Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Supplementary written evidence submitted by HM Treasury


  Short notes are attached here on the following subjects. The committee questions referred to are in brackets.

    — Accounting for the fall in net borrowing (Q. 296).

    — HM Treasury's interaction with UK Financial Investments (Q. 304).

    — Benchmarking procurement practice (Q. 306).

    — Pensioners and tax allowances (Qs. 330-332).

    — Child poverty (covering issues raised in Qs. 327, 329, 334, 339, 345-349, 378, 385).


  This note clarifies the principles governing the exchange of information between HM Treasury and UK Financial Investments (UKFI) and, specifically, consultation with UKFI on due diligence information that was in the Treasury's possession.

  UKFI was set up to manage Government's shares in financial institutions at arm's-length and on a commercial basis. UKFI's objective is to dispose of the investments in an orderly and active manner, within the context of an overarching objective of protecting and creating value for the taxpayer, paying due regard to financial stability and promoting competition.

  The Treasury's relationship with UKFI is set out in more detail in UKFI's Framework Document and Investment Mandate.[1] In carrying out its functions, UKFI acts as an engaged and informed institutional shareholder.

  As stated at the hearing, only the Treasury is in a position to take decisions from the perspectives of both fiscal and financial stability. In consulting with UKFI on the recent announcements, the Treasury sought to balance financial stability and value for money objectives with the need to avoid compromising UKFI's status as an engaged and informed shareholder in the banks.

  Both UKFI and the Treasury take care at all times to respect their legal obligations in respect of the information they hold and share, including legislation on insider dealing and market abuse, and conditions which apply when confidential information provided for the purpose of the Asset Protection Scheme (APS) and financial stability is transferred between the two organisations. This includes confidentiality agreements signed with the banks, and FSA regulations on the disclosure of regulatory information.

  Over the course of the APS negotiations, the Treasury sought UKFI's views on the market reaction to each bank's participation in the APS, Lloyds's alternative capital raising proposal and the implications for shareholder value. UKFI was also consulted on final advice to Ministers to ensure that UKFI's views were accurately reflected. Information discussed with UKFI included:

    — Treasury's analysis of the banks' capital models;

    — the structure of B shares and the contingent capital instruments;

    — RBS strategy for raising capital and balance sheet structure, including liability management proposals; and

    — State aid disposals.

  Information provided by the banks, and seen by UKFI, has been reflected in public disclosures that have since been made by Lloyds and RBS.

  Given the Treasury's wider responsibilities for financial stability, and its role as a member of the Tripartite, the Treasury is also in possession of information that was not provided by the banks, such as the results of its own due diligence. At UKFI's appearance before the TSC on 4 November, John Kingman correctly reported that no such due diligence information was shared between the Treasury and UKFI. Detailed information on the FSA's stress testing was not shared. This was because the Treasury judged that advice from UKFI was not required. In cases where further advice was needed, the Treasury sought that advice from Treasury's financial and legal advisers.


  The 2009 Budget forecasts net borrowing to fall from 12.4% of GDP in 2009-10 to 5.5% of GDP in 2013-14. In cash terms, borrowing is projected to fall by £78 billion over that period, from £175 billion to £97 billion. The table below breaks down the annual fall in net borrowing relative to 2009-10 between cyclical changes and other factors, and discretionary measures.

% of GDP

Net borrowing
Change in net borrowing since 2009-10
of which
Change in net borrowing due to cyclical and other factors
Change in net borrowing due to measures (PBR 08+BUD09)

  Almost 70% of the fall in net borrowing between 2009-10 and 2013-14 reflects the impact of discretionary measures announced in the 2008 Pre-Budget Report and the 2009 Budget, including the reversal of the fiscal stimulus.

  Just over 30% of the reduction is driven by cyclical and structural changes to borrowing largely driven by economic growth. Structural improvements include forecast recovery in the financial sector, supporting income tax and corporation tax receipts, and rises in asset prices, boosting receipts from stamp duties.

  The change attributable to measures includes the reversal of the temporary VAT cut announced in the 2008 Pre-Budget Report. If the reduction in VAT is excluded from the 2009-10 baseline for net borrowing, discretionary measures would account for just over 60% of the fall in net borrowing between 2009-10 and 2013-14, and structural and cyclical factors almost 40%.


