Appendix 1: Government Response
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)
As part of the Tax-Free Childcare consultation published
in August 2013 the Government also consulted on policy changes
to childcare within Universal Credit. In March 2014 the Government
set out a commitment to increase support within Universal Credit
with further details to be set out in due course, including DWP's
own response to the original consultation.
Costings for all policies announced since the OBR's
Budget deadline will be scrutinised by the OBR in the usual way
prior to Autumn Statement, including the costs for the additional
support for childcare through Universal Credit, once the Department
for Work and Pensions has published its consultation response.
The Government will publish details of the methodology and key
assumptions in the costing at Autumn Statement, alongside offsetting
savings.
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)
All briefing on Budget measures to the press and
public stakeholders was conducted in strict adherence to the recommendations
adopted in the Treasury's Review into the pre-release of Budget
information, led by the Permanent Secretary of the Treasury Sir
Nicholas Macpherson, published in July 2013. On the recommendation
of this review, the Treasury introduced a ban on the pre-release
of the core of the Budget (and Autumn Statement), that is: the
economic and fiscal projections, the fiscal judgement and individual
tax rates, reliefs and allowances. The Government will continue
to adhere to this procedure in future fiscal events and has also
agreed that future briefing arrangements for the Budget (and Autumn
Statement) are only changed with the Chancellor's explicit agreement
on the recommendation of the Permanent Secretary of the Treasury.
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)
A failing of the Tripartite regulatory system designed
by the previous Government was the fact that no single institution
was responsible for monitoring the financial system as a whole,
identifying potentially destabilising trends and responding to
them with concerted action. That is why the Government created
the Financial Policy Committee (FPC) within the Bank of England
to ensure emerging risks and vulnerabilities across the financial
system as a whole are identified, monitored and effectively addressed.
The FPC looks at a number of indicators across the economy, including
those which have proved helpful in identifying emerging risks
to financial stability in the past, monitoring them closely and
paying attention to the housing market in collaboration with the
Monetary Policy Committee. As the FPC has made clear, "No
single set of indicators can ever provide a perfect guide to systemic
risks, or to the appropriate policy responses ... Judgement will
play a material role in all FPC decisions".
With regard to risks from developments in the housing
market and household indebtedness, in its November 2013 Financial
Stability Report the FPC said it, "will closely monitor:
· developments
in house price inflation relative to indicators of affordability
and sustainability;
· indicators
of an increasing 'tail' of borrowers with particularly high indebtedness;
· indicators
of underwriting standards in the residential mortgage market;
· indicators
of underwriting standards on construction and CRE loans;
· exposure
of lenders to highly indebted households; and
· the
reliance of lenders on short-term wholesale funding."
The FPC's June 2014 Financial Stability Report includes
the Committee's latest assessment of the outlook for financial
stability. While the FPC judged that household indebtedness does
not pose an imminent financial stability risk, it made two policy
recommendations aimed at insuring against the risk of a marked
loosening of mortgage underwriting standards and a further significant
rise in the number of highly indebted households:
· When
assessing affordability, mortgage lenders should apply an interest
rate stress test that assesses whether borrowers could still afford
their mortgages if, at any time over the first five years of the
loan, Bank Rate were to be 3 percentage points higher than the
prevailing rate at origination; and
· The
Prudential Regulatory Authority (PRA) and the Financial Conduct
Authority (FCA) should limit the proportion of mortgages at loan
to income multiples of 4.5 and above to no more than 15% of their
new mortgages.
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)
The Bank of England Act 1998, as amended by the Financial
Services Act 2012 (the Act), requires the Treasury, on an annual
basis, to specify what the economic policy of the Government is
and to make recommendations to the FPC about matters that the
Committee should regard as relevant to the Committee's understanding
of the Bank's financial stability objective and the Committee's
responsibility in relation to the achievement of that objective.
The Act also empowers the Treasury to make written recommendations
to the Committee about its responsibility in relation to support
for the Government's economic policy, as well as matters to which
the Committee should have regard in exercising its functions.
