House of Commons - Treasury

Select Committee on Treasury Second Report

4 OTHER ISSUES

71. At the time of the 2004 Spending Review, the Government published an independent review of public sector efficiency by Sir Peter Gershon.[187] The Gershon review identified £21.48 billion of efficiency savings which could be secured by the end of 2007-08 by central government departments and local government and these savings were incorporated in spending plans within the 2004 Spending Review. Some savings were intended to be cashable and to allow resources to be recycled to fund priorities at the front line; others were intended to lead to improved outputs for the same level of inputs. The savings were to be retained by departments; they were not intended to represent cuts in departmental funding.[188] The 2005 Pre-Budget Report outlined the progress that has been made so far in identifying and securing these efficiency savings. It indicated that departments and local authorities have reported annual efficiency gains totalling £4.7 billion by the end of September 2005, with further gains achieved since then. Local authorities are reported to have delivered more than £750 million of efficiency gains in 2004-05 and are expected to achieve annual efficiency gains of £1.9 billion by the end of 2005-06. The Pre-Budget Report cites some examples of savings achieved or in prospect within departments.[189]

72. Professor Colin Talbot of Manchester Business School was sceptical about the progress reported by the Treasury. He pointed to the lack of detail about savings by department and to the difficulties in measuring the non-cash savings arising from claims of improved outputs.[190] In response to concerns about the lack of a breakdown indicating how the total of £4.7 billion of savings reported in the Pre-Budget Report was arrived at, Treasury officials indicated that departmental figures were scrutinised and held by the Office of Government Commerce and were measured in accordance with departmental Efficiency Technical Notes which were developed with advice from the National Audit Office.[191] The Treasury also indicated that the NAO would be reporting on the efficiency programme in the spring of 2006.[192] The Chancellor of the Exchequer told us that detailed departmental figures would be available in departmental Autumn Performance Reports.[193]

73. An initial analysis of the Autumn Performance Reports—which, despite their name, were largely published between 7 and 20 December 2005—by the Scrutiny Unit within the House of Commons suggests that around £4.6 billion of the reported savings can be accounted for in those departmental reports. However, there appears to be some confusion about local authority savings, because an overall total is reported on by the Office of the Deputy Prime Minister while some elements of that overall total are also reported on separately by the Department of Health, the Department for Culture, Media and Sport and the Department for Environment, Food and Rural Affairs, leaving it unclear whether or not there has been double-counting. The quality of the information on efficiency savings varies considerably between departments. Treasury guidance on 2005 Autumn Performance Reports stated that "departments should … set out the efficiency gains achieved to date—i.e., the amount achieved in monetary terms—both in 2004-05 and in 2005-06".[194] Some departments fail to do this, including the Treasury itself.[195] The absence of efficiency targets and achievements broken down by financial year hinders the ability to assess a department's performance and verify that efficiency gains achieved in one year are sustainable in the next. Some departments fail to provide any detailed information to substantiate the headline figures provided by relating them to particular programmes.

74. Delivering the efficiency savings identified in the Gershon review represents an integral element in ensuring the effective deployment of public money during the planning period covered by the 2004 Spending Review. The headline figure of savings of £4.7 billion reported by the end of September 2005 presented in the Pre-Budget Report is encouraging, but the information in support of this figure should be enhanced in order to strengthen parliamentary and public confidence in the progress achieved. We recommend that future Budgets and Pre-Budget Reports include a breakdown of reported savings by department and by financial year, as well as an analysis of local authority savings which distinguishes savings by sector and by whether or not they are cashable. We further recommend that departments be required, in future departmental annual reports and autumn performance reports, to set out targets by financial year and by programme or theme for meeting their overall targets and to report on progress in relation to such intermediate targets.

