Budget 2010 - Treasury Contents


Examination of Witnesses (Question Numbers 60-79)

MR ROBERT CHOTE, MR JOHN WHITING OBE, MR IAN MCCAFFERTY, MS FRANCESCA LAGERBERG AND PROFESSOR COLIN TALBOT

29 MARCH 2010

  Q60  Jim Cousins: Mr Chote, Mr Whiting, Professor Talbot, how easy do you think it will be for the Government to raise its share, the billion pounds from so-called mature infrastructure related assets?

  Mr Whiting: This is basically what we like to call privatisation or selling off assets?

  Q61  Jim Cousins: Mr Whiting, really, people will start to call you an unreconstructed old leftie if you talk like that. Really we do not use terms like privatisation any more. Could you recraft your thinking?

  Mr Whiting: You are asking whether the available and mature assets could be sold off?

  Q62  Jim Cousins: Yes.

  Mr Whiting: Clearly there is some scope for the Government to raise some money from it, whether they could get up to the billion is a moot point. One of the concerns I would always have is that those assets that are sold off are potentially no longer available to generate income for the Government. Of course they may well generate tax revenues more than they previously did but they may well not give the Government the cash flow that they did when they were held by the Government.

  Q63  Jim Cousins: So the accountants call for not going in for, I hesitate to call it privatisation but that word has been put on the table, do you agree, Ms Lagerberg?

  Ms Lagerberg: In terms of do you sell off your assets, well it is swings and roundabouts. The money has got to be raised somehow. You are bound to look at it, who would not. Is it going to raise the money you expect? It is a very moot point because you just do not know what you are going to get for it. The reality is we are in a very difficult situation. We have clearly got to look at public spending. We have got to look at tax. We have to look at a whole range of issues. You are going to end up needing a combination of all of them to deal with the economic situation we are in. Will one thing do it? No of course it will not. Will a combination of things do it? A little bit.

  Professor Talbot: Obviously it depends on two crucial things. One is do you need the assets, are they genuinely redundant or not. If they are not redundant then you have got to replace them by renting something, if it is buildings, for example. A lot of the things around the various efficiency programmes may lead to freeing up of some of those assets through things like shared services, reducing the need for building capacity and so on, and the second thing is will the market buy them and what is the state of the market at the time when you try and sell them.

  Q64  Jim Cousins: Would you be an optimist about that?

  Professor Talbot: I have no idea. I do not predict what is going on in the property market.

  Q65  Mr Love: Can I take us back to departmental efficiency savings because the Government has announced in the Budget very significant increases. We have just heard today that part of the Conservatives' plan in relation to increases in National Insurance is further efficiency savings in education. I just cannot resist, Professor Talbot, asking you the question that Martin Weale asked us to ask the Chancellor which is if all those efficiency savings were out there why have we not done something about it so far? Is there anything in the operational efficiency savings and public value efficiency savings that was not there before?

  Professor Talbot: I do not think there is anything particularly new from the Pre-Budget Report to the Budget. There is detail here but there is nothing particularly new. There is a very significant area which I bring the Committee's attention to, and you may want to ask the Chancellor about, which is the health budget. There is a very puzzling statement in the Budget about what is going to happen to efficiency savings in health. As part of the £11 billion they announced they were going to make by 2012-13 health is supposed to contribute £4.35 billion. There was a great deal of debate in the press at the time that was announced about where it was coming from, half a billion from increased costs, staff productivity from reducing sickness absence and those sorts of things. However nobody seems to have picked up that also in the Budget it says in paragraph 6.14, "The Budget confirms that the NHS will deliver annual efficiency savings of £15-20 billion by 2013-14" so the year after it is delivering annual efficiency savings of £4.35 billion. That is an extraordinary jump from £4.35 to £15-20 billion in one fiscal year. There is nothing that explains where that is suddenly going to come from. There is some detail given in 6.14, £3½ billion will come through raising staff productivity. Given that over the last decade or so staff productivity in the NHS has gone down by about 3%, I am just puzzled how they are going to achieve this.

  Q66  Mr Love: Let me just be clear about this, since they are a so-called protected area they will be allowed to use resources to redeploy them?

  Professor Talbot: Presumably, I do not know, but it is a phenomenal amount of money. £20 billion, the upper limit of that is nearly 20% of the health budget.

  Q67  Mr Love: Can I ask you, there has been a lot of chatter from local government saying they have been fixed up with a very rigid regime for efficiency savings, are we asking too much of local government?

  Professor Talbot: Local government achieves more in the Gershon round of efficiency savings more quickly than central government did.

  Q68  Mr Love: There is a lot of waste there.

  Professor Talbot: A lot of the savings were confirmed by the NAO unlike a lot of central government savings. Local government has already done a great deal and they are being challenged to do significantly more in this round of efficiency savings. Certainly the feeling amongst a lot of local authority chief executives—I heard one quoted the other day saying we are finally getting decentralisation—is it is decentralisation of cuts.

