Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80-99)

MR ROBERT CHOTE, PROFESSOR COLIN TALBOT, MR JOHN WHITING AND DR MARTIN WEALE

11 DECEMBER 2006

  Q80  Angela Eagle: In the last 10 years we have an increase, the Leitch report says, in those with high level skills from 21% to 29% and a fall in those with no or low skills from 22% of the working age population to 13%. The report then comes out with a slew of proposals about how this improvement could be continued. How effective overall do you think that Leitch's proposals will be in terms of turning around this skills gap that he identifies?

  Dr Weale: What we found at the National Institute looking at the DfES programme for delivering basic skills was that it seems to raise people's aspirations. Whether and how that will work with school children instead of adults I am not sure but I think it is something that we have to try. I would expect it eventually to be effective, but it will be a very slow process.

  Q81  Angela Eagle: For school children certainly. Clearly there is a range of government policies at a macro-economic level to do that from Sure Start onwards, all the help with parenting and education, et cetera, but Leitch is always about adults.

  Dr Weale: Yes. With adults, as I say, the evidence that we found from looking at basic skills was that it improves their aspirations and that is likely gradually to feed through to employment but I think it is going to be a slow process.

  Q82  Angela Eagle: This issue of the Train to Gain scheme, which has been piloted, I understand, with 30,000 employers and a quarter of a million employees having benefited from it at pilot stage, seems to be an issue that Leitch decided is one of the main delivery mechanisms for getting employers more engaged in basic skills education. Do you share his optimism about that as a delivery process? None of you have read it, have you!

  Mr Chote: I think one issue to bear in mind is that Train to Gain is built on the employer training pilots and certainly some of the assessment that has been done of that so far suggests that there is pretty high deadweight in that. So quite a lot of the money that is spent through that is actually given to companies for training that they would have been doing anyway. One of the concerns has to be how much of this would be additional to what would be happening anyway.

  Q83  Angela Eagle: There is clearly an issue even though there has been an improvement in basic skills levels and also an economic need to try to get our workforce to engage at a higher level of skill too. What I am trying to ask you is, if you are not enthusiastic about what Leitch has come up with, what is the way to do this? Surely everybody agrees that we have to try to do it given the globalisation trends.

  Dr Weale: For school children what is important is to have a framework in schools where the principle is that every child can be taught basic skills. I think we still have an environment where it is assumed that there will be some children who cannot read by the time they are 11 and even adults who are happy to boast that they are no good at arithmetic. As I say, that will be a very slow process but if you look at other countries and the teaching methods they use, they do seem to be more successful.

  Q84  Angela Eagle: Already we have a load of young adults and those already in the workforce, mainly doing low level jobs or unskilled jobs, that do fall behind. The Leitch report shows that in all its starkness. We have to deal with adult training too. It is not something that employers have traditionally been excessively good at. There is clearly an economic need to do it as well as a need about fairness in society. Is what Leitch suggests the way to deliver it, that is what I am trying to get at? It is not only an issue for schools, it is about in-work training.

  Mr Chote: One issue you raise on fairness and efficiency as to whether the money that one is spending on adults rather than children is for fairness reasons or efficiency reasons. There are those who would say that the marginal pound you have available would be better spent in terms of the long-term outcomes on younger people rather than older people, and the question to what extent—

  Q85  Angela Eagle: Quite a lot of that has already been done. You were mentioning the education statistics earlier for the amount of money expended. I am trying to get at skills in work.

  Mr Whiting: One comment from a tax point of view. There is an argument that says encourage the employer to provide the skills training by perhaps giving them an additional deduction in the same manner as the Research and Development Tax Credit and so allow the employer to have a deduction of 125%, or 150% of the actual spend. This recognises that many employers, particularly small ones, pay twice for training in the sense that they pay the cash and of course they lose the time of the employee. Yes, they get the employee back in a better trained state but that sort of pump-priming in the manner that would encourage the employer to look hard at the skills that would pay back in their workforce might pay some dividends, which I think, is in line with some of Leitch's recommendations.

  Q86  Mr Love: In his statement last week the Chancellor announced net efficiency savings of 3% and administration budgets to be cut by 5% across the board. Obviously that would have kept his colleagues happy on equality of sacrifice, but is it sense? Is there room for the same levels of efficiency savings and administrative cuts in every department?

