Conclusions and recommendations
Introduction
1. The
Treasury has again been unable to provide all the information
needed by deadlines agreed with the OBR. The Government may, as
the Chairman of the Office for Budget Responsibility suggested,
have decided that for political reasons this was a "price
worth paying." This would set an undesirable precedent. The
work of the Office for Budget Responsibility depends on the Treasury
meeting the agreed deadlines. (Paragraph 7)
2. We welcome the
OBR's innovation of providing uncertainty ratings for policy costings.
(Paragraph 8)
3. We recommend in
future that the OBR publish a breakdown of the uncertainty rating
assessment against the three criteria for all announced measures
at Autumn Statements and Budgets. (Paragraph 8)
4. The Committee welcomes
the Government's continued publication of the distributional analysis
of the Government's policy changes. The Committee recommends that
the next Government continue with this important aid to transparency.
(Paragraph 9)
5. The current inflation
target set by the Government is symmetrical, and is 2 per cent
at all times. Several witnesses alluded to the risks of very low
inflation and subsequent deflation, including the Chancellor.
The Chancellor has publicly welcomed the current level of inflation.
This is not likely to help anchor inflationary expectations. The
Governor of the Bank of England is required to write to explain
to the Chancellor why inflation has fallen below 1 per cent. It
is important to avoid mixed messages on inflation targeting. (Paragraph
27)
6. The Bank of England
should undertake research on the effect of net migration, and
the potential for future net migration, on the supply of labour
and wage growth as part of the work on meeting the MPC's remit.
The Treasury should ensure that discussions within Government
on immigration policy fully consider the requirements of the economy.
(Paragraph 36)
7. Witnesses have
emphasised to the Committee that productivity growth will be the
key to sustainable improvements in wages, economic growth and
the public finances. Yet productivity growth has once again fallen
short when compared against the OBR's forecast in March 2014.
Should this pattern continue, the OBR may have to consider whether
its forecast of productivity growth returning to its long-term
trend rate remains an appropriate one. (Paragraph 44)
Public Finances
8. For the fifth Economic
and Fiscal Outlook in a row, the OBR forecasts that the Government
will meet the rolling fiscal mandate, but not the supplementary
target. The Government has, as in previous Budgets and Autumn
Statements since December 2012, not proposed any action in order
to meet the supplementary target. (Paragraph 49)
9. The OBR is required
to provide a forecast of public spending over the next five years.
From 2016-17 onwards it has used the Government's policy assumptions
to achieve this. The implied path of public spending set out by
the OBR from 2016-17 indicates that further fiscal consolidation
will be achieved primarily through reductions in departmental
spending. It is, though, important to recognise that these policy
assumptions do not reflect the view of either of the coalition
parties on how fiscal consolidation should be achieved. (Paragraph
70)
10. Institute for
Fiscal Studies calculations show that following the Government's
outlined path will lead to a total cut to DEL in real terms of
22.2 per cent between 2010-11 and 2019-20. However, within DEL,
the government has so far chosen to protect certain departmental
budgets from budget cuts. If these protections are maintained,
IFS calculations show that non-ring-fenced departments will have
experienced real-terms budget cuts of 41 per cent between 2010-11
and 2019-20. As we have previously reported, ring-fencing will
require spending reductions to be targeted on the diminishing
budgets of the non-ring-fenced departments; and we have previously
reported on the possible consequences. (Paragraph 71)
11. The Government's
new Charter for Budget Responsibility shortens the target date
of both the fiscal mandate and the supplementary target. It also
now describes the former 'targets' as 'aims'. Aims are generally
considered to be less binding than targets. The Chancellor's assertion
that they amount to the same thing was surprising. (Paragraph
77)
12. The new Charter
still relies on the OBR coming to a nominally authoritative view
about the unmeasureable and unobservable output gap, something
of which this Committee has been sceptical in the past. (Paragraph
78)
13. Furthermore, the
current Charter for Budget Responsibility will become obsolete
by 2016-17—the target date for the supplementary aim. The
Charter may therefore be better regarded as a statement of policy
intention until then, rather than a long term fiscal rule. (Paragraph
79)
14. The Chancellor
has said that the sharp cuts to departmental spending assumed
by the OBR from 2015-16 can be mitigated by savings to the welfare
bill. The experience of the past five years shows that the achievement
of planned welfare savings depends partly on economic developments,
particularly in the labour and housing markets, that are not within
government control. It also depends on the timely implementation
and operational success of any major reforms to the welfare system.
