Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 320 - 339)

THURSDAY 8 DECEMBER 2005

RT HON GORDON BROWN MP, MR JON CUNLIFFE, MR MICHAEL ELLAM, MR DAVE RAMSDEN, MR TONY ORHNIAL AND MS MRIDUL BRIVATI

  Q320  Mr Ruffley: You are twisting this again. It is not what we are saying.

  Mr Brown: Chairman, Mr Ruffley should allow someone to finish their answer. The whole history of parliamentary democracy in this country, which I believe your Committee on reflection will want to uphold, is that you do not hand over the responsibility for making decisions on tax and spending to other organisations. What you can do is have independent audit of the assumptions, and what you can do is have independent audit retrospectively at the beginning and the end of the cycle, but I am not in favour of a Stability Pact-type policy on Britain either imposed by Europe or imposed by an independent fiscal committee that would not be wholly answerable to Parliament.

  Mr Ruffley: You are running scared on independence.

  Q321  Susan Kramer: Let me ask a couple of questions on oil prices. You have argued that the oil prices are the primary cause one way or another behind the under-performance in growth against the targets you had originally predicted, but if we look at economies that are heavily oil influenced, such as the United States and Japan, and assume that the UK is virtually self-sustaining in oil, we find that they have not suffered the kind of under-performance in growth that we have. Could you try and explain to us the difference between those two and performance here in the UK?

  Mr Brown: I think the problem that America now has is that inflation has been rising and at 4.3% it has led to substantial rises in interest rates over the last few weeks, if not the last few months, so America is not unaffected by this, but they have been prepared to run a policy of high growth with higher inflation and now they are clamping down on that with higher interest rates, so nobody in America would tell you that they had been unaffected by the rise in the global oil price. As far as Britain is concerned, as I said in the Pre-Budget Report, oil was one of the factors, and it is one of the factors because it has an impact both on inflation and on growth; it is a means by which, of course, people have to pay more for their fuel and companies pay a bit more for their energy costs, and that deprives them either of consumer spending or the funds for investment in other areas. The factors that have influenced, if you like, the global oil price having an effect on the British economy include the effect on domestic demand in the other European countries and therefore the effect on our exports as well. This is a complicated set of effects that starts with the rise in both oil and commodity prices but also is related to a slowing down in the economy because of high house prices and consumer spending in the previous year.

  Q322  Susan Kramer: Looking at it slightly differently, you made the decision and argued the case when Vince Cable asked you this question, and I think there was disruption from the other benches because you did not answer it, not to increase fuel duty because of the rise in oil prices but to put a supplementary tax on North Sea oil. His question to you, and perhaps you could answer it now, was that if prices were to decline would you make the reverse pair of decisions?

  Mr Brown: Our policy as a government has been to review the fuel tax each year and we will continue to do that.

  Q323  Susan Kramer: And the state of the oil industry if there is a price decline?

  Mr Brown: I have said in the Pre-Budget Report that, having made this decision to raise the supplementary tax to 20p, we envisage that not rising during the course of the Parliament, so that is the stability we are offering the oil industry. In addition, if I may say so, there are greater incentives now available because of the decision we made on exploration incentives to develop the smaller oil fields in the North Sea, and we hope that that will happen. We are also looking, and the oil companies are interested in this, at the possibilities of carbon capture, which would also help production in the North Sea in the long run, but would also be a form of environmental policy. We now have a working party with the Norwegian Government to look at that as well, so we are prepared to put incentives into the exercise of carbon capture as well.

  Q324  Susan Kramer: But this is not a symmetrical policy.

  Mr Brown: I think the oil taxation change is on the basis that we expect oil prices to remain higher than what has been the previous range. The previous range was $22 to $28 a barrel and, even if the oil price was higher, OPEC expected oil to go back to between $22 and $28. We are now in a situation where at the beginning of the year it was $40, at one point it went to $70; it is now back to about $55. Our assumption is about $55 over the course of the next year, and nobody expects the price to go back quickly to $22-$28 and therefore our assumption is that the higher profitability of the North Sea will continue.

  Q325  Susan Kramer: I would like to pick up a couple of micro issues though, to switch, that is, on tax credits. I suspect every MP was delighted when you announced the increase in the disregard to £25,000 since we have all dealt with endless clients who have been caught in the trap of the clawback. Could you help me understand why the forecast for the impact of that clawback is basically so minimal, a cost of I think £100 million in the first year and then savings of £250 million in the second year? The explanation that we have been handed today, if one can follow it, seems to be that it is going to be more efficient as it were in getting people to report rather earlier on their claims and to changes in their circumstances, but that surely implies that there has been massive fraud in the system which you intend to avoid by that earlier reporting scheme. Could you please explain to us if that is the situation?

  Mr Brown: We have made nine separate changes in the system to accommodate some of the points that people have raised. The £25,000 disregard is only the most highly publicised of these changes and, of course, that is to make the flexibility of the economy work in favour of those people who take additional jobs or take promotion or are prepared in a family for two to be working rather than one after a period maybe when the child has been growing up. We also made a number of other changes, including mandatory reporting of changes, the one-month limit for reporting changes, the finalisation deadline where we reduced the time for which families' payments are based on out-of-date information. All these will save money and so it is true that the £25,000 disregard will cost money, but it is also true that the other changes we made to streamline the system will save money.

