Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 240 - 259)



  Q240  Chairman: A slowly considered decision?

  Mr Orhnial: The reason I brought you back to first principles was essentially to say what we had been trying to do at the outset was to strike a balance between simplicity and complex rules that tried to rule out certain types of investments. We did that on the basis of the information that we had available at the time, and our judgment at the time—

  Q241  Chairman: But there were representations from industry, the ABI and others, on the issue of investors placing deposits on investment properties on the understanding, quite reasonably, it would be possible to benefit from tax relief as a result of including it within a SIPP from next April. That has changed dramatically. So there is industry representation to us on that.

  Mr Orhnial: I am aware of the representations they made to us as well.

  Chairman: Okay, so that was a U-turn. Andy next.

  Q242  Mr Love: Can I take you to the response to the Barker Report. In his statement before the House, the Chancellor indicated that he wanted to increase house building from 150,000 by a further 40,000, yet in the Barker Report, Kate Barker suggested they needed anywhere between 70,000 and 120,000 new homes if they were to keep house price inflation below 1.8% in the long-term. Do you think the Pre-Budget Report prepares the way for doing enough for future generations in terms of affordability of housing?

  Mr Kingman: Yes, we believe it does. I think there may be a confusion about what you tell us here. I believe one of the figures you cited was a net figure and one was a gross figure. You need to remember a number of houses are removed from the stock every year. The ambitions we set out in response to Barker are within the range that Kate Barker published in her report.

  Mr Love: I may well ask somebody to explain that to me later.

  Chairman: Do you want to write to us again![8]

  Q243  Mr Love: In the Pre-Budget Report document it repeats the commitment to deliver an additional 10,000 new social homes in 2007-08. I would submit to you that you will have difficulty achieving that partly because of construction costs going up, partly because land costs especially in areas you are building are going up, partly because you need a different mix of properties, but even assuming you hit that, Barker was suggesting you needed a minimum of 17,000 to 23,000 new affordable homes. Looking at the envelope in the Comprehensive Spending Review coming after 2007-08, do you see any prospect that you will be able to deliver the Barker figure on affordable homes in the new Spending Review?

  Mr Cunliffe: We should not pre-empt the Spending Review. This is one of the things the Government has said it will look at in policy going forward, but I do not think any of us can tell you now what the outcome of the Review will be.

  Q244  Mr Love: I thought you might say that. Can I ask about the planning gain supplement because it says again in that document that one of the reasons why it has been brought forward is in order to pay for infrastructure, but because of the last question I have just asked about your real difficulty in building the number of required social homes, will you not have to, as well as building infrastructure under the planning gain supplement, build affordable homes if you hope to get anywhere near the target Barker has set? If you do have to do that, will the planning gain supplement delivery enough for both infrastructure and new homes?

  Mr Ramsden: On the planning gain supplement, we have at this stage set out the principle that the Government is following on PGS, why it thinks it is a valid instrument to use in this case, to use a tax instrument to raise money which will finance infrastructure. This is probably not the answer you want but we have thought about the big trends here, we have thought about the housing trends we think are deliverable, we see PGS as the instrument which can help to deliver them, but this is the start of a journey on PGS. We have put out a consultation document, we have made very clear in the consultation document that no PGS will be introduced before 2008. There are quite a few issues which need to be worked through, there are lessons which need to be learnt from attempts in the past which have not worked out for various reasons which we set out, but we think this is a viable and a valid approach and as part of the work which leads up to the CSR, where we will start through the cross-cutting review which has been announced and other things, that will nail down some of the specifics you are interested in. At this stage we have set a direction of travel which says we see a role for PGS alongside a scaled-back 106 which can deliver the infrastructure to support these new and more ambitious housing objectives.

  Q245  Mr Love: You talk a little about lessons from the past, and indeed this whole area has had a chequered history in the past. Almost everyone believes the bringing forward of land is absolutely critical—Barker talked about it, everybody else has talked about it—in the past developers have gone on strike, and that is why it has failed in the past. Barker makes a strong case that the costs of the PGS will fall on the landowner. What is to stop the landowner going on strike? Why would they not go on strike?

  Mr Ramsden: I think you only go on strike if you think the tax is not going to be sustained over a number of years.

  Q246  Mr Love: Do we not have history on this?

