Appendix: Government response
The Government notes the conclusions of the Treasury
Committee's Report on the 2006 Budget.
ENERGY PRICES
1. The rise in energy prices
appears, so far, to have had muted second-round effects. We note
the Government's proposed actions to encourage an "independent
investigation" into European gas markets (and energy markets
in general) and we recommend that the Government provide an update
on the outcome in the 2006 Pre-Budget Report. (Paragraph 7)
The Government is keenly aware of the impact of high
energy prices and the pressures they can impose and believes that
market liberalisation will help reduce upward pressure on energy
prices. The Government strongly supports the independent investigation
of the EU's energy markets, and will continue to encourage the
European Commission to act against anti-competitive practices
and fully support the recent steps taken as part of their investigation
into European electricity and gas markets. The Government will
also work with other Member States to support the proposals to
improve competition contained within the Commission's recent Energy
Green Paper. We note the request to provide an update on this
area in the 2006 Pre-Budget Report.
THE OUTPUT GAP
2. There are some differences
between the Treasury's forecast for the size of the output gap
going forward, and the forecasts of independent observers and
some members of the Bank of England Monetary Policy Committee.
We note that the concept of the output gap has significant, and
possibly insuperable, measurement and definitional problems, particularly
given the growing economic importance of migration and its potential
influence on the output gap, but we recommend that the Treasury
publish a technical note on its methodology for measuring the
output gap. (Paragraph 10)
Budget 2006 acknowledged the uncertainty regarding
the magnitude of the current output gap (paragraphs B.46-51 in
Chapter B of the Financial Statement and Budget Report); and the
2005 Pre-Budget Report included a more detailed discussion of
the uncertainties (paragraphs A.45-51). The Treasury's methodology
for measuring the output gap has been set out in a number of publications,
most recently in the Treasury Paper Evidence on the UK economic
cycle (July 2005). This paper also explained and discussed
alternative approaches. To ensure further transparency of the
Treasury's approach, a Treasury paper Technical Note on Cyclical
Indicators was published alongside the 2005 Pre-Budget Report.
CONSUMER SPENDING
3. While the forecasts of the Budget do not suggest
that consumer spending growth will reach the previously high levels
seen in the recent past, several outside observers note significant
downside risks to these forecasts. We recommend that the Treasury
provide all necessary assistance to the ONS in its task of understanding
and measuring consumer spending, such as on services rather than
retail sales, to help improve the quality of consumer spending
forecasts. (Paragraph 13)
The Treasury's view on the outlook for consumer spending
in set out in paragraph B.86 of the FSBR 2006.
The latest independent forecasts for private consumption
in 2006 and 2007 are within the Budget forecast range.
Average absolute errors on Treasury forecasts are
presented in Table B9 of FSBR 2006 (page 247) and show the average
error on household consumption forecast over the past ten years
has been a little below that of all other main GDP expenditure
components.
Improvements to early (quarterly) estimates of consumer
spending will follow from the national accounts modernisation
programme, when the various sources of data on the supply and
use of goods and services will be reconciled at a detailed level,
on a quarterly basis.
THE LABOUR MARKET AND MIGRATION
4. We note the recent slight weakening in the
labour market, and recommend that the Treasury monitor the situation
closely. We also note the recent publication of research by the
Department for Work and Pensions into migration effects of people
moving into the United Kingdom from the new European Union countries
and the Home Secretary's statement on a points-based immigration
system. However, we recommend that the Government now undertake
a more wide-ranging study of the effects of all migration, both
high- and low-skilled, looking at areas such as wages, productivity,
business investment and the effect on aggregate labour supply
overall. (Paragraph 16)
The Government continues to conduct research into
the effects of migration. As part of its ongoing assessment of
the UK economy, the Treasury closely analyses developments in
the UK labour market and their wider economic implications. The
Treasury is also looking at the trends of demographic and socio-economic
change and their implication for the decade ahead, in the Comprehensive
Spending Review.
5. We welcome the moves in the Budget to encourage
a higher rate of female labour participation, but note that these
only form part of the way in which the Government will be expected
to respond to the recommendations in the report of the Women in
Work Commission. (Paragraph 17)
The Government has welcomed the Women and Work Commission's
report and is currently considering its response to the recommendations.
