Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 527 - 539)




  527. Thank you very much for coming to see us again.
  (Mr Troup) Not at all.

  528. Could I begin perhaps with a very general question relating to some of the things that you have written. Can you at a general level tell us, first of all, why you think that the Treasury does not live up to the standards that it should do in terms of making tax policy?
  (Mr Troup) Do you mean in what ways or what the reasons are for not living up to the standards?

  529. Could you have a stab at both.
  (Mr Troup) Tax policy is very difficult because tax is a difficult subject. It is unlike other aspects of Government decision making which, in many respects, involve holding the ring between competing interests and making a decision between those two interests. It is about taking money from the citizen and it is very much Government against the citizen rather than Government holding the ring between two competing groups of citizens. I would not say it is more important to get it right but it is more difficult to get it right in tax than in other areas and it is that much more important that the Civil Service provides the weight, the counterweight, to the views of the democratically elected ministers than perhaps it is in other areas. So there is a need for the Civil Service to provide a strong centre of excellence to assist the decision making, to make sure that the decisions made do properly take into account all the competing interests. In what ways are the Treasury failing to do this? The interested parties in this, apart from obviously the taxpayers who are out there and who largely do not have a say until the decisions have been made, are, of course, the Inland Revenue and Customs and Excise, the tax raising departments. Because they are the experts in the topic, because they are the people who actually have to go out and collect the tax, and because tax collection is actually, in a sense, the priority of taxation, there is a danger they have too much of a say in the policy making. So the principal failing which I see is the lack of a coherent centre within which all the competing interests in making a good tax policy can be brought together, that the Inland Revenue and Customs and Excise tend to have too much of a view in some respects, their views carry too much weight, simply because they are concerned necessarily about loss of tax. Ministers clearly have a strong view but they come from a relatively uninformed position in terms of the details of the tax system and they need good quality advice to make sure that the decisions are good decisions which will have the effect they want and will not disturb unduly the flow of tax and will be robust over a period of time. I think in all of those respects the Treasury has failed. I, as you know, spent two years at the Treasury from 1995-97 and what really surprised me, and I have to say appalled me, getting there was the lack of knowledge of tax within the Treasury itself. That is not to say that the Treasury is not staffed by extremely good people because they are some of the best civil servants there are and some of the cleverest, but they are civil servants who have a training which is in a variety of different aspects of Treasury work, they tend to get moved from post to post every two years or so, so while they may be very clever, to come to, for instance, responsibility for indirect taxes having spent, I do not know, two years on monetary policy and two years on health spending does not actually leave you in a very strong position to deal with Customs and Excise or the Inland Revenue, whichever taxes you are looking at, and to work to give coherent advice to the ministers concerned. I think that is the central failing of the Treasury. Why that has arisen in a sense is not so important, what is important is to say what is the failing and the failing is the lack of a good, coherent tax policy unit staffed by a representative group of experts, principally internal experts, that is to say principally economists expert in tax, representatives of the revenue authorities, but also involving people from outside.

  530. You are talking about tax policy rather than tax management?
  (Mr Troup) I am talking about tax policy. Tax management, it seems to me, is not a matter for the Treasury in terms of tax collection, which is what I assume you mean by tax management. That is a matter for the revenue departments.

  531. But policy, surely, is the job of politicians, is it not?
  (Mr Troup) The decision on policy is the job of politicians. The job of the Civil Service is to ensure that the decision making is informed. In other words, when the minister makes a decision he has the absolute right to make whatever decision he sees fit, he has a democratic mandate to do so, but if he makes a decision he makes it in the light of the best information and, if necessary, if he needs to say "there are these objections, these are the reasons why I am overriding them" he can do so.

  532. So your tax code is related to that point, is related to providing ministers with proper information in the form that they can use to make their decisions in the best way?
  (Mr Troup) Correct.

  533. That is what the tax code basically delivers.
  (Mr Troup) There are some words that the Chancellor used in his paper, Fiscal Stability, which obviously was concerned about overall fiscal policy rather than the policy for the tax system specifically, and what he said was that the code of fiscal stability "sets out the basis for fiscal policy which will support the long-term economic stability on which prosperity depends and that it will ensure that fiscal policy making meets the standards of transparency and accountability that the public have a right to expect". It seems to me that is absolutely right and what this Government has done on fiscal policy is absolutely excellent in that respect. I do think that when we come to tax policy we do not have the same standards of transparency and accountability which, as the Chancellor said, the public have a right to expect, in part due to the lack of support from the Treasury.

Mrs Blackman

  534. Can I just go back a step and clarify for my own purposes what you were saying about the division of labour, if you like, between the politicians and the Treasury civil servants. Politicians define the effects of the tax, they say what effects the tax will have, but a more coherent unit of civil servants within the Treasury for them to translate what the politicians are saying into a workable, efficient system, is that what you are saying?
  (Mr Troup) That is exactly what I am saying. If ministers want to do something about climate change, to do something about competitiveness, and they want to do something through the tax system it seems to me that the function of the Treasury is either to propose some measures to deliver that broad policy objective, or to the extent that the ministers come forward with some specific policy ideas—Climate Change Levy—to actually ensure that is properly evaluated and that there is a greater degree of public explanation as to why that approach has been taken. If the minister wants to introduce a measure, as it were, in the face of a disagreement or contrary views from his officials against this set of policy, the code of good tax policy which we have, of course he can do so but there would be a greater degree of public accountability because he would have to explain why against these criteria he is doing something which appears not to comply with them. With luck what would happen is that the measures that were brought forward would accord with the code. They would need to be coherent with the rest of the tax system and would ensure better policy making overall.

