Examination of witnesses (Questions 81
THURSDAY 15 MARCH 2001
and MR CLIVE
81. Good morning. Do you want to introduce your
rather impressive team?
(Mr O'Donnell) Certainly. On my far left is Adam Sharples,
director in charge of public spending; next to me is Nick Macpherson,
director in charge of budget and public finances; I am Gus O'Donnell,
managing director in charge of macroeconomic policy and international
finance; on my right is Clive Maxwell, head of the division in
charge of environment, transport and savings tax measures, and
next to Clive is Alex Gibbs, head of the division for all other
tax policy areas.
82. Thank you. Is there anything you want to
(Mr O'Donnell) No, thank you.
Mr Cousins: In terms of the rise in net
taxes and social security contributions, I wonder if you could
offer the Committee a breakdown between tax increases and tax
proposals which were inherited from the Conservative government
before 1997 like the fuel duty escalator, tax increases which
were the product of the decisions of this government and sheer
fiscal drag, that is to say, simply more business activity, higher
levels of personal incomes and so on.
(Mr O'Donnell) You are after that analysis?
84. Yes, I am.
(Mr O'Donnell) Can I just explain the difficulties
of doing that? We can certainly list the measures that were announced
and implemented by the previous governmentand they will
have certain effects; then there will be measures announced by
this governmentand they will have certain effects; and
then there will be fiscal drag, but in terms of estimating what
the impact of measures is from the previous government there are
complications because there will be the measure that was announced
by the previous government and the estimates of what it would
cost at the time but, of course, that was based on the economic
forecast at that time, and the assumptions at that time. Now those
economic forecasts, curiously enough, have turned out to be not
quite right so there is a serious issue about how you cost a measure
going forward and what constitutes the cost of that tax measure
and what constitutes the forecasting policy revision. I just warn
you, therefore, that if you want a breakdown that goes into all
those different matters we would have to
85. You can put that in the footnote, can you
(Mr O'Donnell) Well, it would be quite an important
footnote, that is all.
86. In understanding the causes of the changing
levels of net tax and social security contributions, those are
the three factors that one ought to look at: the dead weight effect
of inherited tax proposals, tax proposals made by this government,
and then fiscal drag, the build-up of business activity and personal
(Mr O'Donnell) Certainly, but just to add one more
point, there will obviously also be behavioural effects. One might
have had an assumption, say, about escalatorsthat that
will have a certain impact and that may have had an impact on
behaviourso if you assume the change in the tax times behaviour
as it was before that will not give you a good answer. You need
potentially to make some estimate of whether, say, an increase
in unleaded versus leaded caused a behavioural change which will
change the impact of the tax. So there will be behavioural effects
87. But you could provide that?
(Mr O'Donnell) We will provide a note which goes into
this but I am just warning you in advance that there is no one
answer to that question. There are a number of answers depending
upon the assumptions one makes about things like behavioural effects.
For example, would you regard the escalator provisions which were
announced by the previous government and continued by the current
government as a measure of the previous government or the current
88. The previous government.
(Mr O'Donnell) OK.
89. What factors would you give for thinking
that net tax and social security contributions are going to decline
as a share of GDP?
(Mr O'Donnell) These are picked up in the table. This
is partly the consequence of tax cuts announced in the Budget,
particularly the consultation measures which were in the PBR now
going ahead, and simply our economic forecast of the way we expect
GDP to go. We have an individual tax-by-tax forecast of what the
revenue from the different taxes will be. For some of them there
are special effects which are starting to ease off as we go forward,
for example, North Sea oil. We had very high oil prices last year
that brought in quite a lot of revenue; we now have a new forecast
based on slightly lower oil prices but also based on DTI's field-by-field
analysis of how much oil they expect to get from different fields,
and that has given us a lower profile of output going forward.
That lower output also brings us in lower revenue and is one of
the key factors, so that is an unwinding of the higher oil price
but also lower oil volume going forward. Secondly, there is corporation
tax regime where corporation tax regime changes have quite a complex
timing effect going forward, but they certainly result in lower
numbers. There are other issues where, for example, we revised
down our forecast of tax revenues from stamp duty because of the
lower starting level of equity prices. We have an assumption whereby
we assume equity prices move in line with money GDP but from the
base level, and the base level that was used in the Budget forecast
was quite a lot below the PBR number so the whole path going forward
is lower, and that lower level, the level of share price, is again
lower than it was at the time of the Budget.
