Supplementary memorandum submitted by
HM Treasury
Q125 Professor's Spencer's evidence on the
Tax-GDP ratio
The chart of tax-GDP ratios provided in Peter
Spencer's evidence (Chart 2 on page Ev 82 of the Treasury Committee's
report on the 2004 PBR, HC 138) seems to have used money GDP as
the denominator for both the total and the non-North Sea tax to
GDP ratios. However, if a non-North Sea tax-GDP ratio is calculated,
it would be more appropriate to use data and forecasts for non-North
Sea money GDP, so that the denominator and numerator are calculated
on a consistent basis. The Treasury does not produce forecasts
for non-North Sea money GDP and so this series could not be calculated
from Treasury sources.
The tax-GDP ratio published in Table C10 and
Chart C3 of Budget 2005 is a total measure rather than one on
a non-North Sea basis.
Q156 Budgeting for NHS Foundation Hospitals
Biennial Spending Reviews set budgets for three
years. As part of this process the Department of Health capital
DEL is set based on forecasts of total capital spending including
all NHS Trusts. As documented in the 2004 Public Expenditure Statistical
Analysis (paragraph 2.20), the Department of Health make a transfer
from their DEL budget into AME, a classification change representing
the Department's estimate of what Foundation Trusts will spend.
The amount transferred in 2004-05 was £350 million. As Foundation
Trust capital expenditure is still accounted for in Department
of Health budgets but as AME, overall Department of Health capital
budgets are unchanged.
Setting the total limits in DEL, as part of
the Spending Review process, ensures that total public sector
capital is forecast, set, and budgeted for in a rigorous and robust
manner. The AME budgeting treatment doesn't, therefore, change
the total of capital spending forecast on hospitals, or impact
on the fiscal forecasts.
Neither does it, in effect, change the way capital
spending is actually forecast, allocated or spent within the NHS.
The amount set aside in AME for Foundation Trusts is in line with
what it is estimated at the SR they would have spent had they
remained in DEL.
Classifying Foundation Trusts' capital spending
to AME is a way of recognising the fact that Foundation Trusts
have greater operational freedom from government.
Q166 Pensioners
As a result of measures implemented since 1997
the Government is spending £11 billion a year more on pensioners.
£8 billion more than if the Government had linked the basic
state pension to earnings in the same period. The £200 payment
to council tax paying households with someone over 65 will cost
£800 million in 2005-06. While free off peak local area bus
travel for those aged 60 and over and disabled people in England
from April 2006 will cost £420 million in 2006-07 and the
abolition of the downrating of benefits after a stay in hospital
of more than 52 weeks from April 2006 will cost £65 million
in 2006-07.
The Government introduced State Second Pension
(S2P) in 2002 to replace the State Earnings Related Pension scheme
(SERPS) to increase the benefits SERPS delivered for low earners
and to provide better support for non-earners. Now, 25.9 million
people have some cover under the Second State Pension. There are
estimated to be 18.7 million people who will gain from S2P in
the long term—55% of whom are women. The Pensions Commission
report shows clearly the additional benefit that S2P delivers
in charts F.8-F.11 in the appendices to the report.
Clearly State Second Pension will not mature
until around 40 years time. It is extremely difficult to make
assessments of poverty levels over this sort of time horizon,
and such assessments are necessarily dependent on a number of
assumptions. In the meantime, Pension Credit is tackling poverty
with a minimum weekly income of £109.45 for single pensioners
and £167.05 for a couple. The Government is committed to
increasing the guarantee element of Pension Credit by earnings
next year and until 2007-08, as a result the guarantee element
is forecasted to rise to £119 a week for a single pensioner
by 2007-08. It is however clear that S2P is delivering substantially
more for people on lower incomes than its predecessor did—as
the EFSR says, a person with earnings of £12,000 will be
able to accrue a weekly S2P of around £70 in today's earnings
terms—roughly double what would have been built up under
SERPS.
Q167 Eligibility criteria for bus passes for
disabled passengers
The Order enabling free off peak local area
bus travel for people aged 60 and over and disabled people will
be laid later this year. The eligibility criteria for disabled
passengers will remain the same as with the current half fare
scheme—that is to say those defined under the Transport
Act 2000. Under Section 146 of the Act someone who is blind or
partially sighted, profoundly or severely deaf, without speech,
has a disability, or has suffered an injury, which has a substantial
and long-term adverse effect on his ability to walk, does not
have arms or has long-term loss of the use of both arms, has a
learning disability, which includes significant impairment of
intelligence and social functioning, or cannot obtain a driving
licence due to their disability is entitled to concessionary fares.
