Government response
The Government notes the conclusions of the Treasury
Committee's report on the 2004 Pre-Budget Report.
The Pre-Budget Report
1. We reiterate our view that this is an unsatisfactorily
short period of notice for what is meant to be an important event
in the economic calendar. (Paragraph 2)
As the Government has previously set out in its responses
to the Treasury Select Committee's reports, it will announce the
date of the Pre-Budget Report (and the Budget) at the earliest
convenient opportunity. However, it may not prove possible to
give two months notice.
UK presidencies of the G7/8 and EU
2. The Committee believes that the UK's joint
leadership of the G7/8 and the EU in 2005 puts the Government—particularly
as the international community comes together to address the consequences
of the tragic earthquake and tsunami in the Indian Ocean—in
a strong position to play a positive role in advancing discussions
with our international partners on the reform of key global economic
institutions and ensuring fairer treatment of developing countries
by the world's major economies. We welcome the Chancellor's commitment
to pursue reform of the major international economic institutions
and hope that solid evidence of progress here will emerge over
the coming year. (Paragraph 5)
The Government agrees with the Committee that our
joint leadership of the G7/8 and the EU in 2005 puts the UK in
a strong position to advance discussion with international partners
on key international issues, including the tsunami disaster, reform
of key global economic institutions and ensuring fairer treatment
of developing countries by the world's major economies. Building
on the analysis set out in the Treasury's Pre-Budget Report paper
'Long-term global economic challenges and opportunities facing
the UK', the Treasury's Budget paper 'Long term global economic
challenges and opportunities for Europe', published alongside
the Budget, sets out challenges that Europe must meet in face
of dramatic changes in the global economy. Whereas in the past
Europe has tended to focus on internal policy issues, as global
restructuring continues apace—with the rise of the new emerging
economies and global sourcing of goods—Europe must now look
outwards. Therefore, the Government will aim, through its EU Presidency
and beyond, to develop a consensus on the need for a more Global
Europe: a Europe, which by becoming more outward-looking and embracing
greater flexibility in labour, product, and capital markets, delivers
high employment for its citizens. At the same time a Global Europe
must step up to its responsibilities to take action to reduce
international poverty, advance fairer trade and support the drive
to tackle climate change.
Under the chairmanship of the Chancellor of the Exchequer,
G7 Finance Ministers reviewed the substantial response to the
tsunami disaster at their meeting in London on 4-5 February 2005.
For affected countries that request it, the G7 agreed exceptionally
to defer debt payments up to the end of 2005, without payment
of interest during this period. The G7 will review at their next
meeting the need for further assistance, based on the full needs
assessments by the IMF and World Bank of the reconstruction and
financing requirements of the countries affected by the disaster.
The EU has also agreed a substantial aid package.
The Government welcomes the Committee's support for
further reform of the International Financial Institutions. The
institutions should continue to adapt to meet the challenges of
the modern global economy; with well-developed international capital
markets, large emerging economies, and a renewed commitment to
help developing countries achieve the Millennium Development Goals.
Extensive reforms have been undertaken at both the World Bank
and the IMF, and further reforms are being considered at both
institutions, including through a review of the IMF's strategic
direction by the Managing Director, Rodrigo de Rato. G7 Finance
Ministers undertook at their meeting in February to support World
Bank and IMF management in their strategic reviews of their institutions,
and will discuss reform further at their next meeting.
The Government will also work with EU and other partners
this year to agree the financing package needed to meet the Millennium
Development Goals (MDGs), including the launch of the International
Finance Facility, increased aid levels and up to 100% multilateral
debt relief. Action on trade is also important to ensure that
developing countries reap the benefits of globalisation and are
able to drive their own development in the long term. The current
Doha Development Round of WTO negotiations offers a vital opportunity
to enhance fairer trade. G7 Finance Ministers discussed at their
February meeting the challenges of meeting the MDGs and the opportunities
in the coming year, separately publishing their conclusions on
how to make progress. These can be found at www.g7.gov.uk.
The economy: the recent past
3.
The Committee welcomes the fact that 2004 has proved to be
another year of solid economic activity in the UK, marking a long
period of sustained quarter-on-quarter growth. The combination
of 3%-plus growth, rising employment, modest inflation and evidence
of some re-balancing of the economy away from household consumption
towards investment is particularly welcome. (Paragraph 9)
Data released since the 2004 Pre-Budget Report estimate
that the UK economy grew by 3.1 per cent last year, consistent
with the Government forecast of 3 to 3½ per cent growth that
has been unchanged since the 2002 Pre-Budget Report. Moreover,
data for the fourth quarter extended the UK's record of unbroken
quarterly growth to 50 quarters—the longest since quarterly
national accounts records began.
