Examination of witnesses (Questions 60
TUESDAY 13 MARCH 2001
and MR MARTIN
60. May I ask Kate Barker: do you think the
initiatives that the Government has taken to boost productivity
are actually working?
(Ms Barker) If you are talking in terms solely of
this Budget, although the Chancellor talked quite a lot about
productivity and it was a big thing certainly early on in his
speech, he actually did not announce very much just in this Budget
to increase productivity in the long term. Of course we have always
argued and it has been said many times before that increase in
productivity is never going to be a question of one or two big
measures. It is going to be as a result of a number of measures
that are taken over time, not all of which are purely budgetary.
A lot of the focus on skills will of course be the result of decisions
that are taken outside the Budget and of course from the CBI's
point of view one of the things that could potentially hold back
productivity, namely a poor transport system, will be helped by
measures taken in the CSR. The good thing from this Budget from
a business point of view and to that extent something that should
help productivity in the long run was that, unlike in the previous
Budgets from this Chancellor, we did not have any unwelcome surprises
on the corporation tax side. Indeed, although we did not have
very much actually announced which will take effect this year,
in a number of cases: the proposed research and development tax
credit for larger companies, the recognition of the importance
of international competitiveness for multinational taxation, we
saw some very helpful pointers to tax measures which we now expect
to see come in over the next year or so which will help to improve
the investment rate in this country from larger companies and
that I think will be good news in the long run. We also saw some
measures for SMEs. They were on the whole, I suspect, in the right
direction. They were less significant than they have been in the
past but as a matter of fact I would agree with the point that
Edward Troup made: we have perhaps had too many measures for SMEs,
not always with a very clear idea of what each of them individually
was supposed to achieve. One of the things I would particularly
welcome would be a really good evaluation of just where we are
in terms of SME taxation overall, what has been achieved by the
measures we have had so far, should any of them be got rid of
and be replaced by something better.
61. What do you see this year as the likely
trend in productivity growth? I understand the Chancellor is closing
the gap with the USA.
(Ms Barker) In a sense I could be really dull and
go back to the beginning and say that one always wonders exactly
how big the gap with the USA is. I personally am of the view that
you should look at it in terms of output per person per hour,
although the gap is not quite as big as some of the very large
gaps that we sometimes have trotted out, which frankly would be
unclosable in any feasible period. Beyond that though there are
clearly uncertainties about how productivity is measured. Sometimes
if you narrow that it can seem a bit less of a mountain to climb.
Over the next five years, which is a reasonable length of time
to talk about it, I would be optimistic about starting to close
the gap with the US and also closing the gap with continental
Europe, partly for reasons which are not necessarily something
to do with fundamentals but are to do with the rate at which people
are adopting the new economy. Of course, seeing the new economy
and new technology adopted in the US, they have clearly been first
movers. On the back of that we have seen part of the effect in
terms of building strong productivity in the US, even though the
evidence for it outside the ICT sector is not very great, and
we should start to see more of that coming through in the United
Kingdom and in particular when we look at Europe over the next
few years, and I would think that would be a very positive trend.
In addition, and here I agree with the analysis in the Treasury's
paper on productivity, we have seen a lot of people moving into
the labour force in the United Kingdom over the past few years
who have previously been out of the labour force. It would be
reasonable to assume that they were not terribly productive when
they were first brought in. Their productivity is going to increase.
There are again good reasons to think that our greater productivity
is going to improve but how much in five years' time will we have
closed the gap? It is a little bit less certain because it is
possible that some other countries may get smarter too.
(Mr Coats) What is important about the Budget is the
medium term strategy that is beginning to emerge here. The Chancellor
has understood that there is only a certain amount you can do
through fiscal measures to boost productivity. There are two mentioned
in the Red Book. One is the proposed R&D tax credit which
the TUC and CBI will be discussing as part of the joint initiative
on productivity that the Chancellor has asked us to develop. We
are trying to answer jointly some of those design questions about
the R&D tax credit: what is eligible and where do you start
from? What counts and what is your bench mark for additionality?
The second is the suggestion that the Government is willing to
look at a tax credit for investment in training for low skilled
workers to obtain qualifications up to Level 2. Both of those
are very welcome. What is clear is that the Government understands
that that is not enough and that ultimately closing the gap with
the US and France and Germany depends on what employers and unions
are able to do in the work place. I would see the Budget measures
as being entirely consistent with the wider initiative the Chancellor
has asked us to take as social partners to close that gap, looking
at skills, investment, innovation, technology and best practice.
