Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 400 - 419)



  Q400  Mr Mudie: Chancellor, I am thinking more of the incentives that help PEPs and ISAs be very attractive and have a very great take-up. Those are the sort of financial incentives that were put on the table which succeeded.

  Mr Brown: If my figure is right, about 15 million have taken up the new savings schemes. They are very popular.

  Q401  Mr Mudie: Can I just move you, without, I hope, opening any controversy over public sector pensions, to a less controversial aspect? Do you think it is equitable for a Permanent Secretary to be paying 1.5% towards their pension scheme and a nurse paying 6%? Why in these discussions has the matter of the inequity of contributions from a well-paid civil servant not been an issue? Do you know how much moving the 1.5% that they pay to the average 6% that a local government worker pays would bring in the Treasury?

  Mr Brown: The local government agreement, the regulation, was put to the House of Common last Friday by the Deputy Prime Minister. As I say, the civil servants issue is part of a framework agreement, which is now subject to sector by sector negotiations, which includes the civil service bloc, the health bloc and the education bloc, and I think that was the point I made to Mr Fallon. There is a framework agreement, but within that framework agreement there are sector by sector negotiations that are taking place.

  Q402  Mr Mudie: Has anyone passed you a piece of paper saying how much money you would raise if it went up to 6%?

  Mr Brown: It would be very unfair of me to pass the question to my colleagues. I am not prepared to do so. Of course, if you put a parliamentary question down, we will do our best to answer it. But the civil service negotiations are within the framework agreement.

  Q403  Mr Mudie: But can you defend the inequity of a nurse paying 6% and a Permanent Secretary paying 1.5%?

  Mr Brown: I think you will find that in the negotiations that are taking place in relation to nurses there is still a lot of work to be done.

  Q404  Chairman: Chancellor, on the Turner report, it is something that we as a Committee will maybe turn our attention to briefly because what Turner is suggesting, from what I can see, is a stakeholder product and it is a simplified product with little advice at all. That really should have been what a stakeholder product was about at the beginning. Certainly, from my questioning of the FSA, it looked as if they were hesitant in that particular area, and it does provide a challenge for private providers, because it is costs and management fees that we have got to get down here. It is something worth looking at.

  Mr Brown: Can I just say on this issue of information, we are working with the employers and the pension industry at the moment so that people get timely, accurate and tailored information to make informed choices about retirement provision. I am told that over 4.5 million pension forecasts were issued in 2004-05 and I am also told that from 2006 the web-based retirement planner will be available so that people can use a web-based system to check the value of their pension and therefore make informed choices about what they should do in future. There is a move to far greater information in this field and a greater degree of transparency which I think will benefit the individual saver making their decision. It may be something you want to investigate.

  Q405  Chairman: Taking George's point, there is a case for the Treasury looking at it here, because the overwhelming conclusion from our report Restoring Confidence in Long Term Savings was that the savings industry you could largely describe as a middle class industry. There are a lot of people we are not getting to, and I think that is a big political and economic issue.

  Mr Brown: Maybe I should answer this point by saying that I have just got information from my colleagues, not about the civil service percentage but about the savings gateway. 22,000 accounts have been opened in pilot areas, which is exactly the point that you are making, Chairman, that there is a large number of people who have no tradition of saving. Maybe better incentives are needed for them to do so. The incentives would include the matching schemes that we have been trying to develop for people who are, for example, on Working Tax Credit so that they can see that they are getting proper value for money for their savings, and the 22,000 accounts will give us a good indication of whether these schemes could work with more incentives.

  Q406  Mr Fallon: Chancellor, have you read the Lyons review?

  Mr Brown: I have read the Lyons review, yes.

  Q407  Mr Fallon: Do you recall in his executive summary he said departments should implement their relocation plans alongside efforts to align their pay with local labour market conditions? "My review has demonstrated that failure to make progress on locally flexible pay will limit the efficiency gains from dispersal and could undermine the economic benefits from receiving locations." When I asked Mr Cunliffe yesterday for some examples of local pay he could not think of any. Can you?

