Select Committee on Treasury Minutes of Evidence



Examination of witnesses (Questions 81 - 99)

THURSDAY 15 MARCH 2001

MR GUS O'DONNELL, MR NICHOLAS MACPHERSON, MR ADAM SHARPLES, MR ALEX GIBBS and MR CLIVE MAXWELL

Chairman

  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 say?
  (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.

Chairman

  83. Growth.
  (Mr O'Donnell) You are after that analysis?

Mr Cousins

  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 government—and they will have certain effects; then there will be measures announced by this government—and 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—

Chairman

  85. You can put that in the footnote, can you not?
  (Mr O'Donnell) Well, it would be quite an important footnote, that is all.

Mr Cousins

  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 incomes?
  (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 escalators—that that will have a certain impact and that may have had an impact on behaviour—so 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 as well.

  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 government?

  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 forward.

  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 future—it will increase in growth, in the short term at least, as a result of the income tax cuts announced in the Budget—and 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 growth—and low inflation, of course, which is the other side as to why it is real.

Mr Davey

  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 spending targets?
  (Mr Sharples) I think it is very important to distinguish between the demand-led component of spending—what we call Annually Managed Expenditure—and the programme spending—what 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 limits—

  96. It is far more than the Chancellor announced in extra spending in health and education for next year, is it not?
  (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 priority—education 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 guess—basically it is going to come a little bit below—or 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—


 
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