62. Are there any further steps that you think
the Government should have taken to improve the prospects of productivity
(Mr Coats) Part of the process that we are now engaged
in with the CBI is to identify what further steps might be taken
next year. The intention is to have a report for the Chancellor
by September, all being wellit is quite a tight timetableso
that the recommendations that are made by the TUC and the CBI
can be taken into account in next year's Budget.
63. Could I ask Andrew Dilnot, Edward Troup
and Martin Weale whether they think the proposals in the Myners
Report, if implemented, are likely to improve productivity?
(Mr Dilnot) I do not have anything to add on that.
(Mr Troup) I do not think so. I do not have anything
(Mr Weale) Could I say that I am not aware that shortage
of capital has been the problem for the investing sector. It is
something which comes up time and time again. Typically in boom
periods we hear how people should be lending more to innovative
companies, and then you have recessions, Internet failures and
so on. Banks get into difficulties because they were doing what
became imprudent lending. My worry on that aspect of the Myners
Report might be that a pension fund could start to find themselves
in the same sort of position and be encouraged to lend into what
really are very uncertain prospects.
(Ms Barker) I slightly disagree with Martin. Although
I do not think there is any particular shortage of capital overall
I think there certainly are occasions you can point to, such as
the so-called equity financing, the financing gap, when people
looking for pockets of money (not very large pockets of money)
do find some difficulty in getting themselves invested in by funds.
Certainly the Myners Report was addressing that and trying to
encourage trustees to as it were take a more flexible view in
the circumstances of their scheme. I am sure it would not be consistent
with the Myners Report to encourage trustees to take a sort of
wildly reckless stance but simply to encourage them to take perhaps
a slightly more enlightened view of risk in the schemes where
it is appropriate. In that sense I think his motivation was correct.
What I think is slightly more difficult is the question you asked
as to whether or not the measures he has proposed will make any
difference because of course the difficulty for anybody being
a trustee, is of being criticised for taking excessive risk or
doing things that are different from other people. In a sense,
unless the trustees are collectively going to start to move in
that direction, it is always going to be very difficult for any
individual trustee body. I think he has made some steps in the
right direction but it is very uncertain whether or not they will
prove to be beneficial.
64. May I come back to the measures for small
businesses. Kate Barker, you said you did not think there was
very much in this one. Can I draw your attention to two things?
One is the proposal for the flat rate scheme for paying VAT for
the £100,000 and below turnovers, but the other one was the
suggestion that small companies could use the same accounting
procedures by which they present their annual profits as the basis
upon which they can make a return to the Inland Revenue for tax
liability. That latter one has had a pretty enthusiastic welcome
from the Federation of Small Businesses. Is that quite a significant
move for reducing the burden of regulation and administration
costs for small companies?
(Ms Barker) Yes. I would not want to be misunderstood
in this. In the sense that I said that the measures were not very
significant, I meant not very significant in the sense that Andrew
Dilnot was looking at winners and losers; they do not appear as
very large negative numbers in terms of the Budget plan, so in
terms of cash coming to small businesses it is true that the measures
are not as significant as they have been in some earlier years.
However, you are quite right to remind me of the fact that one
of the things we always complain about is the burden of regulation
and these are measures designed to ease regulation on small companies
and to that extent they are very welcome. In the case of the second
one you mentioned, the review of corporation tax, we will have
some way to go. I do not really want to express a view on it today
to say just how beneficial I think it would be. Some companies
have expressed some concern about whether or not some of the allowances
they presently have will be lost under the new system and we will
have to wait until we see exactly what is in the Government's
mind to have the opportunity to discuss that with a range of companies
before we are able to say how farthere is always a tension
in this between a tax system that people think encourages them
to do the good things such as investing and a tax system that
is very simple. It is the difficulty in many tax decisions.
65. The measure clearly points towards a simplification,
does it not, which is something that small businesses have constantly
been asking for?
(Ms Barker) It does clearly point to a simplification
and I am making perhaps the unwelcome point that however much
businesses ask for simplification it is also the case that sometimes
simplification can mean giving up allowances or reliefs that they
have found particularly welcome and therefore that turns out not
to be welcome.
66. You cannot have it both ways.
(Ms Barker) And at the moment I am not sure where
this particular consultation will come down in terms of striking
that balance. On the whole I think it is a good thing but I would
prefer to wait until we can see more of the details before I make
a final comment.