The Government has committed to producing an action plan within
six months.
PRODUCTIVITY
6. We note the closing of the productivity gap
(on certain measures) with international competitors. However,
we also note the debate on the productivity figures, and recommend
that the Treasury monitor those figures closely to ascertain the
effect of labour hoarding. We also note the work being done to
improve the public sector productivity figures, and recommend
that the Treasury and the ONS ensure that there is significant
public consultation before the new official statistical standards
are disseminated. (Paragraph 20)
The Government welcomes the Committee's comments
on the relatively strong productivity performance of the UK economy.
As set out in Budget 2006 and in Productivity
in the UK 6: Progress and new evidence, the cyclical slowing
in productivity growth may in part reflect labour hoarding. The
Treasury will continue to monitor productivity figures closely
and will include an updated assessment in the 2006 Pre-Budget
Report.
ONS are currently planning a series of public consultation
seminars, starting in summer 2006, to debate proposed methodological
improvements for measuring public service performance.
The consultations will be based on developments first
proposed in the UK Centre for the Measurement of Government Activity's
Public Service Productivity articles. The aim is to ensure that
this work is made available for, and benefits from, as wide a
consultation as is possible with experts in the field—analysts
and practitioners.
The key areas for consultation include general methodological
issues that impact across all of the public services and specific
issues for individual public services, such as education and health.
ONS has developed a principled framework for these consultations,
which complement the Cabinet Office Guidelines. The consultation
process will last at least three months in accordance with this
best practice.
BUSINESS INVESTMENT
7. The statistics on business investment are prone
to revision, and may also under-report investment. We recommend
that the Treasury, in conjunction with the Bank of England as
a prime user of these statistics, work with the Office of National
Statistics to refine both the methodology and definitions of the
business investment statistics, especially given the greater proportion
of service sector activity in the United Kingdom. We further recommend
that the Treasury continue to monitor the performance of business
investment (including any effects from under-reporting as a result
of weaknesses in the official statistics), including by international
comparisons. (Paragraph 25)
As set out in the current Framework for National
Statistics, the National Statistician has responsibility for the
methodology and definition of official statistics, including those
on business investment. Paragraph 4.3.4 of the Framework document
(http://www.hm-treasury.gov.uk./media/724/BD/78.pdf) defines this
role.
Early estimates of business investment are provisional
and subject to revision when fuller information is available.
Revisions are constantly monitored and analysed to inform the
compilation of the national accounts; and results are published
to inform users of the historic reliability of the estimates.
The ONS has a number of initiatives underway to improve the coherence
and coverage of business investment estimates. Improvements to
coherence will follow from the national accounts modernisation
programme; estimates of business investment will be based on a
wider range of sources with assessments of coherence at a detailed
level built in to all routine processes. Improvements to coverage
will follow from the ONS's investigation into the under-recording
of software investment in the national accounts. The results of
this work will be incorporated into the national accounts in 2007.
In addition the feasibility of the measurement of 'intangibles'
such as training and R&D is being investigated.
EXTERNAL DEMAND AND UNITED KINGDOM TRADE
8. Should the Treasury's forecast of the zero
input to GDP growth from net trade be achieved, we recognise that
this would be a positive break from the recent trend. (Paragraph
26)
As noted in Chapter B of the FSBR 2006, net trade
is forecast to make a broadly neutral contribution to GDP growth
over the forecast horizon. The latest average of independent forecasts
also implies a neutral contribution from net trade to UK GDP growth
in both 2006 and 2007.
Paragraphs B97 to B105 of the FSBR explain recent
trends in UK trade. The drag exerted on UK GDP growth from net
trade in recent years reflects a number of factors, not least
strong UK demand growth relative to that in the UK's largest export
market, the Euro area. Paragraph B104 and table B7 of the FSBR
set out the Government's forecasts for export and import volume
growth and net trade.
THE GOLDEN RULE
9. We note the Treasury's projections which show
that the Government is on course to meet the golden rule after
the end of this economic cycle. We remain concerned that fiscal
policy towards the end of a cycle may be constrained unnecessarily
by spending levels or data classifications from, say, 12 years
earlier, at the start of the cycle. In particular, revisions to
data might be held to require sudden and undesirable changes to
tax or spending in the final years of the cycle for the sole purpose
of meeting the mechanical calculation implicit in the golden rule.
