Evidence heard in Public

Questions 241 - 383



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 27 March 2012

Members present:

Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Stewart Hosie

Mr Andrew Love

John Mann

Mr Pat McFadden

Mr George Mudie

Teresa Pearce

Mr David Ruffley

John Thurso

Examination of Witnesses

Witnesses: Right Hon. George Osborne MP, Chancellor of the Exchequer, Sir Nicholas Macpherson, Permanent Secretary to the Treasury, and James Bowler, Director, Strategy, Planning and Budget, HM Treasury, gave evidence.

Q241 Chair: Chancellor, thank you very much for coming this afternoon. May I begin by saying congratulations on the Red Book, which is half the length and twice as factual as Red Books have been and is now full of interesting information? The Committee also thanks you. We asked, over a year ago, that you start producing some distributional material. While recognising the difficulties of the work, you have started to produce some very interesting distributional charts and tables at the back. My only additional thought on that is that there is probably still more that could be done to improve it and I am sure that you have that in hand.

Were any of the measures in the Budget briefed to the press?

Mr Osborne: First, thank you for your comments on the Red Book. Not just the Ministers but the official Treasury has put a huge amount of work into trying to get this into a shape where it is a factual document that is packed full of information people might find interesting. We would be very willing to take on board any suggestions you have for improvement, because improving the Red Book is a work in progress.

In terms of the contents of the Budget, clearly some parts of the Budget were in the newspapers before I delivered the Budget. I think every single Budget that I’ve seen in the 20 or so years that I’ve been involved in politics has involved a lot of speculation beforehand. Sometimes entire Budgets have leaked and sometimes that speculation has been very well informed. What I can confirm to the Committee is that no Treasury official, no Treasury Minister and no Treasury special adviser briefed before the Budget any specific information on tax rates or tax allowances.

Q242 Chair: So when, for example, The Herald appeared to have details of the changes to the North sea tax regime-I’m quoting: "North Sea oil and gas industry is to get a major boost in next week’s Budget"; it says lower down in the piece "Last night, a Treasury source told The Herald"-The Herald was making that up, was it?

Mr Osborne: The discussion about the North sea oil regime and, indeed, the consultation-although it’s not scored in the Red Book-on high-end TV production were two stories we did engage with the press on, but as far as I’m aware-

Q243 Chair: Sorry, there were two stories that-

Mr Osborne: We did engage with the press on, but they were-

Q244 Chair: What do you mean by "engage with the press"? You mean you briefed the press before the Budget.

Mr Osborne: On the North sea oil tax regime, this is a discussion we’d been having with the industry, so everyone in the industry knew about the discussion we were having on decommissioning relief and there was a lot of speculation about that. I haven’t seen the Herald story specifically, but I’m not aware-maybe you can correct me-that in the Herald story there is any discussion about the specific measures-the tax rates, the reliefs and the like-that are set out in the Red Book.

On high-end television production, it is not scored in this-

Q245 Chair: I will come on to that in a moment; at least I might do. I want to do one at a time. I just want to be clear: where it says "Last night, a Treasury source told The Herald" and then there’s a quote, is that made up?

Mr Osborne: As I said, I have not seen the Herald story, but I know that specifically on the question of North sea oil, there was an enormous amount of industry speculation because we were quite open with the industry, discussing what we were seeking to do with field allowances west of Shetland and also decommissioning relief, because the advice from this Committee and others after last year’s North sea oil tax changes, which I think it’s fair to say caught the industry somewhat by surprise, was that this time we had a much more consultative process with the industry, so there was not a huge amount of secrecy surrounding the North sea oil tax regime. There were certainly other measures in the Budget-other taxes-that I wished to keep secret.

Q246 Chair: On 14 March, The Guardian carried a story saying that you were going to unveil plans in the Budget to relieve the debt burden on future generations by introducing 100-year or perpetual bonds. Was that briefed to the press?

Mr Osborne: Yes, that was, but that’s not a Budget measure.

Q247 Chair: I see. So there wasn’t actually a statement by you, but you decided that you would brief the press beforehand?

Mr Osborne: I draw a distinction. You have a perfectly legitimate concern, and I have a concern, about things like rates of income tax and personal tax allowances, some of which did appear in the press beforehand, but the fact that the Debt Management Office is going to consult in the future on gilt maturities is the sort of thing that, frankly, the Treasury and every other Government Department engages with the press on every day-I would not regard that as Budget purdah, it is not on the score card. I am talking about, and I suspect your Committee is concerned about, what pertains to things in the classic definition of a Budget and what is on the score card.

Q248 Chair: You would agree, wouldn’t you, that that was an important announcement, or at least an important briefing?

Mr Osborne: It is an important briefing, but I don’t think it would have warranted an oral parliamentary statement, for example.

Q249 Chair: What about a written one?

Mr Osborne: Maybe not even a written one.

Q250 Chair: Not even a written statement. You do not think that you are stretching the ministerial code, which reads that "important announcements of Government policy should be made in the first instance, in Parliament."

Mr Osborne: I certainly agree that important announcements of Government policy should be made to Parliament but, in the case you are citing, this is talking about the fact that the Government might, at a future date, bring forward a consultation on their gilt policy. That is not-I would hazard to argue in front of you, Chair-something that has to be done in an oral statement to Parliament; it could easily be in the kind of material in a speech that I would give, whether at the Mansion House or anywhere else. There is a distinction, which I am keen to preserve, between Budget measures such as tax policy, rates, reliefs and so on, which are on the score card and, in an ideal world-it has never happened in a Budget that I have seen in the past 20 years-would all be kept secret until Budget day, and general expressions of future Government policy intent, of which the one you mentioned is an example.

Q251 Chair: Now just tell me, how was this measure briefed? What exactly happened to secure the briefing and therefore the press stories?

Mr Osborne: What? The-

Chair: The story of the perpetual bond, which appeared in the newspapers on 14 March.

Mr Osborne: I think the Treasury press office told people.

Q252 Chair: They didn’t tell me. But they told the press. I am just trying to clarify: what did you do? Did you authorise this?

Mr Osborne: Yes.

Q253 Chair: I see. And you authorised the press office in the Treasury to brief the press?

Mr Osborne: Yes.

Q254 Chair: Without putting out a statement of any type.

Mr Osborne: Well, every single day we receive inquiries from the press, and every single day we respond to those inquiries and, quite often, we make expressions of intent and talk about the future direction of policy. Let me give you an example. I have been talking about planning policy, before this Committee, in television interviews and in Parliament for the past year. As it happens, today the policy is published. With the consultation of the Debt Management Office, I suspect that when the day comes, when we publish the formal consultation, of course it will be accompanied-probably, I suspect-by a written parliamentary statement, but it is perfectly reasonable for the Government to engage in a conversation with the media and everyone else about the future direction of policy. What is not appropriate is to announce significant policy changes outside the context of a parliamentary occasion.

Q255 Chair: What explanation do you have for the fact that, if this was briefed in London, the lead journalist who broke it was with you in Washington at the time?

Mr Osborne: I didn’t say it was broken in London, actually, but the Treasury press officer and the Treasury team involved told the press who were interested in the story. They did not, by the way, confine it to one newspaper, so it was not an attempt to do a scoop for a newspaper. Every day No. 10 Downing street conducts a press briefing with the lobby, and the Treasury, being a Department that people are interested in, conducts press briefings on a pretty regular basis. But I do draw a distinction, although I do not want to repeat myself-

Chair: You have made that point a couple of times.

Mr Osborne: It is a perfectly reasonable distinction-

Q256 Chair: Well, we will hear it a third time, but-

Mr Osborne: There is a very sensible distinction between significant policy announcements, which should be made to Parliament, and the future direction of policy. I can say that I presume-you may correct me-that the Government are interested in changing the planning laws, just as they are interested in changing their gilt policy, and then when the actual policy is announced that should be done in a parliamentary context.

Q257 Chair: Even by the standards of what you described earlier as Budget leaks, you must agree that this Budget was exceptional, wouldn’t you, Chancellor?

Mr Osborne: First, suspecting that I would be asked about this, I have done some research. In 2005, the rate of alcohol duties, fuel duty, inheritance tax rates, stamp duty rates, council tax refunds and the winter fuel allowance were all leaked in advance. In 2008, there was heavy and accurate speculation.

Q258 Chair: In previous year’s Budgets, there was speculation and, if I may say so, when you were shadow Chancellor you were very critical of it, weren’t you, Chancellor? For example, you described a leak in 2008 about the Government’s decision to brief out the possibility of the stamp duty holiday as completely reckless. You were pretty critical of leaks when you were in opposition.

Mr Osborne: As I said, there is always speculation about Budgets, and Oppositions always make a great fuss about that. May I make a serious point about the Budget process? Two things have changed, and perhaps I am the first of many Chancellors who have to deal with this, but to my knowledge I am certainly the first to have to deal with these two features of Budget making, which I think Parliament must understand. First, I must agree my major Budget measures well over a week in advance. On the Monday before the Budget-not the Monday of the Budget week, but 10 days in advance-I must give the Office for Budget Responsibility the major Budget measures, and by Friday I have to have confirmed absolutely everything. No Chancellor has had to do that before. I think it is a good thing that I must do that, and it dramatically improves Budget making, but I have heard folklore-you used to be the special adviser to Lord Lawson-that previous Chancellors finished their Budgets at midnight or 2 in the morning, and that much of the last-minute haggling was in the previous 48 hours. It is difficult to leak a Budget that has not been finalised. Because of the OBR process, which I think is a good process, the Budget exists 10 days before it is given.

The second thing is that I must negotiate in a coalition. Inevitably, a process whereby the Chancellor came up with a Budget in secret with the Treasury, occasionally consulted the Prime Minister, and perhaps intensely engaged the Prime Minister in the last couple of days before the Budget was given was very different from a process in which I must engage two political parties to make sure that I have their consent to proceed so that, as last night when we voted on the Budget resolutions, I can be confident that I will have a majority. This is genuinely not pointing the finger at any individual, but many more people know in a coalition what will be in a Budget because I need to get the consent of both political parties.

Q259 Chair: What you mean is that many people in the Liberal party know about it, but not many more people in the coalition, because it is very restricted on the Conservative side.

