Budget 2010 - Treasury Contents


Examination of Witnesses (Question Numbers 100-119)

MR DAVE RAMSDEN, MR EDWARD TROUP AND MR ANDREW HUDSON

29 MARCH 2010

  Q100  Mr Fallon: For example, you must have made some estimate of the impact of the National Insurance increase on jobs given that it affects employers. You must have made some estimate of the impact otherwise you might have pitched it much higher or much lower. Have you done such an estimate?

  Mr Ramsden: As we have both stressed, what we publish is our forecast and this is consistent with longstanding convention. We publish the economic forecasts that take full account of all the measures that have been announced in this and previous fiscal events. What it is not possible to do is to go back and pick out a particular measure that was announced at a previous fiscal event and work out with the benefit of hindsight because, as Edward says, the counterfactual changes each time. That is not to say that outside bodies cannot do more of a partial analysis based on microeconomic insights into what would be the effect. I am just saying the approach we take, which is consistent with a very longstanding convention, is that we publish post-measures forecasts.

  Q101  Mr Fallon: So there is no estimate in the Treasury of the impact of the National Insurance increase on jobs?

  Mr Ramsden: I did not say that. I just said that—

  Q102  Mr Fallon: Is there or is there not?

  Mr Troup: It is worth looking back at what happened last time NICs went up, that unemployment fell. A rise in NICs is not inconsistent with a fall in unemployment. It is also quite interesting that if you are trying to anticipate what is going to happen that the British Chambers of Commerce survey from February showed that less than 7% of businesses identified workforce reductions as the main tool they would use to absorb rate rise. It is not at all clear how businesses will respond to this particular NICs rise at the time at which it comes in next year.

  Q103  Mr Fallon: You are suggesting either it is neutral or it could indeed be positive?

  Mr Troup: I am saying it is not possible to say one way or the other.

  Q104  Mr Fallon: But Mr Ramsden said there might have been an estimate inside the Treasury. When I said there was not an estimate, you said there was.

  Mr Ramsden: I just was not ruling out that there had been estimates at times. I am saying that consistent with longstanding convention we have not published a pre-measures and post-measures—

  Q105  Mr Fallon: We see you have not published it, but the purpose of these sessions is to probe behind the stuff you have published to try to find out how it has been constructed. You are saying occasionally you estimate it but this time you have not. In essence, is that what you are saying?

  Mr Ramsden: No, I am not saying that.

  Q106  Mr Fallon: So you have done it?

  Mr Ramsden: We have published a huge amount of information which I am sure would also be of interest to the Committee.

  Q107  Mr Fallon: So you have done an estimate or you have not done an estimate?

  Mr Ramsden: I cannot give you a clear answer on that. I just did not want to rule out that estimates had been done in the past on a microeconomic basis at the time policies were decided on. What I am saying is what we have published is our estimate which takes account of all the efficiencies that have been announced and all the tax increases that have been announced and adding all those together gives you our growth forecast.

  Q108  Ms Keeble: Quite a lot of commentators suggest that the deficit will have to be reduced faster than is currently planned and we will get the information about that after the election. Have you done any preparatory work for any announcement of that type?

  Mr Ramsden: What we have done is an awful lot of work to come up with the plans that we published last week and which indeed take forward and show progress on the fiscal consolidation path first announced by the Government a year ago in Budget 2009. If I could just give you one example because I think it is relevant to this debate. You have taken a lot of interest in this in your report on last year's Budget. If you look at Chart 2.4 on page 32 we set out there how many years it is going to take to balance the cyclically adjusted current budget. A year ago in your report you drew attention to the fact, and the IFS commented on this, that the consolidation was over eight years and in only four of those had we given any detail and the other four years were these white blocks because they were illustrative beyond the end of the forecast horizon. Now we are in a position where the consolidation on this measure takes a year less and we have given detail on five years out of the seven. The Government's position is that that consolidation path, which also has more detail underlying it than a year ago, we have filled in the detail on 2014-15, we have given more detail on efficiencies and also announced additional tax changes in 2014-15 in particular, represents the appropriate judgment.

  Q109  Ms Keeble: If in about six weeks' time a new Chancellor were to come to you and say, "Okay, now take out the National Insurance Contribution increase for anybody earning under £35,000", what would you say?

  Mr Ramsden: What we have got used to through the financial crisis over the last two and a half years is to be ready for pretty much any kind of contingency that we can think about. As is typical, our advice to any new government at any time, whilst it is advice, would remain not in the public domain and then becomes public at the time of the relevant fiscal event.

  Q110  Ms Keeble: But people need to know what the options are and what things would look like because people are thinking about what happens to their families, their services and so on. If that happened, and the IFS has costed that at about £6 billion, what would that look like in terms of public sector spending cuts or would it have to be an increase in value added?

  Mr Ramsden: As officials we are here to provide explanation on the fiscal event which has just passed rather than to speculate on any kind of contingency in the future.

  Q111  Ms Keeble: If somebody says to you now, "Take out the National Insurance increase", what would the options be? You have all the figures, you have worked on it and know what it looks like.