(Mr Troup) I was going to make a point similar to
Kate's last point. It is clearly welcome to try and simplify it
but it is extraordinarily difficult. I think it is regrettable
that in the paper which proposed moving to accounts, effectively
leaving businesses to determine their own profit levels for themselves
according to their accounts, there is already a reservation saying,
"Yes, we want to retain the right to give special allowances
for IT expenditure or this and that". It seems to me that
the Government have got to decide whether they genuinely believe
that businesses can go out there and maximise their profits with
a minimum of intervention from the Government or whether Government
have got to go on poking around in bits of business and saying,
"We want a bit more expenditure on this, a bit more expenditure
on that". There is a tension which is not really addressed
at all and it is explicit in the paper on small business taxation.
The other point is that they are trying to carve out part of the
tax system, say small businesses get one regime; everybody else
gets another one. That is likely to be as complex as, if not more
complex than, what we have at the moment because the small businesses
who benefit from the current regime are likely to say, "We
want the option to be taxed as a big business", so they then
have to worry about whether they should be choosing to be taxed
under the small regime or taxed under the large business regime.
You have all the boundary and interface problems there. While
it is clearly welcome in terms of intention, in detail I have
to say my own view is that it is simply not going to work for
small business taxation. I also think that it is regrettable that
the only measure the Government has put forward in this Budget
to help small business with compliance costs is not to try and
simplify but simply to offer them grants and payments to meet
That is not reducing the costs of complexity on the economy as
a whole. It is simply shifting it from the small businesses back
to central government. I do think a rather wider view of the tax
system has to be taken and to decide whether the Government wants
to go on with micro measures which inevitably create complexity
and proportionately more burdens on small businesses, or whether
the Government is going to say, "Yes, we genuinely do want
to simplify", in which case you have got to row back right
across the board and not stopping to look at individual areas.
67. If you take all the measures together that
are in this Budget do you think it has helped or will help to
reduce the burden of regulation on small businesses or not?
(Mr Troup) No.
68. You do not think it will?
(Mr Troup) No. It is very difficult to see any individual
measure, nothing specific that is proposed, that will.
69. So the Federation of Small Businesses is
(Mr Troup) I am afraid they will be proved wrong.
They may benefit small businesses because he has offered to give
them money to help with the regulatory burden, but that is not
actually reducing the burden. It is simply meeting the cost of
it. I have to say that although the flat rate scheme for VAT may
offer some relief, I think that the small business corporation
tax scheme taken as a whole will not.
70. The Federation of Small Businesses actually
said that it thought this measure would save a lot of companies
thousands of pounds a year in administration costs. Do you think
it is wrong?
(Mr Troup) I would be delighted if it does. I am not
going to sit here and argue with the Federation of Small Businesses.
A flat rate scheme for VAT may well do but I think it will also
be quite expensive for the Exchequer. The small business corporation
tax scheme, I am afraid if that is what they have said about it,
that I do not agree with.
71. One of the issues that will be raised about
small firms is the impact of the reforms of maternity and paternity
grants. Maybe Kate Barker and David Coats could comment on what
will be the impact of that on small firms but also maybe more
broadly on whether there are broader economic and employment implications
of the extension of maternity and paternity rights.
(Ms Barker) The CBI have accepted the introduction
of these measures but certainly, on behalf of smaller firms in
particular I have to say, rather reluctantly. Of course it is
the case that more firms will benefit from the payments given
to them to compensate for the administrative costs of dealing
with maternity and paternity pay and that is welcome. We are slightly
worried that there is a slice of firms that will come just above
the cut-off point that will find the extension of the increase
in maternity pay and the increase in leave quite costly and quite
difficult. Of course it is always true that for the smaller firms,
where inevitably every employee is more important, having a long
period of maternity leave which they have to cover may prove to
be difficult. It may prove to be the case that they have to employ
somebody whereas before they might have thought they would get
through the period of maternity leave. Certainly it will raise
costs. I would not wish to say that we oppose these measures in
themselves but they are certainly not helpful to smaller firms.
If you take them together with all the other employment measures
of course, which are talked about in many other areas although
not in here particularly, it does add up to a package of measures
which means that costs of employment and of administration for
smaller firms, administering working families tax credits for
example, have risen under this Government. To go back to the point
that was raised earlier, the measures in terms of tax simplification
are so much less significant for smaller firms than these employment
measures that it is difficult to argue anything other than that
the burden of regulation as far as SMEs are concerned has gone
72. And if you look beyond small firms at the
broad economic and labour market implications, given that there
are starting to be areas of labour shortage?
