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Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 45-59)


29 MARCH 2010

  Q45 Chair: Welcome to the second part of our evidence session this afternoon. Can you introduce yourselves starting with Colin and moving along.

  Professor Talbot: Colin Talbot, Manchester Business School.

  Mr Whiting: John Whiting, Chartered Institute of Taxation and Low Incomes Tax Reform Group.

  Mr Chote: Robert Chote, Institute for Fiscal Studies.

  Mr McCafferty: Ian McCafferty, Chief Economic Advisor to the CBI.

  Ms Lagerberg: Francesca Lagerberg, Head of Tax at Grant Thornton.

  Q46  Chair: Good. The most significant thing in this year's Budget?

  Mr Whiting: From a tax point of view, Chairman, that nothing much happened in one sense. We had got plenty of things already in hand thanks to the PBR. What we needed was a period of consolidation and to a large extent that is what we have got. That said, we still got 71 Budget notes, there is still a plethora of little detail changes, some of which ostensibly are going to raise quite useful sums of money. Some of the anti-avoidance money raising measures one would doubt. There is still quite a lot of detail to grind through and one of the concerns is that this will all be rushed through in a very truncated Finance Bill process.

  Mr McCafferty: The fact we did not get enough clarity on quite how the public expenditure totals will be achieved over the course of the next four or five years. Certainly we still have the totals and, as we heard in the previous session, those are slightly changed from where we were but we still have very little detail on the departmental expenditure limits.

  Ms Lagerberg: Bit of a lollipop budget really, a few little sweeteners to hide some of the pain. Lots of little bits of detail but I agree very much with John, nothing massive in there which is a significant change which for businesses tends to be quite a good thing, but there are actually a lot of small bits and pieces that will require quite a bit of working through. I can only echo that this is going to get so little scrutiny in Parliament I do wonder how those elements of it will be properly reviewed.

  Q47  Chair: How reasonable is it for governments to use fiscal drag to reduce the deficit?

  Mr Chote: It is something that governments have done for very long periods of time.

  Q48  Chair: At what stage will it create any social difficulty, do you think?

  Mr Chote: The Treasury assumes that fiscal drags—that is primarily in income tax, primarily as people are migrating into higher tax bands—get about a fifth of a per cent of national income per year as that happens. You are talking about something like a little under £3 billion per year. I think the main problem with this is that it is not transparent. Basically it implies that the average tax rate on a no policy change rises over time, you see people migrating into a higher tax band and that is a perfectly reasonable thing if a government wants to do that, that is an alternative to raising revenue through other ways. The main problem is that it is rather opaque. The Treasury obviously loves it because it means you do not have to run to standstill.

  Mr Whiting: Let us not lose sight of the fact that fiscal drag is also happening a long way down the income scale with the freezing of the personal allowances. This is bringing people into the tax net and National Insurance net who were not there before. It is not just a case of the 40% tax bracket, and I would echo Robert's point that in some ways the worst thing about fiscal drag is it is not transparent, people do not necessarily understand what is really going on.

  Q49  John Thurso: Robert, I will try another question this time.

  Mr Chote: Good luck!

  Q50  John Thurso: Efficiency savings, are they real, can they be delivered, are we wise to depend so much for the deficit reduction on them?

  Mr Chote: I think we are always wise to seek them out where we can find them. I think we are not quite so wise to rely on official estimates of exactly how much they are going to raise. For example, the National Audit Office is still not convinced by the Government's estimates of what was raised by the Gershon Review over the 2004 spending review. I think there is also an additional transparency point about the claim that we have a fiscal tightening of X to do and efficiency savings have found Y of it.

  Q51  John Thurso: Is not part of the problem that efficiency savings are expressed as resource whereas in fact what we need for a deficit reduction is cash and the two are not necessarily the same thing?