75. An important and integral element of the Gershon efficiency programme is the proposed reduction in the Civil Service workforce. The Gershon review estimated that there would be a gross reduction in Civil Service numbers in consequence of the efficiency programme of 84,150 posts between April 2004 and April 2008; the net target for reductions was 70,600, the difference representing re-allocations to front line roles in the Civil Service.[196] The aim is to secure a gross reduction in posts of 84,000 compared with what would be the case if the efficiency programme were not being implemented; there is no guarantee that other factors will not lead to off-setting increases in Civil Service numbers.[197] The Pre-Budget Report stated that, by September 2005, a gross workforce reduction of 31,085 had been achieved, including 5,771 posts re-allocated to front line roles.[198] The updated Efficiency Technical Notes published by departments in December 2005 indicate that different departments are using different starting dates for measuring workforce reductions: for example, the Department of Health baseline is March 2003, the Department for Education and Skills uses October 2003, HM Revenue and Customs uses April 2004 (the original Gershon starting point) and the Office of the Deputy Prime Minister uses June 2004.[199] If different starting dates are able to be used, departments might seek to choose a time when their workforce numbers were at their highest, thus exaggerating the extent of decline from the Gershon review starting point. We recommend that, in Budgets and Pre-Budget Reports, the Treasury report on progress towards the Gershon workforce reduction targets from a single baseline in April 2004 and ensure that information is readily available to enable departmental reductions reported on different baselines to be reconciled with such totals.

76. In March 2004 the Government published a report by Sir Michael Lyons on public sector relocation.[200] As part of the 2004 Spending Review the Government accepted proposals in that report for relocating 20,000 posts away from London and the South East by 2010, with at least half of the workforce relocations planned for completion by 2007-08, and agreed that these plans would be taken forward as part of the Gershon efficiency programme.[201] The Pre-Budget Report indicates that 6,300 posts had been relocated by the end of September 2005 and that over 7,800 posts would be relocated by April 2006.[202] The Chancellor of the Exchequer thought that "there are areas where the Lyons proposals are moving forward quite quickly".[203]

An independent Office for National Statistics

77. Shortly before the 2005 Pre-Budget Report, the Chancellor of the Exchequer announced that the Government intended to publish plans early in 2006 "to legislate to make the Office for National Statistics independent of Government, making the governance and publication of official statistics the responsibility of a wholly separate body at arm's length from Government and fully independent of it".[204] The Government proposes to create an impendent governing board for the ONS, which will report to Parliament and be accountable to this Committee.[205] These welcome developments follow calls on the part of previous Treasury Committees for statistics legislation:[206] a previous Committee described such legislation as "absolutely essential".[207]

SIPPs and pensions simplification

78. In 2003 the Treasury announced plans, which were subsequently given legal effect in the Finance Act 2004, to simplify the pensions regime, so that a single regime would apply to large pension funds, small self-administered schemes and SIPPs (self-invested personal pensions). As part of the process of simplification, the Government decided to allow all pensions schemes, including SIPPs, to invest in residential property with effect from 6 April 2006. In 2003 our predecessors put to the Chancellor of the Exchequer the suggestion that it was hard to reconcile the ambition to control the disproportionate influence of the housing market on the economy with a proposal that will allow billions of pounds of pension fund money to wash into that market. The Chancellor of the Exchequer indicated at that time that he thought the author of that remark was wrong. At that time, our predecessors recommended that the Treasury assess the extent to which simplification would lead to additional investment in individual houses and "create opportunities for abuse".[208]

79. In the 2005 Pre-Budget Report, the Chancellor of the Exchequer announced that he was publishing "anti-avoidance measures" including measures to address "the misuse of self-invested personal pension schemes to purchase second homes".[209] The effect of the latest announcement is to reverse the previous proposal to allow SIPPs to invest in individual residential properties with effect from 6 April 2006.[210] Evidence we received on this matter focused as much on the timing of the latest decision as on its merits. Mr John Whiting of PricewaterhouseCoopers thought that the disappointing feature of the latest announcement was that "it has taken a long while to get there which suggests a bit of havering and worrying about do we go down there. Undoubtedly given where we are now or where we are going to be, it would have been far better had that been laid down at the start".[211] In their submission to us, the Nationwide indicated that they thought the Chancellor of the Exchequer's latest decision "seems poorly timed" given that the previously announced change was scheduled to come into effect in April. They characterised the latest decision as "a financial blow to those people who have either set up a SIPP in readiness, or who have paid deposits on off-plan flats so that they can put the property into their pension in April".[212] Mr Tony Orhnial, Director, Personal Tax and Welfare Reform, HM Treasury, denied that the latest decision was a "panic decision", describing it as "considered",[213] although he was aware of the industry representations on this subject.[214] The Chancellor of the Exchequer said that the changes to the SIPPs rules "was actually what many people were asking us to do and I think it is the right decision".[215] He also indicated that it followed a commitment to look at the previous position.[216] In view of the concern voiced by our predecessors and others about the possible impact on the housing market of the previous proposals to permit investment in individual residential property by SIPPs, the revised policy appears appropriate, but the reversal came very late in the day. We recommend that the Treasury examine this episode to ascertain why the likelihood of misuse was not more apparent to it at an earlier stage and whether any unnecessary costs were incurred by the timing of the change of policy. We further recommend that the Treasury report on the outcome of this examination and any lessons it has learned for the future conduct of tax policy in its reply to this Report.

