Budget 2014 - Treasury Contents

Conclusions and recommendations


1.  It is regrettable that the Government did not supply details of its additional support for childcare to the OBR in time for it to verify the Government's claims about the costs of this policy. The OBR has said that it will look at this measure closely in the run up to the Autumn Statement. It is not acceptable, however, that the Government's figures should be left unverified for what may be more than eight months. We recommend that, when Budget announcements are not submitted before the OBR's deadline, the OBR should scrutinise major uncosted policies as soon as reasonably possible thereafter and publish its findings. (Paragraph 7)

2.  We welcome the fact that the Government maintained the confidentiality of the Budget this year. This can only have helped the presentation of the Budget measures. This Budget was unusual, however, in that one of its most important components—the reform of pensions—was highly market sensitive: the rules against selectively disclosing market sensitive information appear to have constituted a powerful enough deterrent to advance briefing of those reforms. We will expect this year's good practice in maintaining confidentiality to be maintained in future Budgets, when such considerations do not necessarily apply. (Paragraph 10)


3.  House price and commercial real estate bubbles are easy to spot in retrospect. The problem for the Financial Policy Committee is to spot them in advance of their bursting and take whatever action is required to mitigate their negative effects on financial stability. (Paragraph 54)

4.  Wider economic concerns are the responsibility of the Government and the Monetary Policy Committee. The Government is also responsible for fiscal and policy tools which directly influence the housing market. It should therefore state what indicators it believes are most important in detecting any wider economic risks arising from the housing market. It should also set out how it plans to address these risks, should they arise. (Paragraph 55)

5.  The Chancellor has asked the FPC to be "particularly vigilant against the emergence of potential risks in the housing market". It is not clear precisely what this means in practice, since the new remit document endorses the existing levels of vigilance. The Chancellor should provide a more detailed explanation of his comment, and whether he expects the FPC to interpret its remit in a way that might prompt it to take further action as a consequence. (Paragraph 56)

6.  The evidence we took concurred with the view of the OBR that the recovery to date has been driven by an increase in demand without a corresponding rise in supply potential. The output gap is being reduced in size and, so far, there is insufficient evidence to support the view that productivity growth is returning. (Paragraph 65)

The public finances

7.  For the fourth Economic and Fiscal Outlook in a row, the OBR forecasts that the Government will meet the rolling fiscal mandate, but not the supplementary target. In line with previous occasions, the Government has not proposed any corrective action in order to meet the supplementary target. Instead the Government has allowed the automatic stabilisers to continue their work, rather than taking corrective action—tightening fiscal policy—in order to meet the supplementary target. (Paragraph 70)

8.  The Budget was fiscally neutral on a five year view—the forecast period. Four of the measures announced have consequences within the forecast period that differ significantly from their longer term effects. These measures are fiscally positive within the five year forecast period. However, this tapers and they are projected to be fiscally negative after 20 years. While the effect of these four spending decisions may be small, and subject to uncertainty, the Committee would be concerned if the Government made fiscal decisions with its eye only on the five year forecast period. It is important that the OBR cost the long term implications of Budget measures. (Paragraph 78)

9.  After an economic shock, cyclically adjusted measurements are particularly uncertain. The current fiscal mandate is dependent on an unobservable output gap. It has been made even more unreliable as a consequence of the financial crisis. (Paragraph 83)

10.  For most of the last 30 years, governments have been trying to devise a robust fiscal anchor. There have been successive Medium Term Financial Strategies; the Code for Fiscal Stability (modified during the crisis by the temporary operating rule); and the Charter for Budget Responsibility. The Government is now considering a new Charter for Budget Responsibility. Fiscal anchors have merit. But at a time when the credibility of pledges in all aspects of public policy has attracted greater scepticism than before, it will be more difficult to build confidence in the fiscal anchor deep enough to withstand an extreme event. (Paragraph 84)

11.  Ring fencing distorts spending decisions. It also weakens rigorous scrutiny of spending in ring fenced departments. Furthermore, with each year that ring fencing remains in place, the size of ring fenced departments increases as a proportion of total departmental spending. The IFS has stated that by 2015-16, expenditure reductions of 21 per cent will have been implemented in areas other than the NHS, schools and overseas aid. Each successive round, seeking reductions from an already smaller non-ringfenced base, will be more difficult than its predecessor. (Paragraph 89)

12.  17 per cent of headline total managed expenditure in 2012-13 would have been covered by the welfare cap. The cap raises a number of concerns and we intend to seek further written evidence on its design and operation. Some welfare spending is not included within the cap. This may distort decision making, for example by tempting a government to change welfare entitlements in order to avoid breaching it. The penalty for a breach of the cap is any political embarrassment that may come with Parliamentary debate, a requirement in the event of its breach. The cap is therefore declaratory. Previous examples of such declarations include the child poverty target and the fuel poverty target. (Paragraph 105)

Pension reforms and savings

13.  The Committee notes that all witnesses welcomed the greater flexibility and choice provided by the Government's proposed pension reforms. We further note the Chancellor's commitment to "free, impartial, face-to-face advice", which will be important for many people for the reforms to work. (Paragraph 118)