  Mr Chote: That is one issue. A key one is we would hope and expect that the Government will spend money as efficiently as possible at all times. The idea that the Government conveniently identifies or indeed the Opposition conveniently identifies efficiency savings at a time when cuts are required does not make that free money or painless. One would hope that those efficiency savings were being delivered whether we needed to cut spending or not. In that sense it is not narrowing the gap between the public services we would enjoy in the absence of spending cuts versus those that we enjoy with them. One caveat to that is you could make the case that there are some efficiency savings that are only deliverable in a time when there is the sort of crisis that we have at the moment, so if you argue that delivering the same public services while freezing or restricting public sector pay for a limited period, you count that as an efficiency saving, then the fact the private sector pay is as weak as it is clearly gives you political room for manoeuvre to deliver that sort of reduction in the premium of public over private.

  Q52  John Thurso: Do you think it is wise to talk in terms of public sector pay restraint as an efficiency saving? Efficiency applies, you are paying fewer people to do the same job so you get the same product but it costs less. Pay restraint is just cost cutting is it not?

  Mr Chote: It is. The argument that could be made is that you are paying workers in the public sector more than you are paying comparable workers in the private sector. That is not necessarily the most efficient way to use taxpayers' money. The Irish comparison that came up in the last session, there you have managed to have as part of their fiscal consolidation very large public sector pay cuts in part because such a large premium had been allowed to build up unlike in the UK. The premium between public and private sector wages for a given type of worker is much smaller. It is probably still positive and therefore I would not rely on an extended period of public sector freezing or squeezing before you run into recruitment and retention problems.

  Q53  John Thurso: Colin, you wanted to come in on this?

  Professor Talbot: Yes. The strict definition of efficiency is the relationship between inputs and the outputs, both quantity and quality of outputs that are achieved. One of the problems that we have always had is that we have not really had robust measurement of output. IT is very easy to claim efficiency savings in terms of cash savings in terms of inputs, without the measurement of outputs it is very difficult to say whether they are real efficiency savings or simply cuts. Reducing salaries, for example, may simply lead to lower productivity. We know that during the last round of efficiency savings the Department of Health was claiming large efficiency savings at the same time as productivity measured by the ONS, which was attempting to measure outputs, was going down. Those two things do not actually square and there are explanations as to why that might be the case.

  Mr Whiting: Just a small point on the tax side: one always worries about efficiency savings meaning more work is pushed to the taxpayer and their adviser so there is a saving at HM Revenue and Customs but there is an equivalent extra load in the private sector.

  Q54  Nick Ainger: In the Budget the Chancellor announced that Lloyds and RBS were given commitments that they would provide over £90 billion in lending to businesses. How significant do you think that is in terms of the three pillars that the Chancellor is standing on to address the deficit and the crisis that we face which is a combination of spending cuts, growth and increases in taxation? How informed is it that we get the banks lending to the level they were pre-crisis?

  Mr McCafferty: I think getting the banks to lend again rather than necessarily specifying an exact level that was a pre-crisis level is absolutely critical. Without getting some form of credit flows back into the wider economy we cannot see a significant recovery in GDP growth and that as the denominator of all of our measures on both the deficit and the debt is absolutely critical in terms of where we go in coming years. I think it has to be recognised though that however much we encourage those two banks that are now in public hands to increase their lending, that is only going to be a small part of the issue. Relative to the time before Lehman's there are a number of foreign banks that have now left London, there is a significant need for those banks left in London, particularly the UK banks, to increase their capital and reduce their gearing and that is constraining lending across the board. We face tighter lending conditions across the board than we did before the crisis and to be honest forcing the two nationalised banks is a help but it is only a very small part of the problem.

  Ms Lagerberg: Could I perhaps pick up on the adjudicator point?

  Q55  Nick Ainger: I was going to follow on to that.

  Ms Lagerberg: Yes. You can understand the rationale behind having some form of independent party that could help challenge some of those decision. My only thought there would be that traditionally adjudicators are not always that quick or that nimble and what you are talking about here is often businesses that have real cash flow issues where time is of the essence. For the adjudicator to work effectively it has got to operate very quickly and it has to have the power to operate very quickly for it to work effectively.

