Select Committee on Treasury Minutes of Evidence


  1.  The CBI, through its direct and indirect membership, represents a broad-based constituency of firms with members across all sectors of UK business. The management of the economy is of considerable importance to all our members, and the CBI's own recommendations for the Budget each year are the fruit of extensive consultation and discussion.

  2.  This note gives our first impressions of the March 2001 Budget. In several areas it is only possible to express a provisional view as there has been no opportunity to discuss the detail with CBI members—it would clearly be wrong for example to pre-judge here the CBI's final, detailed response to the consultation on "Increasing Innovation".

  3.  The note comments first on the Treasury's economic forecast and the question of whether the fiscal stance resulting from the Budget is appropriate. It moves on to review the specific measures introduced (or omitted) under the broad headings of: corporation tax; R&D; environmental tax; employment related measures; property issues; SME issues; other topics.


  4.  The Treasury's forecast for overall growth is broadly in line with the CBI and with a wider consensus of forecasters. It is noticeable that the Treasury expects the imbalance in the UK economy between domestic and foreign demand to continue in 2001 (though the forecast moves into balance by 2003). In fact the Treasury projections for household spending are a little stronger than the consensus in 2001 and to a lesser extent in 2002. This means a rise in the current account deficit to 2.5 per cent of GDP in 2002 is projected, and the outlook for manufacturing output is sluggish.

  5.  Business investment is forecast to grow very slightly faster than GDP—though the risk to investment from any further decline in equity prices is rightly pointed out. Government investment is projected to grow by a massive 43.5 per cent in 2001. The growth of government investment has recently improved—although public investment has recently improved, it is not certain that this will be achieved. So although the overall picture for the economy looks favourable, there are some more worrying trends beneath the surface—in particular whether the financing of the current account deficit will become an issue, and how difficult it would be to bring trade closer to balance after a prolonged period of weak manufacturing growth.


  6.  The question usually asked after each Budget is whether or not there has been any loosening in fiscal policy. Further issues are whether the Treasury's fiscal projections are reasonable, whether they point to a sustainable fiscal stance, and what impact the Budget changes will have on prospects for growth and inflation.

Has fiscal policy been loosened?

  7.  The key problem here is agreeing on a definition of what constitutes loosening. It is all too easy to get caught up in a lengthy debate on this issue and miss the more important questions which should be asked of fiscal policy. Taking the different approaches in turn:

    —  Compared with what would have happened if the Chancellor had made no announcements on 7 March, except to confirm implementation of the measures put out for consultation in the Pre-Budget Report (PBR), the Budget loosened fiscal policy in 2001-02 by around £3.35 billion. (This also assumes that the decision to reduce the AME margin and spend this on specific projects constitutes a policy loosening. But it could be argued that this was clearly money which the Government could have been expected to spend anyway, in which case the "loosening" would have been only £1.6 billion.)

    —  However, the projections for both the current balance and for public sector borrowing are virtually unchanged in all forward years from those published in Budget 2000 (and in the November 2000 PBR). This is true both in £ billion, and as a share of GDP (cyclically-adjusted). In that sense fiscal policy is unchanged.

    —  The final way to look at this is the change from the fiscal year just finishing to the next one. On this basis policy is clearly looser, with the cyclically-adjusted surplus falling from 1.4 per cent of GDP to just 0.3 per cent. If these projections turn out to be accurate, the Budget will clearly have the effect of adding more to demand over the next 12 months.

  It seems reasonable to suggest that the Budget loosened policy, though not very dramatically.

Are the fiscal projections reasonable?

  8.  The continued assumptions of 2.25 per cent trend GDP growth for the UK is certainly a bit conservative—but it is not unreasonable. Following the misjudging of trend growth in the late 1980s, it is certainly prudent to stick to a cautious figure. On public spending, as indicated above, there may be doubts in the short-term about whether the ambitious rise in public investment could be achieved.

  9.  With regard to tax receipts, it is more difficult to make a judgement. In 2000-01, income tax receipts were £3 billion stronger than expected, and it is suggested in the "Red Book" that much of this improvement is structural, and will be sustained in future years. However, the Treasury seems to be unclear among a number of competing explanations (p195, para C39) about what has caused the rise in the income tax take. While there is conservatism, going forward, in assuming the unexpected growth of tax receipts does not continue, there is also some optimism in believing the strong growth will not actually be unwound. But as we have suggested before, it would not be good forecasting to be conservative about everything, and any relative optimism on tax receipts is clearly offset by the relative pessimism for trend growth.

