Examination of Witnesses (Questions 160
TUESDAY 4 DECEMBER 2001
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,
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
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.
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
(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
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.
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 youthis will come
into the overall fiscal picture which is why I will answer itwhen
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.