Examination of Witnesses (Questions 60
- 79)
WEDNESDAY 7 DECEMBER 2005 (Morning)
MR ROBERT
CHOTE, PROFESSOR
COLIN TALBOT,
MR JOHN
WHITING AND
MR MARTIN
WEALE
Q60 Chairman: Welcome. Could you
all introduce yourselves please?
Professor Talbot: Professor Colin
Talbot, Centre for Public Policy and Management in the Manchester
Business School.
Mr Chote: Robert Chote, Institute
for Fiscal Studies.
Mr Whiting: John Whiting, Tax
Partner at PricewaterhouseCoopers and also Chairman of the Chartered
Institute of Taxation's Tax Policy committee.
Mr Weale: Martin Weale, National
Institute of Economic & Social Research.
Q61 Mr Todd: In the earlier session
I asked about expenditure plans into the latter part of the projected
period and two of the critical foundations for delivering the
expenditure plans are savings within the public sector and the
delivery of the Gershon projections. Professor Talbot, how far
do you think the Government has demonstrated progress in this
so far?
Professor Talbot: Can I first
of all question your assumption that the spending plans are dependent
on the Gershon savings? The way that the Gershon savings have
been managed in terms of allowing departments to retain savings
and in any case 40% of them being non-cash savings means that
they do not actually affect the overall budget of the department
in terms of department expenditure limits. They do affect output
issues, which is something I will come on to. On the second part
of your question about how much they demonstrated it, I would
say not a lot. They are claiming at the moment in the Pre-Budget
Report somewhere close to £5 billion-worth of savings. What
is striking about this incredibly voluminous report is the lack
of detail in it in terms of where that money is actually being
saved from. I understand the Treasury has been giving out some
slightly more detailed information to the press, although I have
not seen it and it is not in here. What I would have expected
to see in here was a detailed table by department and spending
area of exactly where they are saving money. If they are claiming
this £5 million then presumably they have some source for
how they constructed it. I suspect the £5 billion is referring
to cash savings. I have grave doubts about whether or not you
can prove that these are efficiency savings simply because I have
no evidence at the moment that either OGC or anybody else who
is working on this has come up with a viable way of measuring
output in terms of both quantity and quality in the public sector
which would enable us to say conclusively that, for example, in
terms of the non-cash savings, which is supposed to be increases
in output without any extra spending, we have actually managed
to do that. I would love to see the evidence from the Treasury
to show that they can prove they have done that but so far I have
seen absolutely nothing.
Q62 Mr Todd: Let me take you back
to the first thing you said which was that in net terms this should
make no difference to public expenditure. Part of the theory behind
this programme is that it provides more space for public expenditure
transfer between departments and so on if the same output could
be achieved for less. Going back to the point you have made here,
which is that little evidence has yet been demonstrated, is there
an audit process which should be in place which examines whether
output is genuinely being generated for less cash? In earlier
questions in another session I think we have uncovered that defining
exactly what the savings really are can be extremely difficult
because they are savings against projected increases very often.
What tools do you think should be in place to make us more confident
on this?
Professor Talbot: On your first
point as to whether there should be an audit process, there should
be. The NAO is looking at Gershon implementation and I understand
it is going to be issuing a report round about January on progress
against Gershon. I think that will be very interesting and well
worth looking at. I think the general issue of metrics, which
is how we measure whether or not these savings have been made
and particularly whether or not they have been made without a
detrimental effect to outputs or whether we have had increased
outputs in particular areas, is extremely difficult. If you look
at the section in the Pre-Budget Report on delivering high quality
public services, as far as I can see there is no mention anywhere
in it of the Atkinson Review, which is the only sustained attempt
to try and improve the way in which we measure outputs in terms
of quantity and quality anywhere in the document, which I find
quite odd. It is like the dog that did not bark!
Q63 Mr Todd: Tied to this are reductions
in the workforce and again we have had moving targets as to quite
what we are counting here. Can you throw any further light on
the progress claimed so far?