14.  The full impact of the pension reforms on the long-term social care budget remains uncertain. The Government is right to require the long-term care means test to be revised in the light of these reforms. The Government has an understandable desire to have the radical changes to pensions completed as soon as possible. Because the reforms both to pensions and to long-term care come into force simultaneously, the revision of the long-term care means test should be completed in time for those who may be affected by both these reforms to make informed choices. (Paragraph 132)

15.  Until now there have been very strong incentives to purchase an annuity at the point of retirement. Creating greater freedom and choice in retirement will require individual consumers to consider the range of circumstances they may face, in particular relating to longevity. They will need to make informed decisions based on their personal needs and likely circumstances. For some consumers, these choices will require substantial guidance. (Paragraph 136)

16.  The market is likely to adapt, offering a new range of financial products for those approaching retirement. It is crucial that these products are not defective. Were they to be so, the reputation of the financial services industry, which has suffered severe damage in recent years from large scale mis-selling, would be further tarnished. (Paragraph 144)

17.  The FCA has now been given new powers to intervene early, in advance of detriment occurring. In practice, this will be extremely difficult to accomplish without creating other forms of consumer detriment. In particular, it will be essential to avoid stifling market innovation. The use of these new powers will be a major test of judgement-based regulation. (Paragraph 145)

18.  The impact of these reforms on the annuity market will only be known after a number of years. Increased flexibility and choice in retirement will only benefit consumers if an active and innovative market offers a range of products, which should include annuities, to suit individual requirements. (Paragraph 152)

19.  There is a clear distinction in financial services between regulated advice and guidance. Although what was proposed was clear in the Budget Red Book and in the consultation document, the Chancellor's Budget statement on this point could have been better phrased. (Paragraph 161)

20.  The guidance made available to consumers must explain what, if any, protection they may have in cases of poor guidance. (Paragraph 162)

21.  The guaranteed guidance must be available to people well in advance of their retirement to help their decision-making. (Paragraph 165)

22.  Given that the Money Advice Service has been asked by the Treasury to play a role in developing the standards for financial guidance at retirement, it is even more important that the independent review of the MAS is completed quickly. (Paragraph 168)

23.  It is essential for the success of the pensions reforms that the guidance offered under the guidance guarantee is trusted by those who use it. The guidance offered under the guarantee must therefore be demonstrably impartial. It must certainly not be biased in favour of any particular product type or provider. (Paragraph 170)

24.  It will be important for the success of this policy that people receive high quality guidance. As well as being of value to the individual it will have public policy benefits. People need to be aware that while the guidance is to be free at the point of use, the costs of firms providing it will borne by consumers. It is crucial that people grasp the value of this guidance. We therefore recommend that the full average cost of the provision of the guidance by firms be estimated and disclosed to consumers. (Paragraph 173)

25.  The 'guidance guarantee' is not the only Government sponsored guidance being designed for pensioners or those who are approaching retirement. These schemes should operate in concert to help people make informed decisions about what is right for them in retirement. (Paragraph 178)

26.  The Chancellor's commitment was for face-to-face advice to be available. Evidence to the Committee from a number of witnesses suggested a desire to use other channels. These will be appropriate for some customers but, in line with the Government's pledge, it is important that at least for those who choose face-to-face guidance this is provided without financial detriment to the customer. (Paragraph 185)

27.  The pension reforms announced by the Government are welcome, and also transformational. Consumers will need considerable support in navigating a market which is undergoing major change and in which consumers are likely to be offered an array of new products. The Committee recommends that the proposed guidance under the guarantee observe the following principles. It should:

·  Be demonstrably impartial as to providers and type of product;

·  Include at least an initial opportunity for face-to-face guidance;

·  Be free at the point of use, with the costs of such provision made transparent;

·  Make clear to every consumer exactly what is being offered, the limitations of the guidance, and what protection it gives consumers in the event of detriment;

·  Be offered from at least 12 months in advance of the consumer's stated retirement date; and

·  Be co-ordinated with Government-sponsored guidance relating to long-term care.

28.  There are risks to individuals and the wider economy if people decide to concentrate their savings in a single asset class such as residential property. Contrary to widespread perception, residential property can be a volatile asset class and prone to large falls in value. (Paragraph 195)

29.  Taken together, the changes announced in the Budget to ISAs, as well as the reforms to the taxation of defined contribution pensions at retirement, amount to a substantial increase in the flexibility available to savers. As this flexibility increases, ISAs and pensions will become increasingly interchangeable in their effect. In the light of this, the Committee recommends that the Government set out comprehensively the approach it intends to take to taxation of all forms of saving. This should include an examination of the merits of moving further towards taxing savings once, the scope for bringing closer together the tax treatment of ISAs and pensions, and the appropriateness of the present arrangements for the pension tax free lump sum. (Paragraph 205)

30.  The Government's announcement that National Savings and Investments (NS&I) will offer 'pensioner bonds' at a market-leading rate represents something of a departure from NS&I's usual approach. NS&I is required to balance the funding needs of the Government, its customers and the wider financial services sector. Pensioner bonds have tilted this balance—in this case at least—in favour of customers and away from the Government and the financial services sector. The Government must provide clarity about the framework within which NS&I is now operating. (Paragraph 211)