  Q69  Mr Love: Mr Chote, can I ask you about relocation. They are putting quite a lot in the Budget for savings from relocation and yet a lot of people said most of the easy savings have already been made, it will be much more difficult. What is your view?

  Mr Chote: Colin may have a better view on what the historical experience suggests.

  Q70  Mr Love: I am going to ask him.

  Mr Chote: I would have thought that quite a lot of that low hanging fruit may already have been plucked. Therefore whether you can expect to maintain the same sorts of savings looking forward as you think you have achieved in the past, Colin will have a better view on. Just on your previous question, if I could just mention, it is notable if you look at the size of the efficiency savings that the Government has identified by 2012-13 by department and compare it with what they are spending in 2010-11 it is not surprising that local government is being asked to achieve a larger reduction. It is 8% of their departmental expenditure limit in 2010, larger than any other department.

  Q71  Mr Love: Just picking up on what Mr Chote has said, you have already indicated that local government proved more lucrative in the Gershon round. Is there evidence out there to suggest that perhaps putting more onus on local government to achieve these savings is because it will be easier to find them in local government?

  Professor Talbot: Local government and local services. The one thing we have not had yet, unless I have missed it, was that the Budget promised on 25 March the Total Place report was going to be published which would outline how large savings could be made in local services taken as a whole, not just local government but the other services provided in a locality. As far as I am aware that has not been published yet, I am not quite sure why. Coming back to the other point about relocations, there is no strong evidence that the Government has made any real savings so far on the 20,000 relocations under the Lyons Review which was associated with the Gershon efficiency programme. The combination of relocation costs, having to pay people to move, redundancy costs for people who did not want to move and so on. is such that, as far as I can see, they have made no real savings at all. That might explain why this time it is only 15,000 rather than the 20,000 last time.

  Q72  Mr Love: Finally, can I come to you, Mr McCafferty. There is quite a focus in the Budget on help for small business. Is it real? Is that the right area to be looking at or should we be looking to help larger businesses as well?

  Mr McCafferty: Given that the Budget had so little money to play with of course any help across the board tends to cost rather more and, therefore, focusing such help on the most needy clearly makes some sort of sense. In reference to my earlier answer, clearly in terms of flows of credit the small business sector has fewer opportunities for credit outside the banks than do medium and larger firms who can have recourse to bond markets and elsewhere. In terms of the focus of the measures, it is clear that the annual investment allowance, the increase in that from £50,000 to £100,000, is a help, but given the costs where the initial £50,000 was scheduled to cost £1.5 billion and the extension, the doubling of the allowance, costs only a couple of hundred million or so does suggest that it is only a marginal extra assistance to business. The other one that I would suggest is of long-term help is the change in CGT for entrepreneurs where it is clear that the extension of the lifetime allowance will allow more entrepreneurs to invest, particularly serial entrepreneurs who build up a business, sell it, restart, build up a new business and then sell that. The extension of that lifetime allowance to £2 million is more in line with the gains that most of these entrepreneurs would expect to make being serial entrepreneurs and, therefore, should encourage investment in start-up businesses. The other measures are welcome if you are a very small business, but most of them are targeted on businesses of under 20 people and, as such, helpful to that sector but make only marginal difference to the other elements of the small and medium firm sector.

  Q73  Chair: Is there anything new and significant in the Ending Child Poverty document that was published alongside the Budget?

  Mr McCafferty: I have not got any comments on that particularly.

  Mr Chote: There is effectively, I think, as close as we are likely to get to a formal admission that the target for 2010 is missed, basically saying the projection being we are looking at child poverty of 2.3 million in 2010-11, well above the target and roughly in line with what we predicted when talking to you in previous sessions. The document does also include an effort to say how you would make more progress to the 2020 target and it is probably not its intention but that suggests how much more there is that still needs to be done. There are some quite optimistic assumptions in there about the impact of the increases in employment, et cetera. It does look like there is an awfully large gap left that is not going to be achieved without further increases in the generosity of payments to those families. The idea that this can all be done by increasing lone parent employment rates is not plausible. In a sense, both sets of forecasts for 2010 and 2020 are even a bit more pessimistic than the ones I have talked about when speaking to you in the past.

  Q74  Chair: Is there a case for radical change to the tax system to end the bias towards debt finance rather than equity?

  Mr Whiting: I think there is a case for it, yes. It is certainly something that deserves to be looked at because at the moment there is a bias in favour of debt simply because interest is tax deductible and dividends are not. It is wrong to run away with the idea that there is complete freedom for debt because obviously there are considerable anti-avoidance measures around thin capitalisation and transfer pricing, but I would say it is something that is well worth studying. It is certainly something that would not be good to move precipitately on. But to look at it particularly in an international context, and Mr Chairman I am sure that is the basis of your question, would be very sensible and to try and see whether perhaps we can, dare I say, achieve some simplification. Could we move to a more territorial system that allows us to get rid of quite considerable rafts of anti-avoidance legislation around things like controlled foreign companies? But I reiterate, it is not something in my view that should be gone at in a hurry.