As now, whether individuals meet these criteria will be assessed
at a local level, as part of the pass issuing process.
Q179 Life Insurance Companies and taxation
of the "orphan assets"
The aim of the proposed change is to ensure
that life insurance companies pay the same rate of Corporation
Tax, 30%, as any other company on the profits that are attributable
to their shareholders. There is no intention to have any impact
on the assets and income that are genuinely needed to pay policyholders.
Under tax law, a life insurance company must
allocate its income from the assets dedicated to its long-term
business between pension business and other exempt classes of
business on the one hand, and its ordinary (or basic as it is
called) life assurance business on the other. It must, under tax
law, further divide its income from basic life business between
policyholders and shareholders. Income from pension business is
taxed at 0%. The policyholders' and shareholders' shares of basic
life business are taxed respectively at 20% and 30%. It is therefore
important to ensure that the right amounts go into the right categories.
A life company's "orphan assets" or
"inherited estate" have built up over time from amounts
that the company has retained after making payments to policyholders.
Life companies have wide discretion over the level of their payouts,
particularly where the policyholder redeems the policy before
its full term. Over time, the amounts available to the life companies
over and above what they have paid out have built up. Whilst some
of these assets support continuing pension and basic life business,
it is clear that a proportion may be in excess of what is needed
for those businesses, and therefore is attributable only to the
shareholders' interest in the company's assets.
The purpose of the change is to make sure that
the categorisation is correct and properly represents the commercial
reality. New FSA rules provide for considerable improvements in
transparency as between different classes of business and the
assets to support them. On an objective basis, based on the FSA's
requirements, there is an excess that should be allocated to shareholders
and taxed at 30%. The main issue is to identify the correct amount,
and to that end the Inland Revenue has been engaged in detailed
and constructive discussions with the industry. The additional
tax impact was costed at PBR as £30m per annum, significantly
lower than some estimates. The discussions will continue to work
up the detail of the measure to ensure that the impact is no greater
than this stated aim.
The Inland Revenue is also discussing with the
industry ways in which the rules might make the allocation between
exempt pension business and taxable basic life business better
reflect the way allocations are made for regulatory purposes and
is more appropriate for tax purposes. The aim is to reduce the
distortions in the present system that can give inconsistent and
unexpected results, both from the standpoint of the companies
and of the Exchequer.
Qq181-182 Public Service Pension Schemes—Unfunded
Liabilities
The main public service schemes are those for
the civil service, NHS employees, teachers, armed forces, police
officers, fire fighters and local government employees. There
are separate schemes in some cases covering Scotland and Northern
Ireland and around 200 smaller public service schemes.
In general public service pension liabilities
represent pension rights that have been built up during years
of service already provided by public servants. They are not a
reflection of pension rights likely to be accrued in the future.
They do, however, acknowledge that active members are likely to
receive salary increases in the future which increase the value
of their pensions for the years they have already served.
The latest estimate of the total liabilities
of unfunded public service pension schemes at 31 March 2004 is
£460 billion, based on published Resource Accounts figures
supplemented by estimates by professional actuaries (in most cases
the Government Actuary's Department).
The sustainability of the public finances is
demonstrated by the amount that has to be paid out each year for
public service pensions. The Long-Term Public Finances report,
published alongside the PBR, sets out that this will rise only
from 1.5% of GDP to 2.2% of GDP in 50 years from now.
Q297 Scheme where lenders could use benefit
for repayment
Budget 2005, announces that following responses
from private and third sector lenders, the Government will work
towards a scheme where, under certain circumstances, lenders could
apply for repayment to be made through deduction from benefits,
where normal repayment arrangements have broken down.
The aim of this scheme would be to reduce some
of the increased costs and risks of lending to vulnerable groups.
It is the Government's intention that, as part
of the lending process, applicants will be made fully aware of
the possibility that lenders may apply to the Government for deductions
from benefit in certain cases of default. In addition, the ability
to apply for repayment from benefit would be subject to criteria
designed to ensure that it is available only where loan products
are appropriate and provided in a responsible manner.
Under the scheme, lenders would apply to Government
for deductions from benefit to take place, rather than having
direct access to individuals' benefits and there are already similar
arrangements for managing arrears of, for example, fuel bills.
The scheme would look to replicate the safeguards in place under
these arrangements. These safeguards include how much and at what
point, deductions can be made from benefits.
The Government is aware of the views of consumer
groups and welcomes their contribution to the development of the
scheme. It will work with these groups to ensure that sufficient
safeguards are in place.
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