  Mr Brown: There are a number of pay agreements that have been signed actually, and some of them have given greater priority to higher wage rates or higher percentage settlements in the South East and the group of counties just outside the South East, recognising the costs of living in London and the South East. So I do not think it is true to say that there is not greater flexibility in pay arrangements between, if you like, the South East and the regions. There is, but this is an issue that is a continuing source of discussion. If I am right, there have been a number of agreements that have reflected differences in rates of growth of pay in the South East and in the wider perimeter as against the regions.

  Q408  Mr Fallon: How many Civil Service departments now have flexible local pay scales?

  Mr Brown: I would have to write to the Committee on that[2] but I think it is true to say that the Government's policy is to encourage greater flexibility in regional and local pay arrangements. It is also true to say that there are some agreements that I know about, but I could not give you the quantity of the agreements, that actually have moved into a changed relationship between the South East and the rest of the country.

  Q409  Mr Fallon: You announced this in budget 2003. You said, "Measures will be implemented to ensure that public sector pay systems include a stronger regional and local dimension."

  Mr Brown: I am just saying that that is what—

  Q410  Mr Fallon: Has anything happened?

  Mr Brown: Yes, of course. That is what has been done. I am referring to South East and wider South East agreements that reflect a higher rate of pay recognising the cost of living in the South East. Lyons, of course, has proposed that we relocate over 20,000 civil service jobs outside London. I was able to inform the Committee on Monday that more than 2,000 in this period since the last budget had been announced. Wales is one area, Taunton and the South West is another, Yorkshire is another and Scotland is another. So I think there are areas where the Lyons proposals are moving forward quite quickly.

  Q411  Kerry McCarthy: We have touched very briefly on investment in transport infrastructure. Do you accept that so far it has not been a particularly high priority as opposed to investing in schools and hospitals? Do you think that has held back Britain's economic performance and is it continuing to do so?

  Mr Brown: Transport investment is doubling. It is only possible to double investment in transport, as to improve your investment in hospitals and schools, if you are prepared to put the resources into doing it. We have made some quite difficult decisions, like the National Insurance rise to pay for the National Health Service increases in both capital and current investment, and governments have to bear in mind that they have got to get the right balance. We will continue to increase public investment consistent with our sustainable investment rule. I think that is what the country would like us to do. Transport investment is doubling. Of course we want to do more and of course there are major road projects, as well as rail projects, on the stock that we have to look at.

  Q412  Kerry McCarthy: On the question of demand management in terms of transport, obviously, there is only so much you can do in terms of investing in the infrastructure, as you say, because there are other priorities. In terms of using fiscal measures to manage demand, how far are you prepared to go along that?

  Mr Brown: When you talk about the old Keynesian demand management, I think we have moved a long way beyond that. Our fiscal rules are designed to—

  Q413  Kerry McCarthy: Sorry. I meant demand management in the context of transport.

  Mr Brown: Our general policy is to promote the stability of the economy, which is the essential element for increasing jobs and improving public services. On transport, I think the Secretary of State for Transport will be able to tell you of the large number of road projects that have been possible because of the 10-year Transport Plan, but equally of course, because of the rising population in this country, because of the particular pressures in some areas as a result of increased economic development, in a sense, because of the problems of success, we have had higher growth in the economy than many people would have expected over all since 1977 and because we have a rising population and more jobs in the economy, these pressures on infrastructure will grow. That is one of the reasons we have put forward this proposal for the Planning Gain Supplement, which is something that has to be discussed in the consultation period, so that developers are contributing at least something more to the infrastructure needs of the local authority areas which are developing new housing projects. Most people round the country would say that it would be fair for that contribution to be increased.

  Q414  Kerry McCarthy: There is talk at the G8 of an air ticket levy, for example, and things like the fuel duty escalator as well. What role do you see for those sorts of fiscal measures? My perception of the air ticket levy is that it is designed primarily to raise funds for international aid rather than being anything to do with managing demand.