Tax avoidance

TAXING SMALL BUSINESSES

80. Over the past three and a half years, the Government has made several changes to its policy on taxing small businesses with the intention of encouraging small companies to retain and reinvest their profits for growth. In Budget 2002, the Chancellor of the Exchequer announced that, from 1 April 2002, the corporation tax starting rate would be reduced from 10 per cent to zero, "meaning that 150,000 small companies will no longer pay any corporation tax", and that the small companies' rate would be reduced from 20 per cent to 19 per cent, "reducing the corporation tax bills of a further 335,000 companies".[217] In Budget 2004, the Government modified these earlier measures, in order to tackle "the increasing numbers of self-employed individuals adopting the corporate legal form where the change is made for tax reasons rather than as a step to growth".[218] In order to "proceed in a way that protects the benefits of low tax rates for those investing in their businesses", the Government introduced, from 1 April 2004, a 19 per cent minimum rate of corporation tax on distributed profits to "ensure that corporate tax rates lower than 19 per cent, including the zero rate of corporation tax introduced in April 2002, remain available to small companies as they re-invest in their business. Businesses re-investing their profits, or companies with taxable profits above £50,000, will be unaffected by this measure."[219]

81. In the 2005 Pre-Budget Report the Government announced further changes to small business taxation. Despite the modifications introduced in April 2004, the Government continued to be concerned that the zero and minimum rates of corporation tax were resulting in "tax-motivated incorporation", whereby "many self-employed and employed people are being advised to incorporate simply to reduce their tax and NICs liability".[220] The Pre-Budget Report therefore stated that the non-corporate distribution and zero rates would be replaced with a new single banding set at the current small companies' rate of 19 per cent, which will "simplify the corporation tax calculations for most small businesses, refocus incentives, and leave the small companies' rate at its lowest since its introduction in 1973".[221] The Chancellor of the Exchequer announced that the zero and non-corporate distribution rates would be replaced with a rise in the investment allowances for smaller businesses to 50 per cent.[222] The Government estimates that it will make significant savings from "tackling tax-motivated incorporation": an estimated £930 million in tax years 2005-09. In the same period, introducing 50 per cent first year capital allowances for small enterprises is estimated to cost the Government £45 million.[223]

82. Mr Whiting thought that the latest changes in the taxation of small businesses would be viewed by them with a mixture of confusion and relief. He emphasised the importance of providing advice for small businesses "as to how to disentangle themselves out of what they may have got themselves into".[224] The Chancellor of the Exchequer told us that both the Federation of Small Businesses and the Institute of Directors had welcomed the latest changes.[225] Asked to comment on the fact that the Government expected to save £930 million from scrapping the zero corporation tax rate, whereas it expects to spend only £45 million introducing 50 per cent first year capital allowances, the Chancellor of the Exchequer pointed to the fact that the present Government has cut the rate of small business taxation from 23 pence to 19 pence in the pound since 1997. He also referred to the VAT annual accounting scheme, which he estimated would cost the Exchequer £55 million in 2007-08.[226]