Mr Beard

  535. I am trying to grasp the concept of the phrase "tax policy", it is not fiscal policy, it is not monetary policy and not something of somebody else. Is your concept of tax policy essentially deciding, given a certain amount of money is to be raised, where and how it should be raised? Is that the concept of tax policy?
  (Mr Troup) I think that is the best way of looking at it, yes. Tax policy is deciding how the money which the Government wishes to raise will be raised and, within that, achieving what the Government has set out it wants to achieve. The early statement the Government made in the July 1997 Budget was that the tax system should be well designed to meet the objectives of the Government of the day without generating undesirable side effects. It seems to me that is the next thing that tax policy should think about after raising the amount of money which you want to raise but also, again the Government statement of previous governments, is that there are economic and social aims to be achieved through the tax system and that is part of tax policy. What we have seen is too many measures which have good economic or social intentions behind them but are either defective in their specific design or just inconsistent with another part of the tax system simply because there is not a clear framework for the tax system overall which ensures that one measure is not brought in which is inconsistent with another measure or at least fails to explain why those measures are inconsistent. That is what I mean by tax policy, starting with tax raising, looking at fairness and efficiency, but also taking account of ministerial wishes.


  536. Can you give us examples of fixed rules comparable with fiscal rules?
  (Mr Troup) You cannot generate fixed rules. I think what you can do is you can acknowledge the very significant trade offs that have to be made in any tax policy making and to require decision making to take account of those trade offs and to seek to explain how the trade offs have been made. Now, a simple trade off, and I have talked to this Committee before about it, is between simplicity and fairness. A simple system simply raises income tax from everybody at certain prescribed rates, but if you do not have a system which taxes benefits in kind—company cars or whatever—it will become an unfair system because everybody will give their employees company cars instead of giving them cash and as soon as you do that it becomes more complex. Now the trade off between fairness and simplicity is not an easy one. Too often you will find ministers in governments—and this is certainly not specifically about this government, the last government was just as bad about this—putting forward in one Budget something which is designed to make things simpler and fairer and often in the same Budget putting forward something in the name of fairness without any acknowledgement that these could be conflicting aims. It seems to me what your code can do is to require the decisions to be supported by Treasury produced papers analysing the relative weights of fairness, certainty and simplicity, and to explain how the trade offs in these particular cases have been met. That is one example, in fact I think it is probably the most important example I would start off a code with to make explicit trade offs.

  537. Do you think that the Treasury is getting better or worse at tax making and, by having its hands freed by transferring monetary policy to the Bank of England, has it been left to make a better fist of tax policy?
  (Mr Troup) I think there is an interesting point in that. I think the reason that the Treasury has not been good with tax policy is precisely because until the beginning of this Government it was over-concerned with monetary policy and regarded its principal role as being guardians of monetary policy and rather left the details of tax policy to the revenue departments. What has happened since monetary policy was taken away from it and given to the Bank of England is that void, or that weakness, I think has been exposed. Certainly while I was at the Treasury there were people, senior people, who recognised that there was a weakness of tax policy, that there was not at that time really a political will to do anything about it. I do think that since monetary policy has been taken away quite a lot of effort has been made by the Treasury, and of course I have not been within the Treasury but I have had to deal with it a great deal from the outside, to remedy that weakness. I think things are getting better. At the same time that the Treasury has been seen to improve we have clearly had an activist Government and Treasury ministers who have tried to do a great deal with the tax system. Whether they have managed to improve as fast, as it were, as the increase in activity from Treasury ministers I doubt, I think there is a lack of counterweight to ministerial decisions.

Mr Davey

  538. Can I come on to how the code might work for making the tax system more simple, which is one of the main criticisms. You have made a number of criticisms about this Government's record so far but mainly about previous governments, that they tend to make tax far more complicated for taxpayers. Do you think this is a lack of political will, to simplify the tax system?
  (Mr Troup) I think that the lack of any opposition to measures which make the tax system more complex has resulted in it becoming more complex. As I said at the beginning, the odd thing about tax is you do not have competing interests. If the Government stands up and says "we are going to give a tax break to the film industry", clearly the film industry are going to be delighted and everybody else, although they have, as it were, a small countering interest because they have not had a tax break and they are going to have to live with the complexity, are unlikely to say anything. This is not the same as if the Government goes round writing cheques to someone here and not someone there, I do not think. There is no external—external from the Treasury—incentive to make things simple apart from people like myself and others who sit here and say the tax system is very complex.

  539. Should it not be people on this side of the table saying that?
  (Mr Troup) I think you should but, again, it is difficult for you to say that. It does seem to me to actually do anything about it, simply because of the way the Budget process works, and I am not an advocate of abolishing Budget secrecy, I think you have to have a high degree of secrecy in Budgets in order to get any tax reform or tax change through, which means when you come to the decision to introduce the tax relief for the film industry you want to have a proper debate behind the closed doors of the Treasury at which the complexifying elements are weighed against the benefits. I feel what has happened is that because there has been no counterweight, because there has been no standard or requirement to set measures against issues of complexity, your Committee has come and asked after the event but there has been no code which effectively requires ministers to say "I have introduced this measure, I have considered the complexity, I have considered incentives, I have considered simplicity and this is the conclusion I have come to". The Chancellor can just stand up and say "I am introducing this relief for the British film industry" but it is easier for governments to do that, and it seems to me the code would help. I am not suggesting this is going to cure the complexity problem forever, once and for all, but it is I think going to help. It will produce some check on the really quite considerable freedom ministers have at the moment to make the system complex without any resistance.

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