Examination of Witnesses (Questions 80-99)
MR JOHN
WHITING, DR
MARTIN WEALE
AND MR
ROBERT CHOTE
17 MARCH 2008
Q80 Nick Ainger: I am sure they are,
there is no dispute about that, but in terms of a social tariff,
which in effect is a levy rather than a windfall tax on the energy
suppliers, it seems to me to be bizarre that we are looking at
the energy suppliers to provide the resources for the social tariff
but the oil companies which are in the main supplying the gas
and heating oil, for example, which has gone through the roof
compared with mains gas supplies, get away with nothing. There
is no social tariff for somebody who lives in a rural area having
a heating oil or LPG supply, for example.
Mr Whiting: I understand the point
absolutely and I am quite sure it is a subject that needs to be
looked at if only to find an efficient way of doing it because,
as I say, one of the big concerns is we end up with a very administratively
burdensome system all round.
Q81 Mr Fallon: Could we turn to marginal
tax rates. Robert Chote, help me with the table on page 62 where
the increase in those facing a 60% deduction is over a million
since 1998. Who are these people?
Mr Chote: This is basically the
introduction of tax credits and the increase in the generosity
of those tax credits in an attempt to get child poverty down.
What you are seeing is increased payments at the bottom and then
more people being on the taper to get those removed.
Q82 Mr Fallon: But who are the extra
million who are being hit by this 60% marginal rate?
Mr Whiting: At a guess on figures,
they can be people on incomes of around £20,000 quite easily,
so there can be quite significant incomes, with a number of children,
to have this credit then clawed back from them.
Q83 Mr Fallon: Is that right? When
we drew the Government's attention to this in our report on the
2006 Pre-Budget Report the Government said: "published HMRC
tax credits statistics show they are most likely to be families
with children who have incomes under £20,000". Is that
right?
Mr Chote: I do not know.
Q84 Mr Fallon: You do not know who
these million people are?
Mr Whiting: It is incomes up to
about that level. My point was that as the tax credits have become
more generous, as Robert alluded to, that naturally takes this
level at which the claw back starts to affect people up higher.
If we go back two or three years when tax credits were first introduced
we would be looking at people on incomes of £12,000 to £14,000
and as the credits have become more generous that has made them
more available further up the income scale but it has meant more
people being subject to claw back over a wider income band than
used to be the case.
Q85 Mr Fallon: Are these typically
people with or without children?
Mr Whiting: Typically people with
children because we are talking about people with children and,
therefore, eligible for the Child Tax Credit.
Q86 Mr Fallon: To what extent can
the Government tackle these people and still achieve its social
policy goals without altering the tax take-up?
Mr Whiting: It is one of the imponderables
and to a certain extent it goes back to Ms Keeble's earlier point
on benefits, that as soon as you give benefits and then say, "We
want to withdraw them", you are facing people with a significant
taper. To give another example, I have just come from discussing
the impact on the elderly of the income withdrawal of the higher
personal allowances and we are going to see considerably more
people subject to a higher rate for the over-65s because as the
personal allowances become more generous, as they do from three
weeks' time, that will naturally mean more people suffering a
greater claw back.
Q87 Mr Fallon: They will pay higher
National Insurance contributions and presumably they will be losing
out because of the abolition of the 10p rate as well.
Mr Whiting: Yes.[1]
Q88 Mr Fallon: Why is the Government
clobbering these people?
Mr Whiting: There is quite a deal
of complexity in the way that the tax rates are moving. You are
right, the 10p rate goes and this has the greatest impact on those
who are under £18,000 of income roughly because, very broadly,
they lose out. There is compensation for them with the higher
65-plus personal allowance or with Working Tax Credits but some
will be losing out.
Q89 Mr Fallon: The table does not
show the figure for the current year, what is that figure? It
shows the figure before 1998 and the figure for 2008-09.
Mr Chote: You mean 2007-08?
Q90 Mr Fallon: Yes. What will the
figure be for the over 60%, Robert?
Mr Chote: It has gone up 200,000,
I think.
Q91 Mr Fallon: So it is 1.6 million.
Mr Chote: I do not have it with
me. From memory, Budget 2007 had 1.6 million. I think it is 200,000.[2]
Q92 Mr Todd: The spending programme for
the next three years has efficiency assumptions within it which
are challenging, more challenging than those in the previous round.
There appears to be some evidence that departments are producing
methods for reaching that which include the termination of certain
programmes or services early or charging for services to particular
recipients of them. Do you think that is a reasonable definition
of a saving? It is clearly a saving but is it an efficiency saving?
Dr Weale: Yes. Witnesses to this
Committee have said in the past that many of the supposed efficiency
savings were structured in rather odd ways. It is very imperfect
but the best sense of what is happening to efficiency, I think,
can be formed from looking at the national accounts and productivity
in the education industry, productivity in the health industry
and so on, and on the figures that the ONS has produced, and admittedly
this is looking ahead and those are always looking behind, to
date performance has been poor. We will have to wait and see whether
things turn up, but I cannot say I have any great confidence looking
at the best, albeit imperfect, measures that we have that things
will.
Q93 Mr Todd: We also have some discrepancies
in the way in which departments measure their baselines it seems
with some inflating by GDP growth and some by general inflation.
