Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 80 - 99)

MONDAY 22 APRIL 2002

MR JOHN APPLEBY, MR ANDREW DILNOT, MS MARY O'MAHONY, MR EDWARD TROUP, AND PROFESSOR STEVE WILCOX

  80. You are not happy with that really, are you? The United States spends three times as much, yet it has a lower life expectancy.
  (Mr Appleby) That is largely explained with the distribution of the health benefits and so on.

  81. Fine, but that is about the structure, not about the money. I said there was nothing wrong with that, the money was not the problem, and I agree the National Health Service needs more money, but what I am trying to get at is the extent to which you or Mr Wanless have so far provided the justification for the money, this huge increase. Can I take you back to one or two things you said a moment ago where you said you felt that Mr Wanless had made a number of judgements, and you thought those were properly backed up by quite a lot of statistical evidence which is not published. Could you give some outline of what you think it would be helpful for him to publish that he has not put in the public domain?
  (Mr Appleby) Off the top of my head, one is on the issue of the costing out. The way they went about their task is actually to define a new Health Service in 20 years' time, one which has short waiting times, higher quality, better infrastructure and so on, so in a sense they are trying to say, "This is the Health Service we'd like, so how much is it going to cost?" and, working backwards from that, "How much does it cost to get down to two weeks' waiting?" I would very much like to see how on earth they managed to cost out the massive reduction in waiting times. In fact, I have asked Derek Wanless and his team some of these questions. One of the issues with exercises of this sort, which they have not addressed, is the change in behaviour that it will create by changing the supply side. The change in the supply side here is lots more money into the Health Service. One of the questions you were asking me was about pay and does the money become absorbed? It may do, because unions, the BMA, will see lots more money going into the system, they will perhaps want a share of it, they are obviously going to be planning on a bigger share. That is the sort of feedback, the reaction and the change in behaviour—and there are lots of changes in behaviour which can go on here—which make predicting the future very difficult indeed. So I think there is an issue here about waiting times and the data there.

  82. One last question. Do you think that the changes in structure of which we so far have been made aware in announcements over the past few days—and there were some a few months ago—give you confidence about the point you have just made, that when we have improvements in structure that will give you assurance that the increased money is going to find its way into higher productivity?
  (Mr Appleby) Yes, I think the Department of Health and the Government in general are doing their best here to address valid criticisms of where the money has gone and has anything changed. Clearly things have changed. We can look at the statistics and things have got better in certain areas of the NHS. People's perceptions of course may be a different matter. I am pretty confident that in five years' time we will be able to sit down and look where the money has gone and we will see real improvements.

  83. Could you give us a list of questions that you think Mr Wanless ought to ask?
  (Mr Appleby) Certainly.

  Mr Tyrie: Thank you very much.