The Government also welcomes the fact that, as was
forecast in previous Budget and Pre-Budget Reports, the balance
of growth has shifted towards investment, with less reliance on
consumption. Latest data show that whole economy investment grew
at almost twice the rate of private consumption in 2004.
The economy: the outlook
4. While the Treasury's economic growth forecast
for 2005 is more optimistic than the external consensus, the majority
of the experts we asked suggested that the gap between the Treasury's
growth forecasts and those of other major forecasters lay within
the bounds of forecasting error. In any case, the Treasury's recent
forecasting record in the area of economic growth has been good.
(Paragraph 10)
The recent economic forecasting performance of the
Treasury and independent forecasters was discussed in Box A5,
page 186 of the 2004 Pre-Budget Report. As stated there, 'analysis
of forecast errors for current and year-ahead forecasts made since
1995 indicates that Treasury forecasts have on average outperformed
the independent consensus'.
5. The evidence the Committee received in the
course of this inquiry indicates that there is little to suggest
that the UK current account deficit is moving into unsustainable
territory in the near term, although the volatile nature of currency
markets does create risks. (Paragraph 11)
The UK current account deficit averaged 2¼ per
cent of GDP in the year to 2004Q3. This is fully consistent with
the PBR forecast and well within the limits of sustainability.
The current account deficit is also under half the record 5 per
cent of GDP reached in 1989. It is expected to remain at sustainable
levels over the forecast horizon.
6. Recent signs that the housing market may be
cooling and that the household sector is beginning to rebuild
its saving ratio are welcome. In the longer term, the evidence
we have received on the Pre-Budget Report highlights the importance
of work being done in restoring consumer confidence in long-term
savings and reforming the UK's pension system. (Paragraph 15)
The Government is grateful to the work the Treasury
Committee has undertaken on the important issue of restoring trust
and confidence in long-term savings. It is important that this
issue is resolved for the benefit of all in society, and will
require the concerted effort of all, including the Government,
Industry, Regulators, Consumers Bodies and Trade Associations.
We look forward to working with the Treasury Committee, and other
stakeholders, in the Forum recommended by the Committee in 2004.
Furthermore, the Government commends and supports the work being
undertaken by the FSA, particularly that relating to 'Treating
Customers Fairly'.
The 2002 Green Paper set out the Government's strategy
in helping to ensure future pensioners are able to build up retirement
incomes that meet their expectations. Following an extensive consultation,
measures in the Green Paper have been developed and taken forward
through legislation in the Finance Act 2004 and the Pensions Act
2004 and the informed choice programme, as described in the 2004
DWP publication Informed Choices for Working and Saving.
The interim report from the Pension Commission has
furthered our understanding of the long-term challenges facing
an ageing society and we look forward to the Commission's next
report and recommendations.
7. The Committee notes the evidence we have received
suggesting that migration into the UK has played a useful role
in relieving skill shortages in the labour market and boosting
non-inflationary growth. We welcome efforts to improve the functioning
of the UK labour market by raising participation rates and agree
that raising the UK's skill base is vital to meeting the competitive
challenges posed by the global economy. The long term nature of
labour market reform nevertheless means that in the near term
the evidence many experts detect of a tightening labour market
needs to be monitored extremely carefully. The amount of slack
left in the UK labour market is likely to be a key determinant
of how long the UK economy can continue to grow above trend without
generating inflationary pressure and is thus an essential element
in judging the timing of the cycle and whether or not the Government
has met its fiscal rules. (Paragraph 21)
Government closely monitors all labour market developments
and carefully assesses how labour supply contributes to the degree
of slack in the economy when determining the size of the overall
output gap.
The Pre-Budget Report judgement was that despite
the unemployment rate continuing to edge down over the past year,
there still remains a degree of slack in the UK labour market
as evidenced, for example, by the continuation of moderate earnings
growth over the recent past.
The fiscal balance and the fiscal rules
8. The fiscal rules are an important part of
the framework for macroeconomic management and in the Treasury's
view will be met over the current cycle. However, the margin for
meeting the golden rule in the current cycle on the Treasury's
forecasts has nevertheless fallen further since the Budget and
now stands at £8bn, or 0.1% of GDP. On current Treasury forecasts,
the golden rule will be met—by a narrow margin. Many independent
forecasters believe that this is too narrow a margin to be confident
that the golden rule will be met. The Chancellor has assured us
that he could foresee no circumstances in which the Government
would not meet its fiscal rules. We note, however, the narrow
margin by which the golden rule would be met on current Treasury
forecasts, particularly given recent data. (Paragraph 27)
The Government recognises that projections for the
public finances are subject to uncertainty and that every forecast
is subject to risks, both on the upside and the downside. For
this reason the public finances are based on independently audited
cautious assumptions, including a rate of trend growth ¼
percentage points lower than the neutral view. The Treasury's
forecasting record for net borrowing since the new framework was
introduced in 1997 has been cautious and compares well internationally,
both with most EU Member States and with international organisations
such as the IMF, OECD and European Commission.
