Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 160 - 179)



  160. How many people will receive these two credits taken together?
  (Mr Holgate) The short answer is that we do not know because we have not yet set the rates and thresholds. It is only when we set those that we will see how far they reach into or up the earnings distribution. I have seen a figure of 400,000 for the numbers, but it is an estimate of those who might receive the Working Tax Credit only. The question on the Child Tax Credit I am afraid does depend absolutely fundamentally on how far up the earnings distribution it goes.

  161. At what point, at what low number would it simply have been more efficient to raise the minimum wage?
  (Mr Holgate) These have quite different impacts on labour supply and other matters. If we were to raise the minimum wage quite significantly we would begin to cost people their jobs in a way that these tax credits should not have that effect. I think the Government has been quite cautious over the rate at which it increases the minimum wage.

  162. The tax credit starts, once you finalise the details, in 2003-04.
  (Mr Holgate) Yes.

  163. Which is a period covered by this report.
  (Mr Holgate) Yes.

  164. Why are the costs or any estimates of the costs not included in the public finance projections?
  (Mr Holgate) The reason for that is that in contrast, for example, to the Pension Credit where the consultation began last November and concluded, I think, in February, we started the consultation for the tax credits in July and concluded it on 12th October. I think there are two sets of questions which need answering prior to the question of the rates or thresholds. The first are practicalities about how tax credits would best operate, for instance, from the point of view of business. The second is getting the structure of them right such that the Inland Revenue can now make rapid progress with programming the software which will run the system. Those are in two different ways structural questions. If we had included in the consultation in July some prediction or set of assumptions or whatever about the rates and thresholds, I fear we would have diverted some attention away from the structural issues which we need to get right first and then, purely as a programming matter, let alone anything else, one can then inject the figures nearer the time as part of the Chancellor's Budget process.

  165. Given the numbers you have hinted at, there is a physical impact of these changes?
  (Mr Holgate) There is quite likely to be an expense, yes.

  166. Your own Code for Fiscal Stability says ". . . where there is a fiscal impact these decisions and circumstances cannot be quantified with reasonable accuracy by the day the projections are finalised . . .". It is as if that should be noted as a specific risk but you have not done that, have you?
  (Mr Holgate) Yes, we have. Paragraph 23 of the Code for Fiscal Stability covers this. We have noted that our numbers do not include an estimate for the tax credits, I think it is in paragraph 2.43 of the Pre-Budget Report and again in Annex B.

  167. You have not put in any kind of estimate?
  (Mr Holgate) No, that is exactly what we say. For instance in B-23 what we have said is ". . . consistent with the requirements of the Code for Fiscal Stability the whole costs have not taken account of other proposals where a final decision on rates has yet to be taken. These include Working Tax Credit and Child Tax Credit."

  168. Do you not have any estimate of the costs?
  (Mr Holgate) None in the absence of setting rates and thresholds that would be right to include in projections such as this Pre-Budget Report.

  169. Have you seen the Institute for Fiscal Studies estimate the cost could be £2.8 billion a year?
  (Mr Holgate) I have seen that estimate.

  170. Do you think that is too high or too low?
  (Mr Holgate) If I commented on the £2.8 billion then I would be going beyond where we felt it was right to stop in terms of the Pre-Budget Report, so I have no comment to make on that figure.

  171. Do you not think it would have been helpful to use illustrative working assumptions within the PBR while the wider world would have assessed whether the credits would be likely to meet the objectives set?
  (Mr Holgate) I think that if we are to determine the rates and threshold as part of the Budget process then there will be a reasonable amount of time to have just that sort of discussion.

Kali Mountford

  172. I was wondering about the objectives which were set. What was hoped to achieve here? Was this because people were grumbling that they were left out because they did not have children?
  (Mr Holgate) Sorry, the objectives for new tax credits?

  173. For families without children.
  (Mr Holgate) There are three main objectives for the new tax credits. One is to support families, a second is to reduce child poverty and a third is to make work pay. The new tax credits are not just about households without children, they are about making a seamless system of support for households with children and simplifying the system so that whereas now we have the Children's Tax Credit, we have support for children in the Income Support system, and then we have the Working Families' Tax Credit child elements, we are putting all those three into the Child Tax Credit. There is improvement on, as it were, the households with children side as well as the ambition to extend it to households without children.

  174. It is the extending to families without children I am interested in, and the objectives for that. Is that about people complaining they were left out? I have had complaints, I am sure you must have done.
  (Mr Holgate) I dare say there have been complaints. If we are trying to make work pay then it is the case that the gain from work for someone entering at typical entry wages is relatively low for members of households without children and that would be what the Working Tax Credit might be able to remedy.

  175. What would the effect of a lower starting rate of tax have been?
  (Mr Holgate) If, say, you cut the rate of tax by a penny or two, that would affect you by a penny or two in each pound. The Working Tax Credit is going to have a greater impact than that because we are going to create a bigger wedge between in work and out of work incomes which are then reduced as people move on and up in work. I do not think a straight forward cut in a rate of tax would have anything like the same incentive effect.

  176. It is because people qualify for tax credit?
  (Mr Holgate) Well, maybe more people will qualify for the tax cut than the tax credit, it depends, again, on the rates and thresholds. The problem is to make a significant difference for people moving out of work into work and that is what the tax credits certainly do.

Mr Laws

  177. Just one quick question on that before I move on. When you finally put in the estimates for these tax credits could they cause you to have a problem meeting your targets in relation to having a surplus on the current Budget?
  (Mr O'Donnell) I can assure you—this will come into the overall fiscal picture which is why I will answer it—when these are incorporated and the rates are decided, they will be in the Budget arithmetic for the next Budget and the Budget will be consistent with the Government's rules. We will meet the fiscal rules, both the sustainable investment rule and the golden rule.

  178. On page 25, which shows the surplus on the current Budget you are now projecting after PBR, you have not got a lot of manoeuvring room, have you, between 2002-03 and 2004-05? You are projecting 3, 4, 7 in surplus. In evidence to Mr Fallon you were talking about the 2.8 figure and not being able to say whether it was higher or lower. If it was higher it would come very close to wiping out the surplus.
  (Mr O'Donnell) Remember at PBR time, we just push forward what we have got in terms of illustrative numbers. There is still room, for example, for the AME numbers to be revised at Budget time. There will be a new economic forecast so when it comes to it we will need to take all those things into account. The one thing I can assure you is that the projections we come forward with will meet both rules.

  179. I want to see if I can draw in Mr Gibbs before we end otherwise he will feel neglected. You are in direct tax, I see, Mr Gibbs.
  (Mr Gibbs) Direct and indirect.

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