Examination of Witnesses (Question Numbers
OBE, MR IAN
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
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 dragsthat is primarily in income tax, primarily
as people are migrating into higher tax bandsget 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
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
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
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
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 investmentif
we broaden the question slightly away from simply capital allowances
towards saying how can we encourage businesses to invest in the
near termI 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.