9. The Committee believes it is important that
the operation of the fiscal rules should be as transparent as
possible. Given the significance for the fiscal rules of dating
the beginning and the end of the economic cycle we believe the
Treasury should clearly inform Parliament in a timely fashion
of its preliminary analysis that the cycle has ended. To delay
making an announcement, potentially for several months, to the
next Budget or Pre-Budget Report, would not be in the interests
of informed public debate. (Paragraph 30)
The Government agrees that transparency is important
for fiscal policy. The Government's transparent and consistent
methodology for dating the economic cycle is set out in the published
papers 'Fiscal policy: public finances and the cycle' (March 1999)
and 'Trend Growth: Recent Developments and Prospects' (April 2002).
The Treasury needs to consider a wide range of economic indicators
and information in judging when the cycle has ended, a judgement
which by its nature is backward looking. There is a lag in publishing
statistics and some indicators also tend to lag the cycle. The
Government updates its view of the size of the output gap in each
Budget and PBR, and, on the basis of its economic growth forecast,
shows when it expects the economic cycle to end. This provides
an opportunity for these judgements to be subject to public debate
and scrutiny.
10. The Committee believes that clear, well designed
and well understood fiscal rules have an important role to play
in lending credibility to economic policy. The current rules have
generally worked well since their introduction but are likely
to be capable of further improvement and refinement in the light
of the practical experience accumulated over recent years. With
the start of both a new cycle and a new Parliament likely within
the next year or so we believe that it is now appropriate to review
the current fiscal rules with a view to initiating any changes
that are found to be desirable early in the next cycle. It should
be made clear from the start that such a review will not consider
any proposals that lessen the UK's commitment to sound public
finances or that unduly limit the ability of fiscal policy to
support monetary policy in delivering economic stability alongside
low inflation. (Paragraph 34)
The Government agrees with the Committee's view that
clear, well designed and well understood fiscal rules have an
important role to play in lending credibility to economic policy,
and welcomes the Committee's acknowledgement that they have worked
well. The Government, of course, keeps the fiscal framework under
review to ensure that it remains at the forefront of international
best practice.
Revenues: overall tax receipts and forecasting
11. Despite strong economic growth and record
employment, tax receipts are for the fourth consecutive year below
the Treasury's forecast. The growth in receipts has been strong
by historic standards but has not matched the Treasury's optimism
at the time of the Budget. (Paragraph 35)
As explained in the 2004 Pre Budget Report, receipts
from income tax and national insurance contributions have come
in broadly as expected in Budget 2004. At the time of the PBR
growth in corporation tax receipts had been strong but lower than
expected. However, the PBR noted that tax receipts were expected
to be stronger in the remainder of 2004-05 compared to the first
7 months of the financial year. Trends in corporation tax since
the PBR have been consistent with this: Corporation tax receipts
for the first ten months of 2004-05 are 17.4 per cent higher than
in the same period in 2003-04, up from 12.5 per cent for the April
to October period and above the Pre-Budget Report forecast of
15.4 per cent growth for the year as a whole.
12. We note that the Treasury continues to project
a rise in the ratio of tax receipts to GDP over the forecast horizon,
from 36.2% in 2004-05 to 38.4% in 2009-10. We also note that the
Treasury is projecting the fastest growth in receipts over the
next two years since 1997. This forecast implies an acceleration
in receipts growth in the final four months of this year and even
stronger growth in receipts in 2005-06. While there are grounds
for optimism, there are significant risks to this forecast and
the Treasury needs to monitor developments closely. (Paragraph
37)
The lags in the tax system mean that the impact of
the strong economic growth over the last year or so had not been
fully reflected in receipts by the time of the Pre-Budget Report.
With staggered payments for corporation tax for example, a strengthening
of receipts is expected through the year. In addition, the payment
lags related to North Sea taxes—North Sea corporation tax
and petroleum revenue tax - meant that little of the additional
revenue from higher oil prices had yet fed through to the monthly
public finance data at the time of the Pre-Budget Report. Receipts
data for November, December and January supports the view in the
Pre-Budget Report that receipts growth would accelerate during
the remainder of this financial year.