83. Our predecessors had cause to comment on the Government's implementation of its policy on taxing small businesses. In its Report on Budget 2004, the then Committee noted that it had been "widely predicted" by commentators that the introduction of the zero rate of corporation tax would lead people to incorporate to avoid tax and national insurance by reclassifying their income as dividends. Our predecessors were puzzled as to why neither the tax authorities nor the Treasury had anticipated this likely effect and noted that, over the 2003-04 and 2004-05 tax years, the oversight had cost the taxpayer an estimated £670 million in lost revenues.[227] We welcome the Government's announcement that the non-corporate distribution and zero rates will be replaced with a new single banding set at the current small companies' rate of 19 per cent. We are pleased that the Government has recognised the need for both certainty and simplicity in this area, although it is unfortunate that it has taken it over three years to do so. We recommend that the Government issue clear guidance on the tax rates applicable to small business as soon as possible. This guidance should provide sufficient information to enable those running small companies to assess whether the cost of continuing to operate as a company will now outweigh the available tax savings. It should also provide clear information about the steps to be taken to wind up a company. We also welcome the Chancellor of the Exchequer's announcement that the zero and non-corporate distribution rates will be replaced with a rise in the investment allowances for smaller businesses to 50 per cent. The Pre-Budget Report indicates that, while abolishing the starting allowance is expected to increase tax revenues by £930 million over the next three tax years, the rise in the investment allowance is expected to benefit companies by only £45 million over the same period and there will be a further benefit of £55 million by 2007-08 from the VAT annual accounting scheme. We urge the Government to assess what further measures it can put in place to encourage small companies to retain and reinvest their profits for growth.

THE DISCLOSURE REGIME

84. In the 2004 Budget, the Chancellor of the Exchequer announced that he would be introducing legislation to establish a new regime whereby certain tax avoidance schemes would be required to be disclosed to what is now HM Revenue and Customs (HMRC). The disclosure requirements were enacted in Part 7 of the Finance Act 2004 and apply to promoters who market schemes and arrangements that meet certain criteria for direct taxes, and to businesses using VAT arrangements that meet certain criteria.[228] The Pre-Budget Report announced the Government's intention to extend the disclosure regime to "all of income tax, corporation tax and capital gains tax", effective from April 2006.[229] HMRC intends to discuss the proposed changes with stakeholders before bringing them into effect, although it is yet to provide any detailed proposals. Mr Whiting welcomed the fact that HMRC intends to hold discussions on the proposed extension of the disclosure regime. He trusted that such discussions should mitigate the risk of the disclosure regime becoming unduly onerous, warning that an over-burdensome regime would be detrimental to both HMRC and the tax industry because HMRC would be "flooded with lots of disclosures that they do not need to hear about … and we are back to disclosing a haystack of things and leaving the authorities looking for the needle and it serves nobody's interest".[230] We look forward to the Government providing further detail about its proposals to extend the tax avoidance disclosure regime to "all of income tax, corporation tax and capital gains tax". We trust that HM Revenue and Customs will ensure that it consults fully and appropriately on the proposals, to ensure that the optimum balance is struck between protecting tax revenue against inappropriate avoidance schemes and ensuring that the disclosure regime does not place an unreasonable administrative burden on businesses.

85. Once the Government has fleshed out its proposals, we will be interested to learn which taxes will remain outside the disclosure requirements, and the reasoning behind such exclusions. In view of the broadening of the disclosure regime, we recommend that the Treasury state whether it now has any intention to introduce a general anti-avoidance rule.

Other tax issues

THE PLANNING GAIN SUPPLEMENT

86. The 2005 Pre-Budget Report announced a consultation into a planning-gain supplement (PGS), based on a recommendation made by Kate Barker. The PGS is designed to help finance the infrastructure needed to stimulate and service proposed housing growth and ensure that local communities better share in the benefits that growth brings. The introduction of PGS would be accompanied by a scaling back of planning obligations to make the planning system more efficient and transparent.[231] The experts that gave evidence to us were broadly supportive of the concept, while noting that the level of the tax and the way it was administered would determine the success of the tax. Mr Whiting said:

232

87. In their submission to us, the CBI said that they were "very concerned" about the possible imposition of the planning gain supplement. In their view it "would be practical only in a very limited number of cases (e.g. greenfield sites designated for development and undergoing a large and identifiable uplift in value). And these situations are in any case already subject to taxation. Its application to anything beyond the simplest land transactions would risk deterring development."[233] Mr Dave Ramsden, Director, Budget and Tax Policy, HM Treasury, acknowledged that "there are lessons from attempts in the past which have not worked out for various reasons".[234] He believed that landowners will only stop letting land come onto the market if they thought "the tax is not going to be sustained over a number of years".[235] Mr Ramsden gave three reasons why he believed that the PGS would be an effective measure: "it will catch a modest portion of the uplift [in value], so we think it will preserve incentives to develop … we can come up with clear definitions of value and self assessment [and] … we can avoid the kind of complex offshore arrangements you quite often see in this area".[236]

