Select Committee on Treasury Second Report


PROCEEDINGS OF THE COMMITTEE RELATING TO THE REPORT

  

MONDAY 29 APRIL 2002

Members present:

Mr John McFall, in the Chair


Mr Nigel Beard Mr David Laws
Mr Jim CousinsMr David Ruffley
Mr Michael FallonMr Andrew Tyrie


 The Committee deliberated.

 Draft Report from the Committee (Budget 2002), proposed by the Chairman, brought up and read.

 Ordered, That the draft Report be read a second time, paragraph by paragraph.

 Paragraph 1 read, amended and agreed to.

 Paragraphs 2 to 8 read and agreed to.

 Paragraph 9 read, amended and agreed to.

 Paragraph divided (now paragraphs 9 and 10)

 Paragraphs 10 to 13 (now paragraphs 11 to 14) read and agreed to.

 Paragraph 14 read, as follows:

 "Mr O'Donnell said that although the Treasury does not seek to achieve "fine-tuning with fiscal policy (although one of the Government's key objectives for fiscal policy is, "over the short term, to support monetary policy"), he believed that "the Budget will help remedy these imbalances. According to the Treasury, the Budget would increase Government consumption, which has a particularly low import content both absolutely and relative to consumer demand, while consumer spending will "ease gradually" during the second half of 2002, with further decreases in the rate of household consumption growth in 2003 and 2004. The Treasury attributes this to the effects of lower bonuses, moderating house price inflation and the lagged effects of past falls in equity prices. Mr O'Donnell added that, although the increases in National Insurance contributions would not take effect until the next financial year, "when there is talk in the newspapers about increases in taxes, people may look at their consumption plans going forward"; in effect, people may be encouraged to adjust downwards their consumption ahead of the tax increases, by, for example, saving more in order to allow smoothing of their consumption levels over the medium-term. Mr Barr was sceptical of the Treasury's overall rationale, viewing it as "interesting" that there are now "both [monetary and fiscal] sides of policy making ... saying to us that [household] consumption is going to slow very aggressively next year ... without really saying how that is going to happen". The Treasury acknowledge that "considerable uncertainty still surrounds the outlook for consumption". We note the view that, given the intention to raise revenue in this Budget, the Treasury may have missed an opportunity to address fully the issue of strong consumer demand, increasing the likelihood that the imbalances in the economy will persist."

 Amendment proposed, in line 19, to leave out from the word "consumption" to the end of line 22 and insert the words-

 "Although the Budget raises additional revenue from direct taxation from 2003 onwards, we note that the Treasury admits to considerable uncertainty about the outlook for consumption. We are therefore not entirely sure of the grounds on which the Treasury claims that consumption will slow. Consequently, we are not clear that the Budget makes any significant contribution to correcting the imbalances in the economy."-(Mr David Ruffley.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4       Noes 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley      

Mr Andrew Tyrie

 Paragraph, as amended , agreed to (now paragraph 15).

 Paragraphs 15 to 17 (now paragraphs 16 to 18) read and agreed to.

 Paragraphs 18 read and postponed.

 Paragraph 19 (now paragraph 20) read and agreed to.

 Paragraphs 20 and 21 read (now paragraphs 21 and 22) and agreed to.

 Paragraph 22 (now paragraph 23) read and agreed to.

 Paragraph 23 (now paragraph 24) read, as follows:

 "It is perhaps ironic, given recent errors in forecasting the PSNB, that the Treasury has decided to change its assumption of the trend rate of growth this year. As the table below illustrates, in recent years the Treasury has been too pessimistic in regard to the future position of the public finances in its one-year ahead forecasts in. In November 2000, Mr Balls defended the Treasury's PSNB forecasting record to our predecessor Committee, saying that "our assumptions are cautious so that should always mean that the outturns are better than our projections, so they are not mistakes at all". However, these cautious assumptions, including of course the 2¼ per cent trend growth rate assumption, also underpinned the Budget 2001 projection which turned out to be the first one-year ahead Treasury PSNB projection that was too optimistic. If the Treasury had used its new assumption of the trend growth rate, this error would have been even larger. If the less cautious assumption of the trend growth rate adopted in Budget 2002 is maintained, it may be advisable for the Treasury to increase the reserves provision held as the AME margin and DEL reserve."

 Amendment proposed, in line 13, leave out from the word "to" to the end of line 14 and insert the words "maintain a budget strategy which allows for a continued projection of surpluses on the current budget balance, in order to ensure that the fiscal rules are still met in the event of GDP growth being significantly weaker than expected."-(Mr David Laws.)

 Question put, That the Amendment be made.


 The Committee divided.

Ayes 5        Noes, 1

Mr Nigel Beard      Mr Jim Cousins

Mr Michael Fallon

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Question put, That the paragraph, as amended, stand part of the Report.

 The Committee divided.