We remain of the view that it would be appropriate to review the
fiscal rules now such that any improved formulation of the rule
could be introduced at the start of the next cycle. (Paragraph
38)
As explained in the Government's response to the
Committee's Report on the 2005 Pre-Budget Report, fiscal
policy is set in a forward-looking manner. Budget 2006 included
extensive projections for key fiscal aggregates. On the golden
rule, Budget 2006 shows that the average surplus on the current
budget will be 0.7% of GDP over the years from 2008-09 to 2010-11.
So, at this early stage and on the basis of cautious assumptions,
the Government is on course to meet the golden rule in the next
economic cycle.
The golden rule ensures fairness for future taxpayers
by requiring that current spending, including the consumption
of fixed assets, be financed by current revenue over the economic
cycle. Performance against the golden rule provides a clear yardstick
by which fiscal policy can be monitored. The golden rule has worked
to ensure sound public finances: the surplus on the current budget
over the current economic cycle is projected to average 0.1% of
GDP, as shown in Budget 2006. That compares with an average deficit
of 1.9% of GDP over the last economic cycle from 1986-87 to 1997-98.
SUSTAINABLE INVESTMENT, LIABILITIES AND WHOLE OF
GOVERNMENT ACCOUNTS
10. As we noted in our Report on the 2005 Pre-Budget
Report, while criticisms of the arbitrary level of the limit imposed
by the sustainable investment rule have some merit, these do not
outweigh the essential role that the rule plays in ensuring that
Government expenditure and investment today do not lead to an
unfair or unsustainable burden on future generations. However,
looking forward, the sustainable investment rule will need to
be considered in the context of the Government's balance sheet
to be prepared under the Whole of Government Accounts (WGA) programme,
which is discussed further below. (Paragraph 45)
The Government agrees that the sustainable investment
rule, alongside the golden rule, plays an essential role in ensuring
sound public finances in the medium term, which is the primary
objective of the Government's fiscal policy.
Performance against the sustainable investment rule
is measured by the level of public sector net debt as a percentage
of GDP, which will be maintained below 40% in each and every year
of the current economic cycle.
As set out in Delivering the benefits of accruals
accounting for the whole public sector, published alongside
the 2005 Pre-Budget Report, the Whole of Government Accounts programme
is providing an additional and valuable perspective on the public
finances. The Government is continuing to work on the development
of WGA.
11. Future public sector pensions can be paid
from future tax revenues and therefore long-term forecasts of
cash payments are directly relevant when considering fiscal sustainability.
We recommend that the estimated present value of the Government's
public sector pension liabilities today, which is useful for the
purposes of comparing the pensions provision for public sector
employees with that for employees in the private sector, be published
regularly. (Paragraph 50)
Estimates of the present value of public sector pension
liabilities provide a snapshot of the stock value of liabilities
accrued at a particular point in time. They therefore give only
a partial picture of the ongoing cost to government. That is why
the Government publishes long-term projections of the flow of
cash payments for public sector pensions, which include not only
payments accrued to date by current public sector employees but
also, crucially, future accruals to current and future public
sector employees. The latest estimates were published in the 2005
Long-term public finance report and show that public sector
pension commitments are fully consistent with sustainable public
finances over the long term.
The Government also recognises that the total unfunded
public service pension liability and the reasons for changes in
it in the course of a year are issues in which there is an interest.
This is why as well as publishing projections of payments by the
unfunded schemes in its long-term public finance reports, the
Treasury has regularly published the latest estimate of the total
unfunded liability along with a detailed technical note on how
it had changed during the preceding financial year.
12. The publication of WGA is likely broadly to
coincide with the end of the current economic cycle, although
estimates in WGA may be volatile over the first few sets of accounts
as valuation issues are ironed out. However, once any valuation
concerns have been resolved, it may be timely to revisit the sustainable
investment rule to ensure that estimates of public sector liabilities
included in the Government's accounts are borne in mind in any
review of the sustainable investment rule. (Paragraph 51)
As set out in Delivering the benefits of accruals
accounting for the whole public sector, published alongside
the 2005 Pre-Budget Report, the Whole of Government Accounts programme
is providing an additional and valuable perspective on the public
finances. The Government is continuing to work on the development
of WGA.
