House of Commons - Treasury - Thirteenth Report

Select Committee on Treasury Thirteenth Report

6 Lessons for budgetary processes

152. So far in this Report we have been concerned largely with the substantive effect of Budget measures and of subsequent policy options, as well as with the broader context in which future decisions will be taken. In this chapter, we draw conclusions and make recommendations about the lessons to be learned from the handling of the removal of the 10 pence starting rate of income tax, principally for the Government itself, but also for others concerned with the authorisation and scrutiny of policy decisions in this area, including the House of Commons itself.

Information available to Ministers

153. Late in April this year, Mr Nicholas Macpherson, Permanent Secretary to the Treasury, told the Committee of Public Accounts that "a thorough distributional analysis was done" regarding the impact of the abolition of the 10 pence rate of income tax and that "Ministers took decisions on the basis of that analysis".[386] In evidence to us, the Chancellor of the Exchequer confirmed that Budget decisions were made after considering their distributional effects and that, when the original decision had been taken in the 2007 Budget, "it was recognised … that there were people who were losing out".[387]

154. There is other evidence to suggest that the Treasury was aware from the outset of the full distributional effects of the 2007 Budget decisions. As we have noted before, a Treasury official told us on 28 March 2007 that the estimate by the IFS given to us two days earlier that 5.3 million families would lose was "in the right ball-park".[388] However, a series of announcements by Ministers in the House of Commons since then have suggested either that Ministers were not awake to the full impact or else remained in denial about it.[389] We noted earlier that the use of the household as a unit of measurement does not necessarily correspond to social realities, in that a household may not equate with a single financial unit with a shared household budget. It is thus important that Budget proposals and decisions are made with the fullest range of information about different forms of distributional analysis.

Transparency and the provision of information to others

155. The range and quality of information available to Ministers in advance of a decision being announced is also related to the issue of the information provided to others. The Code for Fiscal Stability, which was published in November 1998 and which sets out what the Government sees as the principles of fiscal management, states:

The principle of transparency means that the Government shall publish sufficient information to allow the public to scrutinise the conduct of fiscal policy and the state of the public finances.[390]

156. During our inquiry into the 2007 Budget, we were frustrated by the apparent reluctance of the Treasury to confirm the precise effect of the abolition of the starting rate of income tax in terms of winners and losers. A Treasury official appeared to endorse the analysis by the IFS, while the Chancellor of the Exchequer drew attention to the inadequacies of that analysis.[391] In our Report on the 2007 Budget, we concluded that

An important part of any change to the personal taxation regime must be that both winners and losers can identify, with ease, how they are affected by the changes stated within a Budget package. We recommend that, in future, this information be provided within the Red Book.[392]

That recommendation was supported during the current inquiry by Citizens Advice.[393] In its response in June 2007, the Government said:

The reforms announced in Budget 2007 included eight separate measures designed to simplify the system, help pensioners, tackle child poverty and make work pay. The overall effect on a household will depend on the interactions between the different elements. So whether, or by how much, one might gain from these changes will depend on both individual and household characteristics. Therefore in this case it was not feasible in the space available to set out comprehensive tables of the effects of all the measures. However, HMRC will, as usual, produce their specimen tables following Budget 2008 once all the tax, national insurance other parameters have been finalised. In addition, HM Treasury has provided detailed answers to Parliamentary Questions of the impact in specific circumstances that the Committee might find helpful.[394]

This Government response failed to address the need we had identified for information that was available at the time a policy was announced, but was justified in highlighting the fact that individual tax effects were dependent on wider household circumstances.

157. In our Report on 2007 Budget we had also highlighted the need for the Government to provide a broader analysis of its measures, citing the example of the complex interaction of different policy initiatives relating to child poverty:

We have noted the Government's reference to many different strands of the personal tax, benefits and tax credits system when describing its efforts to combat child poverty. On top of this, there is also a need to consider the efforts of other departments, such as the Department for Work and Pensions. It is appropriate that the Government use every means at its disposal when tackling such a difficult but important issue. But, this also raises issues of transparency and accountability. We recommend that whenever the Government reports on complicated, multi-faceted responses to policy issues, such as child poverty, it should attempt to draw together all the analysis on all relevant policy instruments in the appropriate Budget or related document, so that it is transparent what the different policies are intended to achieve, at what cost, and how the whole package of policies will interact and achieve their purpose.[395]

158. At present, the Government is required by its own guidance to prepare and issue Impact Assessments for all policy proposals, including those within Budgets. These are centred on impacts on the public, private and third sectors, but also include as appropriate a competition assessment, a small firms impact test, an assessment on implications for legal aid, a sustainable development assessment, a carbon assessment and other environmental impacts assessment and a health impact assessment, and also address issues relating to disability equality, gender equality, human rights and "rural proofing". These impact assessments are prepared separately for each Budget measure.[396] They thus deal with individual measures, not their interaction and overall impact. Impact Assessments are also not concerned directly with household or household income.

159. The quality and quantity of information about Government decisions, including Budget decisions, has improved in recent years, in part through the provision of Impact Assessments. However, the current documents do not take sufficient account of the interaction of Budget measures with each other and with other policy decisions. This Committee has repeatedly recommended that Ministers include in the Red Book a table showing the winners and losers from the proposed personal tax and benefit changes. We recommend that the Government publish a Household Impact Assessment alongside future Budgets and Pre-Budget Reports. This would analyse the impact on individual, family and household finances of Budget measures and other changes to the welfare system, having regard to other developments such as changes to the National Minimum Wage. We further recommend that the Household Impact Assessment provide distinct analyses for each future financial year to which Budget measures relate.

