Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 48 - 59)




  48. Good afternoon, everyone, and welcome to this second session into the microeconomic issues. Could I ask you to introduce yourselves for the sake of the record, please, starting with Professor Wilcox?
  (Professor Wilcox) Steve Wilcox, from the University of York, representing the Joseph Rowntree Foundation.
  (Ms O'Mahoney) Mary O'Mahony, from the National Institute of Economic and Social Research.
  (Mr Appleby) John Appleby, Director of Health Systems at the King's Fund.
  (Mr Troup) Edward Troup, Head of Tax Strategy, Simmons & Simmons.
  (Mr Dilnot) Andrew Dilnot, from the Institute for Fiscal Studies.

  49. Thank you very much. We are hoping to get through our session by six o'clock. We are rather depleted with our Members, and we need three for a quorum, so I think we have six o'clock as a target. With that in mind, we shall try to get through everything, if possible. Could I start by putting a few points to you, and please do not feel that you all have to answer every question. The Chancellor's personal tax measures were littered throughout the Budget. Can I then ask, are there any measures in the Budget designed to simplify the income tax regime, particularly for those subject to the self-assessment system? Who would like to answer that?
  (Mr Troup) No.

  50. You would not like to answer it, rather than that there is nothing?
  (Mr Troup) There is nothing that I can say.

  51. I think I have read a few of your comments at the weekend.
  (Mr Troup) Yes, broadly.

  52. Could you expand on them just a little?
  (Mr Troup) Yes, just to say that leaving aside the question of the choice of what taxes are to be raised, of how much tax is to be raised in this Budget, it seems to me, having made the decision on what appears to be to raise substantial tax from business and a rather lesser amount from the personal sector, that the Chancellor has gone about it in an extraordinarily abstruse way by, as we all know, raising National Insurance on both employers and employees and then giving it back in various other ways, as well as raising it elsewhere. I think my choice of raising tax would not have been to raise it substantially from business in the first place, and even if it were, I would not have done it in this way. If complexity were the criterion of deciding how to do it, that is certainly not the right way of doing it.
  (Mr Dilnot) I have thought of a possible simplifying measure: the twentieth in the list on table 1.2 on page 14—over-indexation of age-related allowances for ages 65 to 74. So I think it is just possible that we could say that that measure, by taking some people out of the tax regime, could be seen as simplifying income tax, but it is not one of the central measures of the Chancellor's Budget.

  53. I think we shall go on from that to National Insurance contributions. The effect of changing the rate rather than income tax is, as you said, Mr Troup, that the burden would fall on those in employment. Are the Budget proposals to increase the National Insurance contribution rates rather than income tax going to ensure that the burden is "spread as widely and as fairly as possible" as the Treasury seeks?
  (Mr Dilnot) As far as the employee contribution is concerned first, the increase of 1 per cent in the employee's class one contribution and the increase of 1 per cent in the self-employed contribution, alongside the removal of the cap for that, delivers a tax increase which is very, very close to being identical to an increase of 1 per cent in the 10 per cent, 22 per cent and 40 per cent rates of income tax. There are only two ways in which it differs. It differs in that the richest third of retired people who do pay income tax will not pay this, and it differs in that those able to live off unearned income will not pay this, but will pay income tax. I think it is a reasonable presumption that for most forms of public spending one might want to give better-off pensioners and those living off unearned income the opportunity to serve through paying tax. I cannot see what coherent strategy for raising tax can be met by these National Insurance employee changes, that could not equally have been met by 1 per cent increases in all the rates of income tax. The effect is very similar on the groups that are excluded—not groups that I think it is easy to imagine reasons for excluding. Of course, the employer's is slightly different. The increase of 1 per cent in the employer's rate in the long run will have almost identical economic effects to an increase of 1 per cent in all of the main income tax rates, but in the short run will have a differential impact; in particular it will have an impact on corporate cashflow. Overall, these are changes that raise very much what would have been raised by about a 2 per cent increase in all income tax rates. The overall long-term impact will be very similar to that. The only group that will escape that are pensioners and those living on unearned income.