Is the medium-term fiscal stance sustainable?

  10.  The fiscal projections out to 2005-06 show the current balance remaining in modest surplus, a small borrowing requirement emerging, and net debt falling to around 30 per cent of GDP and then remaining at broadly that level. This is certainly sustainable, and indeed seems to provide a sufficient cushion to weather the impact of a cyclical downturn on the public finances without causing the Chancellor's two fiscal rules to be missed.

  11.  The recent criticism from the European Commission and from the IMF of this medium-term perspective seem misplaced. While debt remains under control, borrowing to invest, especially when in so many areas public finance is so badly needed, seems fully justifiable, provided that good practice is maintained in terms of careful evaluation of public investment decisions. The delays in getting public investment to increase suggest that there is indeed a lot of evaluation taking place.

What impact will the Budget have on UK growth and inflation?

  12.  At the time of the Pre-Budget Report we expressed some concern about whether fiscal relaxation would add to demand in the short-term and increase inflation pressure. As argued above, the March Budget adds to the fiscal relaxation, partly by carrying forward an underspend of £1 billion for the present fiscal year. However, concerns about inflation pressure are less important than they seemed in November following the deterioration in global economic prospects. This Budget will add to domestic demand over the next year and support growth—but we do not believe it will do so sufficiently to prevent further cuts in interest rates. We still consider interest rates could be reduced by a further 0.5 points by September 2001.

  13.  However, there is one general concern about the balance of measures actually announced for 2001-02. Although as far as business is concerned there are some useful proposals for future tax changes (the R&D tax credit for example) there was very little to reduce the tax burden on firms in the short-term. Given the concerns raised above about imbalances in the economy this can only add to worries that the imbalance between consumption and investment could worsen further. In this context it is particularly disappointing that our recommendations with regard to stamp duty on commercial property, and SME capital allowances, were not taken forward.

  14.  In terms of the total tax burden on business, the Budget made very little difference (apart from the implementation of the PBR proposals on road user costs). As the impact of earlier corporation tax payments comes to an end, the additional tax burden on business due to measures introduced since 1997 is set to fall from an average of about £5 billion per annum up to 2001-02, to £4.5 billion in 2002-03 and £1.5 billion in subsequent years.


  15.  Following the cumulative changes made since the Budget 2000 the new regime on Double Taxation Relief is much improved. However as a result of implementing change by amending amendments the emerging rules are unnecessarily complex and very difficult to understand. Even though there is less than a month to the date of implementation there is no published official statement explaining the precise working of the new regime in the light of the Budget changes. Additionally a number of technical issues remain to be tackled.

  16.  As regards the other two connected elements of the March 2000 Budget "package", there is disappointment that, despite intensive discussion, action to implement change to capital gains on substantial shareholdings has been deferred but on Intellectual Property the publication of the latest technical note does take the consultation forward though a number of important issues are yet to be resolved.

  17.  Welcome news did come in the form of the announcment of the relief for cleaning up contaminated land. The CBI has long urged that where Government imposes obligations on business the costs of meeting those obligations should be fully recognised for tax purposes.

  18.  More broadly the Chancellor's firm commitment to international competitiveness and the encouragement of innovation, investment and entrepreneurship as part of his vision for the future of the corporate tax system is welcome news. It reflects the CBI's message that our tax regime has a vital role to play in the UK's success not only within Europe but also in the wider global market.


  19.  We welcomed the publication of the consultation document "Increasing Innovation" which gives a useful overview of the UK's performance on R&D and outlines the main alternatives and issues to be considered in introducing an R&D tax credit for larger firms in the UK. We agree with the basic proposition that this should be done on an incremental basis and will be consulting our members on which of the options should be pursued. Two key factors to consider are ease of implementation (too much red tape can reduce the impact of tax incentives) and a measure that will really serve to emphasise the benefit of doing R&D and lead to a significant change in companies' attitude. It is also important to have the right definition of R&D—the definition currently being used for the SME tax credit leaves out some development activity which we believe should be included.


  20.  We were particularly disappointed that this Budget saw no progress on the remaining issues around the introduction of the Climate Change Levy. This remains a key concern for many CBI members, and we continue to urge that some way is found to extend eligibility criteria for negotiated discounts beyond the current IPPC basis. We hope that discussions with the Government can continue on this issue, to avoid putting UK business at a competitive disadvantage against countries such as Germany and the Netherlands, where less restrictive eligibility for discounts prevails. There are also anomalies such as the plastics industry (who face the full CCL), who compete with glass and paper in packaging (who do not).

