Conclusions and recommendations
Introduction
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 componentsthe reform of pensionswas
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)
Macroeconomy
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 actiontightening fiscal policyin
order to meet the supplementary target. (Paragraph 70)
8. The
Budget was fiscally neutral on a five year viewthe 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 balancein this case at leastin
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)
Taxation
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 oversightfor example by
a new ombudsman or tribunal, or through the courtswould
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 placeeither by this Committee
or outsidein 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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