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Mr. Burnett: As usual, my hon. Friend is giving a powerful speech. I fully agree with what he says about the necessity for a more co-ordinated approach to tax strategy. With that, of course, will come responsibilities for Treasury operators to accept the level of confidentiality that will be imposed on members of the Inland Revenue.

Mr. Laws: I agree with my hon. Friend. He is absolutely right to suggest that change in the location of the policy-making bodies for tax should in no way compromise taxpayer confidentiality. The Government have already given certain guarantees about that and we shall obviously be able to probe them in more detail in Committee.

I have covered the points of agreement in our approach to the Bill, so now I want to consider some of the aspects that are of greater concern to us and to pick up some of the points raised by the hon. Member for Chichester. I shall start by focusing on the Government's objectives in introducing the Bill and the problems that are likely to arise in its implementation. I share the concerns of the hon. Gentleman about whether the Government have a clear sense of the ranking of the achievements and objectives
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they want to secure through the Bill. At least three have been mentioned frequently: increased efficiency, reduced compliance costs for business and more effective tax gathering. Do the Government have a clear sense of the ranking of those priorities?

Over recent months, we have heard much from all political parties about the need to make savings in Government expenditure. Indeed, we have heard a lot from both the Government and the Conservative party about the need to make administrative savings in Government expenditure. Much of the context for the announcement of the Bill focuses on efficiency savings and job cuts but not on the possibly bigger issue raised earlier by the hon. Member for Bexleyheath and Crayford—the tax gap. Is the Chancellor giving short-term cost reduction too high a priority, or giving it too high an emphasis over more important objectives? Concern about that seems widespread not only among employees and their representatives—we should expect them to be worried about reductions in staff numbers—but also among professionals who have commented on the Bill.

Those people are right to be concerned about whether the Government's focus is simply on securing efficiency savings. After all, when the Chancellor announced the merger of Customs and Excise and the Inland Revenue in his 2004 Budget statement, he did so in the context of securing value for money, as he put it, in a section of his speech where he announced—with, I understand, no previous consultation with employee groups—a gross reduction of about 54,000 staff in the Department for Work and Pensions, Customs and Excise and the Inland Revenue. As one of the witnesses to the Select Committee said,

Dawn Primarolo: The hon. Gentleman is absolutely wrong to say that there was no discussion with representative bodies of the two departments before the Budget announcement. My hon. Friend the Economic Secretary and I, as the Ministers with responsibility for those departments, had long discussions with the unions on how to modernise, and how to make savings and efficiencies to move forward in those departments. On the very day that the announcements were made, we briefed them on that matter, so what the hon. Gentleman says is not true; the discussions were of long standing.

Mr. Laws: I am grateful to the Paymaster General for clarifying that point and obviously I accept her comments, but will she accept that many Inland Revenue and Customs and Excise staff learned about the plans through hearing them announced on the radio or on television or by hearing the announcement made in the House of Commons? It appeared to many people that the plans were driven by the Government's political need to face down many of the criticisms made by the Conservatives about wasteful public expenditure rather than by a focus on the best way to manage the important resource of staffing in those departments.

Dawn Primarolo: The hon. Gentleman is wrong again. Both departments have a good history of partnership working with the representative trade
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unions. As the Gershon review was being worked on—not just on the day of the Chancellor's speech—my hon. Friend the Economic Secretary and I ensured that at each point the representative bodies knew the nature of the discussions and the likely progress that would be made.

Mr. Laws: I do not want to get bogged down on that particular point. Having discussed the issue with local representatives of the Inland Revenue offices in my area, I can tell the Paymaster General that they seem to feel strongly about the way in which the announcement was made, and the Government should be acutely aware of that in terms of taking staff on board for a strategy that will mean considerable change.

To return to the Government's presentation of the matter, on 23 November, the Gracious Speech announced the merger in the context of

In other words, the focus was very much on efficiency, costs and the staffing savings that could be made rather than on the tax gap—the point raised by the hon. Member for Bexleyheath and Crayford earlier.

