Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200 - 219)



  Q200  Mr Mudie: The other one is the one before "providing an additional £85 million . . . for the expansion of the security and intelligence agencies." The word "additional" interests me. How much do we spend? Are we allowed to ask that? Are you allowed to tell us? Jon?

  Mr Cunliffe: I do not know if we are allowed to tell you.

  Q201  Mr Mudie: I do not want names and addresses.

  Mr Cunliffe: Certainly we are allowed to take the question back.

  Q202  Chairman: Can you write to us and tell us?[4]

  Mr Cunliffe: I can tell you whether we can tell you or tell you the answer.

  Q203  Mr Mudie: The least controversial one, the money you are giving local authorities, it is reallocating. I do not know if Mark asked this, because I was looking at my papers preparing these important questions. It is reallocated from central departments. Can we have a breakdown of which departments the money was reallocated from? You do not have to tell me now, again you can tell the Committee in writing.

  Mr Cunliffe: Yes.

  Q204  Ms Keeble: On the long-term Comprehensive Spending Review, your account of plans for the CSR stresses the importance of reviewing the success of departments in delivering the outputs. Will the report you are producing in the middle of next year assess the success of each department in relation to the PSA targets set in the last Spending Review and will these then feed into decisions on future spending plans?

  Ms Brivati: The PSA framework and department's performance on PSAs is an important part of the overall composition of the Comprehensive Spending Review. One of the reasons why we are having a Comprehensive Spending Review is to enable us to undertake a fundamental stock take of performance against the Government's objectives and assess how we should set policy and go forward. The set of PSA targets we have following CSR04 represent an important statement about the Government's overall objectives in its priority areas. I think what the CSR will seek to do is review the appropriateness of those targets going forward, how departments have performed, the extent to which spending contributes to performance and the extent to which other aspects of delivery contribute to performance.

  Q205  Ms Keeble: What it says in the documentation that you have given us is a bit more robust than that. You talk about basically a zero-based approach to budgeting, looking at performance and delivery, and that is obviously quite a robust framework for departments which have particular spending plans and particular things they are supposed to achieve. When we had the meeting this morning we were given a rather different picture from that. We were given a picture where depending a bit on economic growth there was likely to be a slight slowing back of the increase in public spending, only slight because by and large they agreed with your figures. That would happen in the framework of real constraints on flexibility of spending because of pensions, depending partly on Turner and what happens there, and also health budgets and other budgets, and that is also borne out by this document, Long-Term Public Finance Report. Those are two very different patterns for allocating spending. One is the robust zero-based approach which is always quite nice for politicians because you set the priorities, get them and everyone is judged on them and that is how you perform. The other one is this rather more constrained approach with large spending and also the international development dimension disclosing the constraint on flexibility. Those are two very different models of spending. Which do you see as being the one which is going to hold, assuming the other things about growth we have been told?

  Mr Cunliffe: I think the answer is we would like both to hold.

  Q206  Ms Keeble: You cannot have both, can you?

  Mr Cunliffe: What one does is within the fiscal framework and the management of public finances at a broad level you have to set the rate of growth of public expenditure and the rate of growth of public finances. That has got to be sustainable over the long term. The Long-Term Public Finance Report is designed to indicate broad sustainability because it goes up to 2050. You cannot make sensible decisions 50 years ahead. It is really the public expenditure review process that takes the decisions over the next two or three years. You have to put that within an envelope. That is the first part. Clearly public spending cannot grow indefinitely faster than the rate of growth of the economy. The second question is how to ensure that you are getting maximum value for money and that you allocate spending where it will best fit your priorities and that is the zero-base. Then you put those two things together. In every finance ministry around the world when those two things come together there is tension and you have an iterative process by which you resolve it. We do it bottom-up and top-down at the same time. Most firms do that as well.

  Q207  Ms Keeble: You have made very robust statements about the zero-based budgeting in your report. I think everybody understands all this is compromised at the margins and all the rest of it. You have a fundamentally different approach. If you really want to hold to a zero-based approach you have also got these massive constraints, in particular around pensions, which are a bit unknown. If you look at the indexation of the pension credit and what happens if we go to a higher citizen's pension then you have even bigger constraints. You cannot get much in terms of efficiency saving on that because that is money paid out, it is demand-led. That is a very different process. In the middle of it then is the housing stuff which needs to be done as well which is one of the discretionary areas. How are you going to approach resolving those tensions because they are very, very good and they are critical for us?

  Mr Cunliffe: As far as I know no decisions on pensions have been made. The decision whether to upgrade pension credit in line with earnings is one of those decisions that you take in this framework. The machinery we have for managing public expenditure which is not to do it outside of the fiscal framework but to put it into a firm fiscal framework is the machinery we have for managing the pension.

  Q208  Ms Keeble: Unless you say that you are going to do something about the big blocks then we have to assume that your pressure on the zero-base is going to be on the discretionary and that is going to be very tough on some of the areas which are discretionary which are very important, like housing.

  Mr Cunliffe: I think zero-based, I am not sure about the term discretionary or non-discretionary, but in an area like health where there are some commitments going forward we would still do zero-based. Zero-based is also about how efficiently you use expenditure and how much of an output you get for a particular input. I do not think zero-based is restricted to some parts of spending not others.

  Q209  Ms Keeble: Sure. In your chart 5.2 on page 44 of this report actual health is the biggest constraint you have got. It is even bigger in fact than state pensions. That is precisely what I mean.

  Mr Cunliffe: Which report, the Long-Term Public Finance Report?.