Professor Talbot: Perhaps I could
take a step back before I answer the workforce question. One of
the interesting things about these figures is that of the almost
£5 billion that the Government is claiming has been saved
£1.9 billion is from local government, which is said to be
about £0.9 billion ahead of target. If that is correct then
that suggests, although we do not have the detail to show it,
that somebody else is behind target considerably because the £5
billion is roughly what the Government says they ought to be aiming
for at this stage. As far as I can see the bit that is behind
is central government. Insofar as we do have some figures on staffing
reductions here and staffing reduction numbers that have been
issued by the Civil Service itself, they seem to be way behind
in terms of the sort of targets that they have set themselves.
Maybe it is one of these slow starting things and we will see
acceleration at some stage in the future. It is not a straight
line from last summer to the end point of this.
Q64 Mr Todd: I think that is what
has been said, that there is not a straight line on this process
and I do not think that is an unreasonable view to be honest.
Finally on this, the Lyons Review is somewhere in this as well,
which also would be tied to workforce reduction. What progress
has there been on that? It is supposed to deliver some savings.
Professor Talbot: If you took
it as a straight line projection then the figures are slightly
low. They seem to be having difficulties with the relocation.
I would stress that the Lyons total of 20,000, if you look at
the geographical spread of the Civil Service in particular, gets
us back to roughly where we were in 1997. It does not redistribute
the Civil Service round the regions; it simply corrects a change
that has taken place since 1997. Even on that they do not seem
to be getting quite as far as they ought to. I would reiterate
the point that I made in evidence here on the Spending Review
last year, which is that a basic question needs to be asked about
this which is not being asked at the moment, which is why, if
we have resource accounting and budgeting, is it the case that
departments are continuing to put their staff into more expensive
places?
Q65 Angela Eagle: I just wanted to
ask in general your view of the microeconomic effect of the tax
credit system, Robert Chote, and then move on to ask your view
of some of the changes. I think it is important to establish how
you feel it is going in terms of Making Work Pay, dealing with
poverty and increasing support for families.
Mr Chote: There is the issue about
the fact the Government has made a clear commitment and delivered
on it to redistribute resources and then there is the way it has
done that. Taking that together, there has obviously been a considerable
improvement in child poverty. Next year we will find out whether
the short-term target has been met or not, but whether it is or
not by a small margin, the progress on that should not be doubted.
In the early days it has been possible to do this without causing
real problems for employment. The difficulty if you want to keep
costs down, you want to encourage work and you want to reduce
poverty is that it is always easy to do two of those but it is
never easy to do three. They have done quite well on that so far.
The question with the new tax credits is whether the continued
emphasis on child poverty starts to make the work incentive issues
more difficult. One of the important judgment calls now is where
the Government allocates the resources because that trade-off
is now becoming tougher and if you continue to do what has happened
recently, which is to put the money specifically into the child
tax credit, that does deliver on the poverty outcome in the short
term but it does cause more problems on work incentives. Arguably
if you stuck more money into the working tax credit the hit on
child poverty would not be as great but the balance might be better
over time. There clearly has been good progress. It has not had
the detrimental effect some people would have feared, but the
tension is now tough.
Q66 Angela Eagle: That is very helpful.
The Chancellor announced in the Pre-Budget Report some changes
and simplifications to deal with some of the practical administrative
problems that we are all only too well aware of to do with overpayments.
There was an unexpectedly large increase in the disregard for
increasing income in-year from £2,500 to £25,000 which
the Paymaster-General in her Ministerial Statement said would
reduce by about one-third the number of overpayments. Could you
comment on whether you think that is a helpful initiative which
is going to help solve a lot of the problems?
Mr Chote: I think it is helpful
in the light of the sorts of experiences which were being reported
by the advisory and advocacy groups and the clear distress that
the recovery of overpayments was causing a lot of people. There
has always been this choice to be made between having a system
that is responsive but which has the potential then for overpayments
and the associated difficulties and something which involves fixed
awards, which offers greater certainty to people but also cannot
respond as easily when the circumstances get more difficult. In
a sense the higher disregard is moving us more towards something
that is to all intents and purposes a fixed awards system for
many people.
Q67 Angela Eagle: Although it is
sticky upwards, it is not sticky downwards, is it?
Mr Chote: Yes.
Q68 Angela Eagle: If your income
goes down then you get credited with your new level of income
and you do not have an in-year problem there, but if your income
goes up by £25,000 then you get the same award.