THE COMPREHENSIVE SPENDING REVIEW
13. A full understanding of the costs associated
with policy options arising from the recent Report of the Parliamentary
Ombudsman on final salary occupational pensions is essential to
a proper public and parliamentary debate on that report in the
context of the Comprehensive Spending Review. We recommend that
the Government publish estimates of the cost of various options
for compensating affected pensioners in net present value terms
as part of the Department for Work and Pensions' further reply
to the Report of the Parliamentary Ombudsman, including options
for expanding the Financial Assistance Scheme. (Paragraph 60)
John Hutton, Secretary of State, Department for Work
and Pensions has announced that he will publish a full response
to the Ombudsman's report; this response will include an explanation
of the estimated cost of meeting the Ombudsman's proposals.
14. It is important that the Government clarifies
at an early stage whether the "modernisation fund" proposed
as part of the spending settlements for the Department for Work
and Pensions, HM Revenue and Customs, the Treasury and the Cabinet
Office is included within the new totals for those departments
or is to be accounted for separately and provides a breakdown
of the proposed expenditure between the departments. (Paragraph
65)
Modernisation funding sits outside these departments'
settlements and is available for departments to help meet transitional
costs. Allocation of funding will depend on the approval by HM
Treasury of departments' applications for access to the fund.
The fund is designed to offer flexibility to departments in their
planning. Because the modernisation fund will only be made available
on application to HM Treasury, no presumption has been made about
the years in which the fund will be drawn down, and the exact
proportion of the fund that will eventually be spent by each department
is not fixed. The fund is therefore not included in departments'
Departmental Expenditure Limit (DEL) totals.
15. The early announcement of a decision on the
overall spending levels of the Home Office provides an opportunity
to focus on the distribution of expenditure within that total
and the savings to be expected in specified areas of the Home
Office budget, although it does also constrain the forthcoming
national debate on spending priorities in relation to services
funded through the Home Office. (Paragraph 66)
The Government agrees with the Committee that the
early Comprehensive Spending Review settlement for the Home Office
provides the long-term stability of funding that will enable the
Home Office to focus on delivering maximum value for money, improving
delivery, and ensuring they have the optimal distribution of expenditure
between their priorities. The national debate will inform this
process.
16. We welcome the Government's decision to initiate
a national debate as part of the Comprehensive Spending Review.
It is important that this debate is set in a context which enables
it to amount to an opportunity for full consideration of options
and priorities, rather then simply providing an opportunity for
departments to canvass for public support for their bids for increased
expenditure. In this context, it is vital that departmental select
committees of the House of Commons ensure that they are fully
engaged with the process. As a first step, we expect to hold an
initial inquiry on spending matters following the publication
of the report expected in mid-2006 on the spending challenges.
To assist with timely parliamentary scrutiny of matters arising
from that report, we urge the Government to ensure that this document
is published no later than the end of June 2006. (Paragraph 68)
The Government agrees that it will be important that
the national debate takes place in the context of realistic trade-offs
and questions about priorities, rather than simply about increased
expenditure. The Government will take full account of the need
for parliament to have time to debate the issues when determining
the timing of any report on spending challenges.
EFFICIENCY SAVINGS AND THE PUBLIC SECTOR WORKFORCE
17. We welcome the contribution made by the recent
National Audit Office study to understanding of the Efficiency
Programme. We also welcome the Treasury's commitment to work closely
with the National Audit Office on the issues identified in that
study. We continue to believe that public and parliamentary confidence
in the Programme, and in the effectiveness of the central coordinating
role played by the Office of Government Commerce, would be enhanced
by the provision of more information about measurement systems
and data in a single source in Red Books and Pre-Budget Reports.