  Q326  Susan Kramer: But do you understand why we are doubtful about the scale of this? I notice that in 2003-04 the Treasury spent £800 million financing a disregard of only the first £2,500. Now you are going to £25,000 with the size of the disregard. Surely the people who are failing to, as it were, pick up the phone and call you and who are now going to be faced with very high penalties are people in serious need? Have you considered that we are going to have coming back now into our surgeries people in very difficult circumstances facing penalties because of very tight reporting deadlines, not dishonesty, and indeed to claim tax credit you now have to report by the end of August? Anybody who has two or three small children and happens to be working at a part-time job has to understand that to provide information in August is a completely lost cause when you are trying to deal with the school holidays. This is a completely impractical programme.

  Mr Brown: There are two ways we can deal with this. The first is to return to a system where you base the tax credit awards, like family credit or like other systems, on last year's income, and so, simply speaking, if you would get a tax credit based on the income you had last year in the coming year, that—

  Q327  Susan Kramer: That is almost what you have done, is it not, with the disregard?

  Mr Brown: No, that is not correct. The second way is to try to respond flexibly to people's changing circumstances, in which case we have raised the disregard and we are still trying to base the tax credits on the income ahead over the course of the year. If this does not work and it is not going to be seen to be working, then we will have to look at going back to last year's system, and I certainly in my report to the House on Monday said that it would be better for the economy, and I think everybody round this table irrespective of political persuasion would agree, if the child tax credit was based on your actual income over the course of the year, at least at the start of the year, than on last year's income, and that is what we are trying to achieve. The changes that have been made so that people's statement of income is more up to date. It is a genuine attempt to show that in a flexible economy we want to respond as quickly as possible to the changes that are taking place in people's incomes, and if we cannot respond quickly then we will have a higher disregard.

  Q328  Susan Kramer: Do you understand that concern is coming from people who just cannot see how in practice this is going to be successful and that we are going out of the fire of the clawback system into the flame of a very tight and difficult reporting system? It is from a practical perspective. Would you be willing to commit to having at least some of your people go back and talk to the kinds of mums who make these claims and understand the practicalities of their lives and how it comes that they have to handle reporting and feeding information into the system, because this looks impossible?

  Mr Brown: We do all the time. We listen to what people say. One of the reasons why the disregard has changed, as you acknowledged at the start of your question, is that as people thought that was the right thing to do, to have a more flexible disregard system, other people have suggested to us that we should return to last year's income, and we will continue to look at that, and if that becomes necessary to do we will do it. I think it is in everybody's interests to have a tax credit system that responds as flexibly as possible. Let us remember that there are six million families enjoying tax credits, that tax credits have done more to take children out of poverty than any other single measure of this or of previous governments in living memory. Equally, at the same time, the spread of tax credits is to middle as well as lower income families in the country in a way that is the Government and the country accepting that we have some obligation to help families with the costs of bringing up their children and that we want to help them balance work and family life through the implementation of the child tax credit. For the very vast majority of people on child tax credits this has been a very successful system.

  Q329  Susan Kramer: If I could just take on the issue of competence of the Treasury, that is the issue of SIPPS and this decision that you announced on Monday not to permit people to put second homes, personal property, fine wines, etc, into their SIPPS. It is obviously something that I have been campaigning for along with my colleagues for months, during which we have been told that we simply did not understand the system, and I am delighted that you made that decision, but why so late?

  Mr Brown: I do not think I ever said that.

  Q330  Susan Kramer: I went through a Finance Bill, so I know what was said. Can I please ask why the decision was made so late in the day and how are you going to assist people who have already gone ahead, for example, and made a down-payment on an off-plan property with the expectation that it is going to go into their SIPP in April? There are a number of people who have been caught up in the expectations.

  Mr Brown: We have done what we thought was right, looking at all the evidence. It was actually what many people were asking us to do and I think it is the right decision. People are not prevented from putting assets into their scheme. What they are prevented from getting is the benefits of the full tax relief that was available before.

  Q331  Mr Mudie: Just on tax credits, Chancellor, whilst accepting, and very much without reservation, the benefits of tax credits, and welcoming the moves you have made in the Pre-Budget Report, I am still not losing sight of the fact that the Ombudsman has made some recommendations which you are considering. I presume the Pre-Budget Report was not an answer to those or a final decision on those, but I hope—and I would like you to confirm it—that those are still being considered somewhere in the Treasury.

  Mr Brown: Just as we will look in detail at the recommendations from the National Audit Office, as I was indicating to Mr Ruffley, we will look in detail at the recommendations from the Ombudsman. We do this all the time, but to get the decisions on these things right you have to look at them in some detail.

  Q332  Mr Mudie: I am not arguing. It is simply that you are confirming that they are still being looked at, and this is not the response in the Budget. Good as these moves are, they will not deal with the major items raised in the Ombudsman's report.

