate them—

  Q32  Mr Ruffley: I am not talking about those people. I am talking about, for want of a better term, the middle-class families getting a tax break. It is the case, is it not, that it will help people who do not really need it? This is not targeted in favour of those—

  Ms Rookes: It is not targeted—

  Q33  Mr Ruffley: You said "it is not targeted"?

  Mr Holgate: It is targeted. It depends—

  Q34  Mr Ruffley: No, with respect, Mr Holgate, I asked the question. You said, "it is not targeted"?

  Ms Rookes: The Child Trust Fund is universal—

  Mr Ruffley: Can you please answer the questions? Not the ones you want to answer: the ones I am asking.

  Chairman: Let her answer.

  Q35  Mr Ruffley: Did you say "it is not targeted"?

  Ms Rookes: The £1,200 limit is not targeted—

  Q36  Mr Ruffley: I want to clarify on the record just what you said a few minutes ago. Did you say, "it is not targeted"?

  Ms Rookes: I said the £1,200 was not targeted.

  Q37  Mr Ruffley: It is quite easy. If you just listen to the questions, you can answer them.

  Mr Holgate: There are two bits which are not targeted. There is the £250 for all children and there is the £1,200. There is one bit which is targeted, which is the additional £250. I think that where you are at risk of painting an unfair picture is when you say that this is a tax break for the middle classes. If you allow for the fact that the 75th percentile of those aged under 25 have all of £400 savings by then, you are well into any definition of middle-class territory. You are nowhere near the sums of money that you need to be contributing in order to make any significant inroad into tax payments under this scheme. It is a hypothetical example. There will, I am sure, be a few specific individuals, but it is a very small minority.

  Q38  Mr Ruffley: Can you put a figure for the deadweight cost? In other words, the cost of the tax break you are giving to people. They would otherwise have saved anyway. This is a tax break you are giving them for something they would have done anyway. In other words, the deadweight cost. What is the figure in millions for that? Your best estimate, Mr Holgate?

  Mr Holgate: We have a convention in the Budget document and others called "negligible" and—

  Q39  Mr Ruffley: It would be that, would it?

  Mr Holgate: My starting bid to you would be "negligible".


 
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