Examination of Witnesses (Questions 200
WEDNESDAY 7 DECEMBER 2005
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
Mr Cunliffe: Certainly we are
allowed to take the question back.
Q202 Chairman: Can you write to us
and tell us?
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,
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
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
Q212 Ms Keeble: The medium term.
Mr Cunliffe: There is an envelope
for health spending that has been set. We will have to take decisionswe
said after Wanlessabout 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
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 describedI am sorry
I had to describe them because you have to set them in contextall
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