Conclusions and recommendations
General issues
1. There
may well be good reasons why the Finance Bill also contains provisions
extending the period for which all Budget Resolutions have statutory
effect to seven months, but we recommend that our colleagues on
the Finance Bill seek a full explanation for this change. (Paragraph
3)
2. It has been noticeable
over many years under successive Governments that measures appear
to have been trailed, sometimes accurately, sometimes in a way
designed to place them in the most favourable light. Whether particular
press reports are leaks or briefings or merely press speculation,
we have no view, but we deprecate both leaks, and any advance
briefing. Such activities are corrosive of good government. We
will return to this issue at future autumn statements and budgets.
(Paragraph 4)
Inflation
3. The
combination of high inflation, some derived from external factors,
and weak income growth is affecting the living standards of many
in the UK. At the moment, the costs to the Government are rising
with inflation-linked benefits but revenues—such as from
income tax—are not keeping pace, as wage growth remains
subdued. (Paragraph 13)
Forecasting general government
employment
4. We
understand that the collection of workforce planning data across
Government is difficult, particularly when radical changes are
in progress. The Government is the best source of workforce plans
to enable bottom-up forecasting of general government employment.
Such information, if collated, would be of use to the Treasury
in monitoring implementation and achievement of the consolidation,
as much as it would be of assistance to the OBR in employment
forecasting. We recommend that the Treasury does what it can to
collect this information in a timely fashion, so that more is
available before the next OBR forecast round. (Paragraph 27)
Output gap
5. We
recognise the importance of estimates of the output gap for assessments
of the size of the structural deficit but we note the risks inherent
in overreliance on this uncertain and imprecise measure as a basis
for fiscal policy. (Paragraph 32)
Changes within the Budget
6. In
2010 major decisions regarding public spending and tax were made
in the Chancellor's Budget and Spending Review. It is therefore
to be expected that the net fiscal effect of the policy changes
announced in the 2011 Budget was minimal: to have done anything
else would have contradicted one of the Chancellor of the Exchequer's
stated objectives in the Budget. (Paragraph 37)
7. In this Red Book,
as in the last, the Treasury has included a considerable amount
of additional analysis of the distributional impact of the Budget
measures, in response to our requests. We are grateful for the
Chancellor's responsiveness. This has become a regular feature
of the Budget documents. (Paragraph 41)
8. We note that the
majority of the consolidation has yet to begin. In the coming
year, for example, the total consolidation will increase over
fourfold to £41bn in 2011-12 from £9.4bn in 2010-11.
The consolidation of spending is £5.5bn in 2010-11 and £22bn
by 2011-12. One concern expressed to us was that these future
spending cuts may prove too difficult to implement. We agree with
the Chancellor that it will be important to strive 'to spread
the burden fairly' as the consolidation begins in earnest. Being
seen to do so is important. (Paragraph 42)
Meeting the fiscal mandate
9. The
scenario and sensitivity analysis done by the OBR in trying to
understand the risks surrounding the meeting of the fiscal mandate
is welcome addition that will assist in explaining the thinking
behind whether or not the fiscal mandate will be met. We welcome
the fullness of the OBR Economic and Fiscal Report. It will be
the task of the newly created and independent OBR rigorously to
examine and explain progress in meeting the fiscal mandate and
hence reinforce the fiscal plan's credibility. (Paragraph 48)
Alternative strategies
10. Markets
need to be confident that the Government is committed to its fiscal
policy. A Government which talked of a Plan B as a substitute
for that policy would prejudice that confidence. However, as we
explored in our evidence, a responsible Chancellor is likely to
have contingency plans to deal with a variety of scenarios where
economic circumstances are fundamentally changing. Those plans
should not be made public unless and until they are needed. (Paragraph
53)
The Plan for Growth
11. We
examine some of the proposals in The Plan for Growth later in
this report; we urge colleagues on other Committees to evaluate
the benefits of those within their terms of reference. (Paragraph
74)
Tax reform and corporation tax
12. We
welcome the reduction in the headline rate of corporation tax
and note the evidence provided that this has boosted business
growth and tax revenues elsewhere. We will monitor closely the
impact of this policy on corporation tax revenues in the UK. (Paragraph
81)
Enterprise Zones
13. Enterprise
Zones may have some effect in reviving particular areas, but we
note that almost all the evidence received is unsure about the
extent to which they will contribute to UK growth. It is clear
that there is still much to be done on the details of this policy.