Does this suggest that having some robust central control over
this process is required, that leaving these matters in the hands
of departments is not an adequate mechanism for ensuring some
consistency of approach in efficiency savings?
Dr Weale: What happens as of 1
April is we have the Statistics Authority and the National Statistician
setting out how the statistics should be produced. What I would
hope is the figures used to look at performance prospectively
would be entirely consistent with those. I think those would probably
be deflating neither by general inflation nor by the GDP deflator
but looking at measures like productivity. This might be something
for the Statistics Authority to address.
Q94 Mr Todd: I am not sure that is
going to lie within their ambit, but yes. This Committee has suggested
before that we should have some sort of quality audit process
as well to balance any efficiency programme. Have you seen any
sign in the Budget papers of addressing that other than the assertion
that something like that might be attempted?
Dr Weale: As far as I know progress
with measuring the quality of public services remains at an extremely
early stage. Going back to your earlier point, a measure of efficiency
should take account of what has happened to quality otherwise
it is not a measure of efficiency at all.
Mr Chote: Certainly as the ONS's
UK Centre for the Measurement of Government Activities has been
going through looking at a series of areas, we have seen, for
example, on areas like health and education the introduction of
different sets of output measures looking at different ways of
assessing quality and those are being refined and whittled down
as you go along. All of which adds up to the picture Martin paints
of more inputs going in and obviously a less than proportionate
quantity of quality adjusted outputs coming out, but to some extent
diminishing returns to what you put in is not necessarily surprising.
Q95 Mr Love: How strong is the link
between the public sector wage restraint of 2% and the Government's
inflation target, Mr Chote?
Mr Chote: Not very, I would have
said. Inflation is driven more by the balance between overall
demand and supply in the economy. If you have a set of public
expenditure plans laid out in cash or real terms then in part
the choice about what wage levels are appropriate there is what
appropriate mix of spending between money on labour versus other
factors will deliver you the best sorts of outcomes. It is certainly
not the case, as sometimes seems to be suggested, that in order
to be consistent with the inflation target you need to have the
earnings growing in the public sector at the same rate as prices
are expected to be growing across the whole economy, leaving aside
what is happening to productivity in the appropriate sectors.
Over time you would expect the wages of public sector workers
to have to reflect productivity improvements across the wider
economy because labour can go between the public and the private
sectors.
Dr Weale: Could I just add to
that?
Q96 Mr Love: Add to this as well
as giving that answer. Is there any link, no matter how weak,
between public sector wage restraint and awards in the private
sector? Is there any evidence of that at all?
Dr Weale: My first point is that
people do not buy the output of the public sector and what appears
in the inflation measure is what people buy in the shops, so there
is no first round impact at all. That said, movement in wages
in the public sector can from time to time affect notions of a
going rate, and the connection which the Chancellor has to be
relying on is that if people are getting a 2% settlement in the
public sector then in the private sector they will be more willing
to accept 3, 3½% than they would be if the public sector
were getting 6%. There probably is some substance to that.
Q97 Mr Love: The first round of three-year
pay deals seems to suggest actually they are going to be greater;
although the Government has set a target of 2% in each of the
years, it looks likely they may not actually live up to that especially
in the later years. Will that have any impact on the public finances?
Mr Chote: Not unless they end
up pushing up the overall spending envelope. If that is contained
within the overall spending envelope, that should not make a difference
to the public finances. It will show up arguably in the changes
in quality of the outputs of those services, depending on whether
that is money well spent or not. You could make the case that
having those higher increases may help to retain, motivate public
sector workers and deliver higher quality output, but unless you
breach the overall spending total it is not going to affect the
public finances.
Q98 Mr Love: The Financial Times
reported just after the Budget that the Comprehensive Spending
Review total for education was £500 million adrift from that
which appeared last autumn, and I believe there may have been
other changes which came with the Budget documents. Do you know
why that has happened? Is there any implication for it? Can I
also ask you a slightly wider question as well, will any under-spends
at the end of this financial year go back to the Treasury or will
they be left with the Departments?
Mr Chote: On the specifics of
the education figures, as I understand it, it was the revision
to the 2010-11 numbers you are referring to?
Q99 Mr Love: Yes.
Mr Chote: My understanding is
that that reflects the fact that the Treasury now has information
on the spending plans of the devolved administrations which it
did not have at the time of the PBR. So, roughly speaking, the
Treasury previously estimated there would be more education spending
by the devolved administrations than they now think is likely
and that is what has led to that revision. On the broader question,
I presume end-year flexibility will apply, so if there are under-spends
then in principle the Departments can go back to the Treasury
and can claim for spending that in future years.
1 Note by witness: Yes, many will lose out
through the abolition of the 10p rate, depending on their income
level. On National Insurance, those on incomes above about £35,000
will pay increased amounts; once the full increase in NIC upper
earnings limit comes through from April 2009, those earning above
£43,000 effectively lose on the NIC swing almost all they
have gained on the income tax roundabout. However, if you are
thinking about those aged 65+, they do not pay NICs of course. Back
2
Note by witness: The actual figure is indeed a 200k rise
from 1.68m to 1.88m. Back
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