  54. So you are suggesting it could have been fairer?
  (Mr Dilnot) It could have been done differently.

  55. Now on to tax credits. I know you have had a lot to say on that, Andrew, over the years. Taking the Child Tax Credit and the Working Tax Credit which replaces the Working Families' Tax Credit and the Childcare Tax Credit introduced in 1999, what improvements do you think will result from the introduction of the new tax credits? Are they just adding to the complexity of the system? Do you think they will have any positive effects on the take-up?
  (Mr Dilnot) They are certainly not just adding to the complexity of the system, because they are also adding £2½ billion, so I think the very least that can be said for the tax credits is that they are increasing expenditure on one of the Government's key target groups. Most of that £2½ billion is going to low-ish paid families with children, or, rather, low-ish income families with children, and some of the largest gains are not going to them, the families with children in work, they are going to the families with children out of work. It is a consequence of the levelling up associated with the Child Tax Credits that some of the biggest gains go to those out of the labour market. So if your sole objective was tackling child poverty, then this will certainly allocate money to some of those groups. The impact on take-up, in the short term at least, is likely to be unwelcome. We know that when new benefits are introduced, the take-up of those benefits is low in the short run. When Family Credit was introduced in the late 1980s, in its early period the take-up seemed to be as low as 25 per cent; it rose very significantly over the following ten years. When the Working Families' Tax Credit was introduced, we know the take-up rate was not very high to start with, and we can see now it is not much more than60 per cent. I think we can be sure that the take-up of the Child Tax Credit, when it begins, will be lower than we hope it will be after a few years' time. There are some aspects of the way it will be administered that will be beneficial for take-up, in particular having a fairly wide margin for error on the estimate of income that is used and having a relatively infrequent means test. Those things may be positive. The fact of having a benefit that can be carried from unemployment into work may ease that transition. We know that for families with children the risk and uncertainty associated with what will happen to their benefit incomes as they go from unemployment into work can be a disincentive for the labour market. So certainly one can see some positives in this. There will be some dislocation when it is introduced, and it is worth saying that the number of people facing a very high marginal tax rate, the multiple withdrawal rate, will rise significantly as a consequence of this very large further extension of means testing. If means testing is the route you are going down, I think that is inevitable.

  56. We now have it being extended to individuals with incomes up to £58,000. What is the economic rationale for doing that? Is it sound?
  (Mr Dilnot) My own sense is that £58,000 is a bit of a red herring, so the thing that is available to families on incomes up to £58,000 is really a replacement of the income tax Married Couple's Allowance which was turned into a child-related tax credit. The income tax allowances had always gone all the way up the income distribution. When it was turned into a children-related tax credit, the cutoff was where either of the parents were higher-rate tax payers, so that was beneficial to incomes above £58,000. The rationale for the current proposal is simply to take that piece of support for children through the tax system away from the very highest earners—we are talking about a very small number of people. I think there is an additional debate about whether that tapering away should necessarily occur precisely there. It is interesting to ask what social welfare function would give that as the optimum, but I do not think the £58,000 is relatively material. I think that more important is that the main means-tested element of the Child Tax Credit can be received by people with incomes in the low twenties of thousands of pounds if they have any children. That is a necessary consequence of the increased generosity at the bottom and a slight reduction in the overall taper rate of the credit that preceded it.

  57. Now a question for Mr Troup, before I hand over to my colleague James Plaskitt. The new tax credits will be awarded on the basis of income. Is this going to undermine the concept of individual assessment in the tax system? The Chancellor estimated that 90 per cent of families will benefit from the change.
  (Mr Troup) Yes. I do think that we need a clear statement of policy in relation to the taxable unit. There is quite a lot of logic in choosing the household as the taxable unit, as is the case in the United States, but we made a policy decision over ten years ago to move to the individual. That is sustainable so long as the tax system and the benefits system are kept reasonably apart, because it is only really for the benefits system that you need to look at household means, for obvious reasons, because you cannot have a non-earning spouse of a high earner claiming benefits on the basis that he or she is low income. So long as the population that receives benefits is relatively low, it is sustainable to have a single assessment for tax and a household assessment for benefits. By moving effectively the benefits system, the tax credits system, much further up the income scale, the tensions between the household assessment for benefits, tax credits, and the single assessment for tax become more apparent. It seems to me, having taken in what must be—I am not sure precisely what the percentage figure is—a very high percentage of the earning population, the tension, into tax credits, that the time is ready for a policy decision as to whether we should abandon single assessment and go back to, or go to, a complete system of household assessment for tax purposes. I think again there is tension in the way the Government is moving without a clear statement of what the policy direction or their ultimate aim is for taxes.

Mr Plaskitt

  58. Can I turn to the NHS and direct a question to Mr Appleby. The Budget comes up with 7.4 per cent real growth for the National Health Service budget for each of the next five or six years. In your view, is that enough to keep the ten-year plan on track?
  (Mr Appleby) Sorry, by "the ten-year plan" you mean what?

  59. The NHS ten-year plan launched in 2000.
  (Mr Appleby) It is interesting, I was thinking really that we need to read the Budget and the Chancellor's statement in conjunction with obviously the report from Derek Wanless and also a report out subsequently to the Budget from the Secretary of State for Health, which expands on delivering the NHS plan as a strategy and actually adds some new things. So the plan has been expanded, in a sense. Whether this 7.4 per cent real growth is enough, frankly, is anybody's guess. The figures that Derek Wanless has come up with—7.4 per cent on average over the next five years—were their judgement of, in a sense, the maximum the NHS could effectively spend and efficiently spend, given that there are capacity constraints, you cannot magic doctors and nurses off the shelf. So Wanless is not too keen to suggest that the largest figure possible will get the NHS coping. To answer your exact question, it is very hard to say.

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