  Professor Talbot: No, and they did not do that last time either. The Gershon target was 2.5% per year for three years, but it was not 2.5% for every department. The Cabinet Office target in terms of the actual amount of money in relation to its budget that it was supposed to save was 0.4% of its budget per year for three years, whereas DWP's was 5.8% per year for three years. There was a huge degree of variation in the actual targets which were set for departments, even though allegedly this was an across the board 2.5% target. That is the first thing. Clearly there is a lot of variation in what is possible within individual departments. Secondly, I think the 3% figure is quite interesting. If you assume that the public sector is largely much more labour intensive than the rest of the economy, and the labour intensive parts of the economy are the most difficult to achieve efficiency or productivity gains in, then I find it quite odd that we are expecting a 3% gain in efficiency across the public sector—this is not just central government, this is central and local government—a 3% increase when the overall productivity increase in the economy at the moment is running at about 2.4% according to the PBR. Obviously they are not measuring exactly the same things but it seems to me to be an extraordinary idea that you can achieve that level of efficiency gains in areas which are primarily labour intensive. If I can refer you back to the answer I gave earlier about the discrepancies between the different work streams, it is quite obvious if you look at the figures, the small amount of information that we do have, the fact that on the productive time work stream, which is the one which is focused on individual's work and how they do it, we are only running at about 47% of the target according to the figures which have been released, whereas on procurement, for example, we are running at 70% of the target. It is quite clear that it is much more difficult to achieve efficiency savings in those areas where you are looking at human resources issues essentially.

  Q87  Mr Love: Let me take you on. They also announced that the Value for Money Programme will be delivering net cashable savings. Gershon was gross. Is that going to be an improvement? Will that really get their noses to the grindstone?

  Professor Talbot: First of all, it would be nice if they did actually measure things net because one of the things the National Audit Office pointed out in their first report was that we do not know from the way the information is being reported about the efficiency gains whether or not they are being reported net or gross, and in most cases they seem to be reported gross which means they are not necessarily real efficiency gains, or not as much as is being reported if you are disregarding the costs of actually implementing them. The fact that they are moving towards supposedly cashable gains is interesting. Because of that I would be interested to see that because the main area of non-cashable gains in Gershon was areas like the productive time activity because they were not forecast to release cash, they were forecast to improve the quantity and quality of output by improving the way in which people worked. Are they saying that those things are no longer going to be done in the new forecast? We do not know, there is not enough detail there to be able to say.

  Q88  Mr Love: But it will be tougher if they do not include that?

  Professor Talbot: Yes, absolutely. Except that we do not know, because they have not said, is this going to be on the same basis as the Gershon efficiency savings, which is that the savings were retained by departments and local authorities, so those that did make real savings released cash to do things and those that did not did not. To that extent, it is not money that is supposedly flowing back to the Treasury.

  Q89  Mr Love: The Chancellor also in his statement set out the proposed levels of public sector capital investment up to 2011-12. Can I ask Mr Chote how that compares with trends in recent years?

  Mr Chote: Yes. The quick answer while I find the table is that it is much slower, again coming back to this point that there has been a big step up with adjustment.

  Q90  Mr Love: I would say take your time but the Chairman will start to pressure you in a second.

  Mr Chote: Averaging capital spending the real increase to come increase is 2.7% a year, the real increase to come, compared with 15.5% under Labour to date. As I say, you have to bear in mind the fact that when Labour came in there was an initial attempt to get capital spending up which did not work out and it actually dropped to a lower level in the first term than previously, but there has been a subsequent much larger increase. It would be unrealistic to expect capital spending to continue to be growing at 15% or so, but 2.7% is the real growth rate over CSR 2007 on those figures.

  Q91  Mr Love: The other side of that equation, of course, is asset disposals. They are talking about £30 billion of surplus assets by 2010-11. How does that compare with recent disposals? Is there any reason to believe that they can get up to that level based on the sorts of assets that they are talking about disposing of?

  Mr Chote: I do not have that number on me. I think 30 billion has been the number for quite a while, has it not?

  Professor Talbot: I am not sure. The basic problem is where are these assets coming from and identifying them. They are setting targets for them. It would be very interesting to see what the assumptions are behind those targets.

  Q92  Mr Love: Based on recent experience there is no reason to believe that level of asset disposal could be achieved? We have not disposed of anything like that level of assets over the period of this current Spending Review.

  Mr Chote: I do not know over what time period that would be.