88. In her final report on housing supply, Kate Barker said "Government may want to consider the operation of a (substantially) lower rate for housing development brownfield land, and the possibility of varying rates in other circumstances, e.g. for areas where there are particular housing growth strategies, or where other social or environmental costs may arise".[237] Mr John Kingman, Director, Enterprise and Growth Unit, HM Treasury, said that the PGS will make "a difference to local authority incentives [such that] we believe that the net effect of the package amount will be to increase supply quite substantially".[238] On investment in transport and local services, the Chancellor of the Exchequer noted that the PGS would provide revenues that could be used to improve local infrastructure: "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".[239] On the planning process itself, Mr Weale commented "If you think you need a tax that has to accrue to the local authority to encourage them to change the way they handle their planning rules then it seems to me that there is something very badly wrong with the planning process".[240] We welcome the Government's announcement that they are to consult on the introduction of PGS, which should help to deliver the necessary new housing growth in a sustainable fashion. We trust that the Treasury will ensure that it consults fully and appropriately on the proposals, to ensure that the optimum balance is struck between raising revenues to improve local infrastructure, whilst not deterring landowners from selling their land for housing development or compromising appropriate planning safeguards. In particular, we expect the Treasury to give full consideration to applying lower rates (or a total exemption) for PGS applied to brownfield sites. We also consider that, regardless of the eventual decision on introduction or design of the PGS, Government should continue to accord a high priority to securing improvements to the planning system, which currently inhibits the growth in housing supply necessary to keep house prices at an affordable level.

THE NORTH SEA SUPPLEMENTARY CHARGE

89. The 2005 Pre-Budget Report announced, "in response to the recent significant rises in oil prices which are now expected to be sustained in the coming years, the Government will, with effect from 1 January 2006, increase the rate of supplementary charge to 20 per cent… The Government is clear that there will be no further increases in North Sea oil taxation during the life of this Parliament".[241] Mr Whiting told the Committee that as a consequence of the increase in the North Sea supplementary charge, North Sea oil companies would be looking carefully at the viability of future investment opportunities, although he welcomed the assurance that there are no further tax changes to come in. Mr Ramsden told the Committee: "where we introduced the supplementary charge of 10 per cent, we cannot see a discernible impact on investment … This picture we now have that the oil price is going to be sustained at a higher level in the medium-term does seem to be feeding through into the amount we are seeing of exploration and appraisal … We would not be doing this if we thought it was going to have an effect on investment".[242] The Chancellor of the Exchequer said the "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 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."[243] We welcome the Treasury's promise of no further increases in North Sea oil taxation during the life of this Parliament, not least because any subsequent increases might increase uncertainty around future taxation of oil companies and might serve as a disincentive to future investment in the North Sea.

Tax credits

90. The 'new' tax credits—child tax credit and working tax credit—have been in place since April 2003. The 2005 Pre-Budget Report announced a package of measures to reform the tax credits regime, most of which will take effect between April 2006 and April 2007. The key changes in this package include:

increasing the disregard for increases in income between one tax year and the next from £2,500 to £25,000;

applying automatic limits on the amount of overpaid tax credits HM Revenue and Customs recovers from claimants where awards are adjusted in-year, following a reported change; and

in the case of claimants who report a fall in income during the year, continuing to adjust their tax credits payments for the rest of the year to reflect their new income level but assessing whether they are entitled to a one-off payment for the earlier part of the year at the end of the year, rather than at the point at which they report the fall in income.

The package will also require claimants to report more changes in circumstances than is currently the case, and to do so within one month, rather than the current three month limit. The deadline for the return of end-of-year information will be moved forward, from the end of September to the end of August.[244] The Paymaster General, Dawn Primarolo MP, described the reforms as providing "greater certainty for claimants, particularly those on lower incomes, while maintaining flexibility to respond to falls in income and changes in circumstances" and as giving "claimants clear responsibilities to report changes promptly and more regularly".[245] Treasury officials described the reforms to us as "a package, if you like, of rights and responsibilities in that the Government is giving people a more generous treatment both in terms of in-year repayments and threshold payments, but in return they are expecting, assisted by HMRC, more responsibility [to be taken by claimants]".[246]