Mr Osborne: I am just saying that the sort of classic constitutional model of a Chancellor of the Exchequer producing a Budget that he has to square only with the First Lord of the Treasury does not apply in a coalition. As I suspected that the Committee would be exercised by this, I have looked at Budget making in other European countries where there are coalitions, and inevitably there is a huge amount of speculation.

Q260 Chair: If you want to come forward with proposals for reform of the way you do Budgets, we would be interested in having a look if you produced a paper.

Mr Osborne: Those are two realities that I must deal with.

Q261 Chair: But Chancellor, while we have the system we currently have, we would like to find out whether it will carry on working in the way intended. On the basis of what you have just said, am I to conclude that, for example, the 7% stamp duty change was leaked as a consequence of coalition discussions?

Mr Osborne: I genuinely don’t know.

Q262 Chair: I noted that David Gauke said on the Floor of the House that it certainly wasn’t sourced out of the Treasury.

Mr Osborne: I genuinely don’t know where the stories come from. I don’t know the individual or individuals who-

Q263 Chair: Do you agree that we need tighter-?

Mr Osborne: First, I can assure you that to the very best of my knowledge, and I have investigated, no Treasury official, no Treasury Minister, no Treasury special adviser leaked, briefed-however you want to describe it-changes to the personal allowance, changes to the top rate of income tax, the stamp duty change and the like. No rates or allowances were briefed. I don’t know where those stories come from. I completely agree with you-I would rather they had not appeared. Of course, I am always seeking to improve the Budget-making process, but we have two practical constraints: first, I have to complete my Budget 10 days rather 10 hours before giving it; and secondly, I am in a coalition and, completely understandably, I need to take all parts of the coalition with me.

Q264 Chair: Do you agree with the Committee’s conclusion after the leaks in last year’s Budget that leaks are to be deprecated and are corrosive of good government?

Mr Osborne: I completely agree that it would be much better if the announcements that I referred to-on stamp duty, personal allowances and the like-had been made on Budget day. I am happy to hear recommendations from the Committee about how, within the constraints of a coalition Government who have set up an independent auditing process for Budget measures, which means that these things are available for 10 days, when the entire Westminster press pack is trying to find out what is in the Budget-

Q265 Chair: You say available; they are only available as far as the OBR.

Mr Osborne: They are available-in other words, there is a-

Q266 Chair: But you are not suggesting that these leaks may have emanated from the OBR.

Mr Osborne: No, I am not.

Q267 Chair: No, right, but you are suggesting that they may have emanated from the coalition, are you not?

Mr Osborne: What I am suggesting is that the-

Q268 Chair: You are, aren’t you, Chancellor?

Mr Osborne: Of course, they emanate from within the coalition Government, because, as far as I know, the document fell into the hands of the Opposition before the announcement.

Q269 Chair: And therefore the Liberals.

Mr Osborne: No, I am just making the point that this Budget is not completed at midnight on Budget day. It therefore exists for 10 days in a coalition Government, in which I have to get-and I was glad to see that we had a majority of 83, I think, for my Budget. I need the consent of the coalition to proceed with the Budget.

Q270 Mark Garnier: Sir Nicholas, may I ask how long you have worked for the Treasury?

Sir Nicholas Macpherson: For 27 years.

Q271 Mark Garnier: For how many of those years have you been involved with the formation of the Budget?

Sir Nicholas Macpherson: About 26.

Q272 Mark Garnier: Fantastic. If I were to ask you to cast your mind back 26 years, could you give us a flavour of what the culture was like at the time, in terms of the secrecy surrounding the Budget and the expectations of Ministers and civil servants?

Sir Nicholas Macpherson: I think it fair to say that that culture has changed over time.

Q273 Mark Garnier: I am anxious to hear what it was like. I am a relative newcomer to this trade.

Sir Nicholas Macpherson: The Budget process of the 1980s was different from how it has evolved over the past 15 years. The convention in those days was that there was extraordinary secrecy about nearly every aspect of the Budget.

Q274 Mark Garnier: When you say extraordinary secrecy-

Sir Nicholas Macpherson: We had strange paper on which the whole Budget process was photocopied, which was amazingly time consuming and, in relation to a lot of measures, was completely pointless. The culture of politics has changed. If I were stuck in 1980s-think, I would probably be utterly appalled by what goes on now, but the reality is that through the 1990s and 2000s, the way in which the Government of the day engaged with the media changed. I do not think that is a bad thing. Exposing policy, ventilating ideas and encouraging debate is all to the good.

May I also say that a whole lot of features of coalition Government are extraordinarily positive? The fact that there has to be a dialogue between two parties improves the Budget process hugely. On the other hand, there are other features of coalition Government. I hasten to add, for the Liberal present, that there is a Liberal Democrat Chief Secretary and there are Liberal Democrat special advisers in the Treasury. As the Chancellor says, to the best of my knowledge there has been no pre-briefing by any Treasury Ministers, special advisers or officials of rates allowances reliefs. There is a reason why you do not want to pre-brief these things. As the Chairman pointed out with the stamp duty rate, some of these things are market sensitive. If you publish the stamp duty rate two months before the Budget, you guarantee that a whole lot of property transactions will be brought forward. These things do matter, but it would be a mistake to look at it through the lens of the 1980s.

Q275 Mark Garnier: I think that is fair enough, but you will clearly understand that a great many people are deeply concerned about the amount of leaking that has gone on and the information that is coming out-I think the expression is trailing. You have said that it has moved from being an incredibly secretive process prior to the early `90s, to a situation where you can almost read what will be in the Budget a few days beforehand. I take your point that it is not necessarily an awful thing if some of this gets out, and perhaps there can be a good debate about it a few weeks beforehand. I also take the Chancellor’s point about things such as 100-year bonds. Clearly, we need to have a public debate on that. None the less, it is causing a great deal of anguish, certainly in this Committee, that so much trailing-or perceived trailing-has been going on. You talked about the fact that that changed during the `90s. Can you think of any specific political event that happened in the `90s and marked a significant change to the process?

Sir Nicholas Macpherson: I think the style of government shifted hugely through the ’90s, and it has continued to shift during the current century although I would not identify any particular event.

I want to return to the point about market sensitivity. I recall certain information finding itself in the hands of others in the run-up to Budgets during the previous Parliament. Because the information was market sensitive and appeared to me to be getting into the wrong hands, I initiated a leak inquiry. I do not comment on leak inquiries as a general rule, but in this case I was satisfied that nobody in the Treasury was in the business of leaking tax rates, allowances, reliefs and so on.

Q276 Mark Garnier: What about 26 years ago? If you had leaked a bit of paper to a newspaper, what would have happened to you if you were discovered?

Sir Nicholas Macpherson: It is exactly the same now. If I discovered an official leaking information of a sensitive nature-a stamp duty rate, for example-that would be taken very seriously indeed. Unless they were incredibly naive and had turned up only the previous day, I would generally take the view that they did not have a future in the Treasury.

Q277 Mark Garnier: Summary dismissal.

Sir Nicholas Macpherson: This is a very serious business, and sometimes you need to encourage the others.

Q278 Mark Garnier: Chancellor, many years ago Hugh Dalton resigned on account of the fact that he slipped out with something-

Mr Osborne: He briefed it himself.

Q279 Mark Garnier: Absolutely, and I am not for a moment suggesting that you would necessarily put yourself in a position where you need to resign, but presumably you would take a similarly dim view if you knew that someone-

Mr Osborne: As I said, in some senses I am as angry as you are that bits of the Budget appeared before it was delivered. I have satisfied myself about the political net with Treasury Ministers and Treasury special advisers, and you have heard from Sir Nicholas about Treasury officials. It is at least worth thinking about the question that the Chairman asked and the fact that the Budget is finished a long time in advance compared with the 1980s. In his memoirs, Nigel Lawson talks about finishing one Budget at 4 o’clock in the morning during the 1980s. We are also in a coalition so, given the nature of things, I have to tell many more people what is going to be in the Budget, and we have to accept that that is the world I am operating in. I think it would be worth the Committee noting that the permanent secretary, with all his years of experience, has said that the Budget-making process is more orderly, more sensible and less rushed than it was 20 or 10 years ago, and, of course, it is independently audited, which is crucial.

Q280 Chair: Sir Nicholas, will you clarify one point? You said you were satisfied that the leak did not come from the Treasury. Presumably, the only way of knowing that for certain is if you know who did leak it.

Sir Nicholas Macpherson: There are usually tell-tale signs about where things come from. Having looked at the stories and the relevant facts around them, I am confident that they didn’t come from Treasury sources.

Q281 Mr Love: Sir Nicholas, have you initiated a leak inquiry? You sounded very robust in defending your civil servants. Have you initiated a leak inquiry to find out whether one of your civil servants was engaged in this process?

Sir Nicholas Macpherson: Although, as a general rule, I do not comment on leak inquiries, I am happy to say that I have not initiated a leak inquiry inside the Treasury. The reason for that is that I do not have any prima facie evidence to warrant such an inquiry.

Q282 Mr Love: So we are to assume you are confident that the leak came from another source? What makes you confident that that is the case and that it has not come from Treasury civil servants?

Sir Nicholas Macpherson: Over the years, you develop a bit of a sense of where stories come from. Sometimes, it is the way that journalists report it. Sometimes, it is because people have got actual copies of tables or documents. In this case, there is no evidence that anybody had copies of tables or documents. You would have seen it. Mr Ruffley will remember a night when Ken Clarke discovered that the Daily Mirror had large amounts of the Budget and there were unfortunate occasions-

Mr Ruffley: It didn’t come from me

Sir Nicholas Macpherson: It certainly didn’t, Mr Ruffley.

There were certain unfortunate times when the then Opposition got information towards the end of the last Parliament. I took a very dim view of that and, despite inquiries over a number of years, I have yet to find out where they found those documents.

Q283 Mr Love: You are not taking a very dim view of this.

Chancellor, are you satisfied that that the civil service and the Permanent Secretary have taken this issue of leaks seriously enough?

Mr Osborne: Yes, I am. I come back to the central point. This is Budget-making in a coalition. It is not a secret process between the Chancellor and the Prime Minister of the day, but even that process over the past 15 years threw up some extraordinarily accurate Budget speculation, for example, just before the 2005 General Election. We also have a different process where this is all done before we get to Budget week. Materials have been leaked because there is a Budget, whereas if you are still doing the Budget on the night, inevitably it is quite difficult to leak anything in advance.