  Mr Ramsden: I was going to carry on. You referred to Barker and the strong case that she makes in the Review. She looked very carefully at previous development gains taxes and we have summarised in Box 1.2 of the consultation document the lessons she felt could be learnt and which we agreed with. If you look at the design we are outlining for PGS in the Con Doc, in three key areas we think we can learn from those lessons. Before I say what those three key areas are, you have to look at the wider context. You must not compare too much previous instances because the context for why a new levy is introduced always differs. We are very, very clear in this document and we are very clear in the foreword to the main Barker Review response that we think this tax is a means to an end. It is not needed other than to deliver on the more ambitious housing targets that the Government is now committed to. So that is the context within which to assess whether it is going to work. There are three reasons why we think it will work, to come back to where I started. The first is that we have been clear that unlike penal rates of tax, under previous development gains tax, it will catch a modest portion of the uplift, so we think it will preserve incentives to develop, and back to the point about it being a permanent tax, we do not think there will be any reason for landowners to go on strike. Secondly, in the past there have been incredibly complex processes for running these kind of taxes. We think we have learnt a lot over the years and for self-assessment in other areas to think that actually we can come up with clear definitions of value and self-assessment which will make it possible to make this tax workable. Third and finally, always important for any tax, minimising avoidance opportunities. We think there is a way forward there so we can avoid the kind of complex offshore arrangements you quite often see in this area. We have set out the direction of travel, we think this is a valid and viable approach but I should stress that we are embarking on a consultation here, and another tax change which has been widely welcomed by the property industry is real estate investment trusts. I led the consultation on that from the start of 2004, there are lots of issues that the property industry raised around that. We had a very intensive consultation over a number of iterations which has led to an outcome where I think we have delivered something which has been generally welcomed. I think the aspiration of PGS over this period between now and the earliest it can be introduced, 2008, is for a similar engagement and we will have to see where that gets us.

  Q247  Mr Love: I would love to get into a discussion with you about whether or not this will encourage investment in residential development. I am sure it will encourage commercial property development, indeed the pensions funds and insurance companies seem to be salivating at the moment at the thought of getting their hands on it, but I do not want to get into that at the moment. The one thing you never mentioned is the incentives that the planning gain supplement will give to local authorities, some of whom are very recalcitrant on planning permissions. I have some sympathy for that, in fact quite a lot of sympathy for that, but the Daily Telegraph, that wonderful organ of rural areas, is on record in the last day or two as saying that this will mean there will be loads and loads of greenfield development and not the brownfield which we are expecting. Have you any concerns that local authorities will go for indiscriminate development in the way that is being suggested by some of the national media?

  Mr Ramsden: We are at the stage of designing a quite broad outline. What we have stressed, and I would not have interpreted in this way, is that the revenues which will come from this will be recycled back to local government. This is not something which the Treasury or anyone else will take and spend on other things, so we will be supporting local government and, because we have more ambitious housing targets than under the current set-up, we will be supporting the broader stuff that is required both directly from local government and then through more regional and strategic infrastructure. We try in the Con Doc to highlight the issues around brownfield and our hopes there and obviously Kate Barker had a proposal for PGS on brownfield for a different rate. These are issues we have said in the Con Doc are all for consultation. We have done a lot in our evidence base but there is an awful lot more work to do to explore these kind of issues and to look at the incentives and make sure when we deliver on this at the earliest in 2008 and introduce it that we get it right.

  Damian Green: You are still at the level of principle on this, and you have introduced now the REIT, so there will be more money going into property development, but you will introduce a new tax which must at the margin reduce the supply, as all taxes do. So you have increased the demand, you have reduced the supply, that will mean the price of the land available for development will go up, and yet this is all in pursuit of more affordable housing. That seems to me to be straightforwardly incoherent.

  Q248  Chairman: Discuss.

  Mr Ramsden: It picks up almost on the previous question. We would accept that REITs in the version we have ended up with—REIT UK, if copyright allows us to call them that but that is another story—are more likely to encourage flexible investment in commercial property. That is clear from the consultation. It does not mean we will not get some residential property, I think we will get some but it is not going to be the main focus of the REIT. So in a sense you are not looking at exactly the same market. I am not saying the commercial property market and the residential property market do not have a huge amount of overlap, of course they do, but we are looking at investment in commercial property which will be primarily where the REIT is. We will have to wait and see how it operates and obviously there are design details which we still have to announce on the REIT and we will be doing that at the Budget, but I would see PGS as more central from a tax perspective to delivering as John says, ambitions which are within the range of the Barker Review. I think John wants to come in.

