Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 160-179)

21 MARCH 2005

MR JON CUNLIFFE, MR DAVE RAMSDEN, MR TONY ORHNIAL, MS SARAH MULLEN AND MR JOHN KINGMAN

  Q160 Mr Mudie: If you cannot answer, the Chancellor will answer cheerfully tomorrow?

  Mr Orhnial: Certainly in this budget the measure that we are putting in as a council tax refund is £800 million. They stack up on top of what was in the PBR, which was another £250 million, so the numbers are indeed large. I cannot supply it for you right now.

  Mr Cunliffe: The figure of £11 billion a year. You want the total?

  Angela Eagle: Eleven billion a year?

  Q161 Chairman: We are getting it.

  Mr Orhnial: At paragraph 5.69 of Chapter five as a result of measures implemented since 1997, £11 billion a year more on pensioners.

  Q162 Angela Eagle: That would be £8 billion a year more than if it had simply been spent by linking the basic state pension to earnings?

  Mr Orhnial: Yes.

  Q163 Angela Eagle: Can you tell me how you are going to work the free bus-pass for pensioners throughout the country; particularly also how you will treat those authorities that currently already offer that? Are you going to refund money?

  Ms Mullen: What was announced was that the statutory requirement will increase from 50%, which is what we assume in our allocation to local authorities, to 100% funding. Under the new burdens principle we will be funding all local authorities for the increase from 50% to 100%.

  Q164 Angela Eagle: So those authorities that currently provide a full bus-bass, and there are some, will get a rebate from central government to pay for 50% of that?

  Ms Mullen: They will. We have done it that way because of the new burdens policy and also because it would not be fair to penalise those local authorities that have—

  Q165 Angela Eagle: Sure. My authority is such an authority, so I am not particularly interested in your reply. Can you tell me how many people are currently accruing entitlement to the second state pension and how much that is costing?

  Mr Orhnial: I do not have that number to hand.

  Q166 Angela Eagle: Perhaps you would write to us about that?

  Mr Orhnial: I will.[2]

  Q167 Angela Eagle: Not everybody knows about the second state pension, but it is quite a significant issue. I also saw from the announcements in the Budget that the free bus-pass is going to apply to some two million people with disabilities. Can anyone enlighten me as to how those two million will qualify, who they will be?

  Ms Mullen: I do not know the answer to that. I do not know if anyone else does. We can send you a note on exactly how that is going to be implemented.[3]

  Q168 Angela Eagle: In terms of the work towards ensuring that child poverty is reduced to meet the government's target, can somebody explain to me what progress has been made there and what, if any, policies there are in the Budget announcements that help us make that target?

  Mr Orhnial: As you know, I think, we are on target to meet our current PSA of cutting the child poverty numbers by a quarter. Since then, in the Budget last week the Chancellor announced that we would be up-rating the child elements of the child tax credit by earnings until 2007-08. We are also working as a result of the Child Poverty Review last year with a number of departments to try to improve on some of the measures on material deprivation that form part of our three-tier target.

  Q169 Angela Eagle: So there will be more policy announcements on that in due course. There are working parties going on?

  Mr Orhnial: I would expect more policy announcements as we go through to 2009, 2010 in order to keep on track for that, but our quarter way target is set, or we are set to meet that, and independent commentators are also satisfied as far as that is concerned.

  Q170 Angela Eagle: In terms of the announcements on having children's centres in every community, can you tell us what monies have been laid aside in this budget to expand the Sure Start scheme and create more children's centres in local communities to give children a better start in life?

  Mr Orhnial: We are set to reach a figure of £1.8 billion in 2007-08 devoted to Sure Start childcare and early years, but the bulk of that was agreed in the spending review last year. That is the bulk of what we have.

  Q171 Angela Eagle: Will that money pay for the expansion or is there extra money for the expansion that the Chancellor announced?

  Mr Orhnial: He has also announced an additional £35 million in 2006-07 and 2007-08 for parenting and early learning which will help towards that.

  Q172 Angela Eagle: Could I also ask briefly about what is happening in the labour market, because there is disagreement between independent experts and Treasury forecasts about how tight the labour market is? Many independent forecasters seem to think that the labour market is basically so tight that we are risking wage inflation if we continue creating employment, but the red book actually talks about creating another 5% of people in employment, taking it from 74.9% to 80% of the working age population. Clearly the Treasury and the forecasts there are not so worried about a tight labour market, but can somebody explain what the difference of approach is that is leading to this difference of interpretation?