We expect that our colleagues on the Business, Innovation and
Skills Committee and the Communities and Local Government Committee
will want to scrutinise this policy carefully as it develops further.
To aid them in this, we recommend that the Treasury provide an
analysis of the overall economic impact, including measurement
of any frictional and deadweight costs. (Paragraph 93)
Housing and planning
14. The
Plan for Growth contains measures to stimulate demand from first-time
buyers through the FirstBuy scheme, whilst also undertaking reform
of the planning system, which may, in time, increase the supply
of housing. If successful, the combination of these measures should
both increase the supply of houses, and assist first-time buyers.
However, if the Chancellor's expected supply side response fails
to materialise, additional demand from FirstBuy could merely stimulate
house prices. This could take house purchase out of the reach
of more people. We recommend that the Treasury assess the impact
of both the FirstBuy scheme and the wider planning reforms, and
report back at each Budget. (Paragraph 98)
The moratorium on new UK regulation
15. The
plan to boost micro businesses and start-ups by a moratorium on
new domestic regulation is intended to reduce the burdens on business.
The Committee has taken limited evidence on this. We have however
received evidence that the proposal may create problems. Several
lists of regulatory exceptions and some administrative complexity
could however be created by this apparently attractive proposal.
Furthermore, if the Government succeeds in reducing new regulation
overall, there may be less scope for the exemption of micro businesses
and start-ups from such measures. Nor is it clear—where
such an exemption is merited on welfare grounds—that it
should be time-limited, rather than related to the size of the
company. (Paragraph 106)
Taxation
16. The
Budget may not lead to a net simplification in tax law—although
this is difficult to quantify. We recognise that it is very difficult
to simplify an already complex system and welcome the work of
the Office of Tax Simplification and the establishment of a 'direction
of travel' towards simplification. The rate of increase of complexity
has certainly been slowed but much more work is needed on the
tax system before it can be said to be moving towards simplification.
We welcome the OTS's work in this area; however the primary duty
for securing simplification should lie with the Government in
its design and administration of the tax system. (Paragraph 131)
National Insurance and Income
Tax
17. The
Chancellor is not proposing to merge National Insurance and income
tax. The consultation is on the alignment of the operational aspects
of these two revenue streams. Whilst this is likely to generate
some benefits, it falls well short of the more fundamental merger
that had been anticipated in the press in advance of the Budget
speech. This is a complex issue and we understand the Chancellor's
desire to move cautiously. The change appears to have been anticipated
as a radical measure but turned out, at second glance, to be a
modest one. (Paragraph 136)
Disguised Remuneration
18. We
draw the attention of colleagues dealing with the Finance Bill
in Committee to the proposals on disguised remuneration. We urge
them to ensure that the final legislation is properly targeted,
proportionate, and achieves its desired impact without imposing
undue burdens on businesses. (Paragraph 146)
Stability in the 2011 Budget
19. We
recognise that it will not be possible or desirable to consult
on every tax increase ahead of the decision being made. Moreover,
if the Government wishes to adjust duty rates in order to dampen
the effects of oil price rises on end users, compensating revenue
will need to be found elsewhere. The decision to increase the
supplementary oil and gas levy by 12% without warning, less than
a year after the Government had undertaken to provide a "stable"
tax regime in the sector, may weaken the Government's credibility
in seeking to establish a stable tax regime in this and other
areas. Such reversals of policy in the absence of changes of circumstances
that would warrant them is bad for business confidence and the
credibility of government policy making. We note that the Government
"is now talking to the industry quite intensively" and
urge it to make sure that industry is properly consulted on the
design of the "stabiliser". Colleagues on other committees
may well wish to keep the effect of this tax change on investment
under review. (Paragraph 157)
Tax: practicality
20. we
welcome the announcement in the Budget that HMRC's existing administrative
burden reduction target will be expanded to include wider taxpayer
compliance costs. It is crucially important that the wider costs
placed on the economy by the tax system are taken into account
and we will monitor the commitment that any increase in administrative
burdens in the tax system will be met by equal reductions elsewhere
in the tax system. (Paragraph 159)
21. Whilst we welcome
moves to allow businesses and individuals to handle their tax
affairs online, making this mandatory without appropriate allowances
being made runs the risk of leaving behind the significant minority
who do not have reliable access to a computer or the internet.