As earlier exchanges in the debate showed, and the hon. Member for Chichester highlighted, there is considerable uncertainty about what the economics of the merger are. I hope that the Economic Secretary will be able to clarify an important point about the £507 million savings when he sums up the debate. My understanding is that the savings of £507 million over the spending review period relate to the total reduction in staff numbers, now set at 12,500 jobs net—16,000 jobs gross—rather than the 3,200 job cuts that relate specifically to the merger of the departments. I should think that 3,200 job cuts equate roughly to savings of £75 million or £100 million a year, cumulating upwards over a period of time as the cuts take place. I do not see how the Government can get to a figure of £507 million over the spending review period, unless they are doing what the Paymaster General earlier criticised the hon. Member for Isle of Wight (Mr. Turner) for doing—conflating the general Gershon savings with the impact of the merger savings.

We also know from the Government's regulatory impact assessment—thin though that is on the monetary costs and benefits of the merger—that certain costs will arise as a consequence of the merger. The Government put those costs at £75 million for the two years 2004–05 and 2005–06. Presumably, that is just a small portion of the costs that will arise as a consequence of the merger, particularly given that the figure relates to two years and that not much expenditure will be incurred in the first year, 2004–05.

Standing back, as the hon. Member for Chichester sought to do, and assessing whether the Government will make any such efficiency saving at all over the period of the spending review and, indeed, over the rest of the decade, I have considerable scepticism about whether any net saving will be made from the merger. When the Economic Secretary replies to the debate, I would welcome any clarification on whether he expects any net saving during either the period of the spending review or the rest of the decade from the merger.
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My confidence in the Government's lack of clarity about such things is reinforced by the O'Donnell report, which says on page 63, in section 3.99:

In other words, it may be well into the next decade before any net annual saving is made from the merger of the Departments.

Does it really matter whether the Chancellor of the Exchequer and the Gracious Speech are rather over-hyping the potential to make efficiency savings, while the Government quietly, sensibly and rather elusively indicate in their own assessments that there may not be any net saving? I am not sure whether that is simply an issue of presentation, about which we should not concern ourselves. If the Government in presenting the merger and its justification put a great premium on the possible staff and efficiency savings and the Government are competing with other parties in the run-up to the general election to promise reductions in civil service numbers, a great deal of pressure could be put on the new department to make savings in staff numbers that might not be borne out by the sensible economies that the department would implement if left to its own devices.

That point marries with the point made by the hon. Member for Bexleyheath and Crayford, and it was made very effectively in an article in The Tax Journal by John Davidson of Baker Tilly on 19 April 2004, where he says:

In the year that he cited, that revenue was £338 billion, and I think that I heard the Paymaster General say earlier that it was rising to £400 billion over the period that we are considering. The article continues:

even those excluding the cost of the merger—

The importance of the contribution made by the hon. Member for Bexleyheath and Crayford is underlined by the similar point that Martin Taylor makes in his contribution to Gus O'Donnell's report. He says:

That is exactly right, and the Paymaster General very helpfully and honestly acknowledged—she need not look worried when I say that—in her earlier comments that the 3,200 staff reduction figure from the merger is itself a guess.

The Inland Revenue officials who gave evidence to the Treasury Sub-Committee, which is chaired by the hon. Member for Sevenoaks (Mr. Fallon), were clear that the 3,200 figure was taken from guestimates of previous changes, including those in the Department for Work and Pensions. So it could be that the 3,200 figure is unlikely to be delivered and that Mr. Varney could find
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himself working to promises that he has given to the Government to deliver staff reductions that he would not want to bear out in practice. I hope that when the Economy Secretary replies to the debate, he will give us a clear undertaking that he and the Paymaster General will advise the chairman to focus on reducing the tax gap and compliance costs and only to reduce staff numbers when the Government can be sure that doing so will not damage those two other objectives.