91. The Treasury Sub-Committee is currently examining the administration of tax credits in some detail, and will look closely at the implications of the latest changes announced in the Pre-Budget Report.[247] Our remarks at this stage are confined to the cost and overall effect of the changes. The Pre-Budget Report provides estimates of the cost of the package of reforms to the tax credits system. The reforms are estimated to be revenue neutral in 2005-06, to cost £100 million in 2006-07 but then to save £250 million in 2007-08 and 2008-09.[248] We sought clarification from the Chancellor of the Exchequer and from Treasury officials about why they expected the reforms to produce a combined saving of £250 million in 2007-08 and 2008-09 given that the HMRC estimates that, in 2003-04, the £2,500 disregard cost £800 million.[249] Officials responded by saying that the reforms needed to be considered as an overall package, and that it was "a balance of different measures and different timing effects" that produced the estimated savings.[250] The Chancellor of the Exchequer told us that changes such as "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" would all save money: "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".[251]

92. We also sought a written explanation from the Treasury on the cost of the package of reforms proposed to the tax credits system. On the basis of this explanation, the figure of £250 million appears to represent a saving based on existing estimates of the cost of the tax credits system in 2007-08 and 2008-09, although this is far from clear from the information provided: "The basic principle is that when money is paid out to tax credit claimants, it scores as a cost to the Exchequer. On the other hand, when any overpaid tax credits are recovered, there is a yield. Our baseline forecast included a prudent assumption for ongoing overpayments, which were accounted for in full as a cost to the Exchequer."[252] According to the Paymaster General, without the latest changes, initial estimates suggested that subsequent years' tax credits overpayments would be "broadly the same level as in 2003-04", when overpayments totalled £2.2 billion.[253] The Paymaster General anticipated that, once the latest changes were fully implemented, the value of overpayments would be reduced by around one-third.[254] It is presumably this reduction in the value of overpayments which the Government expects to generate the £250 million saving. We are concerned that the Government has yet to provide clear and detailed information about precisely how it has concluded that its proposed package of reforms to the tax credits system will produce a combined saving of £250 million in 2007-08 and 2008-09. We accept that the more stringent requirements for claimants reporting information to HMRC should save money. However, it would also appear that the ten-fold increase in the disregard for increases in income, from £2,500 to £25,000, will be costly. We recommend that the Government provide us with a detailed breakdown of the calculations involved in reaching the estimated £250 million saving.

93. The Pre-Budget Report states that the ten-fold increase in the disregard for increases in income—from £2,500 to £25,000—will ensure that "almost all families" with increasing incomes will not have their tax credit entitlement reduced in the first year of the increase.[255] The Chancellor of the Exchequer told the House that the increase "will cover 95 per cent of all income rises during a year".[256] The Government does not expect the measures to affect the tax credits system's existing flexibility in responding to falls in income and changes in circumstances.[257] Mr Chote discussed the trade-off between having an income system which is simple and one which is responsive:

258

The Chancellor of the Exchequer also commented on the implications of the PBR package for the design of the tax credits system. If the package "does not work and it is not going to be seen to be working", he considered that the Government would then "have to look at" adopting a fixed awards system in which tax credits awards are based on last year's income: "we will continue to look at that, and if that becomes necessary to do we will do it".[259] However, the Chancellor of the Exchequer thought that a more responsive system, where "the child tax credit was based on your actual income over the course of the year, at least at the start of the year, [rather] than on last year's income", was "better" and also "better for the economy".[260] We welcome the fact that the Government is seeking to improve the operation of the tax credits system by introducing a package of reforms. The reforms are intended to redesign the tax credits system so that, where income rises, tax credits entitlements will almost always remain fixed for the remainder of the year and, where income falls, tax credits entitlements should be responsive to such falls. In effect, the Government is seeking to strike a different balance between an income system which is simple and one which is responsive, with the balance leaning a little more towards a fixed awards system than has previously been the case. Most of the planned reforms will take effect between April 2006 and April 2007. We will continue to monitor the operation of the tax credits system during this period, to assess the extent to which the reforms address the significant difficulties associated with the operation of the system to date. We also welcome the Chancellor of the Exchequer's undertaking that he will continue to review the effectiveness of the tax credits system. We note his statement that he is prepared, if necessary, to adopt a fixed awards system in which tax credits awards are based on last year's income.