  The Committee asked why some pensioners do not claim tax allowances to which they are entitled, and asked what HMRC are doing to help pensioners to claim back tax they may have overpaid on their savings income.

  On tax allowances for people aged 65 and over, the figure quoted by Mr Cousins appears to have come from the NAO report, "HM Revenue & Customs: Dealing with the tax obligations of older people", published on 23 October 2009. Most of the 3.2 million people who the NAO estimate do not claim their full age-related personal allowance already have a total income below this level. These people do not pay any tax (provided they register to receive their savings income tax-free) and are not required to inform HMRC of their tax situation. This group would derive no benefit from claiming a higher allowance, which is why their allowance may go "unclaimed".

  Tax on savings income is collected automatically at source, at a rate of 20%, by banks and building societies. For most people this means they pay the right amount of tax, without having to worry about filling in a tax return. There are, however, some people who should pay no tax, or the lower 10p starting rate, on their savings income. Those individuals can claim back any tax that has been overpaid. Non-taxpayers can also instruct their banks or building societies to pay their interest tax-free. HMRC is currently contacting 3.4m pensioners as part of its latest "Taxback" campaign, which aims to ensure that pensioners do not overpay tax on their savings income and that they claim back any tax they have overpaid.


  Child Poverty—performance to date and projections for the future

  The Child Poverty PSA target uses the following three indicators to monitor performance. The data appears in the Households Below Average Income (HBAI) Report published by the Department for Work and Pensions.

    — Absolute low income: this indicator measures whether the poorest families are seeing their income rise in real terms. The level is fixed as equal to the relative low-income threshold for the baseline year of 1998-99 expressed in today's prices. Between 1998-99 and 2007-08 the number of children in absolute low income fell from 3.4 million to 1.7 million.

    — Relative low income: this measures whether the poorest families are keeping pace with the growth of incomes in the economy as a whole. This indicator measures the number of children living in households below 60% of contemporary median equivalised household income. Some 500,000 children have been lifted out of relative poverty between 1998-99 and 2007-08 falling from 3.4 million to 2.9 million.

    — Material deprivation: defined on the basis of those items that cannot be afforded. This indicator provides a wider measure of people's living standards through a survey which asks respondents whether they have 21 goods and services, both child and household items. The 21 items were chosen following a thorough analysis of all existing UK material deprivation data to identify a set of questions which best discriminated between poor and non-poor families. They are designed to work together as a suite of items that combined present a picture of material deprivation rather than as individual indicators.

  The Government's target to halve child poverty requires it to reduce the number of children in relative low income poverty to 1.7 million by 2010. In 2007-08, the latest statistics available, there were 2.9 million children in relative poverty. Since, then the Government has introduced a number of additional measures targeted at reducing child poverty: the Government estimates that as a result of measures announced in and since Budget 2007 around a further 500,000 children will be lifted out of poverty. This is analysis is based on estimates from HM Treasury's tax and benefit simulation model which uses the Family Resources Survey and simulates the impact of changes in tax and benefits on household income and therefore poverty. This model focuses on simulating changes in relative poverty, the model has not been developed to accurately simulate the level of absolute poverty, or material deprivation, as requested by the Committee.

  Child poverty is a result of a number of complex and varied factors and can be influenced by changes in economic circumstances, levels of employment and demographics. There is significant uncertainty about the impact on child poverty of the current economic circumstances and the Government faces additional pressures as a result of the extraordinary economic events. However, the Government remains committed to tackling child poverty and has taken further steps at Budgets and Pre-Budget Reports even in difficult times and is now taking forward the Child Poverty Bill which will enshrine in legislation its commitment to eradicate child poverty by 2020.

Graph 1


Take-up of Tax Credits

  Child Tax Credit (CTC) is an income related payment for parents and carers of children or young people who are still in full-time non-advanced education or approved training. It is a single system of support for families, independent of parents' employment status, thus providing a stable source of income as parents move into work.