The 2014 Remit and recommendations for the FPC noted
that a sustainable recovery in the housing market will only be
secured if lenders continue to lend responsibly and borrowers
do not take on unaffordable commitments, and emphasised the importance
of the FPC remaining vigilant as the recovery progresses. Consistent
with its statutory objectives and with the recommendations in
the Remit, it is for the Committee to monitor developments in
the housing market with a view to assessing whether and, if so,
when it may be necessary to take action to address emerging risks
to financial stability. As noted in the answers to questions 3
and 4, above, the FPC concluded in its June 2014 Financial Stability
Report that household indebtedness does not pose an imminent financial
stability risk, but it made two policy recommendations aimed at
insuring against the risk of a marked loosening of mortgage underwriting
standards and a further significant rise in the number of highly
indebted households.
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)
At Budget 2014 the OBR judged that in Q4 2013 the
economy was operating slightly closer to full capacity than they
thought in December 2013, reflecting the view that there was less
slack in the labour market. Going forward, the OBR forecast a
stronger recovery than at Autumn Statement 2013. As a result,
the economy will return to operating at full capacity around a
year earlier.
The latest estimates of the GDP growth show continuing
signs of momentum in the economy. Data for the first quarter of
2014 showed that the recovery is balanced across all the main
sectors of the economy, with manufacturing, services and construction
all growing compared to the same quarter a year earlier. Business
investment increased by 5.0 per cent in Q1 2014, now growing for
five consecutive quarters for the first time since 1998. This
reflects the OBR forecast which predicts a transition from recovery
driven by household consumption to one with a more even balance
between consumption and investment.
The OBR forecast the potential productivity growth,
which underpins the sustainability of the recovery, to accelerate
to 2.0 per cent by 2017, reflecting the normalisation of financial
markets over the forecast horizon. The actual productivity growth
is forecast by the OBR to turn positive this year and rise by
over 2.0 per cent from 2015 onwards. This will allow the pace
at which resources are allocated to more productive uses to pick
up. The latest outturn figures for Q1 2014 provide evidence of
continued growth in productivity, with output per hour growing
by 0.4 per cent on a year ago, and output per worker up by 0.6
per cent.
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)
The Government's fiscal strategy is underpinned by
a forward-looking fiscal mandate to achieve cyclically-adjusted
current balance by the end of a rolling, 5-year forecast period.
The OBR forecast that the Government remains on course to meet
the mandate a year early, in 2017-18. In addition, the OBR forecasts
that, on its underlying measure of public sector net borrowing,
in 2018-19 the Government will run its first surplus for 18 years.
The fiscal mandate is supplemented by a target for
public sector net debt (PSND) as a percentage of GDP to be falling
in 2015-16. The OBR forecast that PSND as a percentage of GDP
will be falling in 2016-17, a year later than set out in the supplementary
debt target. This is due to the ongoing effects of the financial
crisis, combined with economic headwinds from the euro area and
higher commodity prices, which has meant that economic growth
in the past few years has not been as high as originally forecast.
The Government took the decision to allow the automatic
stabilisers to complement active monetary policy in supporting
the economy. This approach was enabled by the credibility earned
through its medium-term consolidation plan. Whilst allowing the
automatic stabilisers to operate, the Government has stuck to
its economic plan and as a result debt as a percent of GDP will
be falling in 2016-17. The Government remains committed to tackling
Britain's long-term debt challenge. Both parties of the coalition
agree that, once the supplementary debt target has been met, debt
should continue to fall as a percentage of GDP. However, despite
progress made since 2010, the record deficit inherited by this
Government means that public sector net debt will peak at its
highest level since the late 1960s at 78.7 per cent of GDP in
2015-16.
There has been an improvement in the OBR's forecast
for PSND since both Autumn Statement and Budget 2013. PSND will
peak 1.2% of GDP lower than at Autumn Statement 2013 and 6.8 per
cent of GDP lower than forecast at Budget 2013, when debt was
forecast to peak in 2016-17.
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)
At fiscal events, the Government considers the long
term fiscal impact of policies as part of its decision making
process. Budget 2014 set out the projected 25 year impact of the
measures introduced to provide greater flexibility and choice
to defined contribution pensions including the projected impact
on tax revenues. The Budget also showed these impacts in the context
of wider pensions policy introduced by this Government. This showed
that the net impact is a saving to the Exchequer of around 1.1%
of GDP in 2030, or around £17 billion in today's terms, putting
pensions provision on a more sustainable basis for the long term.