(Ms Barker) It is absolutely true in the short term
that we have areas of labour shortage and of course this may make
it more difficult, but I regard that as a cyclical phenomenon
rather than something that would argue against labour market measures
that made sense in the longer term.
(Mr Coats) Two points. First of all, this is obviously
a desirable social policy objective which is broadly consistent
with the Government strategy elsewhere, enabling people to balance
work and family life. The extension of paid maternity leave from
18 to 26 weeks is welcome for that reason. I am not certain that
I agree with Kate that you can only see this as a burden. You
can interpret these measures as a way of improving the overall
performance of the labour market by encouraging women to stay
in the labour market and to return to work after they have had
children. That is a benefit to employers, not simply a cost, because
they are retaining tacit knowledge in the organisation, they are
retaining skills, they are reducing their search/recruitment costs
as a result, so it is not simply a burden and I think we need
to have a rather different discussion about labour market regulation
which is focused on how it benefits employers and improves performance
and is not simply seen as a burden on business.
73. Edward Troup, the new research and development
tax credit is now being extended to large firms. Is there not
a danger that the subsidising of research and development that
might take place anyway is even greater with large firms than
small firms, and what kind of evaluation do you expect to see
of whether or not these tax credits actually do boost productivity?
(Mr Troup) I think evaluation is extremely difficult.
I am not an economist but I am happy to take as read that there
is a shortfall in the amount of R&D done here because the
general benefit of R&D is less than the individual gain to
the companies concerned. I am prepared to take on trust that there
is a need to subsidise the cost of R&D. The choice between
a volume based credit, which effectively has inherent in it a
large deadweight cost because everybody who was doing R&D
will get the benefit, and the incremental base which attempts
only to reward the extra R&D that is done, is very much one
of complexity. In terms of evaluation I doubt that you can ever
evaluate what R&D was done as a result of the tax credit that
was not done otherwise because it requires effectively evidence
of subjective decisions made by the managers of businesses as
to what they would have done had they not got this tax relief.
The one thing about tax is that it is just part of the business
decision and no-one will be able to say, "If I did not have
that ingredient in the framework I would have taken a different
decision". Firm evaluation would be almost impossible. The
question of whether you should avoid the deadweight by going for
the incremental relief is very much a matter of trying to assess
the complexity. The paper does actually make a fair stab at evaluating
the complexity, which is very great, and one of the dangers in
appearing to have pre-decided that we should go for an incremental
system, which is what the paper does, is that it takes as comparisons
Japan, France and the US, but the tax and commercial systems are
very different in those countries because they effectively do
not operate through groups and in the US where they do operate
through groups of companies and are taxed on a consolidated basis.
We have a tax system which works through individual companies
and the complexities (which the paper acknowledges) which that
creates are very significant. My preliminary assessment is that
a volume base is probably going to be more sensible here simply
because the complexities of the incremental base are going to
be that much greater, but that has to recognise that that would
generate a very considerable amount of deadweight cost.
74. Andrew Dilnot, if you cannot evaluate it
properly how can you ever be sure whether you have boosted productivity?
(Mr Dilnot) I have to say I think Edward showed a
worrying lack of confidence in the competence of statistical economists.
I think work is possible which could evaluate this and one of
the things which I think it would be reasonable to expect from
the Treasury would be a commitment to make the availability of
the data and funding such research. It would be well worth asking
the Treasury what they have done so far to evaluate their R&D
tax credit for small firms. It is striking that if you look at
evaluation across the whole run of government policies, a lot
of evaluation is being done of many social policies: the New Deal,
working families tax credit, and so on. So far not as much evaluation
has been contracted out on these kinds of areas where it is crucial.
I think something can be done. It would require a great deal of
data and extremely sophisticated econometric skills. The balance
between complexity and deadweight loss Edward has set out very
clearly. There is a trade-off. The particular scheme outlined
in the report focuses very tightly, even to the extent of indexing
for inflation past spending on R&D. You see the reason for
doing that. You do not simply want to give credit for R&D
spending that is only large because there has been higher inflation,
but it necessarily complicates things.
75. Thank you all very much. Is there anything
you want to say?
(Mr Dilnot) Yes, there is. There are a couple of things
I would like to pick up on from earlier. One is just what has
happened to the tax burden.