Q284 Chair: We have had a very good canter around the process. We are going to move to the substance of the Budget.

Q285 Mr Love: May I turn to the economy? Chancellor, what difference will this Budget make to the real economy of jobs and growth?

Mr Osborne: I hope that it will enhance growth and increase jobs. To put it in the most straightforward sense, I think that it adds to supply-side reforms that we have initiated to the economy. Obviously, it did not involve a change in the fiscal stance. I suggest in that sense, in terms of the fiscal judgment, a more significant event was the autumn statement.

Q286 Mr Love: You mentioned-indeed, prayed in aid-earlier the independence of the Office for Budget Responsibility. According to its judgment told to this Committee yesterday, over the five years of the forecast there is no impact of this Budget at all. Is it irrelevant to the real economy?

Mr Osborne: I don’t accept that characterisation. Robert Chote said that the main thing that is doing the heavy lifting in short-term demand is monetary policy. I argue that my fiscal policy is allowing that monetary policy to do the heavy lifting, and the OBR certainly does take that into account. Indeed, the OECD came out immediately after the Budget and said that the confirmation of the UK’s fiscal consolidation programme should keep bond yields low and support the recovery. Now, low bond yields are absolutely part of the OBR’s economic analysis. If we did not have low bond yields, those figures would look very different. The short-term demand in the economy is primarily being supported by monetary policy. That monetary policy can be as loose as it is because we have credible fiscal policy. What we are also doing, whether it is changes to the top rate of income tax next year, whether it is increasing the personal allowance next year, or whether it is the planning reforms, which were foreshadowed in the Red Book but announced today, and the like, is improving the productive capacity of the economy and helping it to become more competitive.

I have seen Chancellors make the mistake of banking those things before they happen, assuming that they had magically increased the trend growth rate and making all of their public finance forecasts on the back of that and usually living to regret it. The fiscal stance, which is integral to the Budget-of course, a lot of the commentary from my political opponents and other critics before the Budget was, "Change the fiscal stance"-was not changed. It did not happen. I would argue that it is the credible fiscal stance that supports the accomodative monetary policy.

Q287 Mr Love: Referring again to the independent Office for Budget Responsibility, when it was asked yesterday whether there was capacity for growth available in the economy, it indicated that there is spare capacity. You will know about the output gap, which is measured at 2.6%. Not only is that available now, but it will not be fully closed by the end of the forecast period in five years’ time. We were also told today that quantitative easing will not close the gap, so there is spare capacity there. Does that mean that you are running the economy at a lower than optimum level and that we are not fully utilising the capacity of the economy and that we are keeping unemployment, particularly youth unemployment, at a higher level than it need be?

Mr Osborne: I am the first person who wants to reduce unemployment and youth unemployment. Of course, I want to close the output gap as well. I suspect-you can ask the Governor of the Bank-that he would not be running such a loose monetary policy if he thought that the output gap was closed. He is interesting on the challenges of trying to calculate the output gap. Of course, we are in the recovery phase and what the OBR said this year and last autumn is that the impact of the financial crisis or financial crash, which, let’s be clear, is on some measures the worst in British history, has had a real effect on the pace of recovery. Chuck in the external factors, such as the euro crisis at the back end of last year and the oil price, and those are additional headwinds. I can tell you that I am doing everything that I possibly can to speed up the recovery and ensure that the accomodative monetary policy can work for as long as possible. The idea that I am tolerating this is not true; I am doing everything I can to speed up the recovery.

Q288 Mr Love: Well, let’s look at that. The OBR was asked to comment on areas in which it could usefully contribute to this debate. It resisted the temptation, because that is not part of its remit. As you have said, you have introduced a number of measures. One measure associated with this Budget is the setting up of the national loan guarantee scheme, which was described by The Economist as "tiny", just £5 billion initially, compared with a reduction in business investment of £35 billion over recent months. The OBR said that it would have no material impact. Do you accept that characterisation?

Mr Osborne: My reading of the OBR document and the evidence that Mr Chote and others gave you is that it will have an impact on small business lending, which is exactly what it is designed to do. I think that he said that to your Committee. It is targeted at that. The initial tranche is £5 billion, but the total allocation is £20 billion. I have made it clear that if the scheme is working and if the money is coming out of the door, I am prepared to look at increasing that £20 billion. No British Government has attempted this before. It is a very complex operation to try to guarantee lending to banks, which is then passed on from the banks to small businesses. When I launched the scheme in Parliament, I said that I did not expect that we would get it 100% right when we started and that we would have to improve it as we went along. I am really pleased with the way it has been launched, and we have not found any problems yet, but I am certainly prepared to increase its capacity if we can show that it is getting to those small and medium-sized businesses, which is something that the OBR thinks, in its document and in its evidence to you, will happen.

Q289 Mr Love: I think the message coming clearly from all the sources that we have looked at is that you need to make it much larger and that you need to make it much larger now, but that is no doubt an issue that you will take up.

Finally, let me ask about your growth strategy. You could go for a bigger national loan guarantee fund. There was a lot of talk about infrastructure, and indeed you and the Prime Minister have both talked about it in speeches. Whatever happened to that growth strategy? One of the commentators this morning said that it seems to have been forgotten. Where are we in terms of a growth strategy that will make a difference to the real economy in the foreseeable future?

Mr Osborne: Again, I do not accept that characterisation. First of all, to give you an example, when I launched the growth strategy last year, I said that planning reform was a critical part of it and one of the absolutely central measures. A year later we have, with all the challenges of ensuring that it is properly consulted on and so on, implemented a policy that comes into effect today. No one, to my knowledge, has changed planning rules in this country in a generation as quickly as we have. If you look at the corporate tax rate, it is now aggressively lower than our main competitors, and that is being commented on around the world. The CBI said of our Budget that that is "the big game changer". Larger companies are getting a clearer signal that they need to invest in the UK, because we have the lowest tax rates of any major economy. If you look at the components of the growth strategy, which were things such as planning reform and other supply-side changes to regulation and the like, and if you look at tax reform, those things are taking effect. When it comes to investment in infrastructure, we have had the Chinese sovereign wealth fund confirming that it is investing and taking a stake in Thames Water. That is the first major western infrastructure investment, and I am very keen to get British pension funds investing as well.

Q290 Mr Love: One of the commentators this morning took a view similar to your own and suggested that we have to reconcile ourselves to a slow growth path for the economy. Is that what you are asking the British public to do?

Mr Osborne: Look, we are having to recover from a very deep recession-the deepest of our lifetimes-and from the largest banking crisis in British history, and we have the additional headwind of a sovereign debt crisis in our major export market, which we have avoided. So of course the recovery is a challenge, but I think that everyone knows that. The questions are whether we are taking the right measures and what the alternatives are. The suggestion that I sometimes hear, which is that we spend a few billion pounds more and have a temporary cut in VAT and that somehow magically solves Britain’s economic problems, is a little bit simplistic.

Q291 Chair: You said earlier that you had a strategy for tax reform, which you set out a year ago. John Whiting told us this morning that, while 100 pages had been removed from the tax code, over 300 pages had been added. That does not sound like tax simplification or tax reform.

Mr Osborne: I am keen to make the tax code simpler, and John Whiting is helping, through the Office of Tax Simplification, to do that. You will find in the Finance Bill that a great amount of the pages and clauses in it are around changing the tax regime for insurance companies, because of the solvency II directive. The other bit that takes up the bulk of the Finance Bill is changes to the controlled foreign companies regime, so these are complex areas of tax law and they replace some existing tax law.

Q292 Mr Mudie: You said in response to Mr Love that, in enhancing growth and increasing jobs, the heavy lifting is done by the Monetary Policy Committee through the Bank of England. That is not how we see it on this side of the table. Every time the Governor comes before us and we press him on jobs and growth and measures related to them, he says that it is a matter for you. He says, "I am here for monetary policy linked to the inflation target"-which might be useful-"but for jobs and money going into the economy, it is the Chancellor."

Mr Osborne: The Bank of England has the important role of supporting demand consistent with its inflation target. The Governor of the Bank and the Monetary Policy Committee believe they are doing that, but I would argue that as the output gap as calculated by the OBR shows, there is room for accommodative monetary policy. I have always believed and have consistently argued this for years-by the way, until the very last part of the last Parliament, it was the view of my immediate Labour predecessors and indeed, we have mentioned Nigel Lawson, going back to the Mais lecture. There has been a consistent view in British politics for 30 years that demand is best supported by monetary policy.

Q293 Mr Mudie: Supported by monetary policy, but you and Alistair, through quantitative easing, wanted the Governor-the Bank of England-to put money into areas other than gilts, which would have helped the economy grow and would have got some liquidity into the real economy. The Governor has ignored you and Alistair Darling, so there is a paralysis on the jobs and growth side, while the Governor is sitting, using quantitative easing to help him meet his inflation target. Millions of people are unemployed, looking for help from either you or the Governor. The Governor is quite happy with what he is doing, and you are leaving it to him on the jobs and growth front.

Mr Osborne: I am not leaving it to him on the jobs and growth front. What I would say is that we are running a large-at the moment-structural deficit, which we are seeking to reduce, but we are not trying to balance the Budget in one year. We have a very accommodative monetary policy. We have introduced measures in this Budget that, for example, deliver a tax cut to millions of working people, to get some money into their pockets. We are doing a variety of things, but on your specific point, Mr Mudie, I would say that I accept the Governor of the Bank’s argument that he does not want the central Bank involved in the sort of quasi-political fiscal space of buying car company assets, or whatever it is, and that he thinks that if he does that, he crosses a line and turns his central Bank into an instrument of politically controversial policy. When it comes to credit easing, it was clear that if the Government wanted to undertake it, the Government should undertake it-well, I have undertaken it.

Q294 Mr Mudie: I hear that, but in passing, I would say that in your letter to the Governor on quantitative easing, you referred him to Alistair Darling’s list of assets that he could buy, which were much more than gilts. The Governor ignored you and Alistair, so help that could have been going to the real economy has not. However, if we are just looking at what you are doing, Andrew raised the issue of the loan guarantee scheme. The Breedon report reckoned this month that there would be a shortfall in small and medium-sized enterprise business funding of up to £190 billion over the five years. The response from the Treasury is to put £5 billion in this year. It sounds disproportionate, doesn’t it?

