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
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