  Mr Brown: The air ticket levy, if I may tell the Committee, is something we have already got. It is the passenger tax that is paid on airline tickets. We have no proposals to change that. What other countries are considering doing is introducing that, directly contributing from that to the overseas development budget. We would agree to make a contribution directly from the existing air passenger duty, and therefore other countries would be doing as we do, and that is to make some contribution from what we raise from that to international development. But we would do it from the existing amount that we do raise. I think that, as far as fuel duty is concerned, we have the right policy now. We inherited an escalator, we dropped the escalator and we have the right policy to look at these decisions year to year.

  Q415  Peter Viggers: The thinking behind my allegedly offensive remark earlier is that I really do believe that there is a disconnect between the intellectually satisfying world of the Treasury and the real commercial world of businessmen working late into the evening to complete their VAT and tax returns. Have small businesses gained anything from your continual adjustments for the last three years to the tax breaks available to small business?

  Mr Brown: You talked about VAT. The VAT simplification scheme that we have put forward is to the benefit of particularly small businesses because, instead of having to submit calculations for each item where VAT is charged, you can have a flat rate overall VAT allocation based on a proportion of your revenue, and that avoids all the difficult form filling. I think a lot of accountancy firms have not found it terribly attractive to them because part of their work is to do this for small businesses, but if I was a small business, I would see huge advantages in avoiding the amount of form filling that is necessary. If I may say so, about the Pre-Budget Report, the Federation of Small Businesses have kindly said they welcome the small business measures—this is after the PBR—and the simplification that they will offer, especially the corresponding increase in the level of capital allowances that can be claimed by small businesses. The Institute of Directors has welcomed our proposals as well. I understand we sometimes have to take difficult decisions but the VAT annual accounting scheme on top of the VAT simplification scheme is an attempt to help small businesses deal with that necessary return on VAT, without them having to fill in additional paper work.

  Q416  Peter Viggers: Three years ago, you introduced a zero rate of Corporation Tax for small business. You were warned at the time this cause difficulty. You have now scrapped it, and the capital allowances you just referred to will result in a benefit to small businesses of £45 million over three years.

  Mr Brown: If I may say so, the Institute of Directors has just issued a statement saying the replacement of the zero rate by increased capital allowances for small businesses was welcome and this will reduce differences in the taxation of small businesses and how they are organised.

  Q417  Peter Viggers: Cancelling the introduction you made three years ago of the zero rate Corporation Tax will cost small businesses £885 million. It is actually £930 million over three years.

  Mr Brown: I do not accept that. We have cut the rate of small business taxation from 23 pence to 19 pence since we have been in government. Even with your criticisms of some of our other policies, you should give us some recognition for the fact that we have actually cut the rate of taxation for small businesses from 23 pence to 19 pence, by 4 pence. Actually, when we came into government it was 24 pence, and it was just an announcement that we cut to 23 pence, so in a sense we have cut it by 5 pence.

  Q418  Peter Viggers: In the Pre-Budget Report it says "Tackling tax motivated incorporation +10, +390 +530 million over three years". Why should not small businesses regard this as an increase in taxation?

  Mr Brown: Most small businesses will understand that where there is tax avoidance, people have been artificially creating a small business simply for the purposes of avoiding tax, it is our duty to take action in that regard, and I think, even with your other criticisms of government policy on this issue, you would support us for taking action. But in the end, what we have done is increase the capital allowances for small businesses. We have introduced at some cost also the VAT annual accounting scheme. That cost £55 million in 2007-08, so in addition the 4p cut in Corporation Tax, we have the VAT annual accounting scheme and we have the capital allowances improved.

  Q419  Mr Ruffley: Just a quick point of clarification, Chancellor. I am quoting from a DTI supplement to a DTI press release known as P/205/321 18 October, and it is quite important, if I may just—

  Mr Brown: It sounds like a question for the Trade and Industry Committee, if I may say so.

2   See supplementary memorandum dated 16 January 2006. Back

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