Conclusions and recommendations
The macroeconomy
1. Recent data revisions
suggest that GDP has been growing by more than previously thought,
and business surveys also suggest that the recovery is taking
root. That the recovery is, at the moment, consumer-led, is not
surprising. As the Governor of the Bank of England has noted,
"recoveries are very seldom, in this country or other countries,
led by business investment". However, a broad based improvement
in the long run performance of the economy will be required if
the recovery is to lead to a long period of trend growth. As we
have previously recommended, a greater focus on supply side reform
will be required. (Paragraph 18)
The public finances
2. The Committee has
previously emphasised the considerable uncertainty in the measurement
of the output gap and therefore the limit to its usefulness. The
OBR's projection of the cyclically-adjusted current budget, which
relies upon a forecast of the output gap, is therefore also highly
uncertain. Despite these uncertainties, it nevertheless appears
that a significant structural deficit has been the inheritance
of the last decade, emphasising the need for further fiscal adjustment.
Closing the structural deficit will require an improvement in
economic performance. (Paragraph 25)
3. It is not yet clear
what the outcome of the Government's review of the Charter for
Budget Responsibility will be. It is reasonable to suppose that
it may contain amendments to the fiscal mandate. This Committee
has previously recommended that any new fiscal framework should
be subject to full public consultation. The requirement for the
updated Charter for Budget Responsibility, including any amended
fiscal framework, to be approved by the House of Commons, falls
some way short of this proposal. The Government should consult
on any proposed changes to the fiscal framework as part of its
review of the Charter for Budget Responsibility. Effective public
consultation will improve the prospects of creating a framework
for fiscal policy that will be more stable and resilient than
those used in the past. (Paragraph 33)
4. Ring-fencing, by
definition, requires that the balance of public expenditure restraint
and cuts be borne in the rest of public expenditure. Each successive
year of public expenditure restraint results in an increase in
ring-fenced spending as a proportion of the total. The smaller
non-ring-fenced areas in turn have to bear a higher proportion
of any savings in subsequent years. The IFS has shown that non-ring-fenced
expenditure may fall from 61.6 per cent in 2010-11 to around 50
per cent in 2018-19 of total Departmental Expenditure Limits.
Ring fencing also reduces the discipline on spending in these
areas: the rigour of negotiations between the department and the
Treasury on allocations will be weakened, since it is known in
advance by both sides that this spending is protected. (Paragraph
45)
5. The Chancellor
says that the ring-fencing of health, schools and overseas aid
budgets reflects public preferences. Protection of health and
education spending, but not overseas aid, appears to reflect public
preferences. (Paragraph 46)
6. The Government
should do what it can to ensure sufficiently informed public debate
on the trade-offs inherent in ring-fencing and the allocation
of spending cuts. Such a debate is especially important in a period
of transformative spending reductions. (Paragraph 47)
Housing
7. Data from the end
of 2013 indicate that national aggregate house prices have recently
been growing at a rapid rate. Mortgage availability, and the demand
for mortgages, have both increased. The growth in house prices
has drawn considerable public attention, particularly regarding
whether the activity yet represents a speculative housing bubble.
Witnesses explained rising prices by drawing attention to pent-up
demand and the limited supply of housing within the UK, and to
the likelihood of a limited short-term supply response to rising
house prices. (Paragraph 54)
8. The danger is that
it will be difficult for the Financial Policy Committee to identify
when a speculative housing bubble may have begun. Such a bubble,
driven by increasing lending to households, would be a risk to
the UK economy. As the Governor has told us, "experience
has shown that imbalances fuelled by a credit boom, which may
manifest themselves in asset-price movements, pose the greatest
medium-term risk to the economy, because of the powerful deleveraging
process they induce when they unwind." House prices are therefore
a class of asset price which requires careful attention by policymakers,
given their historic and continuing influence on the UK economy.
(Paragraph 55)
9. The Committee has
previously concluded that the Help to Buy: Mortgage Guarantee
scheme could produce negative distorting effects on the housing
market. Our judgement has not changed. (Paragraph 60)
10. In addition to
this, the Government's Help to Buy: Mortgage Guarantee scheme
may have further distorting effects on the UK housing market when
withdrawn. The Treasury should examine the impact of an abrupt
end to this scheme, and act in advance to mitigate market distortions
before they arise. The Government should explain now what the
exit strategy from Help to Buy: Mortgage Guarantee will be in
order better to influence expectations. The Bank of England may
need to adjust the timing of its regular annual review of the
Help to Buy: Mortgage Guarantee scheme accordingly. (Paragraph
61)
Individual measures
11. The Treasury's
analysis of the dynamic effects of the Government's corporation
tax cut is subject to great uncertainty. Nonetheless, there is
some merit in continuing to study the dynamic effects of policy
decisions. It is important to emphasise, however, that the OBR
took account of some of the effects of the Government's corporation
tax cut discussed in the Treasury's paper in its own forecasts,
including the effects on business investment and profit shifting.
The OBR has stated that the Treasury's analysis has not affected
its official economic forecasts. We will expect the OBR to continue
to reach its own independent judgement on the effects of tax changes
on the yield. (Paragraph 66)
12. Every year estimates
have to be made of the yield of anti-avoidance measures, in the
face of great uncertainty about the outcomes. The OBR itself points
out that there is a limit to what can be learned from previous
policies in determining whether such costings are suitable. The
Treasury Committee warned in 2012 that the proceeds of the UK-Swiss
tax agreement might not meet expectations. The Government has
reduced its estimate of the expected yield of the UK-Swiss tax
agreement by almost two thirds over the course of a year. Given
the great uncertainty that surrounds the fiscal effects of tax
avoidance measures, the reduction in the estimated yield of the
UK-Swiss tax agreement should not be a great surprise. (Paragraph
74)
13. The Government
has now announced a series of further measures designed to close
down avenues of avoidance, each vulnerable to similar uncertainties
of their own. In the Government's own words, though, these further
measures "will bring in more than £6.8 billion of new
revenue over the forecast period—more than any other fiscal
event this Parliament". Therefore this perennial problem
has now assumed particular fiscal importance given the size of
the revenue being forecast. The OBR should do all it can to report
on whether yields were attained as originally costed. Where that
is not possible, it should limit the extent to which the Government
may account for such projected gains. (Paragraph 75)
Transport and energy infrastructure
14. In the interests
of transparency of decision-making, the Treasury should set out
the absolute benefits and absolute costs, and the benefit:cost
ratios, for each road and rail scheme considered by Government,
whether approved or not. The calculations should be consistent
with well established Department for Transport best practice.
This practice is based on Treasury Green Book principles. (Paragraph
80)
15. The Treasury should
ensure that contingency funds are used only for contingencies,
and do not become a safety margin to accommodate poor planning.
(Paragraph 83)
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