Ayes, 5      Noes, 1

Mr Nigel Beard    Mr Jim Cousins

Mr Michael Fallon

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph 24 (now paragraph 25) read and agreed to.

 A paragraph - (The Chairman) - brought up, read the first time and postponed.

 Another paragraph - (Mr Andrew Tyrie) - brought up, read the first time and postponed.

 Paragraph 25 (now paragraph 28) read as follows:

 "The Chancellor's announcement of a five-year plan for health spending to 2007-08 means that the final year of the spending plan, namely 2007-08, is not covered by the Treasury's medium-term projections of the public finances. The IFS estimate that the extra health spending in 2007-08 will cost "an additional 0.7% of GDP, which in current terms is approximately £7bn", although cautions that this may not necessarily lead to financing difficulties at that time. The Chancellor told the Committee that "by tradition we will publish the 2007-08 borrowing requirement at the time of the November pre-Budget Report". Mr Balls highlighted that the figures for the year beyond the 2002 Spending Review that is included in the Government's projections of the public finances, namely 2006-07, take into account the extra planned health spending, adding that "obviously that trend and that number continues to 2007-08 too". Mr Balls also highlighted that Annex A of the Red Book contains the illustrative long-term fiscal projections, where the Red Book states that the Treasury's "long-term fiscal projections ... show that the UK's public finances are broadly sustainable over the long term". However, specific figures for 2007-08 are not available for Parliament to scrutinise, even though the Treasury's Code for Fiscal Stability imposes no restriction on the maximum number of years for the Treasury's projections of the public finances. It would be helpful if the Treasury's medium-term fiscal projections covered at least those years where spending or taxation policies have been stated".

 An Amendment proposed, in line 8, after the word "Report" to insert the words:

 "Nevertheless we note that the Chancellor in his evidence did not say whether health spending in 2007-08 was covered by existing tax plans or whether new tax, borrowing or expenditure changes in the future might be necessary".-(Mr David Ruffley.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley

Mr Andrew Tyrie

 Another Amendment proposed, in line 17, to leave out from the word "finances" to the end of line 19 and insert the words:

 "If specific spending figures are to be committed on a five year basis, we want to see that complete period covered by the Treasury's medium-term fiscal projections. Given the significance of the additional spending on the NHS, the Chancellor should have published at the time of the Budget the borrowing requirement for the final year 2007-08. "-(Mr Michael Fallon.)

 Question proposed, That the Amendment be made.

 Amendment proposed to the proposed Amendment, in line 2, to leave out from "projections" to the end of line 5.-(Mr Jim Cousins.)

 Question put, That the Amendment to the proposed Amendment be made.

 The Committee divided.

Ayes, 2      Noes, 4

Mr Nigel Beard    Mr Michael Fallon

Mr Jim Cousins    Mr David Laws

        Mr David Ruffley

        Mr Andrew Tyrie

 Question put, That the proposed Amendment be made.

 The Committee divided

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley    

Mr Andrew Tyrie

 Question put, That the paragraph, as amended, stand part of the Report.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley    

Mr Andrew Tyrie

 Paragraphs 26 and 27 (now paragraphs 29 and 30) read, amended and agreed to.

 Paragraphs 28 and 29 (now paragraphs 31 and 32) read and agreed to.

 Paragraph 30 (now paragraph 33) read and agreed to.

 Paragraph 31 (now paragraph 34) read and agreed to.

 Paragraph 32 (now paragraph 35) read and agreed to.

 Paragraph 33 (now paragraph 36) read and agreed to.

 Paragraph 34 (now paragraph 37) read, amended and agreed to.

 Another paragraph - (Mr Michael Fallon) - brought up, read the first and second time, and inserted (now paragraph 39).

 Paragraph 36 (now paragraph 40) read, amended and agreed to.

 Paragraph 37 read as follows:

 "In respect to the continuing imbalances in the economy, Mr Barr said that "with the Chancellor deciding to largely bypass many voters in his bid to raise extra revenue, the burden is on the MPC to slow above trend household spending". As a result, Mr Barr increased his forecast for the Bank of England repo rate to 5 per cent by the end of this year, from 4.5 per cent. Schroders commented that, in the light of the Budget, "the job of slowing consumption and thereby rebalancing the economy now lies with the Bank of England". As discussed above, however, there has been only a small change in the projections of the fiscal stance since the Pre-Budget Report and therefore, in this respect, the Budget did not contain any major surprises for the MPC."

 Amendment proposed, in line 9, at the end to add the words-

 "We therefore agree with Mr O'Donnell's view that the Budget would not introduce any new factor into the MPC's assessment of the economy that the Committee was unaware of at the time of the Pre-budget Report".-(Mr Nigel Beard.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 2      Noes, 4

Mr Nigel Beard    Mr Michael Fallon

Mr Jim Cousins    Mr David Laws

        Mr David Ruffley

        Mr Andrew Tyrie

 Paragraph agreed to (now paragraph 41).

