Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 180-199)


12 DECEMBER 2006

  Q180  Mr Newmark: I am just curious, and we touched on this yesterday, have the recent figures on the number and the pay of public sector workers ultimately affected this figure, ie, as the public sector expands, the public sector pension liabilities ultimately will increase?

  Ms Brivati: Well, we have published alongside our PBR documentation our long-term fiscal report and we give our latest estimate about what the long-term impact of our current liabilities and stance on pensions and pay is, and that shows it rising to 2% of GDP over the next 50 years which we deem to be affordable and sustainable, so we have taken it into account over the long term.

  Q181  Mr Newmark: My third question is to do with the timing issue of this whole air passenger duty thing. [1]I noticed that air passenger duty is actually going up in February rather than April which is unusual, is it not, because usually things begin at the financial year and I am wondering why it is happening, how many holidays will be affected, and what revenues will be raised?

  Mr Neale: There is no iron law about when tax changes come into effect. We have chosen to implement this particular change to air passenger duty from 1 February.

  Q182  Mr Newmark: Is there a reason for that? Do skiing holidays for middle-class people have anything to do with it or anything?

  Mr Neale: It is a matter of judgment based on the information we have about the proportion of flights that are pre-booked at any particular time and the Government's policy and revenue objectives.

  Q183  Mr Newmark: They are pre-booked, so you should have an idea then of (a) how many passengers are affected and (b) how much revenue will actually be raised between that figure of February, which is an unusual date to begin this, versus the beginning of the financial year.

  Mr Neale: The information we have is that roughly 30% of air passengers have booked more than two months in advance, so that would give you an indication of the number of passenger flights affected, but it is quite important to emphasise that air passenger duty is not a levy on individual passengers, it is a tax on airlines which airlines on the whole tend to collect by collecting from individuals.

  Q184  Mr Newmark: But it is still ultimately affecting people who are flying, so you should have an idea of how much you are going to raise.

  Mr Neale: Well, it will be for airlines to decide how they pass it on.

  Q185  Mr Newmark: You are in the numbers business, so you must have done an analysis. In your decision to decide suddenly to raise it in February versus April, I assume you recognise that there are going to be people who will be travelling quite a lot over that mid-winter period.

  Mr Neale: Yes, the point I am making is how that is passed on to passengers is a matter for the airline.

  Q186  Mr Newmark: That is not the question I am asking. I have asked you a specific question on the timing. It is unusual timing; usually it begins in April, not February, and you must have done an analysis of roughly how many people are going to be affected and how much more money you are going to raise with that.

  Mr Neale: I have given you an indication of the proportion of passengers who are likely to have booked more than two months in advance. We think the revenue raised in respect of those passengers rate will be about £50 to £100 million—

  Q187  Mr Newmark: So you are not going to give me any figures?

  Mr Neale: We reckon the rates will be between £50 and £100 million.

  Mr Newmark: Thank you very much.

  Q188  Mr Fallon: Can you just explain to me, Mr Neale, what the Parliamentary and statutory authority will be for collecting APD at the new higher rate from 1 February in advance of the Budget and the Ways and Means Resolution?

  Mr Neale: It is a perfectly standard procedure. The Finance Bill will contain the provisions to implement the tax and it will begin on 1 February. It is quite standard practice for a Finance Bill to contain provisions that actually come into effect earlier.

  Q189  Mr Fallon: But in the previous financial year?

  Mr Neale: Yes, it is not unusual.

  Q190  Jim Cousins: The figure has been given to us of a public sector pension liability of £530 billion. I just wonder what we know about the distribution of those liabilities across the public sector workforce, because it is plain that people with long periods of service at a higher rate of pay will make up those liabilities to a much greater extent than those on low pay with short periods of service. Indeed, there may well be public sector workers who are not even members of the public sector pension scheme. I wonder what we know about the distribution of those liabilities across the workforce.

  Ms Brivati: I will try to tell you what we do know about the distribution of pension liabilities. The way in which we take account of the management of the public finances and the need to manage public finances against future pension liabilities is to look at the future net cash payments that are required from the schemes that exist, and all departments publish the net cash payments in their departmental reports. That will give you one indication of the distribution there.

