Scrutiny of annual Budgets and Pre-Budget Reports represents an important means by which the Treasury Committee examines the economic policy of the Government. In this Report on the 2005 Pre-Budget Report we explore the reasons behind the slowdown in the United Kingdom economy in 2005 and the Treasury's lower forecasts for growth in 2006. We note that, despite its relatively large forecast error in 2005, overall the Treasury has had a good forecasting record for GDP growth in recent years. We recommend that the Office for National Statistics devotes more resources to improving the measurement of growth in the service sector of the economy. We draw attention to the need for assessments by the Treasury and The Pensions Regulator of the impact of recent changes relating to pension funding on investment by and the solvency of companies affected. We recommend that the Treasury investigate the extent to which the negative effects on growth of higher oil prices were greater in the United Kingdom than in the other major G7 economies and report on the outcome of those investigations at the time of the 2006 Budget. We recommend that the Government consider commissioning research into the economic effects of migration, and note areas for improvement relating to skills levels in the United Kingdom.
The public finances
Lower economic growth has contributed to a tighter fiscal situation than previously forecast. We explore the changes that have affected consideration of whether the Government will meet its fiscal rules in the current cycle, in particular the "golden rule" which states that, over the economic cycle, the Government will borrow only to invest and not to fund current spending. We propose that the Treasury review the fiscal rules, including examination of the extent to which the existing fiscal rules need to be supplemented during a period when it seems likely that the economy is passing from one cycle to another. We examine the Treasury's overestimates of revenue receipts in recent years, and consider prospects for public expenditure in the medium term.
The Pre-Budget Report contained a number of tax measures and other policy announcements which are also explored in this Report. We recommend the provision of further information to enhance public and parliamentary confidence in efficiency savings arising from the Gershon review. We recommend that the Treasury examine its analysis and decision-making processes in relation to deciding whether to allow investment in individual residential property by self-invested personal pensions (SIPPs) from April 2006. We call for the provision of further information to assist in analysing the costs and savings arising from the changes to the tax credits system announced in the Pre-Budget Report.