We agree with the Minister for the Cabinet Office, who has stated
that "Every single Government service must be available to
everyone—no matter if they are online or not", and
expect that principle to be respected in the forthcoming consultation
document. (Paragraph 162)
Tax: coherence
22. The
Budget contained a number of measures that have an impact on energy
prices, ranging from the cancellation of the fuel duty escalator
to the introduction of the Price Floor for carbon. Whilst we do
not comment here on the likely impact of individual measures,
we note that, as a package, they lack overall coherence. (Paragraph
169)
The Office for Budget Responsibility:
process
23. Transparency
about the basis on which the forecast is made is essential. The
Treasury now has to deal with an external and independent body
in constructing the Budget. It needs to make allowances for that.
However, the timetable agreed for this forecast and Budget required
all decisions which would impact on the economic forecast to be
made at least a fortnight before Budget day. We recommend that
the timetable should be revisited to provide more flexibility
enabling economic shocks and late political decisions to be accommodated.
It is understandable that a number of adjustments to the process
and timetable will be needed, given that this was the first full
forecast cycle since the creation of the OBR. (Paragraph 173)
The reliability of the forecast
24. In
our earlier Report we noted "One of the ways in which we
will judge whether the OBR is a success is whether there is greater
public understanding of the purpose and limitations of the forecasting
process, and realistic expectations of what it can deliver."
While forecasts are useful tools, it is important that policymakers,
and the public if possible, are aware of their limitations. It
is important that the OBR plays its part by setting out as fully
as possible each year the considerable limitations of the forecasting
process and product. (Paragraph 175)
25. We urge the OBR
to reconsider the way in which asset sales are treated both in
the Economic and Fiscal Outlook and in the forthcoming sustainability
report. All economic forecasts deal with a number of specific
and very uncertain outcomes to which numbers or assumptions are
attached in the forecast. Asset sales are no different from many
of these. We are concerned that caution in the treatment of asset
sales may lead to a bias in the central forecast. A forecast is
no longer central if decisions are made which have the effect
of entrenching 'upside risk', a phrase used by Mr Ramsden. (Paragraph
180)
Responsibility for the forecast
26. We
understand the Chancellor's desire to preserve the OBR's independence.
However, the uncertainty in forecasting means that the OBR's work
will indicate a range of probabilities, not a precise prediction
for each economic variable. It is reasonable for a Government
to accept and adopt the OBR's forecast without necessarily agreeing
with every single judgement in that forecast. (Paragraph 183)
Review of the OBR
27. The
review of the OBR's reporting performance provided in the Act
is well short of our recommendation that there should be a fundamental
review of the OBR's remit and operating model after five years.
We welcome the provision for independent review of the reports
from the Office for Budget Responsibility, and may well engage
with the Non-Executive directors on the arrangements for those
reviews. However, we continue to believe there is a need for a
fundamental review of the Office for Budget Responsibility, which
would not be confined to assessing the output of the new organisation,
but which would consider whether the framework established by
the Budget Responsibility and National Audit Act was the most
appropriate one. A wide ranging review of the OBR is essential.
There is, of course, no need for such a review to be statutory.
(Paragraph 185)
28. We welcome the
Chancellor's commitment, subject to consultation, that there should
be such an independent, external review. It should be led by someone
outside the OBR, appointed for the purpose after consultation
with, and with the agreement of, this Committee. We would like
the Chancellor to come back to us after he has consulted Mr Chote
to confirm the arrangements for this fundamental review. (Paragraph
187)
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