Mr Osborne: First, we are putting £20 billion in over a couple of years.


Q295 Mr Mudie: Over three years, which means £6.5 billion-

Mr Osborne: Over two years, and I am very happy to increase that amount if the scheme is working. It is £20 billion of guarantees. We also have £1 billion of direct lending into a business finance partnership that is being established at the moment. If you are telling me that credit conditions are not what we would want them to be, as we survey the aftermath of this enormous banking crash, I would completely agree with you.

Q296 Mr Mudie: Two years now-it is getting a bit lame, isn’t it?

Mr Osborne: To be honest, Mr Mudie, when you think what the British economy has been through and you look at how we have done, relative to some of our neighbours, I do not think actually-

Q297 Mr Mudie: If you are going to take refuge in something that happened two years ago, let’s take you back-

Mr Osborne: Can I just say the thing that happened a couple of years ago was the largest banking crisis in British history and the deepest recession since the 1930s?

Q298 Mr Mudie: It has been the largest global financial crisis.

Mr Osborne: Well, if you want to characterise it as the largest global financial crisis in history, it reinforces my argument that if you think 24 months after that, you can just bounce back and everything can be hunky-dory, I suggest that that has not happened either here or in any other country.

Q299 Mr Mudie: George, let’s take you back to your conference in October. When you were discussing credit easing, the scheme you stated to conference was that the Treasury would provide credit direct to companies through an arm’s length operation, with the Bank of England acting as the Treasury’s agent. Under the scheme, the Treasury will buy small firms’ corporate bonds, providing cash directly to struggling firms unable to gain funds from the banks. Is that another one that the Bank of England turned you down on?

Mr Osborne: The business finance partnership that I mentioned, which is the £1.2 billion scheme, is the Treasury directly providing money into funds that lend to small businesses. The national loan guarantee scheme, which is the £20 billion scheme, is done through Treasury guarantees of lending, and we use the banks. When we considered how best to deliver the policy, it was clear that rather than try to establish an alternative bank funding network around the country, which would have taken at least a year and perhaps much longer, we should use the existing banks, but guarantee lending to them so that they could pass on low interest rates to small and medium-sized businesses.

Q300 Mr Mudie: The scheme that you suggested in October you were going to bring is suggested in the Breedon report. The real problem you had, apart from the Bank of England refusing to do it, was that it meant gathering up small firms’ loans to make them big enough to securitise and get them on a market. Breedon suggested that. You suggested it last October. Is it actively being looked at? When can we and the small firms expect this much-needed initiative to be in operation?

Mr Osborne: It is actively being looked at, and trying to restart the securitised market for small business lending is something that we are considering, but let’s be clear: it completely shut because of the financial crisis. Securitised products were one of the main causes of the loss of confidence-people’s lack of certainty about what was in them. Restarting it is not easy and I am not aware of any country that has successfully done this on a large scale since the crash.

With small business lending, there is the particular challenge of people having enough information about the small businesses that are part of the package. Mortgages, at least, can be a bit more standardised. I am trying to crack that nut; it is a big challenge, but we are actively looking at it. That is why, rather than waiting until we had solved this problem-I think that the previous Government also had a report on restarting the securitised markets three years ago-

Q301 Mr Mudie: Was that the Major Government?

Mr Osborne: No, that was the Gordon Brown Government, which you supported so loyally, Mr Mudie.

Q302 John Mann: Chancellor, in the 22.5 months since you became Chancellor, by how much have petrol prices gone up in this country?

Mr Osborne: I am not sure that I know the exact price the day I came into office, but it is about £1.40 a litre today.

Q303 John Mann: So you do not know how much. I will give you a clue: £1 a gallon since you came in. Why, therefore, are you increasing it further?

Mr Osborne: Petrol duty today is 6p lower than it would have been if I had stuck with the plans that you voted for in March 2010, and from April will be 10p lower than it would have been if I had stuck with the plans that you voted for in March 2010.

Q304 John Mann: Is it true that you are taking £10 million a day extra in fuel duty since you became Chancellor?

Mr Osborne: The examination by the OBR into this last year showed that the effect on the public finances of increases in oil prices was basically neutral, because what we might gain in additional taxes on petrol duty, we lose in squeezed incomes and companies not having as much profit. I think that the Treasury Committee was very interested in this last year. We asked that independent body to look at that and it concluded that we are not net beneficiaries of an increase in the oil price. If anything, the overall impact on the economy is pretty deleterious.

Q305 John Mann: On drawdown pensions, my constituents, Mr and Mrs Matthews, have found out in the past seven days that, due to decisions that you made that you failed to correct in this Budget through previous Budgets, their joint pension has reduced in the past week from £30,000 a year to £13,000 a year-a 60% fall. There are 300,000 pensioners with drawdown pensions, who are suffering in exactly the same way because of gilt rates, but many of them, because of the vagaries of the Government Actuary’s Department renewal dates, do not know it. Do you regard this 60% reduction in the pension of my constituents Mr and Mrs Matthews that you are responsible for through your decisions as morally acceptable? Secondly, do you regard it as practically acceptable for them to continue? If not, what are you going to do about it?

Mr Osborne: So that your constituents fully understand what you are suggesting, you are suggesting that interest rates should be considerably higher, that we should have higher gilt rates, that all of us should be paying-

Q306 John Mann: No, no, no.

Mr Osborne: That is the implication. You are saying that I am responsible for the low gilt rates. I am certainly trying-

Q307 John Mann: With respect, you are here to answer questions. I will be happy at another stage to say what I propose. I am asking what you are going to do about it.

Mr Osborne: Well, the implication of your question is that we should have higher gilt rates than we do at the moment.

Q308 John Mann: No. My question is what are you going to do about drawdown pensions and my constituents whose pensions have fallen by 60% this week?

Mr Osborne: What I would say to your constituents is that, of course, low interest rates are a difficult environment for savers but the Governor of the Bank made a very good point and, indeed, Charlie Bean also made this point recently: policies like quantitative easing have increased asset prices, including the value of pension pots. So there is a benefit, even to savers with pension pots, of asset price increases and it cannot be in the interests of anyone in this country that we have very high interest rates that throttle off any recovery and lead to higher unemployment.

Q309 John Mann: So we are all in it together and my constituents Mr and Mrs Matthews have a 60% reduction and there are 300,000 other pensioners in the country with comparable types-

Mr Osborne: Could I just say-

Q310 John Mann: If you are not prepared to do anything about it, I suggest-

Mr Osborne: The solution to this problem-

Q311 John Mann: I am asking what you are going to do about it.

Mr Osborne: To be fair to you, Mr Mann, the policy that you and your party advocate would, indeed, bring about a sharp increase in interest rates-

Q312 John Mann: No, Chancellor, you do not understand what you are paid to do. You are paid by the taxpayer to come here and answer questions. If you want to have a debate with me on party policy I am happy to have it outside afterwards.

Mr Osborne: Let me tell you what the Governor of the Bank said this year.

Q313 John Mann: I am asking you what you are doing.

Mr Osborne: Well, I agree with this: "Well, we could put up interest rates to 4%, 5% and then maybe the return on savings would appear to go up. But I’m absolutely confident that, if we were to do that, you would see that the value of assets, all financial assets would go down; that there would be a sharp rise in the exchange rate; that investment in consumer spending would fall; we would go back into a recession." That is not in anyone’s interests in this country.

Q314 John Mann: There are a range of things you could have done on drawdown pensions. I suggest that this is your 75p tax issue and that you go away and think out an answer and write to me and other parliamentarians about it

Mr Osborne: The state pension under this Government is going up by £5.30 next month, not 75p as it did when you were in government.

Q315 John Mann: Mr and Mrs Matthews and 300,000 others are losing massively. Let me ask you a question at the other end of the scale. When was the last time you bought a pasty in Greggs?

Mr Osborne: I can’t remember the last time I bought a pasty in Greggs, to answer your question.

Q316 John Mann: That kind of sums it up. As you are putting up the price of hot pasties in Greggs, if I buy a pasty from Greggs that is cooked hot, but by the time it gets in the paper bag and I take it away it is cold, will it be vatable or not?

Mr Osborne: If it is cold when you buy it, it will not be.

Q317 John Mann: So if they do a hot pasty that gets cold, that will not be vatable.

Mr Osborne: The intention was very clear.

John Mann: If that is clear-

Mr Osborne: Hold on; let me just say. In 1984 Parliament decided that hot takeaway food should have VAT on it. Now, in the years-

John Mann: We are asking about your Budget.

Chair: John, let the Chancellor explain the position on hot and cold pasties, because this is a matter of burning significance in the west country.

Mr Osborne: Burning is partly the issue. In 1984, 30 years ago, there was an intention to make sure that hot takeaway food was vatable. Since then, under all Governments, there has been a load of legal action to try and get around that. Lots of reasons have been given for why some hot products are not designed to be hot when they are eaten. I am seeking to-of course, this was voted on last night by Parliament-just stick with the position that hot takeaway food has VAT on it. If you buy your pasty in a fish and chip shop, it almost certainly has VAT on it. If the pasty is heated up in a microwave in the shop, it has a VAT on it. What we are trying to do is make sure that hot takeaway food has VAT on it. That was a decision made in 1984, 28 years ago.

Q318 John Mann: In your consultation document, with the weather as it is today, a lukewarm pasty from Greggs is not vatable, because the ambient temperature outside is the reference point, whereas if it is in the middle of winter and freezing cold, it is vatable. It is an extraordinarily complex situation, isn’t it, when you have to check with the Met Office on whether or not to charge VAT on pasties in Greggs? That is what your consultation document does.

Mr Osborne: I’m surprised that you didn’t therefore choose to vote against it last night-you didn’t.

I will just point this out. It is the intention when there is hot takeaway food to have VAT. That is a perfectly simple thing for people to understand. The way we operate with companies, large retail chains and the like, is that we do not do as you suggest, in the tax system you would want to run, which is a check on every single product sold. We come to an arrangement with a company-a sensible arrangement between Inland Revenue and the company-about what proportion of its products are sold hot. We do it like that. There are perfectly sensible ways of working this out.

Q319 John Mann: Indeed there are.

My final question is a very simple one-a yes or no will do. In your Budget, you described tax avoidance, which of course is the legal, rather than the illegal, avoidance of tax, as "morally repugnant". Will you therefore be repaying the capital gains tax that you avoided when you flipped your home?