  Mr Brown: By the way, so that there is no doubt, I make it absolutely clear that we look at all the recommendations that are made but I am not here to announce decisions today. These are things that we look at in detail.

  Q333  Mr Mudie: That is a shame. Turning to domestic energy prices, the moves you made were very welcome in terms of the additional money for Warm Front. That is going to be divided between Warm Front, which has been aimed at pensioner credit individuals, whereas you have extended this £300 discount to people who are not on pensioner credit. How many households do you reckon will benefit as a result of this additional money?

  Mr Brown: I gave the figures of the number of households that do not have insulation at the moment and do not have central heating. I think it is something in the order of two million without insulation and half a million without central heating, but I stand to be corrected on that and someone will give me a note saying what the exact figures are. The issue is, can we do more to help these people get the insulation and the central heating they need? Some are on pension credit, some are not, so we wanted a system that extended to all pensioners. On average the saving from a fuel bill if you have insulation and central heating where you do not have it at the moment is something in the order of £300 a year, which is six pounds a week, which is a considerable saving for a family. The cost, however, of central heating can be in the order of about £3,000 for the installation. The costs of insulation can run into hundreds of pounds, so what we did was to talk to the energy companies and, to their credit, they have come up with a refinement of their existing schemes. Anybody on pension credit will get free insulation. We will provide free central heating for anybody on pension credit. For those who are not on pension credit there will be £127-£175 for help with insulation and there will be £300 to help with central heating. This is the best set of incentives that have been made available for these installations to take place and I hope anybody who finds out about these incentives from Warm Front—and we will publicise these incentives—will take them up as soon as possible so that even in this winter some people will have the chance of having insulated homes where they do not have them at the moment and central heating.

  Q334  Mr Mudie: I hope that note is not saying what I fear it might, because that is very interesting.

  Mr Brown: For those with no central heating it is around 300,000 and pension credit around 150,000. It is about half a million, as I said.

  Q335  Mr Mudie: That was very interesting though because you have actually made it a better package if that statement is accurate. I am not suggesting it is not; it is good news if it is because that suggests that an owner occupier pensioner can get £300 towards central heating and £175 towards insulation.

  Mr Brown: £125-£175, depending on the local schemes operated by the energy companies. That is a considerable improvement on the existing position. There is no income test involved in this at all.

  Q336  Mr Mudie: One of the worries I have is how are you going to ensure that the owner occupier, for example, gets a fair share? As I see it, the Warm Front people have a working relationship with the councils in the main and they have programmes and the programmes are set out for them by councils. That is now geared in a pretty familiar way. How do the owner occupiers get in and prevent all the money being spent by pensioner credit people with the help of local authorities?

  Mr Brown: I have looked at the website of Warm Front and they are advertising this service to everybody who is entitled to get it. The more there is publicity locally and nationally that this is an available scheme, and I hope individual MPs will be able to tell their constituents that this is something that is now available, the more we can see a take-up from the people on pension credit but also all pensioners for something that must be to the benefit of the pensioner but also to the benefit of the country because it will mean more efficient use of energy in the years to come.

  Q337  Mr Mudie: Ofgem reckoned that fuel poverty had dropped from 6.5 million to two million, which is a considerable achievement. However, the DTI reckons that that two million has been increased by 400,000 this year because of the effect of fuel prices. With the two million that you see coming from the oil companies, what is to prevent the oil companies just passing that on to the consumers at the higher prices and pushing further people into debt poverty?

  Mr Brown: The oil price is set more generally by the market price and it is about $55. This has an effect on gas and electricity prices and announcements will be made. As far as pensioner households are concerned the winter allowance that I was able to confirm at £200 for the whole of the Parliament and £300 for the over-eighties, as well as these other measures on insulation and central heating, mean that it is possible to envisage a situation where pensioners, instead of not being able to pay their fuel bills and not turning up the heating over the winter months, can feel confident that they have the resources to be able to turn up their heating when it becomes necessary, particularly in the coldest periods.

  Q338  Mr Todd: Chancellor, the level of public sector investment—scarcely a month goes by when in my constituency a major public building is not either finished or started.

  Mr Brown: I hope you are at the opening of all of them.

  Q339  Mr Todd: I cannot make every single opportunity, I am afraid. One of my concerns is the future projection of expenditure of that kind. I was slightly discomfited, I must say, by your pooh-poohing of the forecasts in the latter part of the spending period that we are discussing. If one looks at the comments of the OECD and other commentators, it is still the case, even with the level of investment that we are achieving, that we are probably at the bottom end of the scale of spending on our public sector assets. What steps are you taking to analyse that gap and decide how we can make up ground further?

  Mr Brown: I said to the House of Commons on Monday that, whereas we were spending around one billion on hospitals and less than that on schools in 1997, we are spending between five and six billion a year now on hospitals and schools, but you do not build the same hospitals and schools twice in the same decade unless something is really very far wrong, so once you have completed that programme of investment—


 
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