  Mr Ramsden: We could work on the figures under certain requirements for the current Government but it would be for the Government to announce those figures.

  Q112  Ms Keeble: I am asking as an MP who is seeing that as one of the options that is being talked about and I want to know from you, as the people who have got your fingers on the figures and understand what they look like, what that looks like in terms of either tax increases in other areas, like value added, or service cuts. Or is it possible under efficiency savings, which is the other option that is being put up?

  Mr Ramsden: I have tried to set out what I understand to be the convention on this kind of thing. You are seeing the Chancellor in the morning and I am sure you will get an answer from him as a representative of the Government, but I do not think it is appropriate for Treasury officials to get into this kind of detail.

  Chair: You want to keep your job, do you not! I understand that. We are going beyond that line now, we cannot get too political here.

  Q113  Ms Keeble: I just wanted some figures. I just wanted to know what the options were. On child poverty you have pretty much said the original targets are not going to be reached. Do you think there needs to be a revisiting of the targets?

  Mr Troup: The target remains for 2020 and I am sure you will have seen the document. At the moment I do not think there is any case for revisiting the target. It was always going to be, and it remains, a very challenging target. This is a very difficult area of policy. As you know, a lot of progress has been made, half a million children already taken out of child poverty, and this document shows that another half a million are projected to be taken out on policies that are already in place. The Child Poverty Act is now law as of last Thursday and the Commission will sit and the Act requires a national strategy to be published within 12 months. The child poverty paper goes a lot further than previously in setting out the various policy instruments and tools towards meeting the target and that is the path which the Government has set down.

  Q114  Ms Keeble: So you would expect the Commission to come back with proposals to reach the target during the lifetime of the coming Parliament?

  Mr Troup: The Commission is going to come back with a national strategy and it is not for me to say what the national strategy will be or what timing it will be over, that is what the Act requires, which, as I say, was passed last week.

  Q115  Ms Keeble: I think last time I asked you the figures had not been analysed. Have you got information on the impact of the last round of changes which were on housing benefit and council tax benefit?

  Mr Troup: I am not sure I can give you an actual breakdown of those changes but, as you know, they contribute to the 500 and something thousand which are not yet in the figures which will be taken out.

  Q116  Ms Keeble: Have all those changes been implemented smoothly and you have got the figures coming out that you expected?

  Mr Troup: I believe so, yes. I do not actually have a breakdown for the number attributable to those changes specifically.

  Q117  Mr Brady: Mr Troup, what are you hoping to achieve by your changes to pension tax relief?

  Mr Troup: I think it has been made clear to this Committee and the House previously that of the total value of pensions relief, tax relief which has been given through the tax and National Insurance system of something like 26 billion, a very significant proportion, something like a quarter of it, currently goes to the top 2% of pensions savers under the current arrangements and the intention was to redistribute that benefit so that there was a fairer share of the pensions tax relief amongst those people who were saving for retirement. I think it is worth noting in that context that even when these changes are fully implemented, even those individuals, which obviously is a minority of individuals, who are affected by the restriction will still be getting basic rate relief which is worth about £20,000 to them whereas an average for a basic rate taxpayer is only £1,000. The pensions tax system will remain extremely generous for the better off, as indeed is inevitable with a contributions based system, after these changes are implemented.

  Q118  Mr Brady: There are a lot of very clever officials in the Treasury. Was none of you able to think of a simpler way of achieving that objective?

  Mr Troup: Once you have taken the decision to restrict the benefit of the relief by reference to incomes, which Government has been quite clear they regard as the fairest way to do this, it is inevitable that you then have to determine income, and for those individuals, which is now the majority, who are in defined contribution schemes this is entirely straightforward. There is no real complexity in these arrangements for anyone who is in a defined contribution scheme or is making payments into a personal pension plan because the amount of their income and their contributions can be measured in pounds, shillings and pence. The complexity which arises is for those individuals who are in defined benefit schemes where the value of the contribution provided by their employer has to be determined year-on-year and where it is not easy to say what the value of a contribution is if you get one year increment to your retirement benefit or your salary goes up and as a result your retirement entitlement goes up. It was always inevitable that once the explicit choice had been made to restrict this by reference to the level of income there was going to be a degree of complexity. I think the important thing is this does apply only to a very small minority of employees and the vast majority of employees are completely unaffected by this.

  Q119  Mr Brady: Would you not achieve almost exactly the same thing simply by reducing the cap on annual contributions?

  Mr Troup: You could do, except if you are going to apply it to defined benefits schemes, you are going to find quite quickly that individuals in not particularly high paid jobs—the senior teacher, the senior hospital nurse who gets a big promotion, the fire officer—get an annual contribution equivalent to being promoted; if they are say 20 years into their employment, they get a £20,000 increase in pay, and the value of that increment to their pension entitlement is actually quite a lot. So if you do bring down the relief for annual contributions, you would find that, contrary to what is intended here, that people on relatively modest middle incomes, or upper middle incomes, in public and private sector jobs would be affected, and that was not the intention.



 
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