Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


14 MARCH 2007

  Q1 Chairman: Minister welcome back to the Sub-Committee. Could you introduce yourself and your colleagues formally, please.

  Dawn Primarolo: Good afternoon. Sarah Walker is on my right and is Head of Benefits and Tax Credits at HMRC. On my left is Tony Orhnial and he is Director of Personal Tax and Welfare Reform at the Treasury.

  Q2 Chairman: Thank you very much. We have got quite a lot of ground to cover this afternoon, as you will appreciate, so I am hoping for succinct questions and reasonably succinct replies if possible and, if necessary, details from your officials, if that is alright with you Minister. Can I begin with your response to our report. The main Committee in its full report said how disappointed it was; it was three months late and it simply repeated a lot of what we already knew. Did you sign off that response?

  Dawn Primarolo: I did sign it off, yes.

  Q3  Chairman: How are you taking forward our recommendations?

  Dawn Primarolo: I hope we will be covering quite a lot in the Committee today. Can I just say, Chairman, that I apologise; it is not acceptable that there was delay. I did sign it off. I could cite reasons why it was late but I do not think that matters and I have made it clear to my officials, because these are not the only reports that we do within time periods, that I expect it to be within that time period, and I offer my apologise to you and the Committee. In terms of the 52 recommendations, some which we had already done or were in the process of doing, there is obviously the question of analysis of errors, and we are taking that forward; the question of the pause and the guidance on reasonableness; the whole question of appeals and the Adjudicator; of course the question of contact centre staff and compliance staff and the increase on the work that is being done there; more work with the claimants, both the work we had already undertaken and the additional pilots, which I am sure we will want to speak about today; of course there is the new improved award notice, which is a proportionate and flexible system on the issue of change of circumstances; the question of the playback; the training of helpline operators. I am flicking through and I am not going to go through all 52 but it was a series of recommendations very much in line, I think, with either work that we were already doing, work we have started to do, or work that we are doing following on from either the report of the Public Accounts Committee or the Ombudsman's report, but I hope that we will touch on as much of that as possible this afternoon.

  Q4  Chairman: The regime has now been going for four years. At what point do you think you will be able to measure the extent to which you have actually been successful? Some of the data, perhaps by the nature of the regime, are fairly dated by the time they are made available. What will be the point at which you are able to say we think this thing is 60% or 70% or 80% successful?

  Dawn Primarolo: We can look at the policy objectives—and we can see a lot of those already present—assisting people into work and making work pay. We can look at our take-up rates. The most recent figures were published on 1 or 2 March[1] showing that the take-up rate for those who are on incomes of £10,000 a year or less is now running at 97%, and that is an increase on the previous year, and there are the other figures in take-up which I could quote. If we look at the childcare tax credit, the support for people being able to return to work, particularly a second partner in the household, these are all issues where we can see that the system is working better, getting to more people, and has a higher take-up than the preceding systems. Of course, there will be other assessments to do, particularly with regard to the PBR changes, changes that we will discuss this afternoon, when they are finally implemented as to whether they are then delivering in terms of administration the improvements that we would want to see.

  Q5 Chairman: Will there be a formal point at which you will assess that or is this just on-going?

  Dawn Primarolo: Are we talking about the success of the system generally or the PBR?

  Q6  Chairman: The PBR changes.

  Dawn Primarolo: I think the point at which the releases of all the changes have been made (the IT) would be the appropriate time then to look back over the whole package. What we will be able to do as each item becomes effective—for instance last year we reduced he renewal period—is to measure some of them straight away and say, yes, that was very successful; and that one was so successful that we are going to reduce it again by a month this year. So some we will be able to do as we see them operational but we will see the package and its impact once we have them all implemented.

  Q7  Chairman: What has been the aggregate overpayment for the first three years of the scheme?

  Dawn Primarolo: The overpayment in terms of the first year was £2.2 billion and the second year £1.8 billion. You will notice that although the amount went down in 2004-05 the number of families involved went up.

  Q8  Chairman: And the third year?

  Dawn Primarolo: We will wait and see the figures when they are published. I do not have those at the moment.

  Q9  Chairman: And have you estimated the extent of the losses? Is it still right that £1 pound in every £3 overpaid is not recovered?

  Dawn Primarolo: In the NAO report and in the reports from the Department it gives a profile—and forgive me I cannot quote the NAO report, I do not have it with me but I can supply the figures—for the recovery of overpayments and it also requires us under accounting procedures to put in place an approved accounting figure for debts that we might be unable to recover. The balance here will be between the ability of the claimant to repay without hardship being caused and that naturally affects the period over which the money might be reclaimed. I do not know, Sarah, if you want to add anything on that.

  Q10  Chairman: I just want to know if £1 in £3 is about right? If you have overpaid about £2 billion a year roughly over the last two years and £1 in £3 is not recovered then in three years you have lost £2 billion quid; is that right, that is the loss?

  Dawn Primarolo: We do not know that it is £1 in £3 because we are looking at what we are recovering, what the profile is and what we are required to have in our accounts as possible losses, and that is an accounting figure which there has been discussion about. I am happy to go through the figures again in writing with the Committee if you would like me to address this specific point.

  Q11  Chairman: You have been running the scheme for four years now and your feeling is that it is not £1 in £3?

  Dawn Primarolo: My feeling is that if I am going to continue manage a system that is fair to the claimant in terms of their ability to pay at any one time, the profile of collecting the overpayment needs to be considered as well. You are asking me for the first two years and I am explaining how we are required to account for it. How much we will eventually collect is dependent on a number of other issues.