We recommend that such documents contain further analysis of progress
of the Efficiency Programme as a whole, including an indication
of the proportions of the overall reported savings that are attributable
to central and local government and that are cashable and non-cashable,
as well as analysis of savings in relation to the themes identified
in the Gershon review—back office functions, transactional
services, procurement, policy, funding and regulation, and productive
time. We further recommend that such documents include an update
on verification, in cooperation with the National Audit Office,
of previously reported savings. (Paragraph 76)
The Government agrees that public and parliamentary
confidence in the Programme, and in the effectiveness of the central
coordination function of the OGC, is important. To this end, there
already exists a substantial amount of publicly available information
related to the efficiency programme.
Regarding measurement systems, departments already
set out their approach to measuring their efficiencies in their
Efficiency Technical Notes (ETNs), which were drawn up in consultation
with the NAO and refreshed in December 2005. In February, the
NAO noted that all ETNs had been improved.
Departments report on the progress of their efficiency
programmes twice yearly in their Departmental Reports and Autumn
Performance Reports. These provide the breakdowns of savings by
department that the Committee has previously requested. HMT guidance
to departments on reporting in their Departmental Reports states
that departments should provide breakdowns of their gains by cashable
and non-cashable efficiencies. The overall projection for cashable
and non-cashable gains in the programme is contained in the original
Gershon report.
Local authorities have already produced Annual Efficiency
Statements that set out the sectors where efficiency gains are
being achieved through locally delivered services, including the
cashable amount of these gains. The Statements are available on
the Department for Communities and Local Government website.
Regarding verification and NAO, the Budget announced
£6.4bn of provisional annual efficiencies. We are currently
working with departments, and with input from the NAO, to further
develop the verification procedures for reported efficiency gains.
18. We welcome the Government's determination
to embed the efficiency agenda as part of the process for spending
allocations during the Comprehensive Spending Review. We recommend
that the initial report as part of that Review to be published
in mid-2006 contain initial proposals for consultation on how
an Efficiency Programme for the period from April 2008 onwards
can be monitored and reported on. As part of such proposals, we
expect the Government to give consideration to ensuring that efficiency
projects are designed and measured using net as well as gross
savings in order that the investment necessary to secure efficiency
savings can be properly measured and assessed. (Paragraph 77)
The current efficiency programme is continuing to
have an impact, delivering significant efficiency savings across
government. For the Comprehensive Spending Review, the Government
will look to put in place an efficiency and value for money framework
that builds on the success of the current programme while seeking
to learn lessons and to make improvements where appropriate. There
are no specific proposals to put before the committee at this
stage, but we welcome the committee's views and will consider
these recommendations carefully.
19. We recommend that, in seeking to embed a culture
of efficiency in Government departments during the period covered
by the Comprehensive Spending Review, the Government places greater
emphasis on delivering and reporting on targets for continued
reductions in departmental administration budgets rather than
on workforce reductions attributed to efficiency projects. (Paragraph
79)
The Government will consider carefully the merits
of all aspects of the current efficiency programme, including
the case for continued headcount targets, as plans for the efficiency
framework for the Comprehensive Spending Review period are developed.
POVERTY AND THE TAX SYSTEM
20. The introduction of tax credits has contributed
to the reduction in the number of households facing the highest
marginal deduction rates of 70% or more from 740,000 before Budget
1998 to 240,000 under the 2006-07 system of tax and benefits.
However, the number of households facing marginal deduction rates
in the region of 60% to 70% has increased since 1997 and now appears
to have levelled off at around 1.5 million households. We recommend
that the Treasury analyse the characteristics and income distributions
of households facing marginal tax rates in the region of 60% to
70% and the extent to which these high marginal tax rates are
discouraging people from entering the workforce, from working
longer hours or from acquiring additional skills. We further recommend
that the Treasury publish the findings of such analysis at the
time of the 2006 Pre-Budget Report. (Paragraph 85)
Budget 2006 reaffirmed the Government's commitment
to making work pay by improving incentives to participate and
progress in the labour market. The Government welcomes the Committee's
interest in work incentives issues, and will continue to report
on policy and progress in making work pay in future Pre-Budget
and Budget Reports.
Research shows that the Government's policies, including
more generous in-work support through tax credits and the National
Minimum Wage, have made a significant contribution in encouraging
people to enter the workforce and raising employment rates for
disadvantaged groups such as lone parents. In addition, the lower
rate of withdrawal under tax credits compared with previous systems
of support has contributed to a reduction of around half a million
in the number of households facing the highest marginal deduction
rates of 70% or more.