Receipts growth in 2005-06 should benefit from the
continued period of relatively strong UK output growth. The increase
in the ratio is also due to the recovery in receipts arising from
financial company profits and the normal fiscal forecasting convention
for the treatment of fiscal drag.
The Government will continue to monitor developments
in tax receipts.
13. We would welcome a clearer explanation of
how the Treasury forecasts the cyclical components of tax receipts
and how this has influenced their current projections. This should
include how the Treasury estimates the long-term averages of components
such as corporation tax and financial company profits, what factors
it bases these estimates on and how quickly it expects them to
return to their long-run averages. (Paragraph 38)
Corporation tax is a particularly cyclical tax and
has varied between 1.6% of GDP and 4% of GDP over the last 25
years. With the overall economy a little below trend and financial
company profits as a proportion of GDP below its long term trend,
there is scope for a sizeable rebound in corporation tax receipts,
especially as a larger than expected backlog of unused losses
or allowances may have temporarily depressed taxable profits.
14. We recognise the Treasury's statement that
it bases its forecasts on cautious assumptions. However, following
a prudent start in the run up to the year 2000, we note that the
Treasury has now over-estimated the growth in tax receipts in
four consecutive years. Many other countries and outside forecasters
have also over-estimated the growth of tax receipts during the
world economic downturn.
However, given that the economic recovery is now
under way it is important that official forecasts for tax receipts
are accurately constructed and avoid an over-optimistic trend.
(Paragraph 41)
The 2004 End of year fiscal report noted that the
one and two year ahead net borrowing forecasts made since the
introduction of the new framework have been on average cautious.
This was not the case before the new framework was introduced.
In addition, the Treasury's forecast differences have tended to
be smaller than those of the OECD, IMF and the European Commission.
When considering the Government's forecasting record,
it is better to focus on an aggregate measure of the public finances
such as net borrowing.
We welcome the Committee's acknowledgement that the
Treasury bases its forecasts on cautious assumptions. A key reason
for using cautious assumptions is to guard against assuming an
overoptimistic trend in receipts.
Corporation tax
15. We ask the Treasury to review the assumption
that financial company profits grow as a share of GDP, given the
contrast with the assumption used for the FTSE All-Share index
which is that it grows only in line with GDP. We also ask the
Treasury to publish data on the backlog of unused losses and allowances
in the financial sector which the Treasury notes have "temporarily
depressed taxable profits". (Paragraph 44)
The Treasury regularly reviews and monitors forecasting
assumptions. The Pre-Budget Report noted that one of the factors
which may explain the lower than anticipated growth in corporation
tax receipts from the financial sector was that companies offset
higher profits against past losses or capital allowances to a
greater degree than expected. A detailed explanation of recent
receipts will have to await the 2004 tax returns and will not
be available until 2006. Detailed statistics on corporation tax
receipts up to 2002 is available on www.inlandrevenue.gov.uk/stats/corporate_tax/menu.htm.
16. There are widespread doubts amongst experts
and outside commentators about the Treasury's corporation tax
forecasts. While it is true that corporation tax receipts have
grown by over 30% in some previous years, this has typically taken
place when the economy was recovering strongly, or where there
was a significant stock market boom. To reinforce the credibility
of the corporation tax forecasts, we recommend that the Treasury
publishes a breakdown of its corporation tax forecast, differentiating
between the various sub-sectors involved. In the absence of further
information, the evidence we have received suggests that the balance
of risks to the Treasury's corporation tax forecast is to the
downside. (Paragraph 48)
The current forecasting methodology for non-North
Sea corporation tax has separate models for corporation tax accruals
from different sectors, including industrial and commercial companies,
life assurance companies and for financial companies (excluding
life assurance). However, the calculation of corporation tax receipts
(corporation tax accruals adjusted for repayments, Budget measures,
late payments etc) is done at an aggregated level. A sectoral
breakdown of corporation tax receipts is not presently available,
although the Government will continue to investigate how it can
provide more detail about its corporation tax forecasts.
Expenditure: current expenditure, end-year flexibility,
investment spending, local services
17. The Treasury's forecast for central government
current expenditure in 2004-05 requires substantial spending restraint
by government departments over the last four months of the financial
year. This illustrates the importance of the recent reforms aimed
at ensuring a smoother profile of spending over the course of
the year. This is an area we will expect to examine further at
the time of the 2005 Budget. (Paragraph 51)
The Government concurs with the committee's assessment
of the importance of recent reforms in ensuring a smoother profile
of spending over the year. Monthly outturn data is affected by
a range of factors and the data is still subject to revision,
but it is reasonable to expect a more stable pattern of spending
following the introduction of accruals accounting, which records
spending when activity takes place, and the End Year Flexibility
scheme, which prevents the year-end surges of expenditure which
occurred under previous budgeting regimes. However, the profile
of spending across the year will not flatten completely as the
timing of some payments—for example seasonal payments—will
continue to be fixed in a particular period.