Mr Osborne: No. The Select Committee on Standards and Privileges looked into this and cleared me. It is exactly that sort of personal attack that has come to characterise your questions on this Committee every time I appear before you.

Q320 John Mann: You’re the one who raised morality-

Mr Osborne: There was a parliamentary Committee that looked into that three or four years ago-whenever it was. You can read the conclusions of that. As I say, it is absolutely typical of you, Mr Mann, and that is how you behave yourself every time we appear on this Committee.

Chair: Chancellor, this is not the Committee in any case in which we would want to be asking those questions.

Q321 John Thurso: May we return to your fiscal policy? What have you identified as the major risks to achieving the fiscal target?

Mr Osborne: I guess I would agree with the OBR. First of all, I do not think the euro crisis has disappeared. I think the action from the European Central Bank is extremely welcome, but that is not a long-term solution to the problem. I think that high oil prices are a cause of concern for every western Government at the moment, and indeed other Governments. I think there is also the challenge that the OBR always puts to us, which is whether we have properly assessed-it includes itself in this-the depth of the effects of the financial crisis.

Q322 John Thurso: With regard to the eurozone, which is the greater worry-the financial crisis or the trading implications, if they are sluggish or in recession?

Mr Osborne: I think the financial crisis, as you saw at the end of last year, has potentially the most catastrophic effects. Of course they are connected, and you want these economies growing in order to reassure people that they can pay their debts. But I think the fear last autumn, which was very clear at the time and I think is also clear now, was that there was going to be some catastrophic event-either a collapse of a eurozone bank or a failed sovereign debt auction for one of the peripheral countries. In November or December, that was a very acute fear. You can see that the impact on business investment in this country, let alone in eurozone countries, was pretty acute.

Q323 John Thurso: May I turn to one of the announcements that took some of us by surprise? That was the announcement you made of an extra £10 billion of welfare savings that would be required in 2016-17. What work have you done to look at the area that those savings should come from?

Mr Osborne: That work is starting now. Let’s be clear: the £10 billion figure is the figure if you assume similar spending rates for the Departments. That leads you to the calculation for AME savings. That is the £10 billion; it will only confirm that number in a spending review. I thought it was a good guideline for both Government and Parliament to work off. In other words, if we don’t do anything about welfare bills, this country is going to find itself again running a high deficit, unless there were a very dramatic increase in taxation. We have to tackle that head on. If we want not to put additional pressure on Departments-more than they have seen in this spending review-that is where you get the £10 billion figure.

Q324 John Thurso: Does that welfare include pensions and benefits? Is it the complete welfare?

Mr Osborne: Yes, it is all annually managed expenditure. So, that is all parts of welfare, all transactional payments and, indeed, other things such as contributions to the European Union.

Q325 John Thurso: So, we have the triple lock on pensions, which will provide, as we wish, an upward pressure. We are moving to the universal credit, which will also hopefully add to the fairness of the system in due course. Where is the deliverability of an extra £10 billion, given the pressures we have already decided upon?

Mr Osborne: As I say, this process is just starting in Government. I hope to provide an update on this at the autumn statement. This is the work for the next spending review. We need to start the big thinking on future welfare reform, having undertaken very significant welfare reform with the Welfare Reform Act that has just become law, and the introduction of universal credit. I am saying that the job is not done. It is right that Parliament and the public, and not just Whitehall, focus on this issue.

Q326 Chair: Could you explain why you introduced an export target into the Budget, rather than a net trade target?

Mr Osborne: I thought it was a good ambition to set the Government. It was recommended to me by Stephen Green, who has been an excellent Trade Minister. He thought that would help lift the eyes of Government Departments to what more they could do to promote exports.

Q327 Chair: Why only exports, rather than net trade?

Mr Osborne: Because in the end we can have a more direct impact on the promotion of British exports. I think the net trade figure is more difficult for the Government to target.

Q328 Chair: If exports rise by £1 trillion and imports rise by £1.2 trillion, you would not be so happy with the export target, would you?

Mr Osborne: It is much simpler to get Government focused on what they can do to promote exports.

Q329 Chair: Is it a real or nominal target?

Mr Osborne: It is a nominal target.

Q330 Mr McFadden: I want to ask you about the child benefit changes, Chancellor. You introduced this sliding scale between about £43,000 and £60,000 for people to lose their child benefit. You didn’t deal with the anomaly that a couple where one partner earns £60,000 or above will lose all their child benefit, but another couple, where two partners are earning £49,000, I believe, will keep it. Why is it fair for one household where the total income is almost £100,000 a year to keep child benefit, but another household where the income is £60,000 a year to lose all of it?

Mr Osborne: First, between the higher rate threshold and £50,000 they keep their child benefit. We are talking about when someone in the family has an income of over £50,000. The child benefit is then in effect tapered away through a tax charge. The alternative, implied in your question, is to assess total household income for people on household incomes of £40,000, £50,000, £60,000, £70,000, which is not something that the Government do. We would have to create an entirely new system to assess the total household income of 6, 7, 8 million people. I do not think we need to do that. Let me be blunt: we do not assess the household income of anyone sitting around this table. The tax system does not do that because the welfare system does it. Of course, people on higher incomes are not in the tax credit system or the welfare system.

The only way to remove child benefit from better-off families in a way that assesses household income is to create a system that means-tests every household and assesses every household income. I thought a simpler thing to do was to say, "If someone in your family has an income of over £50,000, we will taper away your child benefit through a tax charge." That is a much more administratively simple way of doing it than means-testing every single household in the country.

Q331 Mr McFadden: But HMRC estimates that, as a result of what you have just outlined, an extra 500,000 people will have to fill out self-assessment forms. This is hardly a simplification, is it? We heard this morning that this adds significantly to the complexity of the tax system.

Mr Osborne: Once you accept the premise-of course, there are some people who don’t accept the premise-and take the decision to remove child benefit payments from better-off families, and we are talking here about the top 10% of families by income, you then have to consider how best to do it. The alternative implied by your question would put 7 million or 8 million people into some form of household means test requiring a complicated form. Now, some people argue that we should not be taking money away from these people at all.

Q332 Mr McFadden: That is not what I am arguing. Some households earning almost £100,000 will keep it.

Mr Osborne: My Labour opposite number makes that argument. I have to tell you that, without the child benefit change, people in the top 10% or 20% of the income distribution would not have made, in terms of the fiscal consolidation, any significant contribution. In other words, all the other changes would affect people on lower incomes. This is the one measure that affects people on the highest incomes, and I thought it was perfectly reasonable to ask people in the top 10% or 15% of the income distribution to make a contribution to the spending component of the consolidation.

Q333 Mr McFadden: Let me ask you about another cliff edge much further down the income scale. One of the measures that you didn’t change in the Budget but that is just about to come into force is the cliff edge for families with children where a parent works part time between 16 and 24 hours a week. Families in those circumstances are going to lose £3,800 a year in tax credits. Their average incomes are around £17,000 or £18,000 a year. The benefit to such families of changing the personal tax allowance is, I think, about £170 a year. These are, I stress, families in work. These are benefits for people in work. You said that the Budget was a Budget to encourage work. How can it encourage work to take away almost £4,000 a year from 200,000 families working part time?

Mr Osborne: I completely accept that dealing with a budget deficit requires some very difficult decisions. The tax credit bill had gone up from £18 billion in 2003 to £30 billion by 2010. If you can propose to me a way of dealing with a 10% or 11% budget deficit without touching welfare spending-you and your party voted against the child benefit changes last night-and without touching a £30 billion tax credit bill, I have yet to hear it. These are difficult decisions. Of course, the cliff edge to which you refer exists at 16 hours, and it exists for lone parents at 16 hours and was introduced for couples by the Labour Government at 16 hours. We are not asking lone parents to work more than 16 hours, but we are asking couples to work more than 16 hours between them. Given the difficult decisions we have to make across the board, it is a reasonable thing to ask.

Q334 Mr McFadden: The purpose of welfare reform should be to encourage work. The effect of these changes if the families cannot get extra hours-surely you accept that in a constituency like mine, which is among the top 20 in the country for unemployment, getting extra hours of work is not easy-will be that many of these families will be better off on the dole. Surely the purpose of welfare reform should be to make work pay, rather than make the dole pay.

Mr Osborne: I completely accept that the welfare system is not doing enough to encourage work. That is why we are introducing universal credit. The tax credit system has very high marginal withdrawal rates. That is why we are replacing it with the universal credit system. But your arguments about the cliff edge, frankly, are arguments you could apply whether it was 16 or 24 hours. They are exactly the same argument. I would say-let me put it this way-it was rather strange that the previous Government had decided that a single parent should work 16 hours and a couple should also work 16 hours.

We have not changed the hours requirement for the lone parent, but we have changed it for the couple. I completely accept that these are difficult decisions, but if you are not prepared to tackle the tax credit bill and you are not prepared to tackle child benefit going to better-off people, and if you voted against the changes to benefit uprating from RPI to CPI, what exactly are you proposing that we do to deal with the fact that we were borrowing £1 in every £4 that we were spending?

Q335 Mr McFadden: We will probably come on to discuss the 50p rate in some detail in this session, but I will end with one question on it. Do you not think people will find it odd that the argument about the 50p rate is that to encourage work among not just the top 10%, but the very top earners above £150,000, we should cut their taxes and put more money in their pockets, but to encourage work among people who are earning £17,000 or £18,000 a year, it is necessary to impose a cut in their incomes of £4,000 a year? How do you think that makes the Government look?

Mr Osborne: I would argue that the purpose of universal credit is also to reduce these high marginal tax rates that exist in the welfare system, so we are also trying to improve work incentives for people on welfare. I do not know whether you want to begin the discussion on the top rate of tax, but for Britain to have a top rate of tax that is higher than in France, Italy or Germany, that Robert Chote and his independent body assesses costs £100 million to reduce from 50p to 45p, and that is only the direct cost-indeed, the indirect cost in terms of forgone VAT receipts may mean it raised absolutely nothing, the gap between 45p and 50p-if we want to carry on with that rate just because it looks good on our press release, but makes our country deeply uncompetitive and damages jobs and growth in our economy, fine. My predecessor took the view that it should be temporary. I took the view that it should be temporary. We are removing it once the public sector pay freeze comes to an end next year. As I say, if you felt so strongly about it, Mr McFadden, you should have voted against it last night, as indeed your SNP colleague sitting next to you did.