Tackling the highest marginal withdrawal rates, and
hence the worst work disincentives, has involved withdrawing support
more slowly. However, this has the effect of extending support
to more families and so increasing the number of people facing
withdrawal rates of between 60% and 70% (although such calculations
take no account of the £25,000 disregard in tax credits which
significantly reduces shorter-term deduction rates). The trade-off
is inevitable and, in the Government's view, has been struck in
the right place. The Government recognises the importance of evaluation
of this and other issues surrounding the introduction of tax credits.
HM Revenue and Customs has actively promoted and published significant
research into the impacts of the Working Families Tax Credit.[1]
The evidence so far has not revealed any widespread adverse impacts
on average hours worked or on shorter-term wage progression. The
Government will continue to consider the longer-term impacts,
and to promote and to monitor the evidence base.
21. We recommend that, as part of its report,
due to be published in mid-2006 on the challenges for the Comprehensive
Spending Review, the Government set out in greater detail what
existing measures it has in place to meet its target of halving
child poverty by 2010-11, what additional measures it is considering,
and what assessment it has made of the current likelihood that
the 2010-11 target will be met. In particular, given that about
one million more children are defined as living in poverty after
housing costs are taken into account, as opposed to before housing
costs are taken into account, we recommend that the Government
set out how it intends to address further the issue of housing
costs in order to reduce levels of child poverty. (Paragraph 92)
The Government agrees that the Comprehensive Spending
Review will be an important opportunity to take stock of how it
is taking forward its child poverty agenda. The Government has
set out a comprehensive approach to tackling child poverty in
the Child Poverty Review, published in 2004, and continues to
keep progress under review. An analysis of progress against child
poverty and other social inclusion goals will be published later
this year as part of the Government's annual Opportunity for
All report. Since 1998-99, the Government has lifted 700,000
children out of poverty on both a before housing costs and an
after housing costs measure.
ENVIRONMENTAL TAXATION
22. We urge the Government to re-examine whether
it is making the fullest possible use of taxation instruments
as a mechanism to achieve the Government's environmental targets.
(Paragraph 99)
The Government is committed to protecting the environment
and recognises that this is essential if strong economic growth
is to be maintained in the long term. Taxation instruments are
one of several possible tools for making progress towards environmental
targets and, in its 1997 Statement of Intent on Environmental
Taxation and the Treasury's publication Tax and the Environment
in 2002, the Government highlighted that consideration of taxation
instruments should take place within a principled framework. In
particular, the decision to use taxation instruments to achieve
environmental aims take account of the impact on wider economic
and social objectives. Environmental taxes must also meet the
tests of good taxation.
Within this framework, the Government has introduced
a number of fiscal measures. To tackle climate change, the climate
change levy package (including CCL; climate change agreements;
enhanced capital allowances for energy-saving technologies) has
been the main instrument used to encourage businesses to improve
their energy efficiency. In the household sector, the Government
has introduced reduced VAT rates for energy-saving materials,
and launched the Landlords Energy Saving Allowance to correct
particular market failures in the private rented sector. In the
transport sector, the Government has introduced the Company Car
Tax, carried out significant reforms to Vehicle Excise Duty (VED),
and used duty differentials to encourage the development of environmentally-friendly
fuels. The Government has also used taxation instruments to tackle
other environmental issues, for instance making significant reforms
to the landfill tax and introducing the aggregates levy.
As part of a wider package of measures, these measures
have delivered significant environmental benefits. For instance,
the climate change levy package has delivered emissions savings
of over 28 million tonnes of carbon (MtC), which accounts for
a quarter of the total emissions reductions the UK would need
to achieve to meet its Kyoto commitment. Fuel duty and VED incentives
have also contributed significantly to reducing greenhouse gas
emissions. Landfill tax has contributed to a 28% fall in waste
disposed to landfill between 1997 and 2005, and the aggregates
levy has resulted in an increase in the production of recycled
aggregates in England by over 3 million tones between 2001 and
2003. This progress has been achieved whilst also supporting progress
towards wider economic and social objectives—in particular,
strong and stable economic growth. And within the principled framework,
the Government continues to look for ways to use the tax system
to achieve environmental aims.