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)
The UK's fiscal policy framework requires the Government
to set out its fiscal policy objectives and fiscal mandate before
Parliament in the Charter for Budget Responsibility. As
set out in the Charter the fiscal mandate will lapse at the end
of this Parliament.
The Government has made significant progress in dealing
with the deficit, which is forecast to have halved as a percentage
of GDP by 2014-15. In Budget 2010 the Government said it would
revisit the future of the fiscal framework once the public finances
were closer to balance.
The Government is therefore reviewing the fiscal
framework this year. This review is considering several questions,
including:
· What
is the appropriate time horizon for the fiscal mandate once the
structural current deficit is closer to balance?
· How
could fiscal credibility be further enhanced by a stronger Parliamentary
commitment to the path of consolidation in 2016-17 and 2017-18?
The outcome of the review will inform an updated
Charter for Budget Responsibility which will be presented
to Parliament alongside Autumn Statement 2014.
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)
The Government has had to take tough decisions in
order to bring down the deficit. As a key part of this, the Government
set out plans in 2010 to reduce spending by £80bn over the
Spending Round 2010 period, and by a further £11.5bn at Spending
Round 2013, while simultaneously prioritising the vital public
services that everyone relies on at home, and supporting the poorest
overseas.
As part of these spending reductions, the Government
has committed to increase efficiency and cost-effectiveness across
all areas of public spending, including those that have been protected
from headline reductions. The Government expects to deliver £20bn
of efficiency from central departments over the five years to
2014-15.The Government is also focused on increasing the efficiency
of the wider public sector; the NHS, for example, is on course
to deliver up to £20bn of savings by 2015 through the QIPP
(Quality, Innovation, Prevention and Productivity) efficiency
programme.
Specific decisions on composition of spending consolidation
beyond 2015-16 are for the next Spending Review, but the IFS assumes
that all further spending consolidation will be delivered through
departmental budgets alone.
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)
The Government welcomes the Committee's interest
in the welfare cap. The Charter for Budget Responsibility sets
out the scope of the cap and the accountability mechanisms that
underpin it. Jobseeker's Allowance (JSA) and Housing Benefit (HB)
paid to jobseekers has been excluded because these payments are
the most counter-cyclical and the Government wishes to continue
to allow the automatic stabilisers to function. The Government
believes that State Pension expenditure is better controlled through
a separate automatic mechanism that links the state pension age
to longevity. The Government will seek the approval of the House
of Commons before changing the level of the cap or changing its
scope. The Government has asked the OBR to publish an annual report
on trends in and drivers of welfare spending so that an informed
debate can be held about any action on welfare spending.
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)
The current rules on eligibility for social care
funding were not written to account for these pension flexibilities.
The Government is already committed to considering new financial
services products when reviewing and developing new guidance and
regulations on charging for care. It is not our intention that
someone's eligibility for social care support should be affected
simply because they purchased certain flexible pensions products
as alternatives to annuities. We will ensure that, where necessary,
appropriate updates are in place for the start of the new flexibilities
in April 2015.
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)
The Government agrees the FCA's exercise of the product
intervention power must not unduly stifle innovation. It is important
to note that, when exercising this power, the FCA is under a duty
to act in a way that promotes effective competition in the interest
of consumers, so far as that is compatible with its objectives.
This means, among other things, the FCA will have to consider
the extent to which its actions encourage innovation, as a feature
of effective competition. The requirement that the FCA have regard
to statutory Principles of Good Regulation including the principles
of proportionality and of the desirability of sustainable economic
growth in the medium and long term, presents a further safeguard
against regulatory actions which would unduly stifle innovation
and growth.
The Government will also work closely with the FCA
to ensure that potential innovation is complemented by high-quality
impartial guidance which stimulates active and informed choices,
promotes consumer awareness of scams and helps to ensure consumers
are less vulnerable to mis-selling.