Q336 Mr McFadden: I will just remind you of what your predecessor said in the debate last night. You are right-he did say he thought it should be temporary, but he also said he would not have withdrawn it when asking those further down the income scale to continue to make the kind of sacrifices that you are asking them to make, so I do not think he can be prayed in aid for the Budget that we have before us.

Mr Osborne: The question was should Britain continue with a tax rate, which had been identified around the world as deeply uncompetitive and a deterrent to investment in Britain, simply to make Members of Parliament feel good that somehow they were levering a rate, which we know people were not paying. That work has been done independently of me. What I have instead tried to correct are abuses that have existed for years in the tax system, where people were able to claim unlimited tax reliefs to reduce their income tax rate to zero, not 50p to 45p, but people on incomes of £5 million or £10 million a year reducing their income tax rate to zero.

What I am trying to do is tackle those uncapped reliefs and make sure that we have a competitive top rate of tax. I think that is a fair way of dealing with the tax system. My numbers are audited by Robert Chote, and the score card shows that we are raising five times as much money from the wealthiest people in our country through the tax measures we announced in the Budget.

Q337 Michael Fallon: Continuing with the 50p rate, were you surprised by the HMRC study showing that the underlying yield was so much lower than originally forecast?

Mr Osborne: I am not sure I had a particular expectation in mind of what it would reveal, although it was pretty clear from all the surveys done of the British economy and all the conversations that have been had with some of our big FTSE companies that it was having a very serious impact on our competitiveness.

Q338 Michael Fallon: This survey is only of one year, isn’t it? I asked the OBR more than a year ago what work they were doing on the dynamic effect of tax changes. Are you going to continue to look at the effect of the new top rate in the same way that HMRC has done for the 50p rate?

Mr Osborne: First, at every fiscal event the OBR assess how much money they are getting from particular taxes, so there will be an ongoing assessment of how much revenue we have raised from 45p, and HMRC in their document talk about that. I think there is an interesting question about whether the Treasury should undertake more work on dynamic scoring, in other words trying to take into account more of the economy effects of different tax rates. I am not proposing we change the way the score card is calculated, and I am not proposing we change the way that the OBR does its work-I think we should be cautious about making these changes-but I think the Treasury can now, and I have asked for this to happen, start undertaking some real research into dynamic scoring and what the broader-economy effects are of changes to taxation.

Q339 Michael Fallon: The 50p rate was described by your predecessor as temporary. Do we now assume that the 45p rate is permanent?

Mr Osborne: I keep all taxes under review, which is what all Chancellors say. The 50p rate was assigned a special status by my predecessor, and by me, of being temporary. I do not assign a special status to the 45p rate. It is now, like all other tax rates, something we keep under review.

Q340 Michael Fallon: So it could change in the future?

Mr Osborne: It could change, and it could not change. It is like any rate of income tax. My predecessor gave it a special label. He did not say that the basic rate of income tax was temporary, although he might, if he had continued in office, have changed that. He did say that the 50p rate was temporary, and I repeated that language. I am not ascribing to the 45p rate any special status. Like all tax rates and allowances, we will keep it under review.

Q341 Michael Fallon: Given the need to make us more internationally competitive, wouldn’t it be simpler if we eventually simply moved to two rates?

Mr Osborne: Well, as I say, we keep all tax rates under review.

Q342 Michael Fallon: You said it would cost £100 million to reduce the top rate to 45p, and the OBR looked at that. How certain of that figure are you?

Mr Osborne: The OBR described it as a reasonable and central estimate. First, this was work done by the HMRC, and the OBR looked at it and came up with this being the central and reasonable estimate, which is what you would ascribe to any of the costings in this document. There is no special status ascribed to the costing of the 50p measure compared with any other measure in the Budget.

Q343 Mr Ruffley: Chancellor, on 50p, the HMRC study says, "The longer the additional rate remains in place the more people are likely to consider it a permanent feature of the UK tax system and the more damaging it would be for competitiveness. This suggests the negative impact on GDP may increase over time, and therefore the direct yield…might fall over time toward or beyond zero." For those of us who applauded your reduction of 50p, if it fell to zero, would you abolish it?

Mr Osborne: Mr Ruffley, you and I, and perhaps others on the Committee, are people who want to have lower taxation. I want to do it in a way that is sustainable and that the public finances can support, but I am not going to be drawn on the future status of the 45p rate. Like other tax rates, it is under review.

I would say this, also; I think there was something particularly damaging about having a 50p rate of tax. I do not think that applies to a 45p rate of tax. I think we now have a competitive top rate of tax if you look at how it compares with France, Germany or Italy. I do not think it is sustainable for this country to have a higher top rate of tax than France. Indeed, the President of the French Republic was making a joke about how high the British personal tax rate was just a few months ago, so it was certainly noticed on the continent. We now have a pretty competitive top rate of tax vis-à-vis our continental neighbours. The top rate of tax in the United States, depending on which state you live in, is lower. But as I say, I am not going to be drawn on, "Could we cut this in the future, or could we cut that?" I would like overall levels of taxation to be low.

Q344 Mr Ruffley: Finally on this, HMRC said that it could go beyond zero-in other words, it would actually have a negative effect. At that point, is it not almost true by definition that a Chancellor would not keep a tax that was costing the economy dear?

Mr Osborne: I think what the Revenue was specifically looking at in this regard, when it came to the costing, was the cost of cutting to 45p. It scored that as the direct cost of that to the Exchequer of £100 million. In this document, it then says that the indirect cost, in VAT receipts, is of up to £130 million that were forgone as a result of the 50p rate. That is why you can come up with a less-than-zero costing. We just had the direct static cost, in this Red Book, of £100 million. As I said in the Budget speech, no Chancellor of the Exchequer can justify a deeply uncompetitive top rate of tax that is raising next to nothing.

Q345 Mr Ruffley: Sure. On age-related allowances, you raised £360 million in the first year, £670 million in year 2 and £1 billion in year 3. In the great scheme of things, those are not huge numbers. Yet there was a staggeringly negative response. Were you surprised by that response?

Mr Osborne: Well, I guess my responsibility is not to write the newspaper headlines the next day, but to try to come up with a Budget that I think is the right one for the country and, particularly at a time like this, makes us more competitive and balances the books. As I made clear in the Budget speech, there were savings involved in this policy and, in the interviews afterwards, I also drew people’s attention to the £5.30 increase in the basic state pension that is coming next month. Of course no one likes it when their allowances are frozen. We have frozen child benefit and we have frozen some of the tax credit rates, and these are all difficult decisions.

Q346 Mr Ruffley: But if you had your time over again, do you think it was worth the row for, in year 1, £360 million?

Mr Osborne: Well, you read out the figures. It increases to about £1.2 billion by the end of the score card. That is a significant saving. We are doing this in a way that will simplify the tax system. The National Audit Office and the Office for Tax Simplification both pointed to the complexity of the system. We are doing it in a way in which there are no cash losers-people have their allowances frozen-and we are also not handing out new allowances next year. But we are also doing it at a time, and this was very much part of our thinking, when we are rapidly increasing the personal allowance so that, in a few years, everyone can be on a single personal allowance. When you have a bit of the tax system that is identified as complex and there is an approach that you can take that deals with that, it is worth looking at.

Q347 Mr Ruffley: What about the argument from many pensioners that they feel they are taxed twice-they are taxed on their earned income and then, if they are over a certain threshold, they are taxed again on their retirement income. Why is that something you did not take cognisance of?

Mr Osborne: As I say, I would not say that I am fundamentally changing the basis for the taxation of savings. There is an age-related allowance, which was identified as a complex part of the tax system. We have frozen the rate; we have not, for existing holders of age-related allowances, abolished it. The rapid increase in the personal allowance has afforded us a moment to do this.

Q348 Mr Ruffley: On philanthropy, I hope that we all, on this Committee, can agree on one thing-that philanthropic giving and charitable giving is a good thing and, indeed, part of the big society. Have you made an estimate of what will happen to charitable giving in total as a result of capping income tax allowances, as you have chosen to do?

Mr Osborne: First, as I identify in the Red Book, there is a potential issue around large donations to nationally important cultural institutions and the like. We are going to look at this and consult on it. [Interruption.] We are looking at the big-end philanthropy. Let me remind you that under our proposals-we are consulting on them this year-if you have an income of £4 million, you can give £1 million to charity. Of course, you can give as much as you want to charity, but you can give £1 million with tax relief.

I suspected that this might come up, so I asked the Inland Revenue to give me stylised examples of the tax affairs of some very wealthy people. They are stylised examples; they are not individuals. I, like any previous Chancellor, am not allowed to know the tax affairs of any individuals. Here are illustrative examples that I have received from the Inland Revenue of some of the kinds of things it sees. An individual-a stylised individual-can have an income of £10 million. Under the tax system that I inherited, they could claim loss relief for £5 million, charitable relief for £4 million and qualifying loan interest of £1 million. Their average income tax for the year is 0%, so they pay no income tax whatsoever. I have another example to give the Committee. Again, these are examples based on analysis of some of the top 20 claimers of income tax reliefs, but they do not involve actual taxpayer details. We have a stylised example of someone who, with an income of £10 million, could claim loss relief of £5 million and charitable relief of £5 million-tax due: zero; average income tax rate: zero.

That is the tax system that we have at the moment. I think it is very difficult to justify people having 0% tax rates when they have very high incomes. I am not setting a minimum tax rate. I looked at that, but it would be extremely difficult to enforce. Of course, people can save into a pension. We want to encourage people to save into various venture capital and enterprise management schemes. All I am doing is capping currently uncapped reliefs, like loss relief and charitable giving relief. That will mean that people on incomes of, say, £10 million will not be able to reduce their income tax bill to 0%.

I think that was a fair change to make, particularly at a time when I was taking a decision to cut the top rate of income tax from 50p to 45p, even though it raised no money-or close to no money, depending on which view you take. It is an important change. I will look specifically at large philanthropic donations to charitable institutions. I should also say that if you make a one-off donation, you can use the allowance for several years on it. I just think it is difficult to justify 0% rates of income tax for some of the wealthiest people in this country.

Mr Ruffley: That is very helpful. Thank you.