  21.  There are other outstanding concerns about the treatment of electricity exported from combined heat and power (CHP), the regime in Northern Ireland and the allocation of the £50 million energy efficiency fund.

  22.  On transport issues we are broadly pleased by the implementation of the package of measures announced for consultation in the PBR. We also welcome the fact the fuel duty rebate for buses will not be cut in line with the diesel tax cut, effectively reducing bus fuel costs by 3p per litre. However, we are disappointed that the Government is still not taking up our recommendation of a full review of transport taxation.


  23.  On maternity leave and pay, the CBI accepts the increases in Statutory Maternity Pay (which from 2003 will be increased to £100 per week, and paid for 26 weeks rather than 18 weeks) and welcomes the extension of Small Employer Relief (SER). But the increase in SMP may result in a significant increase in costs for some employers not qualifying for SER. And firms just above the increased threshold for SER will face significantly higher costs (only 92 per cent reimbursement of SMP) than otherwise similar firms below it (105 per cent reimbursement, including 5 per cent compensation for administrative costs).

  24.  The extension of paid maternity leave will be problematic for some companies, such as SMEs and companies with multiple small sites which use internal cover during such absences. It could also increase the costs of the many companies which "top up" SMP if employers cannot resist pressure to pay occupational maternity pay for the extra eight weeks.

  25.  The CBI has accepted the introduction of paid paternity leave but business will find it easier to accommodate this if the right applies only to employees with over 12 months' service and if it is subject to adequate notice periods. Pressure to top up paternity pay, combined with the cost of replacing men on paternity leave, could lead to significant additional costs—particularly in companies employing large numbers of younger men. Some of the firms which already "top up" SMP to full pay will face claims for a similar increase to be applied to paternity pay, and many employers have expressed concern that they, rather than the state, will be expected to pay for paternity leave in the future. Some SMEs have said that they will struggle to cover the absences.

  26.  The CBI supports the introduction of paid adoption leave from 2003.

  27.  We welcome the particular focus of the Budget proposals on training for the low skilled. The CBI has highlighted for some time the need to raise the skills level of the 32 per cent of the workforce who lack a level two qualification (equivalent to GCSE). Our Budget submission specifically recommended that all those who do not hold a qualification at level two should have an entitlement to achieve one through publicly funded education and training system. The National Skills Task Force also called for this, which should be a priority.

  28.  The open, consultative approach of the Budget proposals is welcome. We note that the Government intends to consider a range of possibilities, including one based on the R&D tax credits model. More research is needed on what can work most effectively in tackling the problem of the low skilled, particularly SMEs, and the CBI already has work underway on this area. We will gladly participate in the Treasury's consultation.

  29.  There is disappointment that nothing was said about employer NIC on unapproved share options where we had hoped, at least, to have consultation on a better solution.

  30.  The broader red tape burdens created by the transfer of the administration of citizen-state social welfare dealings onto employers seem set to increase as a result of those Budget changes which will fall to be delivered via payrolls.


  31.  The CBI welcomes the Government's announcement that it will abolish the minimum funding requirement (MFR), which is the main distortionary influence on pension scheme investment. We urge the Government to take immediate measures prior to the abilition of the MFR in order to provide relief to companies on whom it is currently having an adverse impact. The CBI has suggested the following measures for this purpose:

    —  extending the MFR transitionary period beyond 2002.

    —  abolishing the requirement for annual certification of employer contribution rates.

  32.  We also support the Government's proposals for replacing the MFR, which closely mirror those put forward by the CBI. The CBI believes that the adoption of a long-term scheme-specific funding standard supported by a strong regime of transparency and disclosure is the right approach to ensuring the adequate funding of defined benefit schemes. We look forward to working with the Government as it develops its proposals in more detail.

  33.  We will consult fully with members regarding Paul Myners' recommendations for improving the quality of trustee investment decision-making:

    —  A legal requirement for trustees to be familiar with the issues on which they make decisions merits consideration, but could have drawbacks. In particular, members would be unlikely to welcome such a requirement were it to limit pension fund trusteeship to those with professional investment expertise.

    —  The more widespread payment of trustees may be acceptable. However, employees are already allowed paid time off for performing trustee duties, and consideration would need to be given to the level of payment that should be received.

    —  We support the recommendation that funds and their sponsors should increase their investment in training for trustees.

    —  We support the recommendation that decision-makers should consider a full range of investment opportunities across all major asset classes, including private equity.