90. Well, it is probably lower than it was at
8.30 this morning!
(Mr O'Donnell) So those are the sorts of effects and
that is why taxes are coming down and GDP is forecast to grow.
91. So let's be clear about this: just as some
of the increase, perhaps quite a high proportion, in net tax and
social security contributions can be accounted for by fiscal drag,
so some of the decline in net tax and social security contributions
that the government is anticipating is accounted for by what I
might call negative fiscal drag, ie declines in, in this case,
oil production in the North Sea and so on?
(Mr O'Donnell) Right. Certainly there are timing effects.
For example, North Sea oil revenues were particularly strong last
year and are expected to come down this year, so they will have
timing effects on tax receipts and hence on tax GDP ratios. So
it pushes up the tax ratio for last year and pushes it down going
92. So do you anticipate real household disposable
income continuing to grow at the rates we have seen?
(Mr O'Donnell) We are forecasting real household disposable
income will pick up somewhat in the futureit will increase
in growth, in the short term at least, as a result of the income
tax cuts announced in the Budgetand there are other factors.
Consumption is likely to stay relatively robust and we have seen
some figures come out today on retail sales that are in line with
that, so given that we expect spending to stay reasonably robust,
we are expecting quite strong household disposable income growthand
low inflation, of course, which is the other side as to why it
93. Mr Sharples, Mr Dilnot told the Committee
on Tuesday that, "What has happened to total public spending
is that it has been less in total this year than it was planned
to be. It is now being planned to be less next year than it was
previously planned to be. It is going to be less in the following
year than it was previously planned to be and then in the last
year it will be 0.1 of a billion pounds more than it was previously
planned to be. Total public spending over this period is going
to be lower than the Chancellor previously expected". When
you look in the Budget book you see that some of that shortfall
is due to lower debt payments; some is due to lower social security
payments; but by no means all of that underspend is due to those
two factors. Why is the government failing to meet its public
(Mr Sharples) I think it is very important to distinguish
between the demand-led component of spendingwhat we call
Annually Managed Expenditureand the programme spendingwhat
we call Departmental Expenditure Limits. It is true that the projections
for total spending now are slightly lower compared to the pre
Budget report projections but that is mainly accounted for by
lower expectations about demand-led spending, particularly about
social security, debt interest and other demand-led factors. The
programme spending, which is what counts for the delivery of services
for education and health, as you know has been increased compared
with the plan set out last year.
94. Are you meeting all your DEL targets then
for this coming year that ends in April?
(Mr Sharples) We expect the outturn for this year
to be very slightly below the departmental expenditure limits
95. What do you mean by "very slightly"?
(Mr Sharples) I mean about a billion below the limit
which is round about half a per cent of the departmental expenditure
96. It is far more than the Chancellor announced
in extra spending in health and education for next year, is it
(Mr Sharples) That is an expected underspend compared
to the limit spread across the whole of all departments. What
the Chancellor announced was an increase that is targeted on services
that have a particular high priorityeducation and health
97. But in total less than the underspend?
(Mr Sharples)So what I would emphasise about
this year is that there has been very strong growth in spending
on these services. The spending on departmental expenditure limits
this year has grown by about 6 per cent in real terms, so there
is very strong growth coming through in spend on services. We
are expecting to come in a little bit below the total limits but
that is perfectly normal because those are budgeting limits and
it is perfectly normal for organisations to come in slightly below
that. As I say, we are expecting to come in round about half a
per cent below the limits, which I think most organisations would
regard as a perfectly reasonable outturn.
98. How did you come to that figure? Was it
a guessbasically it is going to come a little bit belowor
is that from a trawl through all the departmental spending profiles?
(Mr Sharples) It is based on forecasts made by departments.
They give us returns each month giving their outturn and giving
their forecasts for outturn for the year, and we base our estimates
of the outturn for the year on those forecasts.
99. You say there is a billion underspend in
this financial year across the departments. Is there any department
that is particularly failing to meet its expenditure target?
(Mr Sharples) It is difficult to comment at this stage.
The normal practice is to publish details of department-by-department
breakdown in July when we publish the public expenditure