  Q56  Nick Ainger: With the previous panel I asked a question about the concentration that the Chancellor's Budget clearly gives to growth in relation to small and medium sized businesses. Is there not a case to be made that those incentives, which seem to be concentrated solely within the SMEs, have actually spread to the larger businesses as well because if they are not investing then we have got a significant problem. Would you like to comment on that?

  Ms Lagerberg: Yes, I think in terms of incentives you either take a view that you do not incentivise, it is a level playing field at that level or you do incentivise and you incentivise everybody. I can understand why sometimes targeting incentives has a huge attraction to help particular sectors but broadly the types of incentives we are looking at have got value right across the piece. One of those is the annual investment allowance, that is available for everybody, that is not just targeted at SMEs, although undoubtedly SMEs will benefit from it more but the value is there for everyone to use. Just one point on investments, the enhanced capital allowances which are effectively an incentive towards greener forms of usage, again they have a place and they have a merit. You may have noticed although some new ones are coming on board some have also dropped off the list and for a business that actually moves towards taking an incentive because it is considered to be a good thing, to have things drop off the list quite quickly is also very difficult so you do need some level of constancy to make these types of incentives work.

  Q57  Nick Ainger: By those, are you referring to the 40% first year short life?

  Ms Lagerberg: These are the particularly targeted ones for green technology. Again you need some buy in for length of time to enable those to really have a value.

  Mr Whiting: Yes, of the green tax measures, the environmental allowances are actually in the Red Book as raising money which is slightly odd as they were sold as increasing the numbers of assets qualifying. Just to pick up on that, if you are looking to get business to commit to investing, the best thing you can have is long-term consistent policies and levels of allowances. Ian will no doubt have a view on this, but I think that is one of the greatest things the Chancellor can do—

  Q58  Nick Ainger: It is better to go to capital allowances rather than cuts in corporation tax because presumably in terms of corporation tax the business can take it and by putting it on its bottom line, if it likes, it does not necessarily encourage it to invest?

  Mr Whiting: They have a different impact. What I would reiterate is, choose your method and stick with it.

  Mr McCafferty: I do not think we can say that one is preferable to the other because they are doing very different things. The marginal tax rate is quite important for those deciding on mobile investment, particularly whether they choose the UK as the destination for their investment rather than another country. They would look at that rather than necessarily capital allowances. I think the question of encouraging investment—if we broaden the question slightly away from simply capital allowances towards saying how can we encourage businesses to invest in the near term—I think capital allowances are an interesting issue but they are by no means a silver bullet. Part of the reason why we are seeing investment so low at this stage is simply a question of demand. Businesses are very uncertain about the outlook and are facing difficulties in terms of raising capital. In terms of the larger companies I think it is clear that they have many more options when it comes to raising capital than do the SMEs and it is clear with the dramatic growth we have seen in the corporate bond market, and the issue of new corporate bonds over the course of the last 12 months, that some companies are using that vehicle. In terms of providing capital, I think the focus on the SMEs is probably correct. When it comes at looking at encouraging investment, I would suggest it should be more of a level playing field but even then you are pushing against a reluctance to invest on the part of most businesses because of the uncertainty going forward.

  Q59  Jim Cousins: Mr McCafferty, the green investment bank, do you think the private sector will look at this with some enthusiasm? Do you think its share of the equity will be easy to raise?

  Mr McCafferty: I do not know whether it will be easy to raise. I think the private sector reaction, certainly since the Budget, has been to say that it is a welcome mechanism to kick start investment in the low carbon sector but I would also say that the sums that are being raised, if we look at the £1 billion from the Government and then matched by another billion from the private sector, are relatively small beer compared with the size of the problem. If we look at the green and infrastructure investment in energy that we require over the course of the next eight to ten years, estimates range between £150 and £200 billion. So providing a channel for £2 billion into this is really only a very small green shoot or kick start into that area. I think it is not clear either whether this is actually a bank in the normal sense of the term or another investment fund on the part of the Government, in which case I think we already have quite a number of different investment funds looking to channel investment into different environmental infrastructure policies. It may provide some confusion to many private sector investors rather than clarity.

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