  34.  The CBI welcomes Paul Myners' recommendation that the tax rate on the withdrawal of surpluses should be reduced. As the Myners review recognises, current restrictions on the repayment of surpluses may encourage employers to take a more risk-adverse attitude to pension scheme investment than they might otherwise, since these restrictions make employers less likely to benefit from any investment gains. The CBI has said that scheme surpluses recovered by the employer should be subject to corporation tax in the normal way and that the current 40 per cent tax on the recovery of scheme surpluses should be abolished.


  35.  The confirmation of the changes to property tax in the PBR was welcome, but the CBI continues to argue this does not go far enough. We would have preferred to see VAT reduced to 5 per cent on all conversion and renovations, to come closer into line with zero rated new building.


  36.  Small and medium-sized enterprises (SMEs) will have a keen interest in many of the general business issues discussed elsewhere in this submission. These include:

    —  scrapping of the minimum funding requirement for employer pension funds

    —  new parental employment rights

    —  further corporation tax reform, especially the treatment of intellectual property and goodwill

    —  consultation on a new tax credit for training

    —  eligibility for climate change levy discounts

    —  road user costs

  37.  We welcome the Review of Small Business Taxation as a means of reducing tax compliance burdens for small businesses, and will be seeking the CBI SME members' views on the most appropriate definition to use and on how to achieve the greatest simplification of the system.

  38.  However, we would note that the cash flow pressures which all SMEs face make it essential that all existing investment allowances, reliefs and credits are maintained. Indeed, as noted in the CBI's SME Council Budget recommendations, Removing Barriers to Growth, there is a strong case for further enhancing the existing first year allowance for fixed capital, and for widening the definition of expenditure qualifying for the SME R&D tax credit. We are disappointed that no action was taken in this Budget.

  39.  SMEs can also suffer disproportionately from the failure of the corporate tax system to recognise certain genuine business costs ("nothings") for tax purposes. The incidential cost of raising equity finance is particularly notable here.

  40.  Our Budget submission urged the Government to amend the rules on allocation between associated companies of the profit thresholds for both the small companies' rate of corporation tax and the quarterly instalment regime. At present, these rules can cause some individual associated SMEs to be taxed as large companies, even though collectively the whole group's profits fall below the threshold at which a single company would start to pay tax at the higher rate, or become liable to quarterly instalments.

  41.  The improvements proposed to the detailed rules of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) will help to make them more practical to use and will remove a number of the traps which can cause bona fide users inadvertently to lose their status and the tax relief which goes with it. The CBI is involved in continuing discussions with Revenue officials on these schemes and will be looking to achieve further improvements to facilitate increased take-up.

  42.  The CBI continues to believe that investors in smaller quoted companies should have access to tax benefits akin to those available to investors in non-quoted firms through the EIS. We will be pursuing this matter in the course of 2001 as part of our more general investigation into this sector's needs.

  43.  The improvements to the scope and flexibility of the Enterprise Management Incentives scheme are very welcome.

  44.  We are disappointed that the rates of stamp duty on transfers of business assets, including commercial property and goodwill have not been reduced. Stamp duty is a serious obstacle to SMEs pursuing growth by asset acquisition, and the fact that duty is charged on the gross value of individual assets acquired means that the effective rate on the net assets acquired can be absurdly high.

  45.  We welcome the increases in the VAT turnover thresholds for the annual accounting and cash accounting schemes, and the consultation on proposals to introduce a simplified VAT system for small businesses.


  46.  The freezing of excise duties on alcohol, and the lower increase in tobacco duty was good news for industries suffering from big duty differentials. But we would still prefer to see a full review of the issues around excise duties to establish a long-term strategy, rather than have the industries concerned subject to an annual period of uncertainty about duty

  47.  We welcome the move towards a Single Budget for RDAs and the increased flexibility this will afford them. This will not be effective until 2002-03, but unused Single Regeneration Budget can be used more flexibly from next year. These moves should go some way towards enabling RDAs to spend according to particular needs in their regions. It should also increase their ability to meet the new Government-set targets sooner. On the £5 million extra to boost the Regional Chambers' scrutiny role, we hope that this will help the Chambers to focus their activities more clearly and encourage greater business involvement.

  48.  A final, but no means unimportant disappointment was the lack of any reference to the issue of stamp duty on share transactions—where we believe there should be a full review to examine the case for reform. This is due to concern about the competitiveness of the City of London, and to the question of the cost of capital in the UK.

12 March 2001

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