Budget decision-making and the role of the Pre-Budget Report

160. There has been a long-standing practice that the process of Budget-making is shrouded in secrecy. A difference in approach between tax policy-making and policy-making more generally is justified because certain decisions in the field of taxation, in the words of the Code for Fiscal Stability, "carry the risk of forestalling activity by existing or prospective taxpayers or could lead to significant temporary distortions in taxpayer and marker behaviour".[397] The current Government has sought to broaden the range of information provided alongside Budgets. It has introduced the Pre-Budget Report into the budgetary calendar, an event which take place at least three months prior to the Budget and which is intended to be 'consultative in nature' and to 'include, so far as reasonably practicable, proposals for any significant changes in fiscal policy under consideration for introduction in the Budget'.[398] However, there remains scope for improvement.

161. In our Report on the 2006 Pre-Budget Report, we argued that the Government had failed to develop the Pre-Budget Report as an effective tool for consultation on substantive fiscal measures that might be included in the ensuing Budget.[399] In our Report on the following year's Pre-Budget Report, we stated that we continued "to support the principle set out in the Code for Fiscal Stability, that the Pre-Budget Report should be consultative in nature, and should include, so far as reasonably practicable, proposals for any significant changes in fiscal policy under consideration for introduction in the Budget".[400] Our calls for a more consistent use of the Pre-Budget Report for consultation about revenue-raising plans have recently been supported by the House of Commons Liaison Committee.[401]

162. The removal of the starting rate of income tax was announced well in advance—on 21 March 2007 for implementation on 6 April 2008—but it was announced in the form of a final decision in the long tradition of Budget measures rather than as a proposal subject to consultation in a Pre-Budget Report. The form and timing of the announcement has had several adverse consequences. First, it was perceived as a fait accompli from the moment of the decision, closing off avenues for consultation.[402] Second, by announcing the decision so far in advance, the Government was politically committed to implementing a measure in April 2008 well before the precise economic circumstances at the time of implementation, which we discussed earlier,[403] could have been apparent.

163. Since the Government became committed to further tax changes to undo some of the damage done by the removal of the starting rate of income tax, it has placed emphasis on the 2008 Pre-Budget Report, as opposed to the 2009 Budget, as the major policy statement in which the Government will seek to address concerns.[404] We welcome the emphasis by the Government on the 2008 Pre-Budget Report, but the Government should not simply respond to a short-term political problem by turning the 2008 Pre-Budget Report into an early Budget. Instead, the Government must re-establish the consultative nature of the Pre-Budget Report. For personal tax decisions, the sudden and final nature of Budget decisions has been less about the need to prevent forestalling activity than it has been about the perceived benefit of seeming to pull rabbits from the hat. Recent experiences suggest that such short-term benefits are outweighed by the longer term benefits from proper consultation.

164. We do not envisage consultation being confined to individual tax measures. Rather, the Government should seek to create the optimal conditions for constructive consultation by being clear about the policy objectives it is seeking to achieve as well as the means being proposed to meet those objectives. In particular, we wish the Government to use the opportunity of the 2008 Pre-Budget Report to set out clearly its views on the policy objectives which underpin its approach to personal taxation.

The role of scrutiny

165. The controversy over the removal of the 10 pence tax rate has highlighted the importance of effective parliamentary scrutiny of tax measures. To some extent, the rapid change in Government policy since the time of the 2008 Budget demonstrates a strength of the House of Commons: the Government has not been able to take for granted success in the passage of the Finance Bill as originally proposed and this has served to concentrate its collective mind. However, the weaknesses of the House of Commons in its scrutiny of tax measures, which have been noted in several recent studies,[405] have also arguably been highlighted by recent events.

166. Although we played a role in illuminating the effects of the removal of the 10 pence rate of income tax, it is now evident to us that our Report on the 2007 Budget accepted too readily the then Chancellor of the Exchequer's emphasis on the potential for increased take-up of Working Tax Credit to alleviate the problems caused by the removal of the starting rate of income tax and that we could have done more to highlight the information we received about the losers from the measures in that Budget. We intend to re-examine the way we scrutinise tax proposals in Pre-Budget Reports and tax measures in Budgets and propose changes to our own working methods. We expect our own re-examination to form part of a wider consideration by the House of Commons and its committees of ways in which the scrutiny of tax measures can be improved and strengthened.

386 Committee of Public Accounts, Uncorrected transcript of Oral evidence, Improving Finance resource Management to deliver better public services, 28 April 2008, Q 137 Back

387 Qq 188-189 Back

388 See paragraph 29. Back

389 See paragraphs 28-30. Back

390 HM Treasury, The Code for Fiscal Stability, November 1998, para 4 Back

391 See paragraph 29. Back

392 HC (2006-07) 389-I, para 41 Back

393 Q 66 Back

394 Treasury Committee, Fifth Special Report of Session 2006-07, The 2007 Budget: Government Response to the Committee's Fifth Report of Session 2006-07, HC 696, p 7 Back

395 HC (2006-07) 389-I, para 51 Back

396 Cabinet Office, Impact Assessment Guidance; HM Treasury and HM Revenue & Customs, Impact Assessments, March 2008 Back

397 The Code for Fiscal Stability, para 16 Back