76. I thought you might.
(Mr Dilnot) There was some confusion there. It would
have been nice to have seen the numbers in table C23, which go
backwards, put against the numbers in table C9 and C5 which go
forwards. I think that was what was being struggled for. My copy
has had those scribbled in since the evening of the Budget day.
On the Chancellor's preferred measure, net taxes and social security
contributions, in 1996-97 the figure was 35.2 per cent, in the
year about to end the Treasury's forecast is that it will be 37.7
per cent, that is an increase of two and a half percentage points
of GDP or roughly £25 billion a year.
77. Does that include the scoring of the tax
(Mr Dilnot) I am about to come to public sector current
receipts. So that is the Chancellor's preferred measure. Public
sector current receipts, which is the total of receipts, which
leads to the amount we have to borrow or the surplus, the longstanding
measure was 37.6 per cent of GDP in 1996-97 and according to table
C9 or C5 it would be 40.5 per cent in the year 2000 01, an
increase of 2.9 per cent of GDP or about £29 billion. As
to whether that is discretionary or not, I think at one level
of course it is discretionary because it is up to the Chancellor
to decide how much tax she or he will raise in any one year. The
component parts of that increase have been some deliberate measures,
some announced in advance by the last Conservative Government,
some announced and implemented by this Labour Government; growth
in the economy, as the economy grows we expect to see tax share
of national income rise because the tax system is progressive;
then finally forecasting error, tax revenues have been buoyant,
buoyant in some unexpected ways and that has contributed to this.
78. I note you say the Treasury has estimated
in the absence of offsetting measures the ratio of taxes to GDP
will rise by 0.23 per cent, this is once a year, when the economy
is growing at close to a trend rate.
(Mr Dilnot) Yes.
79. Over four years that would amount to what?
(Mr Dilnot) Four years of two and a half per cent
growth, roughly ten per cent so you might think about two, two
and a half per cent extra on the tax system. There was one other
point which I wanted to make which was about fiscal rules. Martin
Weale said that many economists would think that the optimum thing
was to have constant tax rates going forward. Martin may well
be right but I think there is another way of thinking about it.
When you ask an economist what the optimum thing is they tend
to say "We should balance something against something else",
you know a marginal cost and a marginal benefit, and actually
the natural thing to think about the activities of Government
is you should undertake activities of Government where the marginal
social benefit exceeds the marginal social cost, that is it. As
the external economy changes, as populations change, that might
lead you to borrow more or less, it certainly would not lead you
to the fiscal rules that we have at the moment and nor, I think,
necessarily would it lead you to the idea that tax rates should
be constantly going forwards.
80. Are we starting a late argument here?
(Mr Troup) No. You asked if we had any closing comments;
I was just going to make comments on a completely different point,
really picking up the issue of policy making. This Budget even
more than the preceding Budgets gave the impression of being put
together in a terrible hurry. There were a number of mistakes
in the press releases. The websites were chaotic. I am concerned
that the process of policy making is not satisfactory. To pick
one example from last year, there was the most tremendous row
aboutas this Committee is awaredouble tax relief.
If you look on page 150 of your Red Book, you will see that the
first three years of those measures being brought in, it will
actually cost the Treasury five million pounds: plus five, plus
five, minus 15. So at a cost of five million pounds as a result
of what I believe was rushed policy making last year, we have
done a great deal of harm to the reputation of the UK as a place
to do business. It is one example, I think it is an extremely
important example from the point of view of British business but
I think you can look at a number of other measures and criticise
them for the lack of proper evidence based policy making, proper
internal discussion within the Treasury before the announcement
and proper discussion out here. I would hope the next Parliament
we will do better.
(Ms Barker) I am slightly obliged to respond to that
and defend the Treasury slightly. I absolutely agree what happened
with double tax relief last year was confused and highly undesirable.
I think I would point out in terms of some of the other measures
where consultation has been going on this year, the Treasury has
quite rightly decided that they cannot bring them through in a
rushed way this year and it has hesitated to bring in changes.
This is a bit regrettable in the case of the changes to capital
gains on the disposable of substantial shareholdings because I
think it is a very desirable measure. Nevertheless I think it
is absolutely right that they are taking the time to get it right
so perhaps they did well at something.
(Mr Troup) I agree with that.
Chairman: I think that is a good time
to stop. We cannot start all over again. Thank you very much.
1 Note by Witness: Para 5.13(1) enhanced small employer
relief for maternity pay provider for additional payment of `compensation'
to recognise increased compliance burden. Back