  Work is the most effective route out of poverty. Working Tax Credits (WTC) "tops-up" income from low-paid work, improving incentives to work while also helping to ensure a decent income for families. For people who face a significant barrier to working full-time, such as those with children or a disability, Working Tax Credit is available if they work at least 16 hours a week. Other people who do not face these barriers and who work less than 30 hours a week are not generally entitled to Working Tax Credit, because working for less than 30 hours per week is less likely to create a strong attachment to the labour market and lead to sustained employment. Creating financial incentives to work part-time for people who could work full-time would therefore be counter-productive as a means of making work pay and tackling poverty. Nevertheless, to help people affected by the recession the Government announced in the Budget that from 31 July there will be a four-week run-on of entitlement to the Working Tax Credit for people who cease to qualify as a result of working shorter hours. This is worth up to £32 for a single person on the National Minimum Wage and £68 for a couple, and will help people with the transition to shorter working hours.

  The WTC also contains a childcare element, which provides support with up to 80% of childcare costs, to a maximum eligible amount of £175 a week for one child or £300 per week for two or more children.

  Take up of tax credits is higher than any previous system of income-related support for in-work families. In 2006-07 take-up of the child tax credit was 81% rising to 92% for those earning under £10,000. Take-up of the Working Tax Credit by people with children is 88% and 20% for those without children. In Budget 2009 the Government announced an ambitious target to raise take up of WTC among people without children by 100,000 by April 2011. HMRC will continue to expand its work with employers to increase take-up which is now reaching around 750,000 employees at over 50 organisations and its work with Jobcentre Plus to help those going in and out of work. Budget 09 also announced that HMRC will begin new research-driven marketing aimed at the half a million people who stand to gain the most from taking up WTC, and launch a pilot using data from Pay As You Earn records to identify and contact potentially eligible people.

Take-up of the childcare element of the Working Tax Credit

  A take-up rate for the childcare element cannot be calculated in the same way as for Working Tax Credit or Child Tax Credit. This is because we do not have an estimate of the number of people who are eligible for the childcare element as this relies on use of formal childcare as well as work status. The administrative and survey data we currently hold does not allow us to determine which tax credit recipients are entitled to, but not claiming the childcare element.

  The table below gives estimates of the number of families benefiting from the childcare element at points in time based on our snapshot statistics for tax credits awards. This number has increased by 78% since New Tax Credits were introduced in 2003, and also there are now over twice as many families benefiting from it as from the childcare tax credit in the Working Families Tax Credit, the predecessor system. However, during this time the number of families eligible for the child care element will also have grown, for example the Government has increased the amount of support in tax credits by increasing the proportion and maximum costs allowed for child care as well as increasing the child element above indexation.

Table 1


Numbers benefiting1
Average weekly help

July 2003
October 2003
April 2004
December 2004
April 2005
December 2005
April 20062
December 20062
April 2007
December 2007
April 2008
December 2008
April 2009


1.  Those claiming the childcare element and with CTC above the family element.

2.  Proportion of childcare costs allowed increased from 70% to 80% on 6 April 2006. The higher rate would be reflected in the December 2006 snapshot onwards. The April 2006 snapshot was taken on 5 April 2006 so would be based on 70% of costs allowed.

3.  Source: HMRC Provisional Statistics at snap shot dates available at

  Further analysis of the number of families receiving the child care element of the Working Tax Credit can be found in the statistics published on our website at

Employer Supported Childcare

  The estimated costs of Employer Supported Childcare were published in the Tax Ready Reckoner and Tax Reliefs supplementary document at PBR 2008. In this document, the estimated costs to the Exchequer of Employer Supported Childcare was £400 million in 2007-08 and £500 million in 2008-09.

  Most people claiming tax relief and National Insurance Contributions exemptions on Employer Supported Childcare have a household income that is too high for them to be eligible for childcare support through the tax credit system. Around one third of the funding for Employer Supported Childcare goes to the 6% of parents who pay tax at a higher rate.

Housing benefit

  Budget 2008 announced that, from October 2009, Child Benefit would be disregarded for the purposes of calculating Housing Benefit (HB) and Council Tax Benefit (CTB). The implementation date was subsequently changed to 2 November 2009 to align with the changes to regulations which increased the HB and CTB capital thresholds for claimants of a pensionable age. This also allowed the local authorities more time to make the necessary changes to their software and instructions to staff. Given the timescale, involved, it is too early to say, but so far no local authorities have reported difficulties with its implementation.