I take some hope from David Varney's contribution to Gus O'Donnell's report, where he wrote:

David Varney knows very well what the priorities are, and I hope that the Economic Secretary and the Paymaster General will strongly support him in ensuring that those are the priorities. I wonder therefore whether the Economic Secretary could give us more information about those very important issues that relate to the merger's economic costs and benefits. Will he give us a time scale for the reduction of 3,200 jobs in the merger; or is that figure so uncertain that no time scale can be offered?

Will the Economic Secretary be absolutely clear with us about whether the £500 million savings relate to the merger or to the Gershon savings? Can the Government give us any guestimates of what the net savings will be from the merger over this spending review period, let alone any further round? Can the Economic Secretary give us any indication of whether there will be any net saving over the spending review period?

Will any of the 3,200 job losses result from outsourcing in the two departments? I understand that Customs and Excise and the Inland Revenue have different arrangements governing the extent to which they outsource work. I am sure that the Economic Secretary would not want any pressure to be put on the new department artificially to reduce job numbers by outsourcing, rather than doing what is in its best economic interests. In particular, is there any plan to outsource the debt collection facility of the combined department?

On the number of total employees, is the Economic Secretary confident that both departments are able to carry out their current work, particularly with tax credits, which have caused a lot of problems recently, not least because of the huge backlogs at the call centre. Is the Economic Secretary confident that, despite the job losses, the combined department will be able to introduce the new proposals on child trust funds?

The hon. Member for Chichester is right to draw attention to the fact that the job numbers at the Inland Revenue and in the combined department appear to have increased quite a lot since 1997–98, but the O'Donnell report makes it clear that all the increase in job numbers at the combined department is a consequence of additional burdens imposed on the department in relation to issues such as tax credit, while the underlying number of staff who carry out the work that was done before 1997 has fallen slightly. We want to ensure that the staff are there to do those important jobs, particularly in relation to tax credits on which the lowest income people in the country depend.

I want to probe the Government's thinking on a couple of other issues. Following the concern about the lack of clarity about costs and staffing, the second issue
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is the Government's expected improvement in compliance-related activity. It was clear from Gus O'Donnell's evidence to the Treasury Committee that even the Government accept that there is currently a huge tax gap in the United Kingdom. Mr. O'Donnell's evidence indicated that that gap was likely to be around 8 to 10 per cent. of revenues, which is in the order of magnitude of £30 billion or £40 billion.

It is unusual for such an estimate to be volunteered by a senior Government official because the Government tend to be sensitive about acknowledging the extent of the problem of tax evasion and tax avoidance. Given that that figure has been put into the public domain and that Mr. O'Donnell was willing to acknowledge that the figure for uncollected VAT alone is estimated by the Government as 12 per cent.—£12 billion a year that would be collected if people adhered to the letter of the tax law—I am interested to know whether they anticipate that the tax gap will be closed in any way by the merger of the two departments.

I should have liked the Paymaster General to say more about the detail of how the Government plan to close that enormous tax gap, which after all is the central purpose of the two departments. We can talk as long as we want about improving service to customers, but, as the right hon. Member for Wells (Mr. Heathcoat-Amory) pointed out robustly in the evidence taken by the Select Committee, ultimately the purpose of the departments is to collect revenue for the Government's public services and other priorities. If £30 billion or £40 billion is going missing, it needs to be a high priority for the new department to tackle.

On compliance, the new department must focus on those entities who are in the black economy, and who are probably avoiding contact with both Customs and Excise and the Inland Revenue, rather than simply focusing all efforts on the largely compliant group of businesses and taxpayers, which could be easier targets for it. Have the Government recently estimated the compliance cost to business, one of the recommendations by the Treasury Committee in its report in 2000? Will there be an opportunity, either now or in the year ahead, to estimate the savings to business from the reduction in compliance activity? Has the Economic Secretary considered whether the tax system, in particular the business tax system, can be simplified to reduce the compliance burdens on business?

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