  Q93  Mr Fallon: Robert Chote, you have drawn attention in the last few days to the increase in the number of people living in households of less than 40% of median earnings. Could you just clarify that particular figure for us and tell us what the proposals are in the PBR to reverse that increase?

  Mr Chote: If I could start on the 60% child poverty target. We did some work with the Joseph Rowntree Foundation on what would be needed to get to the child poverty target in 2010-11 and to do that you would need to have gone from roughly about 2.7 million children, approximately 21%, in poverty on the new 2010 target definition in 2004-05 and it would need to drop by a million, that is to 1.7 million or approximately 13% in 2010-11 for the target to be met. We estimated that this would cost around £4.5 billion. If, for example, the Government were to do as JRF suggested, to either put the money into the child element of the Child Tax Credit, which is the most well targeted element, or, if you wish to minimise some of the means testing involved, to split it between payments on the Child Tax Credit and additional child benefit payments for larger families, which tends to be poorer families, as I say, that would have cost about £4.5 billion. In the absence of spending that money we would expect the level of child poverty to rise from 2.7 million in 2004-05 to 2.8 million or thereabouts in 2010-11. The Chancellor has not found very much extra money in the PBR to contribute towards that. There have been extra child benefit payments promised from 2009 onwards for—

  Q94  Mr Fallon: If I could just stop you there. It is not the expenditure I want, I am coming to that, I just want to know the numbers. What has been the increase in the number of people living in households of less than 40% median earnings?

  Mr Chote: I do not have the 40% figure. It depends on which measure of income you use—before or after housing costs. John Hutton has used one measure where he stood up and gave a PQ answer in the House, which you may be referring to, in which he said there had been no increase, which is true on one of the two measures and using 1997-98 as a base. There is an increase of an amount, and I cannot remember of what amount, if you use either 1996-97 as a base or you use the excluding housing costs or including other housing costs measure.

  Q95  Mr Fallon: You are using that latter measure for your 60% calculation.

  Mr Chote: The one that is relevant now for the target is before housing costs 60% and with the OECD method for adjusting for family size, all of which is different from the measures that we have used for the target to date.

  Q96  Mr Fallon: Okay. If you turn to B80 tucked away at the back it says that they have revised upwards projected expenditure on Child and Working Tax Credits by about half a billion, as a result of a number of factors, "including lower earnings growth among low-income households". Why have the earnings of those in low-income households grown less than the Government expected?

  Dr Weale: I would say one factor we would need to or want to consider is immigration. The recent surge of immigrants has typically been disproportionately taking low-skilled jobs which does not mean that the migrants themselves are low-skilled but that has had an impact on depressing wage growth in that part of the labour market.

  Mr Chote: That sounds quite plausible, yes.

  Q97  Mr Fallon: Does that not suggest, therefore, that tax credits might not be the most effective mechanism for relieving child poverty?

  Mr Chote: They are the most targeted measure. If you want to get to the target by 2010-11, if you were to do it not by tax credits but by child benefit, for example, then that is much more expensive because it is that much less well targeted, but even the targeted measures are imperfect partly because of take-up and, as you say, you do not know from one year to the next what the trend in pre-tax and benefit earnings is going to be at different points in the income distribution. For example, if median earnings are growing particularly quickly then the hurdle to get over gets that much higher.

  Q98  Jim Cousins: My questions are mostly for Mr Whiting. I did ask in the earlier session about the European Court of Justice decisions. The Government has announced some first strike/counter strike responses to that. Do you think the Government is going to be successful in containing tax losses from these European Court of Justice decisions?

  Mr Whiting: Obviously much depends on precisely the terms of the judgments, some of which are expected tomorrow and there will be more to come. There has been a bit of a trend recently for the judgments coming down from the European Court to be, one might say, equivocal in terms of exactly where the line should be drawn. In the sort of estimates that were initially made as to the costs maybe not so much is at stake, but clearly there is a lot of money at stake with these decisions. You then put it in terms of will the Government be successful in containing them. That is a very difficult question because if the European Court says that the UK tax system is wrong under European law then it is rather difficult for the Government to say, "But we will not pay the money back" because people have been paying taxes under mistake of law and should, therefore, be repaid. The action that is necessary is to have a good and proper dialogue as to how to make sure the system is robust going forward and there are signs of that dialogue starting to happen.

  Q99  Jim Cousins: On the specific point on the containment of retrospection, the Government has indicated that it wants to take a legal power to contain that to six years.

  Mr Whiting: Yes.


 
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