Examination of Witnesses (Questions 240
WEDNESDAY 7 DECEMBER 2005
Q240 Chairman: A slowly considered
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
Mr Orhnial: I am aware of the
representations they made to us as well.
Chairman: Okay, so that was a U-turn.
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
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
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
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
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 criticalBarker talked about it, everybody
else has talked about itin 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
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
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
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 withREIT UK, if copyright allows us to
call them that but that is another storyare 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
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 laterbecause there is an economic
cost of holding and not realising an assetis 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
Mr Orhnial: Means testingas
I understood the questionto 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
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