Select Committee on Treasury Second Report

4  The role of the Pre-Budget Report

Fiscal consultation

94. According to the Code for Fiscal Stability which was given statutory force in 1998, a Pre-Budget Report is intended to be consultative in nature. The Pre-Budget Report is expected to include, "so far as reasonably practicable, proposals for any significant changes in fiscal policy under consideration for introduction in the Budget", although the Pre-Budget Report "shall not be taken as an indication of all tax policy areas where the Government may choose to act".[359] Following the 2005 Pre-Budget Report, and again following the 2006 Pre-Budget Report, some witnesses questioned whether the Pre-Budget Report had retained its consultative character, with suggestions that the extent of concrete announcements had made the December statement more like a Budget and militated against a rounded debate on what measures should appear in the Budget.[360] During our current inquiry, and having previously been critical of the level of consultation about some technical tax changes, Mr Whiting noted the volume of material about tax measures released by the Treasury and HM Revenue & Customs and the level of consultation that implied, which he thought was "very much to be applauded".[361] We have already commented on the measured way in which the Government is taking forward proposals for a Planning-gain Supplement.[362]

95. The Chancellor of the Exchequer rejected suggestions that the Pre-Budget Report was insufficiently consultative in character:

No, it is a pre-Budget document and I think this year in particular emphasises why it is a discussion prior to the Budget. We have published probably more significant long-term reviews about what we need to do as a country than at any point in the last ten years. We are really looking ahead to how an economy like ours faces up to the global economic challenge … so we are preparing the way for the Budget in that particular respect. These reports are now out for consultation and we expect to hear people's views on them. Some of the proposals are more controversial than others, but I think this is exactly in the spirit of what you would expect a Pre-Budget Report to be.[363]

A number of the reviews published leading up to or at the time of the 2006 Pre-Budget Report have a direct bearing on economic policy over the next decade, and some, including the Stern review on the Economics of Climate Change and the Barker review on Land Use Planning, have a direct bearing on future tax policy. We welcome the Government's decision to commission and publish a range of reviews informing future economic policy, including tax policy. However, it is important that the Pre-Budget Report retains a focus on consultation on fiscal measures that may be included in the forthcoming Budget. Although the 2006 Pre-Budget Report is accompanied by a considerable volume of material on technical tax changes, there is less discussion on more substantive tax measures under consideration for inclusion in the Budget. We wish to see such consultation more to the fore in future Pre-Budget Reports.


96. The Treasury gave only 18 days' notice of the date of the 2005 Pre-Budget Report, attributing the short notice in part to international commitments, including those arising from the United Kingdom Presidencies of the European Union and the G7/8. In our Report on that Pre-Budget Report, we recommended that the Treasury give at least four weeks' notice of the date of the Pre-Budget Report and that, in any case where this target was not met, the Treasury explain the reasons.[364] The date of the 2006 Pre-Budget Report was announced on 16 November, a notice period of 20 days.[365] No explanation was given as to why a longer period of notice was not possible. We continue to believe that the effectiveness of the Pre-Budget Report as an instrument of fiscal consultation would be enhanced if Parliament and the public were given greater notice of the date of the Pre-Budget Report. We re-state our recommendation that the Treasury announce the date of the Pre-Budget Report at least four weeks before the statement is due to be made and, in any case where the target is not met, give an account of the reasons.

The implementation of new rates of Air Passenger Duty

97. In the course of the statement on the 2006 Pre-Budget Report, the Chancellor of the Exchequer announced that Air Passenger Duty would be doubled with effect from 1 February 2006.[366] As we have already noted, we intend to comment further on the environmental implications of this tax change when we report on our forthcoming inquiry into Climate change and the Stern review: the implications for HM Treasury policy on tax and the environment.[367] In this section, we are concerned with the timing of the implementation of the new rates of Air Passenger Duty. It is quite usual for tax changes to come into force very soon after their announcement in a Budget. As the Chancellor of the Exchequer pointed out, changes to fuel duty often come into force almost immediately.[368] The 2006 Pre-Budget Report included an announcement that the increase in fuel duty approved in principle by the House of Commons after the 2006 Budget would come into force from midnight on 6 December.[369] It is an established practice for tax avoidance measures to be announced in the Pre-Budget Report as well as in the Budget and to have immediate effect. The Code for Fiscal Stability makes clear that "consultation may not be possible in areas which: (a) carry the risk of significant forestalling activity by existing or prospective taxpayers; or (b) could lead to significant temporary distortions in taxpayer and market behaviour, including disruption in financial markets".[370]