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)
The Budget reforms give people greater choice over
how to access their defined contribution pension savings - this
is beneficial to individuals and the reforms will also provide
opportunities for industry. The Government believes that the current
tax rules stifle innovation in the retirement income market, leaving
pension savers with very little choice over how to spend or invest
their defined contribution savings. This has contributed to consumer
inertia and a lack of engagement. By increasing the choices people
have at retirement, and providing them with the right support
to make the choice that is right for them, consumer behaviour
will change and a more competitive and dynamic retirement income
market will emerge.
We are engaging with stakeholders from industry and
with the regulators to ensure we design a system that allows providers
to develop products that are tailored to the needs of consumers
and which will allow consumers real choice in retirement. For
many people, purchasing an annuity will remain the best way to
secure an income in retirement. As retirement changes, many people
may, for example, opt to buy an annuity later in life, allowing
them to benefit from higher annuity rates or at a time that better
suits their individual circumstances.
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)
The Government acknowledges that there is an important
difference between financial advice and guidance, and it is important
that consumers understand the nature of the service they are receiving.
However, in the Budget speech it is important that the changes
that are being made are described in straightforward, easy to
understand terms: the Budget document accurately outlines the
technical detail of those changes.
20. The guidance made available to consumers must
explain what, if any, protection they may have in cases of poor
guidance. (Paragraph 162)
The Government is considering, as part of the design
of the guidance guarantee, the recourse individuals have available
to them if guidance were to fall below the required standards.
21. The guaranteed guidance must be available
to people well in advance of their retirement to help their decision-making.
(Paragraph 165)
The Government recognises the importance of encouraging
consumers to engage with retirement planning. In designing the
guidance guarantee, the Government's current focus is on ensuring
that everyone with a defined contribution is offered guidance
at the point of retirement - that is, the point at which individuals
can take advantage of the new flexibilities—in order to
support consumers to navigate a new, wider set of options and
make sound decisions that suit their circumstances. However the
Government also recognises that individuals will want to be able
to access information and guidance during their working lives
and in retirement. In particular, it is currently consulting on
the question of which additional measures might be necessary to
ensure that guidance is available at key decision points during
retirement.
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)
The Government has launched the independent review,
led by Christine Farnish, into the Money Advice Service. This
will report by the end of 2014. The review has been specifically
asked to take into account the Government's commitment on retirement
guidance in its assessment of need for consumer advice and the
role that MAS should play in meeting this need.
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)
Impartiality is one of the central tenets of the
guidance guarantee. The Government is currently consulting on
whether guidance delivered by pensions providers and schemes could
be considered genuinely impartial or whether guidance must be
delivered by an independent third party to meet that test. In
parallel, the Government has asked the FCA (working closely with
the Pensions Regulator and the Department for Work and Pensions
in relation to standards for trust-based pension schemes) to coordinate
the development of standards governing the guidance and a framework
for monitoring compliance.
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)
The Government is currently considering the funding
arrangements as part of the consultation on the guidance guarantee
proposals and will set out its conclusions in the Government response
to the consultation before the summer.
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)
The Government agrees that the guidance guarantee
should complement existing sources of education, guidance and
advice to consumers on retirement options. As part of its consultation,
the Government is engaging with a wide range of organisations
which provide consumer help and guidance on retirement to inform
how the guidance guarantee can best build on existing provision.
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)
It is important that consumers are able to access
guidance in a way that best suits their needs and preferences,
including—but not limited to—face-to-face provision.
The Government is committed to ensuring that the guidance is free
at the point of access, regardless of the route by which individuals
access it. The Government will set out a more detailed strategy
for how consumers will be able to access guidance in its response
to the consultation before the summer.
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.
The Government will set out the blueprint for the
guidance guarantee, and the principles it must meet, in its response
to the consultation, which it will publish before the summer.
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)
The Government recognises that home ownership is
an important aspiration for many households and can actually serve
to insulate households from any volatility in the cost of housing.
However, the Government recognises that the housing market has
been overly volatile in the past and that is one of the reasons
for establishing the FPC. Coupled with the implementation of the
Mortgage Market Review, this will ensure that we do not return
to the unsustainable lending practices of the past that have driven
volatility in the housing market. As noted in the answer to questions
3 and 4, above, in its June 2014 Financial Stability Report the
FPC made two policy recommendations aimed at insuring against
the risk of a marked loosening of mortgage underwriting standards
and a further significant rise in the number of highly indebted
households. In addition to housing market policy, the savings
measures announced at Budget 2014 will support household saving
in a wide range of assets.