  Q210  Ms Keeble: The fiscal one. That is in both the medium and long term, health. That is why I say if your options are constrained there it means that your zero-based budgeting is going to impact particularly heavily on these other blocks of spending. This chart.

  Mr Cunliffe: 5.2.

  Ms Keeble: Health is your biggest constraint in terms of growth. If you look at the green, which is other spending, that is the area which I call discretionary which you can squeeze because you are not driven by changes in demand. What I want to know is how robust you are going to be about the zero-based budgeting because it is always difficult. It sounds to me like we are being given this as a bit of a sop and when push comes to shove you will still be looking at the—

  Q211  Chairman: We will be as robust as politics allows.

  Mr Cunliffe: I am not allowed to comment on politics. First of all, I would not look after 2050 on this.

  Q212  Ms Keeble: The medium term.

  Mr Cunliffe: There is an envelope for health spending that has been set. We will have to take decisions—we said after Wanless—about where that goes in the future. There is an envelope that has been set around international development in terms of a GNR target, there is an envelope that has been set which is a bit shorter on education; all that will have to be taken into account. Zero-based can be applied to all those areas to ensure that we get efficiency and we are doing the right things in those areas. I think the decision about competition for public resources, public resources are always finite.

  Q213  Ms Keeble: I understand.

  Mr Cunliffe: There is always competition and those decisions will be taken within the top-down envelope that is set for the Spending Review.

  Q214  Ms Keeble: The CSR is supposed to be setting levels of spending up to 2010-11. Does that mean there will not be a subsequent CSR until 2010 once you have got the pattern set?

  Mr Cunliffe: No.

  Q215  Lorely Burt: I would like to ask you about the reform of the tax credits regime. I am sure you are expecting this. It is something which has exercised this Committee quite a lot. You estimated the cost of the reforms announced in the Pre-Budget Review to the tax credit system as nil in 2005-06, a cost of £100 million in 2006-07 and then a saving of £250 million in 2007-08. Can you explain that? How can you save £250 million in 2007-08?

  Mr Orhnial: What we need to do is to understand the different components of the package. This is quite a complicated package that is supposed to address a number of issues. There are about six or seven measures in it. They are in the box here on page 97. I think what we need to understand about the policies is that some of them are adding to costs and some of them are doing the opposite. The policies that you are essentially adding to cost are those of raising the threshold for changes from one year to another and the policy of limiting the amount of tax credits overpayments which are recovered in year. That is in effect allowing more money to go out the door in particular years. Then there are a set of measures which are designed to reduce overpayments in any year. Causes of overpayments, I m not sure if you have looked at the Paymaster's statement which elaborates on this but there are four largish causes. Rises in income from one year to the next; mis-estimates by claimants of what their in-year income is, for example they have got credit awards on the basis of a particular income, their income falls, their income changes again, they forget to report it and end up with an overpayment at the end of the year.

  Q216  Lorely Burt: Or it gets missed.

  Mr Orhnial: Or it is missed, absolutely, certainly there have been issues around that. Then there are changes of circumstance which are not reported quickly enough where, for example, a child leaves the home and you are no longer entitled to a tax credit or something like that. Finally, there is the renewal window. If you recall, everybody needs to renew their tax credits award starting from April. Currently the end of that renewal window is 30 September. If your tax credit award at the beginning of that period is based on out of date information it remains out of date until you give new information and your award is reworked. A cause of overpayment is basically being paid the wrong amount during that period. Looking to the other measures here, what we are trying to do over a period of a couple of years is make it mandatory to report more changes so that if you reduce the hours of work that you do, and therefore become ineligible for certain credits, you have to report those. When a child leaves the home you are then mandated to report that. We are shortening the period of time, also, claimants have. Currently they have three months to report those changes, we will be asking them to do it within one month. Also, from next year, we are shortening the window for doing your renewals. Rather than having the risk of wrong information from April to the end of September, we are reducing that period from the end of August. There are a number of other measures in there which are designed essentially to try to keep records up to date. HMRC from the beginning of 2007 will start phoning people in the first quarter of the year to try to make sure that their records—

  Q217  Lorely Burt: HMRC will phone people?

  Mr Orhnial: That is the intention. Or they will write to them.

  Q218  Lorely Burt: When week after week you have constituents coming to see you who cannot get through to HMRC I find that quite an interesting statement.

  Mr Orhnial: Phone and write to try to elicit information from claimants. This is not until the first quarter of 2007, so there is a year in which to get this right. That set of measures I have just described—I am sorry I had to describe them because you have to set them in context—all reduce the scope for overpayments during the year. It is really a balance of different measures and different timing effects that produce those numbers.

  Q219  Lorely Burt: From April 2006, I would like to talk about the disregard and the effect that is going to have because it will rise ten-fold from £2,500 to £25,000. Will those changes not create an incentive for claimants to be jobless at the end of the tax year?

  Mr Orhnial: I do not see that. Why would they wish to do that? The system is based on your annual income. If it was a system that was based simply on a snapshot so we looked at a period of five or six weeks, and in many ways that is what family credit and, after it, working families tax credit tended to incentivise, people would in effect reduce the hours they worked so that they reduced their income during that short snapshot period. With a manual system you cannot, simply by going out of work, reduce your income for the whole year substantially.

  Lorely Burt: It is based on annual. I will just stop for a second. I have one more question but I think my colleagues want to ask some questions on this.

4   See supplementary memorandum dated 12 January 2006. Back

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