Chairman

  84. Particularly for our colleagues on the left-hand side, what do you see as the social impact at the micro level of this Budget in terms of individual measures—tax credits, means testing take-up, the redistributative effects on the poorer sections of society?
  (Professor Wilcox) The aspect of the tax credit scheme about which I know most is the relationship with other means-tested benefits, in particular across with the housing sector. That is my particular area of expertise. Andrew has already commented on the general impact of the new tax credit regime and its greater generosity. There is one big question mark about the changes coming in next year, however, and that is the move in the way in which income is going to be assessed. One of the characteristics of the current scheme (which was a characteristic of the family credit scheme before it) is that income is assessed at six-monthly intervals and the award of benefit is then fixed for six months. It was part of the welfare to work strategy which said if you increase your income during that six-month period then bully for you, you are going in the right direction. The next time we come along you might be floated off family credit altogether because your income has increased so much or your income has increased a bit and we will then adjust the family credit for the subsequent period. We are moving now to an assessment where it is going to be assessed at 12-monthly intervals where if there is a significant increase in income of about £50 a week then the benefit will be reassessed and potentially you have the scenario where the benefit is set at one point in time, the change in circumstance does not get picked up until the end of the year and that may well result in a retrospective adjustment back over the previous eleven and a half months. One of the key advantages of the tax credit regime is that it has very much picked up on the point Andrew talked about which is the concern families had for certainty in their household budgets. This change in the way the benefit is assessed is going to remove that element of certainty. The Budget Report and the related report talks about the experience in Canada and the experience in Australia in dealing with these issues but, frankly, what it does not give anywhere is any good reason for changing the current system. I am a great believer in the maxim "if it ain't broke don't fix it." In fact, the only real reason for making the change is to move the system in accordance with the standard operating procedures of the Inland Revenue rather than is it a sensible thing to do in terms of delivery of benefit. I have a related concern from that because one of the things that has been happening in the last four or five years while the Government has been focusing its attention on tax credits is the energies for housing benefit reform have languished. The scheme has been twiddled with but there have been no major reforms and the performance has very seriously deteriorated from a point five years ago when 18 per cent of all cases were not dealt with within the present specified time (which is 14 days for any new application) to now when it has risen for a variety of reasons to 37 per cent. One of the ways in which you could begin to move things back on the housing benefit side of things, which is a significant issue in its own right with an annual expenditure level of £11 billion, 1.5 per cent of GDP, would be to change the way in which income is assessed there. There has been a proposal for some time to move to these fixed six-month periods of assessment for working households on housing benefit. That has been stymied by all the changes under consideration for the tax credit regime, so there are serious knock-on effects there. Secondly, the other point about the tax credit regime is that it will ensure that people are better off in work, particularly in areas of low and modest housing cost. This would mean in areas of higher housing cost if you are a tenant household, that you may still need to apply for housing benefit as well as tax credit. That then links back to this issue about provisional periods of assessment of up to 12 months on tax credit. The potential inter-actions between claiming back changes of circumstances on tax credit and housing benefit eleven and a half months downstream are, quite frankly, horrendous in terms of their implications. The other side of the fence is that homeowner households in higher housing cost areas will still be worse off in work than out of work despite the tax credit because of the way in which they may eventually get some help with their housing costs if they are on income support but they get no help at all if they move into employment. There is a real imbalance in the way in which homeowner households are dealt with which has a direct impact on tax credit because you also have a far lower level of take-up of tax credit by homeowner households. There is only a 50 per cent take-up rate by homeowner households as against a 75 per cent take-up for tenant households. So there is bundle of concerns there and it is linked together in the sense of needing to have a better relationship between the tax credit regime and the issue of housing costs and the way it is linked to housing benefit.

  85. As MPs we experience quite a number of people who come into our surgeries on these very issues that you have mentioned, the complexity of it, and the time for the benefit. What you are suggesting could make it worse. It would be important for us to bring that to the Chancellor's attention not necessarily in the forum on Wednesday but at a later date. I would be grateful if you could provide us with further information on that because it would be beneficial to all of us. Ms O'Mahony?
  (Ms O'Mahony) What was the question?

  86. The social impacts of the Budget.
  (Ms O'Mahony) My main area of expertise is the productivity impacts of the Budget.

  Chairman: James has a question for you then, you should not have opened your mouth!

Mr Plaskitt

  87. Will the R&D tax credit work?
  (Ms O'Mahony) All the available academics' evidence suggests that we will get something out of it.

  88. What?
  (Ms O'Mahony) Some increased expenditure on R&D which will feed into increased innovation and may result in increased productivity to help bridge the gap because we do fall behind our competitors in terms of the amount of R&D we spend as a share of output.

  89. Just work us through the way in which you see the R&D tax credit working and the extent to which it will work.
  (Ms O'Mahony) I do not know the extent. The academic research in this area gives a wide range of different values to the extent that this will stimulate further investment.

  90. When we had the small companies? R&D tax credit introduced there was quite a useful little surge. Do you think it will be of similar proportions?
  (Ms O'Mahony) It is hard to tell because most R&D is undertaken by large firms, so an important part of the stimulating of innovation needs to have an R&D tax credit for large firms so it may be greater but it is very difficult to tell at this moment. The research suggests there would be a multiple affect and increased R&D.

  91. You think there will be a definite positive stimulus?
  (Ms O'Mahony) I hope so, we will have to wait and see.
  (Mr Dilnot) To give you a rule of thumb. The cost of this will be £400 million a year according to the Treasury. The most optimistic one could possibly be is that R&D spending would be higher than it otherwise would have been by, say, twice that. That would be the absolute outer boundary of any academic evidence.
  (Ms O'Mahony) 1.4 is the average number.
  (Mr Dilnot) In the best of all possible worlds we might add £1 billion to UK R&D which at the moment is running at about £11 billion a year, so it is a very small share of the already small share of R&D as a share of national income in this country which might, if the wind was entirely behind, you add 0.1 of a per cent of GDP to R&D. It is unlikely that it is going to transform our R&D performance internationally or in the UK nationally.