23. In particular, we are puzzled by the Government's
justification of its decision to freeze air passenger duty (APD)
for the fifth year running. In the context of the challenges facing
the United Kingdom in reducing its greenhouse gas emissions, we
find the Government's attempt to justify freezing air passenger
duty (APD) for the fifth year running to be incoherent and unconvincing.
It is telling that the only aviation-specific taxation measure
contained in the Budget is to widen the scope of the European
APD to include Croatia—meaning that it is now £15 cheaper
to fly economy class to Croatia. (Paragraph 100)
Greenhouse gas emissions from aviation are making
a significant and growing contribution to climate change. The
Government recognises the importance of introducing a long-term,
evidence-based strategy for tackling emissions from aviation,
while noting that it is important to strike a balance between
environmental, social and economic concerns. The Government believes
that the best approach to tackling global aviation emissions is
an international one, and that the most effective method for ensuring
that aviation contributes to global climate stabilisation is to
include aviation in the EU Emissions Trading Scheme (EU ETS).
The Government also recognises that its focus on
including aviation in the EU ETS should not preclude further work
on other policy instruments, including APD, to tackle emissions
from aviation. But decisions on APD rates need to be considered
in the context of wider social and economic factors, particularly
the current volatile oil market.
All Member State and EU applicant countries are eligible
for the EEA rates of APD. Croatia, given its new status as an
applicant country, is now eligible for the EEA rate.
24. Consequently, we recommend that the Government
give serious consideration to increasing rates of APD. In the
context of the wider problem of climate change, we consider it
entirely inappropriate that, between 2000 and 2004, tax receipts
from APD should have fallen by 8% whilst passenger numbers have
risen by 35%. If this trend continues, the Government risks allowing
APD to become an ineffective policy instrument which does nothing
to recognise or address the contribution made by aviation to greenhouse
gas emissions. (Paragraph 101)
The Government believes that the best approach to
tackling global aviation emissions is an international one, and
that the most effective method for ensuring that aviation contributes
to global climate stabilisation is to include aviation in the
EU Emissions Trading Scheme (EU ETS).
However, the Government is aware that economic instruments,
including APD, may provide a route through which improved environmental
performance in the aviation sector can be incentivised and so
will continue to explore options for developing further such measures.
25. We accept the point made by both the Chancellor
of the Exchequer and officials that it is important to bring aviation
within the EU Emissions Trading Scheme (ETS). Time is running
out for aviation emissions to be subject to the ETS before 2012.
Consequently, for the Government to say that it is seeking to
bring aviation within the ETS is only a partial response to the
pressing issue of climate change currently facing the United Kingdom.
In addition to continuing to press for action at the EU level,
the Government must also act at a domestic level. We refer the
Government to its undertaking, in its Statement of intent on environmental
taxation, to "aim to reform the tax system to increase incentives
to reduce environmental damage". We recommend that the Government
give urgent consideration to how it can best use the tax system
to increase incentives to reduce the harmful environmental effects
of aviation. (Paragraph 102)
The Government believes that the most effective approach
to addressing the international challenge of aviation emissions
is through a trading scheme and is continuing to press for inclusion
of aviation in the EU ETS by 2008 or as soon as possible thereafter.
Inclusion of aviation in the ETS by 2008 is still a feasible timescale
and the Government will continue to push for this timetable to
be adopted in the EU. However, the Government is aware that economic
instruments, including APD, may also provide a route through which
improved environmental performance in the aviation sector can
be incentivised and so will continue to explore options for developing
further such measures.
CHANGES TO THE TAX TREATMENT OF TRUSTS
26. We are concerned that a legitimate measure
designed to reduce tax avoidance may penalise trusts established
to protect family members and consider that the issue merits further
consideration. We recommend that the Government provide detailed
information about how it has arrived at its estimate that the
new rules on the tax treatment of certain trusts will affect only
"a minority of a minority" of 100,000 discretionary
trusts. This information should be provided prior to consideration
in Committee of the House of Commons of Clause 57 of, and Schedule
20 to, the Finance Bill. (Paragraph 109)
Clause 157 and Schedule 20 of the Finance Bill bring
two types of trust—Accumulation & Maintenance (A&M)
trusts and Interest In Possession (IIP) trusts—into the
mainstream tax regime for discretionary trusts.