  As a result of this measure, around 200,000 working families will gain about £1,000 a year, making them an average of £20 a week better off. However, there is currently no reliable way of modelling the combined impact on child poverty of the Child Benefit disregard and the Local Housing Allowance (LHA) reforms announced in Budget 2009. This is because DWP does not currently hold quality assured data on the family breakdown of LHA customers. Although we are not able to say how many LHA customers have children, we estimate as a rough guide that around 45% of HB customers in the private rented sector have children (Family Resources Survey 06/07).


  The Government published its proposals for a better aligned public spending framework in March 2009 (Cm 7567). The Liaison Committee responded to these proposals in its report "Financial Scrutiny: Parliamentary Control over Government's Budgets" (HC 804) in July 2009. The Liaison Committee's report accepted, on behalf of the Parliamentary Committees generally, all of the Government's recommendations on alignment, as well as making a number of other recommendations about Parliament's scrutiny of government expenditure. The Government has since responded to the Liaison Committee report. The Government's response was published by the Committee on 2 November (HC 1074).

  The Government is very grateful for Parliament's support of the proposed alignment changes, which have enabled us to move towards phased implementation of the new spending framework, beginning in April 2010. At present, the necessary primary legislation is passing through Parliament as part of the Constitutional Reform and Governance Bill. The parts of the Bill relating to alignment passed their Committee stage in the House of Commons on 4 November.

  The Government is also planning to put a further memorandum to the Liaison Committee, Treasury Committee and other interested Committees. This will cover a number of implementation issues on which the Committees have asked for further information, such as the format of Supply legislation and resolutions, as well as any new issues that have arisen since the Treasury's memorandum in March 2009.

  Subject to the passing of the legislation and any further comments received from the Parliamentary Committees, the Government is planning to implement the budgetary changes arising from alignment from April 2010 and the full changes to Estimates and resource accounts from April 2011.


  The Office of Government Commerce (OGC) is currently piloting the second wave of Procurement Capability Reviews[2] (PCRs) which compare the procurement capability of the top 16 spending departments using a bespoke procurement capability model. This model uses a mixture of qualitative judgements and quantitative metrics to score departmental performance from nine perspectives (under broad headings such as leadership, governance and processes). Ratings have been published and a "Green" rating can equate to "world class"—as determined by OGC research and comparisons with a range international procurement benchmarks which have been drawn from recognised international benchmarking organisations. The programme of reviews continues, with a greater focus on quantitative metrics, which naturally lend themselves to easier benchmarking—the results will continue to be made public.

  On procurement outcomes, in pricing, for international markets such as energy we track against internationally recognised pricing indices, such as Platts (standard market energy index); and our collaborative approaches to certain categories are breaking new ground internationally. However, it will not always be possible to compare prices directly across international boundaries because the nature of consumption (ie customer behaviour) and the supply side (structure of markets, strength of competition) varies from country to country. Within the collaborative programme, OGC will continue to support the strengthening of Government's relationship with its top suppliers (most of who are international players).

  The UK is a good exporter of Procurement practices; over 20 countries follow the Office of Government Commerce's (OGC) GatewayTM procurement assurance process. International standards have been set by our PRINCE2 and MSP products for project and programme management and ITIL processes for IT service management. This work will continue because since these standards are regularly updated and maintained through consultation and peer review by a pool of international experts.

  It should be noted that the imminent publication of the first Operational Efficiency Programme "back office" benchmarking report will enable all public bodies employing more than 250 people to compare their performance across a number of metrics relating to back office costs, which includes procurement measures of efficiency and effectiveness. The metrics against which benchmarked performance is assessed were developed and agreed by the Audit Agencies (NAO, Audit Commission, etc) after an extensive period of research, which included a comparison with international standards.

  The above are just a few example of the ways in which OGC will continue to make use of international comparisons. OGC seeks to continue to support the UK's leadership in this field and extend it through programmes of collaborative procurement, PPM and capability further into the Public Sector.

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