  Chairman: We will come to those, okay, David Gauke?

  Q12  Mr Gauke: Paymaster General, we have had some figures now on the cost of the disregard and there seem to be two sets of figures floating around, one the Exchequer effects and the other the effect on entitlement. Could you clarify for us which is the figure that gives the best representation of the full cost of the increase of the disregard from £2,500 to £25,000.

  Mr Orhnial: If we are looking at the Exchequer cost then what we need to look at is not entitlement as such because entitlement would be the cost, if you like, in a world in which every change in income was reported and acted on immediately and there were no overpayments, etc. So the figures that correctly identify the cost to the Exchequer are the ones in my letter to the Chairman of the PAC on 18 October, which essentially look at the net impact on Exchequer forecasts as a result of taking into account a number of things. One is the increase in entitlement, the others are things like projected overpayments and assumptions about how long it takes to effect changes. That is the impact and it is a question of the difference between the money that would otherwise have gone out of the door.

  Q13  Mr Gauke: Just to be clear, are you saying that but for the increase in the disregard the cost is, in your opinion, the Exchequer effect and not the entitlement effect?

  Mr Orhnial: Yes, that is right.

  Q14  Mr Gauke: The National Audit Office in their written submission to us says that the entitlement effect captures the full effect of the changes over time. Are you disagreeing with that?

  Mr Orhnial: No, I am not. What I am saying is that is a figure that takes a very long time to reach and ultimately depends on the sort of factor that the Chairman raised a little earlier which is how much of the potential overpayments are actually recovered after a period of years, so in a theoretical world at some point the entitlement will be the correct figure. But I am not disagreeing with the NAO report. I think we are in exactly the same place. They estimated that the entitlement was worth somewhere between £400 million and £600 million; we said £500 million. We both say that is a figure that is theoretical in the sense that it is in a world in which we had no overpayments or if we had overpayments they were all recovered.

  Q15  Mr Gauke: But when you say over a period of time, are we saying that eventually we will get to the entitlement figure or are we saying eventually there are going to be overpayments that you are not going to recover and therefore the Exchequer will lose?

  Mr Orhnial: There may well be. We do not reach it within the forecast period. If you look at the figures which I think the NAO repeat in their note to the Committee at the bottom of page 6, we are not reaching the £500 million by 2010-11, which is the extent of our projections. A lot of that is around the sort of thing the Paymaster was talking about earlier that there is a balance to be struck between the speed with which we recover overpayments and hardship.

  Q16  Mr Gauke: Just to move on, why was the original figure for disregard £2,500 so ineffective or why was it the wrong number?

  Dawn Primarolo: During the consultation on tax credits there was a great deal of discussion around how the system could deal with drops in income and certain rises in income, frankly, to balance the cost over time. It was at a time when the data that was around was very thin about exactly what you should set that figure at. What subsequently has happened, for which there was at the time no information, is where in a household a second earner who was not in paid employment returns to work the number has been quite significant. So at the time with all the consultation that was done, the £2,500 was set from what we understood of what was going on in the labour market and from all our consultations, which in practice demonstrated that actually the tax credits were quite a powerful draw to have people return to work. In looking at some of the causes of overpayments that was one of the issues that was identified.

  Q17  Mr Gauke: Given that you have moved on now to £25,000, have there been any administrative savings as a consequence of the increase in the disregard?

  Dawn Primarolo: We are not actually looking for administrative savings in tax credits. With all of the package of changes, whether it be the shorter reporting period, or the £25,000, if as a result of that there was a reduction in some administrative practices I would expect to see that recycled into further types of work that this Committee and others have identified that needs to be done on delivering the service and interaction with claimants and how best to support them. So there is no saving in that sense. If there was a drop in some budgets it would simply be put somewhere else in the tax credits system.

  Q18  Mr Gauke: More generally have you done any detailed analysis yet on the 2005 PBR measures and their impact on tax credits ?

  Dawn Primarolo: No, well, only in that for instance the shortening of the renewal period went through without problems and that was one of the PBR changes, encouraging people in some of the pilots that we were talking about before. We have assessments of that and that is informing what we do next. The new award notice and the consultation around that and the shorter guidance notes to assist claimants have been successful but, as I said to Mr Fallon at the beginning, we can look at different measures but I think we will need to look at the totality as well. Can I just say of course that going from 31 September to 31 August, and it working, means that we have announced this year that we are actually coming down another month because the run-on period whilst that renewal is taking place means that people could be receiving the incorrect amount and that could be a source of overpayment.

  Q19  Mr Gauke: Given that so far as the disregard is concerned it clearly has a cost and given also the fact that the 2006 PBR estimates that actually the amount paid through tax credits will fall from 2006-07 to 2007-08, albeit very slightly, on what basis is that happening? Is that a consequence of anything within the 2005 measures or is it about overpayment claims? What is driving that?

  Dawn Primarolo: We have done our best to look at the interaction of the package, for instance the shorter window for notifying change of circumstances and the other issues around that, so it is the combination of those measures that will in particular add to our ability to be sure that we are getting the right money to the people at the right time, and obviously the renewal window is the biggest factor. If you have shortened it by four weeks and soon by eight weeks it does make quite a difference.

1   Note by witness: The take-up statistics for 2004-05 were published on 1 March 2007. Back

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