  Q191  Jim Cousins: That does not tell us anything about the public sector workforce and who are the main beneficiaries of future prospective pension payments. Plainly, workers on low pay with short periods of service will not benefit to the same extent as workers on high pay with long period of service. I just wondered what we knew about the distribution of those liabilities across the workforce in those terms.

  Ms Brivati: I am not sure if that is a question about the distribution of the liabilities rather than a question about the distribution of the benefits of public service pensions. I do not think I have any data on that.

  Q192  Jim Cousins: Do you collect that sort of data?

  Ms Brivati: I do not know. I can look into it and get back to you. [2]

  Q193 Chairman: Can I ask Mr Neale, are there any other instances in the past where your rates of tax or duty as opposed to technical tax avoidance measures have come into force soon after the Pre-Budget Report and been given retrospective Parliamentary authority after the Budget?

  Mr Neale: It is quite common for us—

  Q194  Chairman: Are there any instances?

  Mr Neale: I will have to come back to you on specific instances, but it is quite common for us to announce an anti-avoidance measure having effect from the time of the announcement, and then—

  Q195  Chairman: That anti-avoidance measure is different. I have asked for something different from technical tax avoidance measures; I am asking for instances in the past when new rates of tax or duty have come into force. I wonder, Mr Cunliffe, if you could write to us this evening so that, before the Chancellor's appearance tomorrow, we can have that information?

  Mr Cunliffe: We will do our best.

  Q196  Chairman: You say you will do your best. Will you do it?

  Mr Cunliffe: If we are able to write to you of course we will.

  Q197  Chairman: I am looking for instances here. If there are no instances then you write to us and tell us there are no instances; if there are instances and examples you write and give us them. It is dead simple.

  Mr Cunliffe: I accept that, yes.

  Q198  Mr Fallon: Could we now turn, Mr Cunliffe, to the forecasting errors which you have made over the last year. The Budget 06 was nine months ago, but if we turn to Table B12 we will see that already, in nine months, you overestimated tax receipts by nearly £5 billion: £200 million National Insurance; £700 million in Corporation Tax, £500 million in VAT and £2.8 billion in North Sea oil revenues. How did you get it so wrong?

  Mr Ramsden: Just to clarify from Table B12, you are referring to our forecast for 2007-08?

  Q199  Mr Fallon: I am referring to the difference in what you forecast nine months ago and what you published on Thursday. These are forecasting errors for 2007-08 of nearly £5 billion. How did you get it so wrong?

  Mr Ramsden: Actually, if you take out North Sea revenues the forecast error is significantly smaller. Remember, we are talking about a period that at Budget 2006 was not due to start for a year. If it would help the Committee, I can explain what happened on North Sea revenues. As we detailed in the Budget document at some length, at the time of the Budget we were forecasting a significant increase in North Sea revenues in 2007-08 consistent with the trend of the last two years. Since the Budget 2006 forecasts were finalised, and over the last few months, we have had a lot of new information all of which has actually contributed to bringing down our forecast. In terms of the impacts they have had, we have had a significant fall in the data for oil production. There is an underlying long-term declining trend in oil production which averages, over the projection period, about 3% a year, but it has actually, in 2006, been significantly in excess of that. We have had to fully factor those lower production estimates in. Second, this Committee has discussed with us before what we are assuming about capital investment in the North Sea, and what has happened is that capital investment has come in much higher than we were forecasting and, also, operating expenditure in the North Sea has come in higher, reflecting the tightness of the market for, basically, the kit that operators use and the labour needed; it has been much more costly. That is important because both capital expenditure and operating expenditure are 100% deductible against tax. The final thing that has happened is that although, as we account in the document, the oil price has risen in Dollar terms, because of the movements in the Sterling/Dollar exchange rate the Sterling oil price, which is what drives UK tax revenues, has been weaker. So that has had a big impact in the baseline year in 2006-07. So those three factors together—lower production, higher investment and what has happened on Sterling prices—has led to that £2.8 billion change in our forecast. I might just say that for 2005-06, at Budget 2005, we were forecasting that North Sea revenues were going to be about £7.5 billion; they turned out to be nearly £10 billion. All that is meant to illustrate is that at the moment, with everything that is happening in world oil markets and, also, with changes that we have been making to the North Sea regime, it is quite difficult to forecast the North Sea.

1   Ev 81 Back

2   Ev 84 Back

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