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)
The Government keeps its policy towards savings under
review. It welcomes the Committee's acknowledgment that the changes
to ISAs announced in the Budget substantially increase flexibility
for savers. However the Government does not agree that this flexibility
will result in ISAs and personal pensions becoming interchangeable.
The Government's savings policy aims to support savers at all
stages of life: increased ISA flexibility will help to ensure
that all savers have the freedom to save and invest in the manner
they consider most appropriate for their circumstances.
Many of the changes to ISAs and savings taxation
announced in the Budget have yet to be implemented; meanwhile
the roll out of the Government's automatic enrolment changes—which
are expected to result in around six to nine million people making
new and increased retirement savings—is continuing and represents
a major change for employers. The Government does not believe
that it would be appropriate to undertake a wholesale reform of
savings taxation whilst these changes are underway. Savers, investors,
industry and employers all need to be able to absorb and respond
appropriately to changes in policy and Government needs to ensure
that the pace of change takes appropriate account of this.
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)
National Savings & Investments (NS&I) core
remit remains the provision of cost-effective financing for the
Government. Within this remit, its operating framework requires
NS&I to balance the interests of its customers, the taxpayer
and the wider financial services sector. Low interest rates have
played an important part in supporting the recovery, which has
helped taxpayers and the wider economy, including the financial
services sector. But there are those—especially pensioners—who
rely on a reasonable rate of interest on their savings, and this
measure aims to target support at them. In recognition of the
fact that the bonds are issued for specific policy aims beyond
the normal debt management remit of financing the deficit in the
most cost effective way, the increased costs of the NS&I product
compared with financing through Gilt issuance has been included
on the Budget scorecard.
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)
NS&I's core remit remains in line with the Government's
overall debt management objective, to 'minimise, over the long
term, the cost of meeting the Government's financing needs, taking
into account risk, while ensuring that debt management policy
is consistent with the aims of monetary policy'. While the Government
keeps all NS&I products under review, it does not currently
judge that bringing Index-linked savings certificates back on
sale would be a cost effective method of financing. Budget 2014
introduced new products to provide certainty and a good return
specifically to the over 65s, who rely on their savings it retirement.
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)
NS&I always acts transparently and makes banks
and building societies aware of its intentions on Net Financing
so they can factor this in to their planning. This happened again
this year—particularly with the intention to launch the
new bond for those aged 65 and over being announced in March 2014
although it will not go on sale until January 2015.
NS&I's market share has been declining for many
years and NS&I estimate that the Net Financing target of £13.0bn
will represent less than 1% of the total UK savings market, which
grew by £74 billion last year. The Government expects that
inflows into NS&I would be split between those from existing
stock and new growth. The NS&I measure should therefore not
stop other institutions who want to attract deposits from doing
so. In addition, the increased ISA allowance to £15,000 will
allow competitors further scope to attract deposits.
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)
The Government does not agree that this legislation
is retrospective. This legislation does not take effect on a date
before its announcement or enactment, and it does not change any
tax liability arising from any transaction or arrangement, whether
undertaken before or after the introduction of these new rules.
It puts in place a new requirement that takes effect in the future,
to pay over a sum of money in dispute. Those disputes will be
resolved in the same manner as before, with full appeal rights
to the tribunal and courts.
The Government does not therefore consider it necessary
to consider the application of the Protocol on Unscheduled Announcements
of Changes to Tax Law in relation to these measures.
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)
The government is proposing to only use this power
against a small core of taxpayers who are reluctant to pay, who
owe significant debts of over £1,000 and have sufficient
funds in their accounts. The government believes that it is unfair
that these taxpayers who fail to meet their obligations have an
advantage over the vast majority of taxpayers who pay on time
and in full. Before HMRC uses this tool, debtors will have been
contacted several times by HMRC—and will have had multiple
opportunities to pay—before getting to the stage where HMRC
needs to take action to recover the debt. Before this policy is
applied, debtors will usually have the option of appealing to
a Tribunal on the amount of tax due or on the legal basis of the
liability. At any stage in the process, the debtor can contact
HMRC to pay in full, agree a Time to Pay arrangement where appropriate
or query the amount they owe.