Mr Chote: Which helps explain
why the higher disregard is costing money; it is because there
is an asymmetry involved there. By reducing the scale of overpayments
the Government is able to save money there. It says the overall
package is broadly revenue neutral. Although you have fixed awards
in respect of income, the Government is putting more pressure
on recipients to respond to other changes in their circumstances,
to notify them more quickly. It is more like a fixed awards system
and a simpler system in one respect, but the pressure on claimants
to declare other changes in their circumstances in some senses
could make the system more complicated for people and that is
what brings the financial implications overall into check. Clearly
there has been a move towards a fixed award system, which I think
is what many of the advocacy and advisory groups would have argued
for, but there is another side of the coin to it.
Q69 Angela Eagle: The big challenges
in terms of child poverty and the targets lie ahead. Have you
given any thought to how the next phase of the target, which is
to halve child poverty from the baseline figure, can be achieved?
Mr Chote: We are in the process
of doing a project on that and we will have something to say next
year, hopefully. We are coming back to the point about where the
tension between the work incentives and the precise focusing comes
into play. There is also the issue of whether you think it is
appropriate to tackle these issues by income transfers versus
spending on services, such as Sure Start, which has its own issues
about whether that is value for money or not. If you use short-term
targets as staging posts to where you want to get to then in the
end the pressure will always be greater to use cash transfers
because that gives you a fairly reliable hit on what you are aiming
for, whereas if you were standing back and saying "Where
do we want to be in 20/25 years' time?" you might have a
different judgment about the sharing of resources between services
and the cash in people's hands.
Q70 Mr Mudie: How good is this £25,000
in operational terms? As I understand it, if my income went up
in the year I had claimed by £15,000 then the next year nothing
would happen and the year after that they would trigger in both
the new income plus the back payment. So instead of the hit being
the following year now it is the immediate year after. This is
postponing it until the following year. Is that right?
Mr Whiting: To a degree that is
right. If incomes go down then there is the need to put in your
claim and get a responsive credit. If incomes are going up then
in general you are getting your reward on your prior income, unless,
of course, you get a very dramatic increase. You are making your
claim based initially on the last year. Unless this year's income
goes up very dramatically you would continue to get that income.
When you make your claim for next year then you are adjusting
to what you have got this year. There is a certain lag in it.
In practical terms I think this increase to £25,000, which
took me by surprise, is as good and as pragmatic a solution to
the difficulties many claimants have and, I have to say, HMRC
has as well.
Q71 Mr Mudie: Is it not just postponing
the pain a year?
Mr Whiting: No. It is absolutely
solving it for this year. If your income was £20,000 this
year you will get an income award for next year based on £20,000.
The claw back will not happen unless in this year you are fortunate
enough to go from £20,000 to £50,000 and I suppose,
being practical, you ought to spot that and tell HMRC! I think
it is a very welcome move and it is certainly one we have been
calling for to get a practical solution to the design problem
inherent in the initial design of the system.
Q72 Kerry McCarthy: The PBR announced
a significant expansion of the disclosure regime. Is there anything
that is not covered by the new regime now, any tax avoidance schemes?
Mr Whiting: I think the answer
to that is I do not know because it is an announcement of an intention
to expand. We know where they are going to, but what we are told
is there will be discussions on exactly how it will be expanded.
So we do not have a bit of paper saying how the rules will be
expanded. The fact that they are looking at bringing forward the
disclosure requirement for in-house schemes much more in line
with those advised by outsiders, they are looking at bringing
in disclosure of all schemes involved in income tax, capital gains
tax, corporation tax, so not just financial and employment products,
and looking at the "filters" as we term them, which
is where one tries to weed out the chaffs that they do not really
need to know about and focus on the innovative, makes it sound
as though it is a fairly comprehensive review. It is a good way
forward because at the end of the day what they want to hear about
is innovative things. We are pleased that there are to be some
discussions on exactly how these are going to go forward because
at the end of the day one wants practical rules that everybody
can comply with and give the authorities what they are looking
for.
Q73 Kerry McCarthy: So you would
not share the view of Richard Collier-Keywood, UK head of tax
at PWC, who was criticising it for increasing the administrative
burden?