Q349 Stewart Hosie: Chancellor, on the 50p, generally, before any detail, given that people who are earning very modest wages may lose tax credits and have been subjected to wage freezes, and that middle-class families who are losing child benefit have been and will be drawn into paying a 40p tax rate when they were not previously, do you understand why people in general are angry and confused that you are seeking to remove the 50p tax rate at this time?

Mr Osborne: I thought it was very important to demonstrate that we were asking for more money from wealthy people. You can introduce a 50p tax rate, as the previous Government did, and you can live with a system in which people are paying 0% income tax on very high incomes, but is that a fair system? Isn’t it better to try to give yourself a more competitive tax rate, so that you do not have a higher tax rate than France or Italy, but you do have people on incomes of £10 million or £20 million paying some income tax? I thought that was the fair and right thing to do. In the end, my responsibility is not to write tomorrow’s headlines, but to try to come up with Budget policies that give this country a fighting chance in a very, very competitive global economy for the coming decades, and I think that I have done that.

Q350 Stewart Hosie: Let us look at some of the detail on that. The Revenue report on the 50p rate did identify substantial forestalling. It did identify significant yield reduction on the basis of an assessment of self-assessment returns. But, given if there were to be forestalling on a high rate of tax, it would be done in the early year or years anyway, and given that self-assessment returns are likely to show a lower yield because of the downturn anyway and that this was a temporary measure accepted by all of us, why did you not allow the 50p rate to run on for some time to see its forestalling unwind and the yields increase as the economy recovered?

Mr Osborne: As the document makes clear, it is by no means certain-far from it-that you get all the forestalled income back. People make permanent changes to their tax arrangements. They shift their income into capital gains. You do not need reminding, Mr Hosie, but I inherited an 18% rate of capital gains tax so people who were living off capital gains were paying lower tax rates than the people who cleaned for them. That was headlines in the papers. We have changed that.

You can shift your income into other forms of income, like capital gains. There were examples of people leaving the country and, when it came to the self-assessment returns, if you looked across the board at different taxes-corporation tax receipts, VAT receipts and so on-they were not below forecast. What really stuck out was that the self-assessment returns were below forecast, so you would have expected a general-economy effect on tax rates to follow your logic. We didn’t see that.

An important part of the work of the HMRC is to look at some of the academic evidence. It discovered that the Labour Government, when they were costing this policy-ultimately, it was a ministerial decision-used a taxable income elasticity of 0.35, which is right at one end of the academic evidence. There is evidence that it can be 0.7 if you go to the United States. We have plumped for, and the HMRC has recommended, an absolutely standard rate of 0.45, just below the Mirrlees review by the IFS. By the way, if I had gone with the Mirrlees review of the IFS, I think I could have reduced the costing to zero in the Red Book, but we thought it was sensible to go with 0.45 and Robert Chote thought that was a central and reasonable estimate.

Q351 Stewart Hosie: Let us ask you about the costing. The Red Book says costs of £100 million, but the Revenue says yield of £1 billion or less, implying a range of lost revenue between £100 million and £1 billion.

Mr Osborne: That is the cost of 50p-sorry, that was the revenues raised from raising the tax rate from 40p to 50p. That is not the-I have reduced the rate from 50p to 45p. Even the previous Government conceded that, on their estimates, two thirds of the revenue would have gone in a sort of static costing and, taking into account no other factors, would have been lost by raising the tax rate from 45p to 50p.

Q352 Stewart Hosie: Even if we accept that argument about the cost of £100 million, I am slightly at a loss to determine why in the current circumstances you would have implemented a policy that loses you £100 million of revenue yield.

Mr Osborne: If you are going with £100 million, you also have to go with the evidence in the report that the lost VAT receipts as a result of the policy were £130 million for the Exchequer-a minus £30 million impact. As I said, you can take measures that raise around £500 million in the Red Book, again independently audited. It is not entirely my decision. Robert Chote checks the numbers and sees whether they are central and reasonable estimates. He did not take measures that stop some people on very high incomes having 0% income tax rates. Surely, that is sensible tax reform.

Q353 Stewart Hosie: You keep arguing that there are these very wealthy people who have managed to avoid paying tax at all. If it were worth their spending a lot of money on lawyers and accountants to avoid paying tax of 50p and end up paying zero, presumably it is equally worth their while avoiding paying tax of 45p and ending up paying zero. I do not understand how you can have an implied tax yield for those very wealthy people that goes from zero to something higher, when they are managing to avoid it entirely at the moment.

Mr Osborne: I am introducing caps on the currently uncapped reliefs in income tax in order to deal with that issue. The truth is that, when the previous Government raised the tax, he initially said that it would have a 45p rate. Before it even came in, they raised it from 45p to 50p. There was something material about a 50p rate that sent a negative signal around the world. You can pick that up in any international survey of international competitiveness or any commentary on the British economy over the past year. We have got to a situation where we can have a competitive rate of tax of 45p and we can raise more money from wealthy people. Surely that is what you want at a time like this: you want a competitive economy, where everyone is paying their fair share. I have increased the amount of money coming from wealthy people and I have given us a more competitive economy.

Q354 Stewart Hosie: I understand the issue of competitiveness; everyone should pay their fair share. Looking at these numbers, however, the raw numbers show that there is a cost to reducing the 50p rate of £100 million. Let me ask you this: if the vote last night-it was No. 5 or 6-had gone against you, would you have found another way to lose £100 million?

Mr Osborne: Well, I was fairly confident that we were going to carry the vote, because of all that discussion in the coalition, which we talked about near the beginning. It was definitively helped by the fact that the Labour party chose not to vote. The shadow Chancellor told the House of Commons last week that there would be a vote this week and that the Labour party would vote against it. I have the resolution that was on the Order Paper. The SNP, Plaid and some others voted against, but the Labour party went home.

Q355 Teresa Pearce: On the 50p tax rate, we have just had a discussion of its costs, which is offset by what is accepted to be behavioural change. What I gather from what you have said, Chancellor, is that the figures in this book are HMRC’s figures, which have been audited by Robert Chote. In that case, Sir Nicholas, could you explain to me what it means in a booklet like this when it talks about the Government’s view?

Mr Osborne: Can I just say that this document is produced by HMRC? We used this document to get the £100 million costing that we use in the Red Book.

Q356 Teresa Pearce: So this is the first document.

Mr Osborne: This was an HMRC document, which we showed to the OBR. The £100 million costing in the score card-the static, direct costing-is what the OBR have decided is central and reasonable. It has not audited this document; it has audited the number that we use this document to derive.

Q357 Teresa Pearce: So, Sir Nicholas, what does it mean when it talks about the Government’s view?

Sir Nicholas Macpherson: It means precisely what it says.

Q358 Teresa Pearce: Does that mean that it is not HMRC’s view? It is Ministers’ view that this is the assumption on behavioural change and income elasticity.

Sir Nicholas Macpherson: I think that it is fair to say that the convention in these things is that the Government are indivisible.

Q359 Teresa Pearce: Is that right?

Sir Nicholas Macpherson: You don’t publish documents that say, officials think this and the Government decides.

Q360 Teresa Pearce: No, but you would say "we" or "there is".

Sir Nicholas Macpherson: Let us be totally clear, because having been here for this costing and having been in charge of the official Treasury in 2008 and 2009, this costing is a best estimate of Her Majesty’s Revenue and Customs and does not reflect political interference any more than the costing last time round reflected political interference from Alistair Darling.

Q361 Teresa Pearce: So we have actual costing, which is what you can actually estimate, and then we have the presumption of behavioural change.

Sir Nicholas Macpherson: I think this is a reflection of how both Her Majesty’s Revenue and Customs and the Treasury have improved their approach to costings. If you go back to Dennis Healey, the last time that we put up income tax was in 1975. If you went back to the Red Book of the day, there would be no attempt to build in behavioural responses. My recollection-I may be wrong-is that there was no attempt in 1979 or 1988. The costing in 2008 was recorded by the then Chancellor, Alistair Darling, as being cautious. With the benefit of hindsight-we weren’t to know-it turned out not to be cautious enough. We assumed that two thirds of the revenue would disappear through tax planning. As the document sets out-we now have real evidence-something like 83% or 85% disappears through behavioural responses.

Mr Osborne: Mr Bowler wants to say something, because he is the director of the Budget and this is the first time that he has been before a Select Committee.

Chair: He ought to be given a go.

James Bowler: I think I can answer your question. The document, up to page 48, is HMRC’s analysis of the yield that is received from the increase to 50p. Having got that analysis, we then have to take a decision as to what we want to do in this Budget, which is to reduce 50p to 45p. Annexe A, from page 48 onwards, sets out what the Government intend to do. I am hoping that that is the answer to your question.

Q362 Teresa Pearce: Thank you. I have listened very carefully to what the Chancellor has had to say in the Chamber and here today, and it appears that you set great store by the fact that these figures have been ratified by bodies other than yourselves and by Robert Chote. Yesterday, however, when I asked him when he got the analysis from HMRC, he said that they had been discussing them for some weeks before we knew what the Government were going to assume. That leads me to think that this assumption about behavioural change is actually yours and not HMRC’s and not the OBR’s.

Mr Osborne: The way the system works is that the costing that the Treasury wants to put on something is ultimately a ministerial decision. Ultimately, the decision of what number appears here is a ministerial decision. Now, I base that on advice that I get from officials and this work done by HMRC. The crucial difference between myself and my predecessor is that if Robert Chote does not think that is a reasonably and central estimate, he tells us and does not accept the costing. I think the legislation gives me the power to override him and proceed with it anyway, but-by golly-you would know, because all the controversy over the last week would have been that Robert Chote does not think it is a reasonable and central estimate. The big difference therefore in this aspect of Budget making is that I still have to produce the costings, and that is what the annexe does, but-

Q363 Teresa Pearce: So the figure for behavioural change is yours.

Mr Osborne: Well, I have used the evidence from HMRC about the self-assessment forms. I have used the official estimate provided to me within the Treasury, and I looked at that. We have put that forward to the OBR. They think that is a reasonable and central estimate, having also studied all this to see whether they thought it was a reasonable and central estimate and having made their own judgments. That is very, very different from the costing-I do not want to put Sir Nicholas in any kind of position-done when the tax rate was increased, which was a ministerial decision not audited by anyone. There is a difference.

Teresa Pearce: I can see that there is a difference, Chancellor.