  92. Was it worth doing or were there other available measures that could have had a more significant impact on R&D investment than this at a similar cost to the Treasury?
  (Mr Troup) Can I answer a slightly different question and then come back to that. We need to be careful when we look at whatever numbers come out of the next few years. Obviously there will the deadweight, the group who are going to do R&D who will do it anyway. There is also re-labelling. At the moment businesses' revenue expenditure (ie, not their capital expenditure) which is eligible for R&D relief for which they do not need to claim specifically because they will normally get it as a deduction anyway as a business expense. By giving them a 125 per cent reduction for R&D expenditure, you are encouraging businesses to re-label existing expenditure into the R&D category. It seems to me that what is measured as R&D may well increase. The question which will have to be asked is is this really additional R&D or is this simply re-labelling by companies of expenditure which they are already incurring as R&D in order to get 125 per rather than the 100 per cent they get at the moment. To come back to the question could they do it in another way, an awful lot of the £400 million is going to businesses who are already undertaking R&D. If there needs to be some public support for R&D, there is a choice in R&D principally between should it be paid for by the state, should the state encourage more institutions and universities to undertake R&D, or should we leave it to the private sector to do it on its own. That is the choice and not so much how a tax credit is structured. If the Government really want to spend £400 million on a tax credit this is probably the least silly way to do it—and some of the other proposals were very silly—but the choice is really should we do it through the tax system at all.

Chairman

  93. One of the experiences of ourselves as MPs is when companies come in as investment (and we welcome that as everyone does) we find somewhere down the line when there is economic recession that because it is the branch end of the company that the first to go is that company. In the light of the R&D tax is it more likely that companies will remain here or will they still go abroad? Does it make any difference to that?
  (Mr Troup) It certainly will encourage companies to locate more of their mobile R&D expenditure in the UK. When you say companies come here, there is a difference between a company moving itself lock, stock and barrel and closing down its UK subsidiary or setting up a UK subsidiary, on the one hand, which is quite a radical decision which does not take place very often, and the marginal decision as to whether additional expenditure or the new reduction in expenditure should take place in one country or another. It seems to me this is clearly going to encourage more mobile R&D to take place in the UK. The company that has got a business here is likely to be more encouraged to do business here than in a jurisdiction where it gets a lower tax credit.

Mr Tyrie

  94. Would you have done it if you had been Chancellor?
  (Mr Troup) It comes back to a question I would apply to all of the tax reliefs this Government has introduced and continues to introduce which is what is the evidence that there is some market failing? Do we think that some economic instrument will cure that market failing? Do we think that the tax system is that economic instrument? Even if we do think that, do we think that introducing a tax measure will not have second order effects—deadweight, distortions, complexities—which actually make it worthwhile? I have yet to see a tax relief (with one exception which was the reduction of duty on unleaded fuel) that has not failed one of those tests. I would almost certainly say not but that is because of my experience. You only have to look at what happened to the film tax relief, introduced in 1997 at a cost of £15 million which is now up to £360 million of which £295 million was admitted to be abuse, to see what happens when you introduce a tax measure in order to encourage one activity or another.

Chairman

  95. What is the likely overall impact of the new measures in the Budget on North Sea oil taxation and the abolition of royalty?
  (Mr Dilnot) We do not really know yet. We do not know, the Chancellor may or may not know, somebody else may or may not know. We have been told about the measure that will occur.

  96. At a cost of £1 billion.
  (Mr Dilnot) We have been told there will be consultation. We have been told that royalties may go. We do not know. I think it is worth expressing some anxiety that changes were announced yesterday without consultation. Some years ago consultation was set in place and then a decision made not to take account of the fullness of that consultation because there was a feeling there was no revenue to take out. Now we had some changes announced without consultation and we are going to have some consultation on some more change. There was not, as far as I am aware, discussion of this set of issues in the pre-Budget report last November so one does rather feel some frustration about the consultative process that is being used in this area. I do not think it is very helpful to speculate about what will happen next because I think one thing of which we can be sure is we do not know.

  97. I am just looking at Table A1, Page 155, where the Chancellor feels confident enough to forecast that.
  (Mr Troup) There are one or two other things in that table that he is confident about which one might ask questions.

Mr Tyrie

  98. What are they?
  (Mr Troup) The one that leapt out at me was the oil fraud strategy which is predicted to yield £550 million in three years' time. If you turn through to the relevant measure (which is quite hard to find) you will find the principal measure is substituting the change in colour of red diesel from red to yellow to make it more difficult to mix with Irish green diesel to fool people into thinking it is brown properly taxed diesel. I have to say that Customs & Excise have a pretty dismal record in estimating what the yield of anti-fraud measures will be and I think one has to look at the numbers here with some scepticism.

Chairman

  99. What we are told is this is a really good dye!
  (Mr Dilnot) And I am sure no member of Customs & Excise staff is colour blind!


 
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