Any decision to reduce welfare expenditure while protecting other
specified areas will increase the proportion of savings to be
found from other parts of the welfare bill. (Paragraph 97)
15. In its first assessment,
the OBR has found that the Government is on track to meet the
welfare cap commitment. Although there was no disagreement between
the Treasury and OBR on this occasion, the potential for disagreement
over whether a measure is a "discretionary policy change"
risks causing dispute between them in the future. In the event
that the Treasury's own view differs from the OBR's, it should
explain the reasons for this in the Budget or Autumn Statement
Command Papers. (Paragraph 103)
Taxation
16. Estimating the
yield from anti-avoidance measures is inherently difficult. In
response to this Committee's recommendation from 2013, the OBR
in the December 2014 Economic and Fiscal Outlook published its
evaluation of all past avoidance measures since 2010. It found
that there was no systematic bias across the costings—some
produced higher returns, some lower. However, in cash terms, owing
to the shortfall in the UK-Swiss tax agreement, significantly
less revenue was raised in total than originally expected. The
underperformance of a single measure with a large expected yield
can more than offset better performance of a number of smaller
measures. (Paragraph 108)
17. The restriction
on loss relief for banks is the largest revenue generating measure
in the Autumn Statement, with an expected yield of £4 billion
over the next Parliament. It has been assigned an uncertainty
rating of 'very high'. The OBR should continue to monitor the
performance of all avoidance measures against their original costings.
(Paragraph 109)
18. The assignment
by the OBR of uncertainty ratings to each individual policy provides
useful information to outside observers. The OBR's creation of
uncertainty ratings could also encourage the Treasury to provide
more information on their own judgement of the uncertainty of
new policy measures. The OBR should compare its uncertainty ratings
on policy costings of individual measures against the outturns,
and report its findings in its Forecast Evaluation Report.
(Paragraph 110)
19. Loss relief is
an important element of tax planning for all firms across all
parts of the economy. The Committee has previously highlighted
the importance of certainty in the tax system in its 2011 Report,
Principles of Tax Policy. Apparently lucrative tax raising measures
against unpopular sectors of the economy, while attractive to
governments, carry the risk of undermining the principle of certainty
in the tax system. Uncertainty may well reduce the yield. (Paragraph
117)
20. Tackling tax avoidance,
specifically the problems associated with base erosion and profit
shifting, is an internationally recognised problem which requires
an international response. This is currently taking place in the
form of the OECD's base erosion and profit shifting project. The
Committee notes the Government's decision to announce a unilateral
Diverted Profits Tax ahead of the conclusion of the OECD's work.
This should not be permitted to destabilise the international
effort. (Paragraph 128)
21. The draft legislation
is long and highly complex. This is undesirable in itself, and
is likely to be a source of uncertainty. (Paragraph 129)
22. In its Report
Principles of tax policy, the Treasury Committee recommended as
its first principle that tax policy should be fair. By imposing
thousands of pounds of additional tax liability owing to a penny's
difference in a property's price, the old 'slab' structure of
residential stamp duty clearly breached this principle. The Committee
therefore agrees with the Chancellor and the Institute for Fiscal
Studies that the design of residential stamp duty was significantly
flawed, and welcomes its reform in the Autumn Statement. However,
the unfair and distortionary slab structure continues to apply
to stamp duty for non-residential property transactions. The Government
should explain the reasons for reforming residential stamp duty
in this way but not making a similar reform of non-residential
stamp duty. (Paragraph 134)
23. The Committee
notes this example of how fiscal devolution can lead one government
to alter tax policy in response to the decisions of the other.
With further fiscal devolution to Scotland, this is likely to
be more common. (Paragraph 135)
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