Examination of Witnesses (Questions 320
THURSDAY 8 DECEMBER 2005
MP, MR JON
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
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
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
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
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
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 hopeand
I would like you to confirm itthat 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
Frontand we will publicise these incentiveswill
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
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 investmentscarcely a month goes by when
in my constituency a major public building is not either finished
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