98. The last significant changes to rates of Air Passenger Duty were announced on 21 March 2000 and came into force on 1 April 2001. On that occasion, the Government explained the length of the period between the announcement and the implementation by stating that this would "allow airlines and tour operators plenty of time to adjust their marketing and pricing strategies to the new structure".[371] Both the Board of Airline Representatives in the UK and Mr Whiting drew attention to the administrative difficulties and cost implications of the much shorter notice period on the current occasion, particularly in relation to tickets purchased before 6 December 2006 for flights on or after 1 February 2007, where airlines had to decide whether to charge such passengers or bear the costs of the duty themselves.[372] Treasury officials stressed that Air Passenger Duty was "a tax on airlines", not on individual passengers, and the Chancellor of the Exchequer characterised it as "a departures tax … not a bookings tax … not a ticket tax", so that it was for airlines to decide whether to pass on the additional costs to passengers.[373] The Chancellor of the Exchequer indicated that the additional yield from the increased rates amounted to about £80-90 million a month, and the Treasury estimates that around £165 million of additional revenue will accrue from the implementation of the higher rates during the current financial year.[374]

99. The increases in Air Passenger Duty announced in the 2006 Pre-Budget Report can be viewed as retrospective in two senses. The first element of retrospection is that airlines will be liable to pay the tax for departures on or after 1 February 2007 regardless of whether tickets were purchased before the new rates were announced. The second element of retrospection is that the liability to pay Air Passenger Duty at the new higher rates will effectively be incurred before the House of Commons has authorised the increase; such authorisation will take place only after the Budget.[375] Treasury officials initially asserted that the announcement of changes in the rates of duties which would come into force before the Budget and the ensuing parliamentary approval was a "perfectly standard procedure" and offered to "come back" to us with "specific instances" when such changes had been announced in a Pre-Budget Report which would then come into force before the Budget.[376] The Treasury has not subsequently provided us with any such instances.

100. Pre-Budget Reports share many of the characteristics of a Budget, but they remain different in terms of the procedure of the House of Commons. A Budget is followed directly by the passage of financial resolutions which provide initial and provisional parliamentary authority for the collection of taxes and duties at higher rates pending the passage of the Finance Bill. The Pre-Budget Report does not give rise to any such formal decisions of the House of Commons. Where tax changes carry a significant risk of forestalling activity or could distort market behaviour, it is often appropriate for those changes to come into effect immediately upon their announcement, even if formal parliamentary approval cannot be granted for some time thereafter. However, we have received no evidence to suggest that such considerations apply to the changes to the rates of Air Passenger Duty announced in the 2006 Pre-Budget Report. As a general rule, we consider that, where increases in rates of duties or taxes are proposed in the Pre-Budget Report, those increases should not come into force until after the House of Commons has had an opportunity to come to a formal decision on the proposed increase following the Budget. We draw the attention of the House of Commons to the unusual timing of the implementation of the increases in Air Passenger Duty, for which the Treasury has not cited any relevant precedents.

359   HM Treasury, The Code for Fiscal Stability, November 1998, para 18 Back

360   HC (2005-06) 739, Qq 110, 32, 116 Back

361   HC (2005-06) 994-I, para 105; Ev 74 Back

362   See paragraph 91. Back

363   Q 317 Back

364   HC (2005-06) 739, para 3 Back

365   HC Deb, 16 November 2006, col 1WS Back

366   HC Deb, 6 December 2006, col 310 Back

367   See paragraphs 80-82. Back

368   Q 341 Back

369   HC Deb, 6 December 2006, col 310 Back

370   HM Treasury, Code for Fiscal Stability, November 1998, para 16 Back

371   HM Treasury, Budget 2000, 'Air Passenger Duty slashed for most travellers', HM Customs and Excise press notice 4 Back

372   Ev 75-76, 80-81 Back

373   Qq 183-185, 341 Back

374   Q 350; Pre-Budget Report 2006, Table B4, p 226 Back

375   Qq 188, 344 Back

376   Qq 188, 194 Back

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