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Lord Saatchi: Did I understand the Minister correctly to say that the Inland Revenue had carried out a calculation?
Baroness Hollis of Heigham: I said that this figure was supplied to me and, I do not doubt, calculated by the Inland Revenue as a saving of £11 million in costs over the current compliance costs for employers for
the existing tax credit system. As I said to the noble Lord, Lord Northbrook, I shall be happy to write explaining how that figure was arrived at.
Lord Saatchi: I am still puzzled about this. If the Inland Revenue is capable of making that calculation, it must be able to calculate the extra cost of administering the tax credit, deducting the beneficial savings of the workings of the new system, and therefore arriving at a net figure; that is, the figure of £11 million. Is that right?
Baroness Hollis of Heigham: Does the noble Lord mean for employers?
Lord Saatchi: Yes, for employers.
Baroness Hollis of Heigham: The point I sought to make is that it is not the job of the Board of Inland Revenue to determine the costs for employers except in so far as it is calculated through the regulatory impact assessment.
Lord Saatchi: I understand that, which is why I am puzzled by the fact that the Inland Revenue has made this calculation. I think that the noble Baroness said that it was not for the Inland Revenue to make these calculations. The noble Baroness said that they were made for the regulatory impact assessment.
Baroness Hollis of Heigham: It is not for the board to account for costs other than their own in terms of public statements. The RIA has been published with the Bill. When, as requested, the board publishes its reports and so forth, it is not for the board to account for costs other than their own. That is all I seek to make clear. That does not mean to say that we cannot estimate those; it is not for the board to account for them.
Lord Saatchi: If the Inland Revenue is capable of making this calculation of the saving, it means that it is capable of making the calculation and assessing whether there is a burden or—
Baroness Hollis of Heigham: It is not a question of capacity. It is a question of propriety.
Lord Saatchi: Since the noble Baroness is relying on the Inland Revenue's calculations to dismiss the argument that there has been a burden placed on business, it is obviously reasonable to rely on the revenue's estimates to find out whether there has been a burden or a saving. The amendment seeks only to ensure that the revenue will repeat on an annual basis the exercise carried out to arrive at the figure of £11 million.
Baroness Hollis of Heigham: The right place for the costs, as I sought to point out earlier, is in the regulatory impact assessment, not in the report of the board accounting for its own accounts. That is all.
The Committee will forgive me, but I suspect that again we may be considering angels on pinheads here. No one is suggesting that any attempt should be made to conceal or obfuscate the compliance costs for
employers, although I hasten to emphasise that those compliance costs are substantially reduced and their reduction has been welcomed by employers. The question is: at what point and in what way and to whom does the board account for its activities? This is not the right format. It is almost as mechanical as that.
Lord Saatchi: I am happy to leave it at that, though what we have witnessed here is a consistent pattern on the Government's part to be unwilling to accept that this Bill places burdens on small companies. We can swap reports and evidence and quotations from different bodies.
I hope that the Minister understands that, according to the research that one sees, one of the reasons why businesses have grown slightly disillusioned with the Government is this very problem of excess regulation and red tape. Therefore, in the interests of her own Government, the noble Baroness would do better to show more sympathy with small businesses than to dismiss their concerns with the use of the phrase, "All they have to do is to—"
Baroness Hollis of Heigham: I was simply going to challenge the noble Lord about the whole issue of the Government's attitude to small and medium-sized enterprises. I shall write to him because this is important—rather than take up the time of the Committee now—setting out everything that this Government have done to support and help small and medium-sized enterprises, including having a stable economy, having low inflation, reducing corporation tax, helping cash flow, boosting investment, encouraging innovation and research work, encouraging the use of IT and so forth. I shall happily write him a 15-page letter setting out what the Government are doing to support small and medium-sized enterprises. I cannot let that statement go.
I am saying that small businesses should not find this at all problematic. It is a simpler procedure than the one they currently operate—and that is certainly simple. All they have to do is to pay out the figure from the Inland Revenue. As my noble friend said, this is part of ensuring that those businesses will be able to attract a wider labour force than might otherwise be the case. The wages that they would otherwise be paying, which are extremely low although they are the minimum wage, may not offer the best package into the labour market for people with children. They now have a wider labour force on which to draw because people with children can now afford to work as a result of the support for their children coming through the child tax credit.
That is the first point. My stats are out of date so I ask the Committee to forgive me if I am slightly inaccurate. When we last debated this issue of tax credits, I was able to point out to the noble Lord then that in the UK the non-wage labour costs represented an average of about 26 per cent ongoing costs to employers, compared with a figure in Europe which ranged between 40 and 50 per cent. I have seen nothing to suggest that that rough equivalent has changed. This country still has one of the best climates anywhere
in the OECD for small businesses and enterprises to flourish. What this does is ensure that they have a labour force also suitably equipped to come into the labour market.