  Mr Cunliffe: First upon the tightness of the labour market, there is a range of evidence and some of it is mixed but I would highlight a number of points. Earnings growth is around 4.5% for the economy as a whole and I do not think people could say where the sustainable rate, the rate at which inflation would start increasing, occurs but it is probably above that rate. It has grown remarkably slowly over the last couple of years. Going through that, if you look at price inflation, that is remarkably low as well. If we had a really tight labour market you might have expected to be seeing some of those pressures coming through in pay growth. Unit costs for the last couple of years have been a long way below the long run average when the economy is on trend. That said, there are some areas where recruitment difficulties are being faced and there are some firms reporting capacity constraints but, of course, you will tend to find regional pockets within the labour market and certain skills shortages in other pockets. If you look at it from the other end and say are there more hours in the economy to be worked—if we assume we are going to have more people working are there more hours to be worked—I remember I was asked this question about a year ago and I think I said the Treasury's view was hours worked had declined in 2000-01 when the economy grew more slowly. We knew that hours worked generally were declining, that was a social trend, but we thought there were more spare hours in the economy to come back. I know a number of the other commentators said the trend in declining hours, the social change, was more pronounced and the economy was tight as there were not more hours to come back. In the last quarter or so, and we covered this in the Red Book, hours have come back quite sharply but you have not seen an increase in earnings, which is what you would expect if hours were coming back, but that was because people are working more and more overtime and the labour markets are very tight. Our overall view is that there is still a little bit of slack in the labour market. The last point I would mention is one that was covered in the PBR, we did not cover it in the Red Book that rate of unemployment which is consistent with low inflation—

  Q173 Angela Eagle: The NAIRU?

  Mr Cunliffe: The NAIRU, yes. You cannot observe it, you have to estimate where it is. Clearly it has come down in recent years but it may well be below the current rate of unemployment. If that is true then unemployment could come down further without creating inflation. In all our calculations of when the cycle ends and the output gap we have not put that down, but there is a chance, and a number of commentators have mentioned it, that actually the NAIRU is a bit lower. All of that suggests there is a bit more in the labour market. You can read the figures the other way but I would say looking on the pay unit cost hours data, I do not see a very strong story for an extremely tight labour market. Could we increase labour force participation? Yes.

  Q174 Angela Eagle: You have said you are going to try by 5%.

  Mr Cunliffe: Some of it is around inactivity, some of it is around single parents. There is some evidence that what has happened to single parents has increased participation and also the pilots on inactivity have reduced the time that people spend on disability benefits and get them back into work more quickly. I think there is some scope there, yes.

  Q175 Angela Eagle: Do you think these active labour market policies are structurally bringing the NAIRU down?

  Mr Cunliffe: Yes.

  Q176 Angela Eagle: Do you think you have made a structural change because of the active labour market policies and that future changes to Incapacity Benefit and continuing work, for example, on the New Deals has got a chance of bringing the so-called natural rate of unemployment down further?

  Mr Cunliffe: Yes. If one assumes there is a stock of long-term unemployed who stay in unemployment then the rate of unemployment that you could sustain without inflation is the temporary one around that, but you have got this stock that find it very difficult to get back into work. If you bring the stock of long-term unemployed down then you—

  Q177 Angela Eagle: One final question which is on productivity. There seems to have been some kind of sea change in productivity and evidence of us catching our competitors in terms of productivity gaps that have persisted for very, very many years. Can you explain what you think has been going on and how we can accelerate it further?

  Mr Kingman: Certainly there has been some very encouraging data over the years, both in terms of the UK performance and in terms of narrowing the gaps. We say in the document that the gap with France has narrowed from 22% in 1995 to 10% now; we have closed the gap with Germany; the gap with the US has narrowed. We think it is too early to say definitively, as it were, that we think something has changed in relation to the UK's own performance, although, as we say in the document, the data on performance between trend points is rather encouraging. In terms of what we think is necessary to sustain it, I think the Budget itself set out some important measures and we will be pursuing those.

  Q178 Angela Eagle: On training and lifelong learning?

  Mr Kingman: On training, on investment, on enterprise, on competition and so on.

  Angela Eagle: Thank you.

  Q179 Mr Walter: I have got one question on savings. We have discussed in these sessions before the whole question of ISAs and ISA limits and so on, but obviously there is a reduced attractiveness of ISAs, particularly for standard rate taxpayers because of the tax changes to the underlying funds. There was confirmation in the Budget that the ISA limits were not to be reduced but some would say freezing them was a real terms decrease anyway. I want to move on to a slightly different point about savings because, according to an Inland Revenue document that was issued on Budget Day, the tax rate on the income produced by orphan assets—those are investments held in with-profits funds but not earmarked for payment of policyholder bonuses—is to be brought into line with corporation tax. This means that the tax paid on those assets could rise from 20% to 30%. The Norwich Union says the changes could drain its with-profits fund of about £140 million over the next decade. The Inland Revenue was adamant that it will only impact on life assurance companies rather than on policyholders. Gary Withers, the Chief Executive of Norwich Union Life, said it would fall squarely on the shoulders of policyholders because: "Under FSA rules the assets of our with-profits fund are entirely separate to the assets of Norwich Union as a corporation. This tax change affects policyholders and not shareholders." It is not Norwich Union special pleading because the ABI—the Association of British Insurers—has said: "This proposal would represent a significant extra charge on with-profits policyholders. . . ." These are exactly the same people who have had problems with endowments, endowment mortgages and shortfalls on returns. What can you say to reassure these life assurance policyholders?

  Mr Cunliffe: I think it might be best if we gave you a note on that.[4]

  Chairman: I thought that was going to be the answer.


2   Ev 50 Back

3   Ev 50-51 Back

4   Ev 51 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2005
Prepared 14 April 2005