Mr Osborne: There is one other thing. What the OBR decides entirely by itself-it is not a bit of the document that people tend to read-is what they think the receipts are from different taxes. That is their estimate.

Q364 Teresa Pearce: But they were wrong in that last November.

Mr Osborne: Well, they did not have any evidence to change what they had inherited, because the self-assessment tax receipts had not come in. They only came in this January for the first year of operations.

Q365 Teresa Pearce: And they were surprised by those receipts.

Mr Osborne: And they were very surprised by them. They were surprised and they looked into the costing done by the previous Government and made their own judgments. There is an independent element to it in terms of the fiscal forecast. There is an independent element in terms of the auditing of the number that I submit to the OBR. This is how Budget making should be. You can examine the process as much as you like, but the truth is that this was a tax rate that was introduced to put a good headline on a press release. It raised next to no money at all. It allowed a tax regime to continue where people earning £10 million or £15 million were paying 0% income tax, and I have changed that in this Budget.

Q366 Teresa Pearce: Thank you, Chancellor, but that was not the question I asked you. The question I was asking you was, is the assumption about the behavioural change your assumption, or that of the HMRC or the OBR? I can see that we are not going to get anywhere with that.

Can I ask you another question-

Mr Osborne: Well, it is drawn from the HMRC report.

Teresa Pearce: Which includes your figure.

Mr Osborne: The HMRC report is the HMRC’s report, and Annexe A is the Treasury’s-not the HMRC’s-costing. I did not ask the HMRC to tell me what the cost of cutting is. The report is not about the cost of cutting from 50p to 45p. This is the Exchequer effect of the 50% additional rate of income tax. From this work, I then derived a costing of a Budget policy measure, which was to cut from 50p to 45p, and then I asked Robert Chote whether that was a central-

Teresa Pearce: Okay. Can we move on to my next question-

Mr Osborne: I asked Robert Chote what he thought, and he told us he thought that it was a central and reasonable estimate.

Q367 Chair: Before we move on from that point, may I just chip in to clarify the point that I think Teresa was trying to get at? Was there ministerial supervision of the construction of Annexe A? By that I mean Annexe A of what you have described as the HMRC document. For example, was chart A1 constructed after a ministerial view had been obtained as to what it should present? That is three different Laffer curves, the central one being the one that you chose as the basis for your assumption.

Mr Osborne: To the best of my knowledge-I can write back if it is different-these numbers on static Exchequer impact and the like were produced by the HMRC and were not changed by Ministers. That is confirmed by my officials, I think.

Sir Nicholas Macpherson indicated assent.

Mr Osborne: Ultimately, the judgment on the costing we were going to ascribe in this report was a ministerial judgment, as it has always been in Budget-making. But crucially, this was a judgment that Robert Chote had to, in effect, sign off on. He thought that it was central and reasonable. So the constitutional process is that ultimately, the Chancellor of the Exchequer is responsible for everything in this document, which of course I accept, but the big constitutional change is that we now get very independent people-Robert Chote, Steve Nickell and Graham Parker-to check on it.

Q368 Teresa Pearce: According to this booklet, 300,000 people will be affected by the reduction from 50p to 45p. Given that there is an assumption that a number of people have avoided the 50p tax by either moving offshore, reducing their income, tax avoidance or even, as it says in the report, tax evasion, how many people do you think will in future be paying the 45p who would have been paying the 50p had they been included, if you see what I mean?

Mr Osborne: I do not have that number in front of me, and I do not know whether that number exists, but I will certainly write to the Committee with that.

Q369 Teresa Pearce: But if there are 300,000 people now, and you expect behavioural change-

Mr Osborne: Well, they are making all sorts of assumptions about-

Q370 Teresa Pearce: How can you have assumed-

Mr Osborne: Well, because they are not assuming-

Q371 Teresa Pearce: Could you let me finish my question, please, Chancellor? If there are 300,000 people now, and you expect a behavioural change that will reduce the amount that this measure is going to cost, you must have a figure in mind of how many extra people that is; otherwise, you cannot come up with a number.

Mr Osborne: No, because the assumption is more complicated than that. People can put £50,000 into a pension, and we have to make an assumption about how many people are doing that, so that reduces the income-

Q372 Teresa Pearce: But this must be-

Mr Osborne: By the way, it was £255,000 a year into a pension, until I became Chancellor and changed that. They can now put £50,000 into a pension.

Q373 Teresa Pearce: They could put double into an EMI.

Mr Osborne: They can put some money into the enterprise management incentive scheme and, of course, we have also now made changes to cap these current uncapped income tax reliefs, such as loss relief. In other words, there is a whole set of assumptions that go into the costing; it is not a straightforward calculation. That is what the HMRC and Treasury officials do in the preparation of the Budget.

As I say, you can see the evidence we have used to come to our calculation of how much revenue the 50p rate was actually raising, and Robert Chote pores over all these numbers and comes up with a reasonable and central estimate.

Q374 Teresa Pearce: Can we move on to a different issue? We have heard that 500,000 people will have to fill out self-assessment forms because of the change to child benefit. We have also got figures that show that over five years it will cost between £8 million and £13 million for IT, £100 million for staff resources and £5 million for customer information. So could you let me know how much you are increasing HMRC’s budget by so that they can recruit extra staff to deal with these extra self-assessment forms, not only for child benefit but for the 230,000 people who are brought into tax? There is the age allowance; there are the extra people who because of the behavioural change are now going to start paying tax. Can you tell me how much you will increase HMRC’s staff budget by?

Mr Osborne: Well, we are confident that HMRC can handle this work. I might point out that it raises around £2 billion a year. Exactly the people I have just had questions on from the last few questioners are the people who would receive child benefit if I had not removed it. But I have had many discussions with HMRC. I am confident that they can handle this additional work and of course, when their settlement was determined for the spending review, they knew they would have to handle the removal of child benefit because it was all part of the same spending review. So the HMRC settlement included the assumption that they would remove child benefit. My understanding is that the bulk of that cost in terms of administering it was the cost of removing child benefit. As I say, they are well able to cope with this.

Q375Teresa Pearce: So why is there a figure of £100 million for staff resources in HMRC’s own figures if it does not involve extra staff?

Mr Osborne: As I say, it was part of their settlement when we were determining in the autumn of 2010 how much money they would need to operate and how much staff they would need for different functions. Where we have really increased resources in the HMRC is the number of people put on tax points and tax evasion. We are raising £2 billion a year near enough from this measure. Again, it is all very well for some members of this Committee to say that we should not be doing this and then to complain that I am taking measures to reduce the cost of tax credits and the like, but I have yet to hear a constructive suggestion of where we are supposed to get this money. This is money coming from the top 10% of families. I can’t believe you came into Parliament-

Q376 Teresa Pearce: Only families with children.

Mr Osborne: The top 10% of families with children, in terms of income bracket. I know it is controversial, but if we had not taken this measure the better-off end of the income spectrum would not have contributed to the spending element of the deficit reduction plan. That would have been very difficult to justify. You would perfectly reasonably have asked me questions saying, "Why are you still paying welfare payments or child benefit payments?"

Q377 Teresa Pearce: I would not have asked that question, Chancellor.

Mr Osborne: Would you not?

Q378 Teresa Pearce: No. One last thing: you said earlier about the tax credit bill being extremely high. You said to give you another way of cutting it. Have you modelled increasing the minimum wage to the living wage, so that you would cut the tax credit bill?

Mr Osborne: On the minimum wage, we just follow the procedures put in place by the previous Government, which means we have the Low Pay Commission. I am happy to stand corrected, but I think this Government have implemented every single recommendation they have received from the Low Pay Commission.

Q379 Teresa Pearce: So you haven’t done any modelling on increasing the minimum wage?

Mr Osborne: We have left untouched the arrangement we inherited: the Low Pay Commission makes recommendations on the minimum wage and we implement them.

Teresa Pearce: Okay. You asked to be given another way, so I was just being helpful. Thank you.

Q380 Mr Love: Let us return to the vexed question of 50p and 45p, based, as I understand it, on tax income elasticity, where HMRC referred to work being done by the Institute for Fiscal Studies. We asked the IFS representatives this morning. They confirmed to us that the framework of reliefs and allowances will affect the tax income elasticity. The question I want to ask is whether you asked the HMRC to look at reliefs and allowances to see whether they could come up with a regime that would raise more money from the 50p before you decided to reduce it to 45p.

Mr Osborne: I was keen on a regime that would raise more income tax from wealthy people, and I think we have produced that.

Q381 John Thurso: Chancellor, there is obviously a great welcome in the far North for the contractual stability for offshore operations that you announced.

Mr Osborne: As reported by The Herald.

Q382 John Thurso: I wasn’t listening to that. What work is going on in the Treasury to look at the security of energy supply?

Mr Osborne: There’s a tremendous amount of work done in the Treasury on energy policy and the security of energy supply. Something giving us a particular cause for concern at the moment is the proposed strike by the tanker drivers, which could disrupt supplies of fuel. We certainly would not want to see that strike proceed.

Q383 John Thurso: But we had some interesting evidence from Professor Helm this morning on that question, particularly on the projections that indicate the date at which our generating capacity and our consumption go in parallel, which is about four or five years away. He suggested that there was a need for serious investment but nobody will invest in the current regime. Is that something that the Treasury are now actively looking at?

Mr Osborne: Well, part of the Budget was a commitment to produce by the autumn a gas strategy on the understanding that gas-generated electricity is going to be the major source of electricity generation for many years to come. The plethora of environmental policies that were put in place by the previous Government and that exist under this Government do not, we think, provide adequate support for investment in the gas industry.

The Energy Secretary is going to produce that strategy, and the key thing is that it is going to provide some grandfathering for the emission permits. In other words, it will allow people to build a gas power station with some certainty that we are not suddenly going to change in five, 10 or 15 years’ time the emission requirements of that station. That was deterring investment.

Chair: Chancellor, thank you very much for coming before us this afternoon, which has been fairly long. There has been a heap of stuff on 45p and 50p, and there was a bit on the leaks at the beginning. I think it has been worth while, but we do not yet know whether this is going to be one of those Budgets that quietly sinks without trace or one of those Budgets, such as 1981, that is perhaps not so well supported at the start but much later on is considered one of the great reforming Budgets of a Chancellor’s period.

Prepared 29th March 2012