  Mr Kingman: If I understand your question correctly, your assumption is that neither the planning reforms announced on PBR day nor the PGS itself make any difference to the number of developable sites which come forward through the planning system to develop.

  Q249  Damian Green: I am sure that PGS will be an impact, it will reduce it. If you put a new tax on an activity, by and large there is less of it.

  Mr Kingman: Except it makes a difference to local authority incentives.

  Q250  Damian Green: Sure.

  Mr Kingman: There are major planning reforms announced in the PBR in order to deliver the trajectory announced to get us into the Barker territory.

  Q251  Damian Green: So you are hoping that half cancels out the fact you will be discouraging development bringing land forward?

  Mr Kingman: We certainly believe that the net effect of the package amount will be to increase supply quite substantially, yes.

  Chairman: So the consultation has come out with the conclusion that this will promote the release of land banks? Is that right? Which Damian is sceptical of.

  Damian Green: It will be the first time in history that a new tax has encouraged more of an activity. It does not apply to cigarettes.

  Susan Kramer: Just to pursue that land bank issue, the land is not coming forward because people are holding it hoping land prices will rise. Why do you not tax holding land in contrast to taxing development in order to push land on to the market?

  Q252  Chairman: I was talking to a builder last week and he has got a lovely portfolio of land banks over the next ten to 15 years. What I am interested in is if your proposals are going to encourage him to get rid of them over less than 15 years, because he is looking at it and saying, "Land prices are going up". Land prices in my area have gone up five times.

  Mr Cunliffe: One of the points my colleague is making is one of the reasons why the supply of new land and supply of new development does not meet demand is partly because we have planning restrictions.

  Q253  Susan Kramer: That is an excuse, that is not reality.

  Mr Cunliffe: One of the reasons why people might think if they do not use their land now they will get a higher value later—because there is an economic cost of holding and not realising an asset—is actually because supply and demand do not work very well within this market because of the planning system. If there is a freeing-up of land because of local authority actions, then I think you get more land coming on to the market, and I think the economic incentives for someone to hold on to land change. There are more ways of dealing with the underlying economic incentives than putting a tax on.

  Mr Ramsden: Also, we are talking about a modest charge here. It is not the kind of rates which some previous development gains taxes were charged at. So we do not see, as part of the overall package and the commitment to increases in housing, why this should affect incentives to bring forward land for development.

  Chairman: We will wait and see, we are a bit sceptical.

  Q254  Ms Keeble: I want to ask a couple of questions about Turner. We had quite a bit of discussion this morning about the impact of means testing in particular pension credit on people's willingness to save. Where do you think the means testing ranks in the list of explanations for low savings? We also had discussion this morning about the projected impact or the spending profile of indexation to earnings of pension credit, and you put some figures in your Fiscal Report. I wondered if you could comment on the impact of that on the flexibility on public spending which we talked about earlier. The third point was, have you done projections of the cost of the citizen's pension, assuming it is at mid-level, and what the impact of that is on flexibility?

  Mr Orhnial: Means testing—as I understood the question—to what extent do we think that that might currently be affected?

  Q255  Ms Keeble: In terms of savings.

  Mr Orhnial: My answer to that would be that we have no evidence at all to suggest that it is affecting savings.

  Q256  Ms Keeble: Have you done that or do you know of that?

  Mr Orhnial: I know of that. I know of no such evidence. I know about analytical propositions, I know about the reaction of people who say that and who worry about what sort of advice they ought to be giving to people who in 30 years' time might be subject to means testing. We have no evidence at all on that.

  Q257  Ms Keeble: The second two then?

  Mr Orhnial: The second question was about Turner.

  Q258  Ms Keeble: Yes, about indexation of the pension credit to earnings rather than prices and the impact that has. You have estimated the extra spending. The impact that then has on the flexibilities we talked about earlier.

  Mr Cunliffe: When you say "the estimates", you mean in the long-term Public Finance Report?

  Q259  Ms Keeble: You did some modelling in Box 4.2 on page 39 of this report. It is the extra costs, the earnings indexation of pension credit and these are the extra costs over and above the costs you have already put in the pensions. Then also have you done a profile of the cost of the citizen's universal pension, assuming it is at the mid-level and what impact that would have on public expenditure?

  Mr Cunliffe: On the first question it is quite simple. What has gone into public finances is the commitment to link to earnings to the end of the Parliament, no more than that. So when we take the next Spending Review, that decision goes into the Spending Review calculations in the same way as any other decision.

8   See supplementary memorandum dated 12 January 2006. Back

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