When the PBR was published, the expenditure growth
rate was expected to moderate over the remainder of the year.
Current expenditure in December confirmed this expectation, with
the monthly outturn 1.6% lower than in the previous year.
This pattern has resulted in 75% of total spending
occurring in the first 9 months of the year, with 25% expected
in the final 3 months. This profile is broadly in line with the
normal pattern of spending in previous years: 75% of spend occurred
in the first 9 months of 2003-04, equal to the average since 1998-99.
18. We welcome the continued use of the End-year
flexibility arrangements and the move away from potentially wasteful
year-end surges in spending. We note, however, that the build
up of EYF entitlement by departments has reached the point where
it poses at least a theoretical risk, should there be major calls
on their entitlements across departments, to the achievement of
the Government's fiscal targets as the end of the cycle draws
near and the available margin is small. The Treasury should make
clear what arrangements are in place to ensure that this will
not happen. It would also assist transparency and debate if the
figures for outstanding entitlement for each department (following
drawdowns in the Winter and Spring supplementary estimates) were
updated and published at the time of the Pre-Budget Report and
the Budget. (Paragraph 54)
In the past, in part due to the positive incentives
the EYF regime places upon departments, underspending elsewhere
in government has more than offset take-up of EYF entitlements
by departments, leading to net increases in EYF stocks.
Looking forward, departments have an interest in
maintaining reasonable contingency levels of EYF entitlement to
allow sensible management of spend in future years, and so there
is no realistic prospect of full drawing of outstanding EYF entitlements.
In practice, therefore, any net drawdown of EYF entitlements would
be significantly less than the total EYF stock. HM Treasury regularly
reviews plans for DEL spending and EYF drawdown with departments
to ensure that public services are delivered within the fiscal
rules.
The stock of department's outstanding EYF entitlements
is published each year in the Public Expenditure Outturn White
Paper (PEOWP), and drawdown from that stock is published in Winter
and Spring Supplementary Estimates. Actual EYF entitlements available
to departments depend on outturn figures for underspending across
departmental budgets. Outturn data is subject to revision and
so firm EYF entitlement figures are only available at publication
of the PEOWP.
19. This Committee attaches the highest possible
importance to ensuring that the Government's plans for historically
large increases in public sector investment are delivered efficiently.
However, despite recent improvements it is apparent that some
departments, local authorities and public corporations are still
failing to deliver capital spending at the planned level. We first
identified this problem during our 2003 Pre-Budget Report inquiry
and the Committee is disappointed that it has not yet been resolved.
It seems inconsistent to say that reforms will enable departments
to manage current spending more smoothly throughout the year but
yet rely on a very large surge in public sector net investment
in the final quarter to meet the forecast. We recommend that the
Treasury take further action to improve the management and delivery
of public sector investment and to monitor its effectiveness closely.
(Paragraph 58)
The Government is committed to delivering and sustaining
a step-change in public sector investment to overturn years of
under-investment in essential public services and has set ambitious
plans to achieve this. Within central government, outturn data
for capital DEL has tended to come in close to the relevant Budget
forecasts (as set out in tables 4.2 and 4.3 of the 2004 End of
Year Fiscal Report). Where there have been capital underspends,
departments are able to carry this forward through End-Year Flexibility
entitlements. Across the public sector as a whole, investment
though local authorities and public corporations has tended to
come in under forecast—although local government/public
corporation investment figures are still very provisional and
subject to revision—which will reflect devolved decisions
on priorities.
The Government is constantly focused on improving
delivery of capital programmes to reduce delays and promote best
practice—but it is important to focus on quality as well
as quantity of investment. Current initiatives to support the
delivery of public sector investment include taking forward the
recommendations of the Lyons Review asset management, implementing
the Kelly Report 'Increasing Competition and Improving Long Term
Capacity Planning in the Government Market Place' to improve the
management of key markets and continued steps to improve departmental
programme and project management.
20. We ask the Treasury to provide us with a
comprehensive note outlining the sources, with a breakdown, of
the £512m re-allocated from central programmes to local authorities.