  Ms Lagerberg: I totally agree with that. I think there are simplifications to be got out of that. The balance does not feel right at the moment, it does not seem to work in the way you would expect. It warrants a lot of attention and it does warrant giving time to as well. I do not think you can switch from the system we are in at the moment to another system without really thinking through the law of unintended consequences that will come with it. It is not a short-term fix but it definitely deserves being given some more time and attention.

  Mr McCafferty: There is an incontrovertible case for levelling the playing field, that we should equalise the treatment for the raising of equity with the raising of debt, which is clearly not the case at the moment. We need to recognise two things. One is that the costs of debt, as with the costs of equity, are legitimate business expenses and, therefore, under nearly all tax treatment are deductible before tax is levied and moving away from that principle is very difficult. Secondly, we need to recognise that for many small businesses the only available finance to allow them to grow at all is a form of debt and, therefore, taking away tax relief completely from debt simply will hamstring the smaller firms sector from growing their businesses.

  Q75  Chair: Talking about the smaller business sector, Lord Mandelson told your boss to "get real". Is he getting real?

  Mr McCafferty: He stands by his statements.

  Q76  Chair: Are you going to give him support?

  Mr McCafferty: Who am I giving support to, Chairman?

  Q77  Chair: Your boss.

  Mr McCafferty: Of course I am giving support to my boss, I know which side my bread is buttered!

  Q78  Chair: What should we keep in mind for the Chancellor tomorrow morning, starting with Francesca?

  Ms Lagerberg: I think if you are looking at it today and sitting there as a businessman or an individual you want to know what is going to happen and you know that probably tax is going to go up or change in some shape or form. What people want to know is what is coming round the corner. I would ask the Chancellor over the last ten years how much change has he brought in and would he still do it if he were looking back now, has he given people the consistency that they want. Looking forward in turbulent times, how much consistency can he provide in the coming years.

  Mr McCafferty: I would ask where is the strategy and the clarity on reduction of the deficit. It is clear from all of the evidence from both the European Commission and the OECD that there are significant differences in impacts on growth whether you are cutting current expenditure, government capital expenditure or raising taxes. It is clear that cutting government capital expenditure and raising taxes are more damaging to growth than cutting current expenditure, and we do not have the clarity as to where there is the strategy nor on how those current expenditure cuts will be made.

  Mr Chote: On a related point to that, in both the Pre-Budget Report of last year and the Budget of this year the Chancellor has been able to announce that the hole in the public finances is smaller and he has also announced net tax increases, but in both cases he has not used it to ease the squeeze on public sector capital investment, he has used it to ease the squeeze on public sector current expenditure. Why, given all the rhetoric about investment versus cuts, the Golden Rule being designed to stop investment being clobbered when the belt needs to be tightened, is he now relying for more of a fiscal tightening on a squeeze from capital than he was a year ago?

  Mr Whiting: I would also be talking about strategy:- where is the strategy for our tax system, what is happening. I would also be probing about the measures that are apparently going to raise some money and whether they are being done as efficiently as possible, for example the pensions tax restrictions which are absurdly complex. There have to be simpler ways of doing that and, indeed, a number of the other things in here.

  Professor Talbot: Given how critical the efficiency programme is to this whole package from the Chancellor's perspective, I think the Committee ought to be asking for some more detailed explanations. In my judgment there is less explanation in here at the moment of how these targets are going to be achieved which are more challenging than the Gershon targets in 2004. As I just pointed out in relation to the NHS, for example, if you took that seriously that is 20% of the NHS budget to be saved in the next four years through productivity and other changes. I just cannot see how that is going to be achieved and there is not enough in here to explain how it is going to be achieved.

  Q79  Chair: We will certainly ask him that. Given that you are such a loyal employee, Mr McCafferty, we will give you the employee of the month award, which is the last question. What do you think of the 20% VAT increase suggested in the last session?

  Mr McCafferty: I would have to ask in what context. Is this designed to pay for something else not to go up or is this in absolute isolation? Clearly, as I said earlier, cuts in public expenditure on the current expenditure budget are less damaging to growth than either increases in taxes or cuts in public investment, and to that extent I would rather see the deficit cut through greater use of the public expenditure lever if we take the points about efficiencies and drive those a lot further in order to reduce the deficit rather than increasing taxation that damages growth even more.

  Mr Whiting: If that is on the cards then I would be looking to see if some of it is going to be paid back in help for the less well-off.

  Chair: Can I thank you for your evidence. We look forward to putting your questions to the Chancellor tomorrow.


 
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