The Pensions Commission

94. When the Second Report of the Pensions Commission chaired by Lord Turner was published on 30 November 2005, much attention focused on the costs of the Commission's proposals. The 2005 Pre-Budget Report states: "The Pensions Commission has also estimated that the total cost of its package would be £7.6 billion in 2020 in real terms, relative to expenditure assuming earnings indexation of the Guarantee Credit … The cost of indexing the Guarantee Credit by earnings reaches £6.4 billion by 2020. For public finance purposes this £6.4 billion would be an addition to the medium-term expenditure forecast." Accordingly, the total cost above the medium-term expenditure forecast is estimated at £14 billion in 2020, expressed in real terms. Mr Orhnial noted that "the proposal is to give a citizen's pension, as it were, give universal rights to pensions, for people from the age of 75 starting from 2010 …would cost… an additional £2.4 billion, which adds to the £14 billion that the rest of the package costs".[261] The Chancellor of the Exchequer told us that Lord Turner "could not assume that we would raise pension credit in line with earnings after 2008 simply because we had always put in our figures cautious assumptions about what pensions might cost in the years to 2050".[262] He also noted that these figures are not "the basis on which we will plan our policy for the years ahead".[263] However, Mr Chote suggested that "the DWP's numbers have been suggesting that they look at earnings indexation over the longer term and that seems to be a reasonable thing. If you do not earnings index the pension credit then you do get a situation where the possible state support just becomes less and less generous relative to the standard of living of people."[264]

95. The Chancellor of the Exchequer thought that "the main recommendation of Turner is actually the encouragement of private savings…What I would like to do is to look in detail at the Turner proposals that encourage both employees and employers to make provision for their pensions and look at what different decades have put aside for their pensions so that they are satisfied that by the time they do retire they have proper provision."[265] Mr Weale was asked about the impact of means testing on the provision made by individuals for retirement. He said "It depends on the scale of the means testing who is affected by it. One cannot just say means testing has that effect. There are degrees of means testing and the stronger they are the more they become an impediment to personal savings, so it is a relative not an absolute."[266] Mr Orhnial said that the Treasury "have no evidence at all to suggest that [means testing of pensions] is affecting savings".[267] Mr Weale suggested that the Government should produce a table, similar to Table 4.2 in the Pre-Budget Report 2005 (which shows the number of people affected by high marginal taxation rates), for people that are retired. This would give an indication of how many people are being affected by means testing under the current system.[268] We think this proposal has merit. We recommend that, as part of Budget 2006, the Treasury publishes a table comparable to Table 4.2 of the 2005 Pre-Budget Report but relating to people that are retired.

96. In respect of encouraging individual saving, the Chancellor of the Exchequer said "We have a number of pilots looking at how people can save more in which we are giving in some cases £1 for £1, in other cases 50 pence for £1. This is in low-income communities where saving has been difficult, and we are trying to make it worthwhile for people to save more, or to save at all, which is something that has not been happening. We are hampered by having large numbers of people who do not even have bank accounts still in this country, but the experiments or the pilots that we are doing have been relatively successful in encouraging more people to save."[269] We expect to consider the challenges faced in encouraging saving in communities that have not been engaged with financial institutions or savings products and do not have access to basic banking facilities further during our forthcoming inquiry into financial inclusion.

Combating fuel poverty

97. Domestic energy prices have risen sharply over the past year; gas bills have increased by 17.2 per cent in the year to November 2005, and by over 25 per cent in total over the last two years. Energy companies have also indicated plans for further rises in early 2006. Fuel poverty is defined as when a person spends more than 10 per cent of their income on energy bills. There have been substantial falls in fuel poverty since 1997, from 6.5 million in 1996 to 2 million in 2003. However, the Department of Trade and Industry estimates that with increased energy costs (even before some of the latest price rises), an additional 400,000 people will have fallen into fuel poverty. The Government announced in the Pre-Budget Report that it will set aside an additional £300 million to enable pensioners on Pension credit to have central heating installed free of charge, and provide a £300 discount on central heating systems to all other pensioners who do not already have one in their home. In addition, "energy suppliers have agreed to install loft and cavity insulation free of charge to households on Pension credit". The Chancellor of the Exchequer told us that there were around "two million households without insulation and half a million without central heating", of which around 150,000 households included persons who were claiming Pension credit and would qualify for free central heating. He told us that the average saving on a household's fuel bill from the installation of central heating and insulation would be around £300 a year. The said that the scheme would be "of benefit to the pensioner but also to the benefit of the country because it will mean more efficient use of energy in the years to come".[270] We warmly welcome action taken in the Pre-Budget Report to provide pensioner households with central heating and insulation. While substantial progress has been made in reducing fuel poverty since 1997, the Government needs to assess the impact of recent price rises carefully and take further action where necessary, considering the full range of households that might be in fuel poverty.