We also ask for more detail of the areas where reduced ring-fencing
and increased charges will reduce the pressures on council tax
by £1/3bn. (Paragraph 60)
As the Chancellor of the Exchequer set out in his
evidence to the Treasury Select Committee on 16 December 2004,
full departmental spending allocations will be available through
the publication of the Main Supply Estimates, which take place
in due course.
21. We welcome the announcement that in 2005
there will be an additional £50 payment to pensioners over
70 to help with council tax and other living expenses, but the
level of this payment should be reviewed at the time of the Budget.
(Paragraph 61)
The Government is committed to its vision of guaranteeing
security in old age and ensuring that pensioners share in rising
national prosperity. The £50 payment to the over 70s and
the £100 payment made in 2004 is intended to help our older
pensioners meet the cost of council tax and other living expenses.
Council Tax Benefit is available to help those on lowest incomes
meet their council tax bills. In addition, over-60 households
qualify for the £200 winter fuel payment; for over-80 households
this payment is £300.
The Budget announced an additional payment guaranteeing
that council tax paying households with someone over 65 will receive
£200 towards the cost of council tax.
A range of Government policies aim to make utility
bills more affordable for low income and vulnerable customers
by improving energy efficiency, tackling fuel poverty and providing
financial support with fuel bills. The Fuel Poverty Action Plan,
published in November 2004, set out how the Government is working
to tackle fuel poverty and extend the Warm Front scheme. Cold
Weather Payments provide extra help with heating costs to vulnerable
people during periods of very cold weather in their local area.
Reporting issues; the National Audit Office
22. We commend the Treasury on the publication
of the End of year fiscal report. It could usefully be expanded
to provide updates on certain other data which would help debate
and scrutiny. (Paragraph 63)
The Government welcomes the Committee's commendation
of the End of year fiscal report, and will continue to review
its coverage and consider including other data where that could
usefully add to transparency.
23. We recommend that the Treasury provide more
detail on the process by which key assumptions are referred to
the National Audit Office, including how they decide which assumptions
to refer, and how much notice they provide to the NAO of the assumptions
that are due for audit. We note the comment of the IMF that it
would be worth considering whether such outside scrutiny of other
key variables would enhance transparency and credibility. This
is an issue to which the Committee will be returning. (Paragraph
66)
The Code for Fiscal Stability requires that the Government
invites the Comptroller and Auditor General to audit changes in
key assumptions and conventions underpinning the fiscal projections.
The 11 assumptions currently audited are described in Box B2 of
the 2004 Pre-Budget Report. In addition, the Government asks the
Comptroller and Auditor General to audit significant 'spend to
save' compliance packages where these principally affect operational
activity rather than requiring legislative change.
HM Treasury is transparent about its fiscal projections
and the assumptions underpinning them, including the assumptions
audited by the NAO. It welcomes the scrutiny of independent experts
and international organisations.
Departmental efficiency savings ('Gershon' savings)
24. We are surprised that advice from the NAO
and the Audit Commission on each [department's] Efficiency Technical
Note does not appear to have been provided directly to the department
concerned. It is not clear what the role of the central scrutiny
panel was in the process, but we consider that its existence sits
uneasily with the evidence we received that it is departments
that are accountable for this process and that individual efficiency
proposals are not a matter for the Treasury to take a view on.
(Paragraph 73)
The advice provided by the NAO and the Audit Commission
(AC) was passed directly to departments following meetings of
the scrutiny panel.
The scrutiny panel—made up of the NAO, the
Audit Commission, the Treasury and the OGC Efficiency Team—discussed
departments' Efficiency Technical Notes (ETNs) and the advice
of the NAO and the Audit Commission. The panel helped to ensure
that comments were coordinated and communicated clearly to departments.
Departments were then responsible for taking this advice into
account before publishing their ETNs.
25. It is not possible under the procedure adopted
to determine what advice was provided by the National Audit Office
and the Audit Commission nor the extent to which this was acted
upon by departments. We welcome the Chancellor's assurance that
this is an evolving process and that the National Audit Office
and the Audit Commission will be asked to provide further advice.
We recommend that this advice and each department's response be
published. (Paragraph 74)
The measurement of efficiency is complex and in many
areas the Government is breaking new ground. We have stated that
further work is needed in some difficult areas, building on the
advice of the NAO and Audit Commission. We are in discussion
with the National Audit Office and the Audit Commission about
their future role in efficiency measurement. We remain unpersuaded
of the benefit in of publishing the NAO/AC's advice as it was
based on early and developing drafts.