31.  Since the Government has decided that it wants NS&I to give priority to customer interests, we recommend that NS&I consider once again offering index-linked savings certificates. (Paragraph 212)

32.  The increase of NS&I's Net Financing Target from £2 billion, plus or minus £2 billion, in 2013-14 to £13 billion, again plus or minus £2 billion, in 2014-15 could have a significant effect on NS&I's market share. The Government must ensure that this does not destabilise the wider savings market by crowding out private savings providers. (Paragraph 213)


33.  Retrospective tax legislation conflicts with the principles of tax policy recommended by this Committee. In our Budget 2012 Report we recommended that the Government restrict the use of retrospection to wholly exceptional circumstances. Witnesses told us that the Government was not abiding by this recommendation. Furthermore, the Red Book announced an additional retrospective taxation policy: an extension of the requirement for taxpayers to pay upfront any disputed tax associated with anti-avoidance schemes. This policy will retrospectively apply to some of the 65,000 outstanding tax avoidance cases. There may be a case for this policy but the Government has yet to explain what is wholly exceptional about these cases that justifies this retrospective measure. It should do so in response to this Report. (Paragraph 225)

34.  The proposal to grant HMRC the power to recover money directly from taxpayers' bank accounts is of considerable concern to the Committee. It could develop into a return to Crown preference by stealth. The Committee considers a lengthy and full consultation to be essential. The greater detail provided by the Government on 6 May will need further and extensive examination, and the Committee will take further evidence on this. Giving HMRC this power without some form of prior independent oversight—for example by a new ombudsman or tribunal, or through the courts—would be wholly unacceptable. (Paragraph 244)

35.  The Chancellor argues that this measure can be justified because the Department for Work and Pensions already has the right to take money directly from people's bank accounts to pay child maintenance. However, the parallel is not exact: in those cases, DWP is acting as an intermediary between two individuals. HMRC would be acting not as an intermediary between two individuals but rather in pursuit of its own objective of bringing in revenue for the Exchequer. (Paragraph 245)

36.  This policy is highly dependent on HMRC's ability accurately to determine which taxpayers owe money and what amounts they owe, an ability not always demonstrated in the past. Incorrectly collecting money will result in serious detriment to taxpayers. The Government must consider safeguards, in addition to those set out in the consultation document, to ensure that HMRC cannot act erroneously with impunity. These might include the award of damages in addition to compensation, and disciplinary action in cases of abuse of the power. (Paragraph 246)

37.  The ability directly to have access to millions of taxpayers' bank accounts raises concerns about the risk of fraud and error, and this should also be covered by the consultation. (Paragraph 247)

38.  Following the merger of HM Customs and Excise and the Inland Revenue in April 2005, an extensive review of HMRC's powers, deterrents and safeguards was carried out from 2005 to 2012. The Committee believes that sufficient time has now passed to warrant a post-implementation review of these powers. The aim of this review should be to ensure that all the powers HMRC has at its disposal remain relevant and are no more than are sufficient to enable HMRC to achieve its objectives. (Paragraph 248)

39.  The Committee welcomes the Government's decision to reduce the starting rate of savings income tax to 0 per cent and to increase to £5,000 the band of savings income to which this rate applies. There is, however, a risk that the benefits of this measure could be eroded if those who are eligible for the 0 per cent rate do not understand that they are eligible or do not know which forms they need to complete. We urge HMRC to set out a clear plan describing how it will work and how banks and building societies will ensure that relevant savers are aware of this change. (Paragraph 254)

40.  The frequency of changes to the annual investment allowance over the past seven years has created uncertainty and instability for businesses and imposed an economic cost. The Committee has previously highlighted the importance of stability in the tax system in its 2011 Report, Principles of Tax Policy. We therefore recommend that the Treasury develop a strategy for future annual investment allowance changes to reduce the current instability and help business planning. (Paragraph 260)

Parliamentary timing

41.  It is essential that the Budget and the Finance Bill receive adequate, detailed parliamentary scrutiny. Prior to 2011, it was customary for four to six weeks to elapse between the Budget and the Second Reading of the Finance Bill. In the most recent three years, this has fallen to an average of just under three weeks. We welcome the Government's provision of a full sitting week between Second Reading and Committee of the Whole House. Nevertheless, this year, the timings of the Budget and the Finance Bill have not permitted adequate scrutiny to take place—either by this Committee or outside—in time for either Second Reading or Committee of the Whole House. We therefore recommend that, in future, there should be no less than three sitting weeks between the Budget and Second Reading of the Finance Bill, and at least a further sitting week between Second Reading and Committee of the Whole House. Four to six weeks between the Budget and Second Reading of the Finance Bill was once the norm, so our proposal will simply bring the arrangements closer to the practice that pertained before 2011. We accept that it may not be possible to achieve this timetable in an election year, but it certainly should be the accepted practice at other times. (Paragraph 270)

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Prepared 12 May 2014