Public sector pensions

98. In December 2004 the Government announced plans to change the pension age for all public sector pension schemes to 65. It was intended that this would apply to new entrants from 6 April 2006 and to staff currently in post from 1 April 2013. The savings from this move were calculated at 2 per cent of the public sector pay bill once the changes were fully in place.[271] Following negotiations with the public sector unions, the Government agreed a new set of framework principles in October 2005 that will be applied to the reform of public sector pension schemes. The Department of Trade and Industry press release announced that "A principle underlying this agreement is that existing scheme members will have the right to suffer no detriment in terms of their normal pension age and will retain their existing pension provision unless individual or collective agreements within sector specific negotiations are reached which allow changes to those provisions or transition to new schemes".[272] We asked the Chancellor of the Exchequer whether this meant that the pension age for existing public sector workers would remain at 60. The Chancellor of the Exchequer told us that "the Treasury set out to save £13 billion. We have saved £13 billion. There are now sector-by-sector negotiations around a framework agreement that was signed by the negotiators. These sector-by-sector negotiations are not yet complete and I think you might be well advised to wait until these are complete … I think it is possible that all things will be looked at in the sector-by-sector negotiations."[273] It is essential that public sector pension schemes ensure value for money for taxpayers. We ask the Treasury to provide more details of the cost savings made under the framework agreement, compared to those projected under the original proposal to increase the pension age to 65 for all public sector workers after 2013. In view of the significance of such schemes and their cost to the economy, we want the Government to provide a summary of progress in each of the sector-by-sector negotiations in its response to this Report.

The Operating and Financial Review

99. The Pre-Budget Report stated that "the Government is abolishing the statutory requirement for quoted companies to produce an Operating and Financial Review, reducing the burden on business by an estimated £33 million every year."[274] Mr Whiting said "in general we saw the Operating and Financial Review as a good way forward. It promoted more openness, there were more general statements about what was going on and we supported it. It seemed to be a way forward in terms of just generally encouraging more openness and more transparency."[275] We welcome Government measures to reduce the amount of "red-tape" faced by businesses. However, part of the Better Regulation agenda relates to proper consultation with businesses and others, and it does not appear that best practice in this regard has been followed with regard to the recent change of policy on the Operating and Financial Review. We urge the Government to consult widely before changing or abolishing reporting requirements and, where relevant, the Better Regulation Task Force should be involved in the consultation process.

Unclaimed assets

100. The 2005 Pre-Budget Report announced a scheme to invest unclaimed banking assets in community projects. This follows an agreement between the Government and the banking industry that "the definition of an unclaimed asset should generally cover accounts where there has been no customer activity for a period of 15 years as that will best identify those accounts that are genuinely unclaimed, and it will consult further on the detail of this. On this basis, initial record searches by the industry suggest that several hundred million pounds may currently lie unclaimed."[276] The Chancellor of the Exchequer told us that "the agreement in principle was that the money went to finance education and to youth and community services. I believe that agreement is one, reached on a voluntary basis between the two sets of negotiators, which will survive and endure."[277] We welcome the announcement of a voluntary scheme for the investment of unclaimed banking assets. We may examine the progress of this scheme in due course.

187 Releasing resources to the front line: Independent Review of Public Sector Efficiency, Sir Peter Gershon CBE, July 2004 Back

188 Ibid., chapter 4; HC (2004-05) 138, paras 67-75; Q 61 Back

189 Pre-Budget Report 2005, pp 129-130, paras 6.11-6.13 and Box 6.1 Back

190 Qq 61-62 Back

191 Qq 160-162; see also HC (2005-06) 691-I, Q 65 Back

192 Q 162 Back

193 Q 429 Back

194 Publication of 2005 Autumn Performance Reports, HM Treasury, PES (2005) 16, 15 September 2005, para 13 Back

195 Autumn Performance Report: Progress Report on HM Treasury Public Service Agreement Targets, December 2005, Cm 6696, p 26 Back

196 Releasing resources to the front line, The Independent, p 31, Table 4.2 Back