26. Given the size and importance of the overall
efficiency programme, we believe consolidated progress reports
[across government] are required. We therefore welcome the Chancellor's
undertaking to provide further details in the Budget and we recommend
that this become a regular feature of forthcoming budget and pre-budget
reports. (Paragraph 75)
The Chancellor provided an update on the progress
of the efficiency programme in the Pre-Budget Report 2004 and
will provide a further update in Budget 2005. Furthermore, departments
will be required to publish progress in their departmental reports.
The Treasury will report overall progress on efficiency as part
of its reporting against its SR2004 PSA target 9.
Savings and welfare: ISAs, Saving Gateway, financial
inclusion, childcare
27. The Committee welcomes the Government's clear
statement that it remains committed to ISAs, a commitment which
is in accord with our previous recommendations in this area. But
given the lengthy public debate about the future of ISAs we do
not see that any useful purpose will be served by more consultations
on extending the limits on ISA savings. A clear statement of intent
in the Pre-Budget Report to keep the current higher ISA limits
would have been preferable. (Paragraph 76)
The Government first introduced the Individual Saving
Account (ISA) in 1999 with two main objectives: to develop and
extend the savings habit; and to ensure that tax relief on savings
is fairly distributed. The subscription limits were therefore
set with the objectives of the scheme in mind.
The maximum investment limit was set at £5000,
with a maximum of £1000 in cash savings. But for the first
year these were increased to £7000 and £3000 respectively
to encourage take-up and smooth the transition to the ISA. These
higher limits were subsequently retained until 6 April 2006.
Budget 2005 announced the extension of the existing
higher Individual Savings Accounts limits to 2010.
28. The Committee is encouraged to hear that
the initial evidence suggests that the Saving Gateway has been
successful in encouraging new, sustainable saving among the less
affluent. Given the importance of encouraging saving among the
less affluent we look forward to the Government moving as quickly
as possible, subject to evaluation of the initiatives, to national
availability of the Saving Gateway scheme. (Paragraph 77)
In addition to tax relief, the Government is using
cash contributions to incentivise saving, to provide a more understandable,
transparent and equitable framework of support for savers, and
greater incentives for those on low incomes who benefit less,
or not at all, from tax relief.
The 2004 Pre-Budget Report announced a new, larger,
£15 million Saving Gateway pilot scheme to run from 2005.
The pilot will test alternative match rates, different monthly
contribution limits, the effect of an initial endowment, and the
support of a wider range of community financial education bodies.
It will also be made available to a wider range of income groups
than the first pilot. The pilot will inform the development of
matching as a central pillar in the Government's strategy for
promoting saving and asset ownership.
29. The Committee welcomes the funding assistance
the Financial Inclusion Fund will give to the provision of basic
financial advice to consumers and looks forward to rapid progress
on tackling financial exclusion by the Financial Inclusion Taskforce.
But the problems created by financial exclusion and poor access
to basic advice when consumers get into debt or other financial
difficulties are entrenched. We reiterate our earlier recommendation
that the possibility of securing additional funding from the financial
services industry to support the activities of non-profit organisations
in this area should continue to be pursued. (Paragraph 79)
The Pre-Budget Report document 'Promoting financial
inclusion' announced that the Financial Inclusion Fund would be
£120 million over three years. Primarily this Fund will support
the Government's aims to increase access to forms of affordable
credit and to see a significant increase in the capacity of free
face-to-face money advice.
'Promoting financial inclusion' recognises the significant
contribution of the financial services industry in supporting
not-for-profit organisations delivering access to affordable credit
and money advice. The Government will continue to work with the
financial services industry, the not-for-profit sector and other
interested parties.
The Government will invite the Financial Inclusion
Taskforce to consider ways in which the capacity and skills of
volunteers and staff within the third sector lenders can be enhanced,
including promoting the way in which corporates can play a role
in providing assistance.
The Government will also consult stakeholders on
the case for, and practicalities of, extending the Community Investment
Tax Relief to investments in 'community development finance institutions'
(CDFIs) personal lending activities. The Community Investment
Tax Relief has played a valuable role in incentivising investment
from the private sector, into CDFIs enterprise lending since being
set up in 2002.
30. We welcome the indication by the Chancellor
that he is prepared to look further at the proposal to allow lenders
to apply for repayment to be made by deduction from benefit payments
in certain circumstances. (Paragraph 80)
The Government wants to ensure that those on low
incomes excluded from mainstream sources of credit and reliant
on high cost options, are able to access affordable loans. 'Promoting
financial inclusion' therefore sets out a series of measures to
increase the availability of affordable sources of credit.
One of the announcements made relates to exploring
commercial mechanisms that allow loans to be made to those on
low incomes, at lower rates of interest than found in the alternative
credit market. The aim would be to reduce some of the increased
costs and risks of lending to vulnerable groups. The Government
will work towards a scheme where, in certain circumstances, private
and third sector lenders could apply for repayment to be made
by deduction from benefit where normal repayment arrangements
have broken down.