Mr Whiting: That remains the concern
and that is indeed a concern obviously I share with my head of
tax, that at the end of the day if this creates an administrative
burden that is unreasonable then that is going to be a problem.
It is about trying to get the balance that gives us practical
rules and that is why I welcome discussions. The risk is that
it becomes an onerous system where we—be they advisers or
taxpayers—spend all our time worrying about complying and
trying to work out what we have to disclose. I have to say that
HMRC get flooded with lots of disclosures that they do not need
to hear about. If that starts to happen the whole system clogs
up and becomes burdensome to all concerned and we are back to
disclosing a haystack of things and leaving the authorities looking
for the needle and that serves nobody's interest. That is the
risk. That is why we need discussions to make the system work
sensibly.
Q74 Kerry McCarthy: The Government
announced that it would close half a dozen tax avoidance loopholes.
How accurate is the Government's assessment that this will lead
to a saving of £1.75 billion over the next three and a half
years?
Mr Whiting: I have to say I was
surprised when I saw that figure, particularly in the area of
capital losses which have been well attacked over recent years.
There are some very good and lengthy descriptions of some of the
schemes attempted, but it seemed a bigger figure than I was anticipating.
Obviously the figures for how much you will gain through closing
loopholes and other avoidance techniques are always a bit of a
guestimate. There are obviously gains to be made but it seemed
quite a high figure.
Q75 Kerry McCarthy: In 2002 a zero
corporation tax starting rate for small businesses was introduced
and that has now been abolished along with the minimum rate of
19% corporation tax on distributed profits. What is the likely
impact on small businesses?
Mr Whiting: This is a subject
that this Committee has touched on quite a lot in the past. There
will be a little bit of relief in the sense that it gets rid of
a bit of hassle and there is an administrative saving, but I think
most will turn round and say, "Oh for goodness sake, why
did you bother with it in the first place?" There will be
a certain amount of confusion. I do not think the whole episode
has been a very happy one because whilst the possible aim of it
in the first place was laudable, ie to reduce the tax on small
businesses, the way it was effected left open obvious routes where
people would indeed try and save tax. It seems that that is now
to be classified as too much, tax saving, it has not worked and
they are going back to the beginning.
Q76 Kerry McCarthy: What would be
the implications for the sole traders who went down the incorporation
route to get this tax saving?
Mr Whiting: I think there are
going to be an awful lot of sole traders, small businesses, who
went down the incorporation route who are now looking at their
companies, which of course they have, and thinking, "Is this
sensible? Do I need the company?" It is something that we
had flagged up already, that there is going to be a number of
small traders slightly confused about how they carry on. The company
in many cases will just be left and they will then go back to
being a sole trader and possibly run into administrative problems
in disentangling the company and, of course, incur potential penalties
for not filing returns and things like that. There is a little
bit of advice here needed for the small business community as
to how to disentangle themselves out of what they may have got
themselves into.
Q77 Chairman: We have got a better
policy outcome because we have been harking on about this for
a while, have we not?
Mr Whiting: We have a simpler
and more direct result, Chairman, I agree.
Mr Chote: A little bit of stability
in this area would now be welcome!
Q78 Ms Keeble: What evidence is there
that the means testing of pensions reduces people's savings over
their lifetime? There has been a lot of anecdotal discussion.
Mr Weale: In work the National
Institute has been doing we have been looking at trying to match
savings behaviour and employment behaviour. We find that in any
question about means testing you have to ask what alternative
you are comparing it to. Means testing has a number of effects.
For people who face the means test it tends to reduce their saving,
but it may also mean that benefits are available to richer people
than would be otherwise, that there is generally a bit more money
around and those people also face less reason to save because
their incomes are going to be higher.
Q79 Ms Keeble: An awful lot of this
debate focuses on the pension credit and the means testing behind
there. That is a fairly new benefit. Surely the anecdotal evidence
that exists around that is actually just that, anecdotal because
of the time lag.
Mr Weale: I think that is right,
but remember that the pension credit replaced the minimum income
guarantee, which was a much stronger means test, it was a withdrawal
rate of 100% for people in that particular range.
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