Lord Saatchi: I am happy to leave the matter there. I am sure we shall want to return to this very important subject in other stages but, for the moment, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 18 and 19 not moved.]
Lord Saatchi moved Amendment No. 20:
- Page 2, line 28, at end insert—
The noble Lord said: The background to this amendment can be found in box C2 on page 216 of the current Red Book. It is also dealt with in the exchange of correspondence that I have had with the Minister. The third point in my letter asked for confirmation that it was in fact the case that any money paid as a benefit—in other words, not as a reduction in tax—will be dealt with as public expenditure. This would represent a move to the OECD format for the public accounts. Box C2 deals with that, as does her reply to my letter, from which she quoted earlier. In her letter the Minister confirmed that,
In order to explain why the amendment has been brought forward and has caused such difficulty I shall need to repeat a little history. I hope that the Committee will bear with me while I do so. The problem is that the Government have persisted for too long in a practice which many observers have described as "creative accounting". The background to this is that the UK adopted the 1995 European system of accounts, which is known as ESA/95, in September 1998. ESA/95 is an EU regulation that gives legal force to the internationally agreed 1993 system of national accounts, which is known as SNA/93. The UK had been required to make returns to Eurostat, which is the statistical office of the European Union, on an ESA/95 basis since April 1999. While the UK could have continued to publish national accounts data on that basis, it was decided by the ONS to adopt the ESA/95 for domestic as well as international purposes.
While the Treasury generally follows ONS practice in publications such as the Red Book, from which I have been quoting, and the pre-Budget report, there were points at which—for reasons which are not clear and which I hope the Minister will explain; it would be comforting to know what were the reasons—
Many people believe—I am sure that the Minister is aware of this—that the Government defied international conventions under the European system of accounts, ESA/95, which had been adopted by the ONS. They defied the ruling by counting all of the working families' tax credit as negative income tax in their measure of the national tax burden. That was thought by many to be a breach of international accounting standards. People felt, but did not know, that as only a proportion of the working families' tax credit related to relieving an income tax liability, and the other part related to claims which could not conceivably be described as negative income tax because there was no income tax liability to be relieved, that treatment was inappropriate.
I do not think that the critics then knew that the balance between those amounts, which one could describe as "illegitimate" as negative taxation, added up to 90 per cent of the total. Economists and others knew that there was a distinction, but I do not believe that anyone knew that the scale was as enormous as that. That is the background.
When people were looking forward to this Bill, those who were anxious about this point in terms of treatment thought they could see a situation in which large amounts of government expenditure were then being transferred to a tax net-off and other amounts were about to be transferred as a result of the Bill. People thought, though they did not know the scale, that by the time we reached the end of the Bill, there would be a very large sum indeed being dealt with in this way. The noble Baroness has confirmed today that it is a very large sum—£15 billion a year.
With a GDP of around £1,000 billion a year, £15 billion a year is 1.5 per cent of GDP. I believe the noble Baroness said earlier that the correct figure was £15 billion. I think she also said that the correct proportion of that £15 billion, which was to be treated as public expenditure rather than negative tax, was 90 per cent. What is puzzling—I am sure I have misunderstood this, but I would be grateful to understand it better—is that box C2 says that the change to treating the tax credits in line with OECD accounting principles adds about 0.5 percentage points to the tax GDP ratio for 1999-2000 onwards.
That does not seem to add up. If the figure is £15 billion, which represents 1.5 per cent of GDP, and 90 per cent of it is what had previously been classified as tax reduction but is now being classified as public expenditure, that ought to make a difference of 1.5 per cent to the tax GDP ratio. I would be extremely interested to be better informed about what we must remember is probably one of the most important political statistics in Britain. General elections have certainly been won and lost on the basis of the figure that I am talking about.
No doubt I am wrong, but I would like the noble Baroness to take the Committee through the calculation of the impact of the change described in
Taking the noble Lord's preferred wording, I wish to ask the noble Baroness to take the Committee through the previous treatment of tax credits, the new treatment that is proposed and the figures that go from one treatment to another. That is the purpose of the amendment. I beg to move.
Baroness Crawley: Is the noble Lord saying that the Treasury has been acting illegally in its accounting methods?
"( ) The treatment of the accounts kept by the Board shall conform to the standards established by the OECD."
"the Child Tax Credit and the Working Tax Credit will score in Treasury publications as negative tax ... to the extent that the credits are less than or equal to the tax liability of the family, with the remainder scored as public expenditure".
The Minister said earlier that the latest estimates for the total value of tax credits was £15 billion, of which about 10 per cent—it states in her letter 10 to 11 per cent, but I shall stick with the round figure—of the new tax credits will score as negative tax with 90 per cent scoring as public expenditure.
6.45 p.m.
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