 Paragraphs 38 to 40 (now paragraphs 42 to 44) read and agreed to.

 Paragraph 41 (now paragraph 45) read, amended and agreed to.

 Paragraphs 42 to 48 (now paragraphs 46 to 52) read and agreed to.

 Paragraph 49 read as follows:

 "We asked the Treasury whether, given the uncapped nature of the 1 per cent rise in NICs, it was still possible to regard the upper earnings and profits limits as a ceiling for NICs. Treasury officials told us that the Chancellor had described exactly the situation. Employees and the self-employed will not be paying the full rate they pay on earnings or profits up to the upper limit, but merely the 1 per cent rate above. They said that the definition of the upper earnings limit on NICs is "the point at which 11 per cent stops and 1 per cent starts with respect to employees."

 Amendment proposed, in line 7, at the end, to add the words:

 "This view seems to be at variance with the previous, widely accepted, definition of the upper earnings limit, which was that it was the maximum amount of weekly earnings in respect of which employee contributions are payable".-(Mr David Laws.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph, as amended, agreed to (now paragraph 53).

 Paragraph 50 (now paragraph 56) read as follows:

 "The proposed increases in NICs for employees and the self-employed will deliver a tax increase to those groups that is very similar to a 1 per cent increase in the rates of income tax. However, unlike increases in income tax, increases in NICs will not affect better-off pensioners and those living off unearned income, who benefit from the insurance provided by the National Health Service, and may be in a position to make a contribution."

 An Amendment made.

 Another Amendment proposed, in line 4, to leave out from the word "income" to the end of line 6.-(Mr Nigel Beard.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 2      Noes, 4

Mr Nigel Beard    Mr Michael Fallon

Mr Jim Cousins    Mr David Laws

        Mr David Ruffley

Mr Andrew Tyrie

 Another Amendment proposed, in line 6, at the end, to add the words:

 "We think that the Treasury has, as yet, failed to make the case for choosing a method of revenue raising (higher employer and employee national insurance contributions)which excludes well-off pensioners and people living comfortably off unearned income from making a contribution to higher NHS spending."-(Mr David Laws.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Laws

Mr Andrew Tyrie

 Question put, That the paragraph, as amended, stand part of the Report.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Laws

Mr Andrew Tyrie

 Motion made, and Question put, to leave out paragraphs 51 and 52.-(Mr Nigel Beard.)

 The Committee divided.

Ayes, 2      Noes, 4

Mr Nigel Beard    Mr Michael Fallon

Mr Jim Cousins    Mr David Laws

        Mr David Ruffley

          Mr Andrew Tyrie

 Paragraph 51 read as follows:

 "While the upper earnings and profits limits for employees and the self-employed were uprated in the Budget, they will not apply to the 1 per cent increase in NICs. We note this departure from previous practice which could be viewed as a move of the national insurance contribution system towards that of general taxation."

 Amendment proposed, in line 2 , after the word "NICs", to insert the words-

 "To insist, therefore, that the Upper Earnings ceiling remains intact seems to us mere sophistry".-(Mr Michael Fallon.)

 Question put, that the Amendment be made.



 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley  

Mr Andrew Tyrie

 Question put, That the paragraph, as amended, stand part of the Report.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley  

Mr Andrew Tyrie

 Paragraph, as amended, agreed to (now paragraph 55).

 Paragraph 52 (now paragraph 56) read.

 Question put, That the paragraph stand part of the Report.

 The Committee divided.

Ayes, 4      Noes, 2

Mr Michael Fallon  Mr Nigel Beard

Mr David Laws    Mr Jim Cousins

Mr David Ruffley  

Mr Andrew Tyrie

 Paragraphs 53 to 56 (now paragraphs 57 to 60) read and agreed to.

 Another paragraph - (The Chairman) - brought up, read the first and second time, and inserted (now paragraph 61).

 Another paragraph - (The Chairman) - brought up, read the first and second time, and inserted (now paragraph 62).

 Another paragraph - (The Chairman) - brought up, read the first and second time, amended and inserted (now paragraph 63).

 Paragraph 57 (now paragraph 64) read, amended and agreed to.

 Paragraph 58 and 59 (now paragraph 65 and 66) read and agreed to.

 Paragraph 60 (now paragraph 67) read, amended and agreed to.

 Paragraph 61 (now paragraph 68) read as follows:

 "One of the measures in the 2000 Budget was a 0.3 per cent cut in employers' NICs through recycling revenue raised from the climate change levy. At the time, the Treasury considered that "the lower National Insurance Contributions will act to promote employment opportunities ...". In the light of this and the evidence we received from the CBI and others, we asked the Chancellor about the impact of the increase in employers' NICs on jobs. The Chancellor told us that, while an impact assessment had not been undertaken, he did not believe it would have a big impact on employment. The system of National Insurance had been reformed cutting the cost of employing someone. He expected that, with growth over the next period, the economy would still be in a position to create jobs."