The government is not introducing 'Crown Preference
by stealth', which the Committee raises as a concern. Individuals
or businesses with debt should get in contact as soon as possible
to pay what is owed immediately or, if appropriate, set up an
arrangement to pay over a longer period of time. HMRC does not
have an interest in putting viable businesses into insolvency
to recover the debt it is owed. The returns from doing so are
often far lower than supporting a viable business through a Time
to Pay arrangement, where appropriate.
As the Committee notes, the government is consulting
on this measure and published a consultation document on 6th
May 2014. A central aim of this consultation is to ensure there
are balanced and appropriate safeguards in place so that this
is only targeted at the truly non-compliant and there are strong
safeguards in place to protect vulnerable members of society.
This includes proposals to help ensure the policy does not create
unnecessary financial trouble for those affected or lead to funds
being removed that are needed for immediate and essential day-to-day
living costs or business expenses. As part of this, the government
is proposing to leave a minimum of £5,000 across a debtor's
accounts after the debt has been recovered. This policy will also
be easily reversible, allowing HMRC to swiftly remove its hold
on funds once the debtor has arranged to pay what they owe, or
return funds to a debtor's account where necessary.
The consultation also seeks to ensure that there
are adequate checks and procedures in place to minimise the risk
of errors, any mistakes are rectified quickly and compensation
paid as appropriate, and that there are appropriate channels for
debtors to appeal. The government is consulting widely, with a
range of business and taxpayer groups, to ensure these safeguards
are suitably robust and that the concerns raised by the Committee
are considered in full.
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)
The Review led to legislation in Finance Acts 2007-2012.Not
all legislation has been fully implemented and so no policy evaluation
has been carried out. Although we have not undertaken a policy
implementation review, a number of elements have already come
under scrutiny as tax administration develops (for example, through
the introduction of Real Time Information). We continue to monitor
how well implemented legislation is working in practice and will
take into account the committee's comments.
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)
HMRC has published a detailed Q&A document for
savers explaining how the starting rate of tax for savings income
will apply from 6 April 2015. In the run up to this date, HMRC
will continue to work with banks, building societies and representative
groups to develop customer-focused resources that explain this
tax change in a clear and accessible way, and help savers understand
whether they can register for the interest on their accounts to
be paid without tax deducted. Work is also ongoing with banks
and building societies to ensure that the registration process
for savers is as simple and accessible as possible.
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)
The government recognises the importance of certainty
and stability for businesses that want to invest. For example,
in 2010 we published a Corporation Tax Roadmap designed to provide
certainty and clarity to business regarding our plans to make
the UK tax regime more competitive. However, the Government also
needs to be able to adjust tax policy in response to wider economic
trends or challenges.
Business investment is crucial to delivering a sustainable
economic recovery. Investment fell markedly during the financial
crisis. Business confidence is now rising, and latest figures
show that investment has grown for five consecutive quarters for
the first time since 1998.But there is still a long way to go
before it fully recovers.
At Budget 2014 the Government doubled the Annual
Investment Allowance (AIA) to £500,000 in recognition of
the challenges businesses face following the biggest financial
crisis in generations. The measure has been warmly welcomed by
businesses who believe it will help them to bring forward and
realise their investment plans. The OBR estimate that the measure
will lead to just under £1bn of investment being brought
forward into 2014 and 2015.
The Government takes a number of factors into consideration
when making tax policy, including cost, sustainability, and the
impact policy changes would have on business. All tax policy is
kept under review, and tax policy changes are announced by the
Chancellor at Budget or the Autumn Statement.
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)
As the Government has noted in response to previous
reports from the Committee, significant steps have been taken
since 2010 to improve opportunities for scrutiny of the Government's
legislative proposals, including publishing the majority of Finance
Bill clauses in draft at least three months ahead of publication
of the final Bill. Such an approach has resulted in far greater
consultation and external scrutiny than was the case before.
The Government recognises that longer intervals between
publication of the Bill and Second Reading and between Second
Reading and Committee of the Whole House would be desirable. Subject
to the constraints of the Parliamentary timetable, the Government
will continue to look for opportunities to improve scrutiny where
possible.
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