This facility would be subject to criteria designed
to ensure that it is only available where loan products are appropriate.
31. The Committee welcomes the announced doubling
of the threshold above which savings will reduce working-age income
related welfare benefits. It would be helpful to have an indication
of how substantial the obstacles are (financial or otherwise)
standing in the way of both this and other measures designed to
help the less affluent in society being introduced earlier than
the proposed date of April 2006. (Paragraph 81)
The Government is committed to removing disincentives
for those on lower incomes to save. It has pledged to keep under
review the treatment of savings in income-related working age
benefits, so as not to penalise saving unfairly. Budget 2004 announced
that, from April 2006, the threshold above which savings begin
to reduce eligibility for Income Support, Jobseeker's Allowance,
Housing Benefit and Council Tax Benefit would be raised from £3,000
to £6,000. These changes to thresholds have substantial operational
impacts on the Department for Work and Pensions, its agencies
and Local Authorities who have to prioritise the necessary IT
changes alongside substantial existing programmes of modernisation.
The introduction of these changes from April 2006 will ensure
that the necessary administrative and IT systems are in place
and have been adequately tested and that staff have been given
sufficient time to be trained in new procedures.
32. The Government's objective of guaranteeing
affordable, high quality childcare for all those who need it is
welcome and it is important that the expansion of childcare provision
is adequately funded if the parents are to be assured of the quality
of the care their children will receive. (Paragraph 83)
The Government welcomes the Committee's conclusion
on childcare. The Government recognises the Committee's concern
that the expansion of childcare provision is adequately funded
to ensure parents of the quality of care. Every commitment in
the Choice for parents, the best start for children: a ten
year strategy for childcare is affordable and has been funded
in full.?
How fast and how far progress towards the long-term goals can
be made is dependent on the availability of resources, the increase
in childcare demand, the speed of workforce change, improvements
to delivery and the experience of local implementation. But the
Government is clear about the direction of travel and clear about
the social and economic benefits of this policy and investment
in childcare. Quality childcare is vital to the long term development
of the country and will help boost employment, tackle child poverty
and help child development.
Tax avoidance
33. We note and welcome the evidence that the
new tax avoidance disclosure regime put in place at the time of
the 2004 Budget is working well and is having an effect both in
terms of allowing the revenue departments to close off avoidance
schemes earlier than was the case previously and in having a measure
of disincentive effect on the tax avoidance industry. Without
wishing to challenge the legitimate right of individuals and businesses
to manage their tax affairs in the most effective way for their
purposes, we regard it as an equally legitimate objective for
the government to seek to protect the tax revenue against inappropriate
avoidance schemes. (Paragraph 88)
The Government welcomes the Committee's positive
assessment of the introduction of the disclosure rules for direct
taxes and VAT. The Government has always made clear its determination
to tackle tax avoidance and the disclosure rules are achieving
their effect of allowing earlier and more targeted action against
avoidance schemes.
34. The Paymaster General's announcement that
future legislation to outlaw income/NIC avoidance schemes not
yet identified will be backdated to 2 December 2004 raises significant
issues. We support the Government's determination to tackle unreasonable
tax avoidance schemes, which can have the effect of penalising
the general public, but we recognise that some experts have indicated
that their approach could lead to challenge in the courts. This
can only finally be tested as and when the Government introduces
any legislation on the basis of the announcement. It would be
helpful if, at this stage, and without jeopardising their position,
the Inland Revenue were to publish a paper setting out their thinking
on the principles which will guide future decisions as to whether
a scheme is reckoned to be within or outside the terms of the
announcement. (Paragraph 93)
The Government welcomes the Committee's comments
on the Paymaster General's statement on avoidance of income tax
and National Insurance Contributions on rewards from employment.
The Government believes that the statement itself sets out the
principles and context and encourages individuals, employers and
their advisors to read the whole statement and its context to
understand how it might apply to them. Parliament will of course
have the usual opportunity to debate in full any future proposals
on legislation in this area.
35. We welcome the Government's decision to reconsider
its plans for the introduction of some of the proposed changes
for taxation of life assurance companies, and look forward to
a full consultation process in line with the principles set out
in the Code for Fiscal Stability. (Paragraph 94)
The Government welcomes the Committee's comments.
Consultation is ongoing with industry representative bodies,
insurance companies and professional advisers who specialise in
this field to ensure that the final form of the legislation more
accurately meets Ministers' policy objectives.
HM Treasury
18 March 2005
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