Under these rules trusts are subject to inheritance
tax charges on any value exceeding the IHT threshold, currently
£285,000 and rising to £325,000 in 2009, in addition
to the IHT threshold that applies to a person's estate when they
die. The assets someone might put in an A&M trust would exclude
their main home (this would be charged as a gift with a reservation).
Moreover, settlements made more than 7 years apart each benefit
from their own IHT threshold.
The Finance Bill provisions also mean that IIP trusts
in existence before Budget day are effectively grandfathered.
There is a 2-year window in which the beneficiary of such a trust
can be changed, and after this the trust will continue to be exempt
from IHT trust charges going forward.
Taking into account these transitional provisions
and the exemption for trusts with assets under the IHT threshold,
of an estimated 100,000 discretionary and A&M trusts in existence
before Budget day, only some are A&Ms and of these only some
are large enough to be potentially subject to an inheritance tax
charge under the new rules. The Government estimates there may
be a maximum of 20,000 A&M trusts in this position.
27. In future, we suggest that the Treasury considers
the benefits of undertaking appropriate consultation on measures
such as those changing the tax treatment of certain trusts, where
there is a strong argument that people have been quite properly
planning their affairs on the basis of explicit exemptions in
tax legislation. (Paragraph 110)
The Government always considers the benefits of undertaking
consultation and tries to make as much room as possible for advance
preparation ahead of changes to the tax regime. However this will
not always be possible, for example in cases where there is a
significant risk of large-scale forestalling.
THE PRIVATE FINANCE INITIATIVE
28. We note Professor Talbot's concerns at the
length, terms and scope of some PFI contracts. We welcome publication
of the Treasury document entitled PFI: strengthening long-term
partnerships at the time of the Budget, which examines
issues to which we will return in due course. (Paragraph 114)
The Government has noted the contributions made by
Professor Talbot and that the Committee welcomed the document
on PFI published alongside the Budget. As set out in 'PFI:
Strengthening Long-Term Partnerships', the Government has
identified areas where strengths in PFI procurement and contracts
could be built upon based on the experience gained from previous
projects. Contained within are recommendations relating to the
support of operational projects and improvement of flexibility
that address the issues raised by Professor Talbot. Further guidance
for procuring authorities is being developed to this end.
ADDITIONAL PAYMENTS TO PENSIONERS
29. We note that the rise in council tax over
2005-06 and 2006-07 is forecast to be the lowest since 1997. However,
it is important that the Government understands the effect of
rises in council tax and household utility bills on pensioners
and others on fixed incomes. We note that the Government does
not propose to repeat the £200 council tax rebate for pensioners.
The Government should take action to improve the take-up of council
tax benefit amongst pensioner households. We welcome the guarantee
of the higher winter fuel payment of £200 and £300 for
the over 80s for the rest of this Parliament, alongside the support
for insulation and central heating for pensioner households. In
the light of continued volatility in energy markets and announcements
of future gas and electricity price rises, we recommend that the
Government re-assess the situation at the time of the 2006 Pre-Budget
Report and take further action if necessary. (Paragraph 116)
The Government understands the pressure that increases
in bills can place on pensioners on fixed incomes. That is why
the 2005 Pre-Budget Report announced the extension of Winter Fuel
Payments—£200 for all pensioner households, £300
for a household with someone aged 80 or over—for the remainder
of this Parliament, at a cost of around £700m a year, as
well as support for insulation and central heating. Council Tax
Benefit is available for the poorest pensioners. The Government
has already taken steps to boost take-up of council tax benefit
amongst pensioner households eg through joining up claims for
Housing Benefit and Council Tax Benefit with those for Pension
Credit, and through the Pension Service's 'Local Service' that
offers full "benefit health checks" when visiting customers
in their homes, and the Government will continue to look at ways
of further improving take-up. As recommended, the Government will
continue to assess the need for further action as part of the
normal PBR and Budget cycle.
HM Treasury
3 July 2006
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