 Amendment proposed, in line 10, at the end, to add the words:

 "The Chancellor has clearly reneged on his previous view that lower NICs can promote employment."-(Mr Michael Fallon.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Question put, That the paragraph, as amended, stand part of the Report.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Another paragraph - (Mr David Laws) - brought up, read the first and second time, and inserted (now paragraph 69).

 Paragraphs 62 and 63 (now paragraphs 70 and 71) read and agreed to.

 Paragraph 64 read as follows:

 "The Chancellor told us that nine out of ten of the top foreign branches were paying no tax. The rules regarding the treatment of capital applied here are different to those applied elsewhere. The aim of this measure is to follow international practice and put us on a level playing-field with America, Germany, France and others. It affects some of the tax currently paid by foreign companies in their home country will not be paid there, but paid here instead, as in many cases they would be eligible for double taxation relief in their home jurisdiction. The Treasury told us that they did anticipate these changes affecting the status of the City as a major centre for international financial transactions. On the question of consultation, the Treasury admitted that they had not yet consulted with the banks, but referred to a public consultation process at the OECD which they said international banks were well aware of".

 An Amendment made.

 Another Amendment proposed, in line 11, at the end, to add the words:

 "We regret that the Treasury did not use the Pre-Budget Report 2001 to consult on measures such as the change in the taxation of foreign companies and the changes to the North Sea Oil tax regime. One of the principal reasons for introducing the Pre-Budget Report was to be able to carefully consult on tax matters before bringing proposals forward. We believe that the Treasury has unnecessarily missed an opportunity to consult on these measures in the Pre-budget Report and we urge the Treasury to use the Pre-Budget Report in the future as part of a full consultative process."-(Mr David Laws.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws    

Mr David Ruffley

Mr Andrew Tyrie

 Another Amendment proposed to the paragraph as amended, at the end, to add the words:

 "We particularly deplore this lack of consultation with foreign banks in London."-(Mr Michael Fallon.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws    

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph, as amended, agreed to (now paragraph 72).

 Another paragraph - (Mr David Laws) - brought up and read the first time.

 Question put, That the paragraph be read a second time.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph added (now paragraph 73)

 Another paragraph - (The Chairman) - brought up, read the first and second time, and added (now paragraph 74).

 Another paragraph - (The Chairman) - brought up, read the first time as follows:

 "The CBI told us that the new supplementary corporation tax charge of 10 per cent on profits was "both a surprise and a disappointment to CBI members, particularly as they had not been given the opportunity for prior consultation. The perceived financial risk of operating in the North Sea will be increased and it is likely that the profitability of recently completed investment projects will be adversely affected. The increase in first year capital allowances to 100 per cent may be a plus, but is not enough to balance the negative effects of the tax rise. The possible abolition of North Sea Royalty should now be speeded up, preferably without the need for a lengthy consultation process."

 Amendment proposed, in line 5, after the word "affected" to insert the words "We agree".-(Mr Andrew Tyrie.)

 Question put, That the Amendment be made.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws    

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph, as amended, divided (now paragraphs 75 and 76).

 Another paragraph - (The Chairman) - brought up, read the first and second time, and added (now paragraph 77)

 Another paragraph - (The Chairman) - brought up, read the first and second time, and added (now paragraph 78).

 Another paragraph - (The Chairman) - brought up, read the first and second time, and added (now paragraph 79).

 Postponed paragraph 18 again read.

 Paragraph agreed to (now paragraph 19).

 Postponed paragraph proposed by the Chairman again read.

 Paragraph read a second time, amended and inserted (now paragraph 26).

 Postponed paragraph proposed by Mr Andrew Tyrie read again as follows:

 "In addition, there is the issue of off-balance sheet finance. The accumulated and future PFI and PPP commitments amount to £43.5 billion, a proportion of which represents contingent liabilities. We recommend that the Red Book should include an annual estimate of these contingent liabilities."

 Question put, That the paragraph be read a second time.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Paragraph inserted (now paragraph 27).

 Motion made, and Question put, That the Report, as amended, be the Second Report of the Committee to the House.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Motion made, and Question put, That the Chairman do make the Report to the House.

 The Committee divided.

Ayes, 4      Noes, 1

Mr Michael Fallon  Mr Jim Cousins

Mr David Laws

Mr David Ruffley

Mr Andrew Tyrie

 Several Papers were ordered to be appended to the Minutes of Evidence.

 Ordered, That the Appendices to the Minutes of Evidence taken before the Committee be reported to the House.-(The Chairman.)

  [Adjourned till Wednesday 1st May at a quarter-to Four o'clock.


 
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