Memorandum submitted by HM Treasury
1. GROWTH FORECASTS
At the 11 December 2001 hearing of the Treasury
select committee, Mr. Tyrie asked whether, given the greater uncertainty
surrounding economic forecasts, the Treasury should have widened
the opportunity range of its own forecast.
The projections for GDP growth and its components
produced by HM Treasury and published alongside the Pre-Budget
Report are presented as opportunity ranges. These ranges do not
represent general forecast uncertainties: key forecast risks are
examined in the Pre-Budget Report document and average errors
on past forecasts are shown in Table A9. Rather the opportunity
ranges represent alternative views about the supply side performance
of the UK economy.
Since November 1999,
these opportunity ranges have been anchored around the Government's
neutral view of the trend rate of GDP growth over the medium term
of 2½ per cent a year. This neutral assumption is based on
a careful consideration of the evidence on UK economic performance,
including clear signs of a decline in the sustainable rate of
unemployment. The lower and upper ends of the opportunity ranges
are based on 2¼ and 2¾ per cent trend growth respectively.
Projections for GDP growth at the low end of
the opportunity ranges are intended to be deliberately cautious,
and make no allowance for any improvement in the supply side performance
of the UK economy over recent years. This deliberately prudent
and cautious approach underpins the projections of the public
finances set out in Annex B of the Pre-Budget Report. The upper
end of the opportunity ranges illustrates the potential for stronger
non-inflationary growth based on the Government's policies to
raise productivity and to increase the labour supply.
Within the range of outcomes for GDP growth,
the forecast path for inflation is assumed to be invariant. This
is a highly stylised assumption that is made for the illustrative
purpose of focusing on the real benefits of lower wager pressure.
It amounts to assuming that the supply side benefits show up quickly
in employment and output, abstracting from transitional adjustment
through wages and prices. In practice, lower wage pressures would
be likely for a time to show up partly in lower inflation before
the full effects on employment and output came through.
Ratios of demand components to GDP are also
assumed to be largely invariant within the forecast ranges for
GDP growth. This stylisation is based on the assumption that factors
affecting the NAIRU (and employment) are unlikely to have much
effect on the sustainable real wage, which is mainly determined
by productivity. In this case, income and expenditure shares in
GDP would tend not to vary much within the forecast ranges for
2. NATIONAL INSURANCE
At the Treasury select committee hearing of
11 December 2001, Mr Ruffley asked what the revenues would be
from abolishing the upper earning limit on employee National Insurance
contributions and from aligning the upper earnings limit with
the higher income tax band.
Primary Class 1 contributions B contributions
paid by employeesare payable at 10 per cent of earnings
between the Primary Threshold (PT) and Upper Earnings Limit (UEL).
The UEL for 2001-02 is £575 per week, and for 2002-03 £585
The full-year yield from removing the upper
earnings limit on National Insurance contributions is estimated
to be £3¼ billion in 2002-03.
For 2002-03, the alignment of the upper earnings
limit with the higher income tax band is estimated to yield £830
3. THE GROWTH
At the 11 December hearing, Mr. Beard asked
for the reasons behind the change, between the Budget and the
Pre-Budget Report forecasts, in the figure for real growth in
general government consumption for 2001 (PBR table A9, page 160:
3 per cent; FSBR table B6, page 174: 43 per cent).
The difference between these two figures is
mainly explained by changes to the deflator for general government
consumption. Outturns for the government consumption deflator
for the first three quarters of 2001 have shown stronger year-on-year
increases than expected in the Budget forecast.
Forecast consumption for 2001, in current year
prices, is £0.2 billion higher than at the Budget. However,
upward revisions to the data for the first three quarters of 2000
result in slightly lower overall annual growth. In current year
prices, forecast growth in government consumption is 7.7 per cent
in the Pre-Budget Report forecast as compared with 8.1 per cent
in the Budget forecast.
4. THE NHS/DEPARTMENT
At the 4 December hearing, Mr Fallon sought
clarification on the size of the NHS underspend. A figure of £44.0
billion published at the time of Budget 2001 was quoted as relating
to NHS expenditure in 2000-01. This figure is from table C13 of
the Financial Statement & Budget Report 2001 (published in
March 2001) and actually represented the Department of Health,
including the NHS, resource budget.
The other figure quoted of £42.8 billion,
which was published in table B16 of the Pre-Budget Report 2001
(November 2001), related to the resource budget for the NHS
only and not for the wider Department of Health.
The comparison between the two figures is therefore
not meaningful, as one relates to the Department of Health as
a whole, including the NHS, while the other is for the NHS alone.
The provisional Department of Health underspend,
including the NHS, for 2000-01 is £692 million in resource
terms (in cash terms the provisional underspend was £514
million). Over one third of this sum was a planned contingency
to meet costs falling in the current financial year. The total
underspend has been carried forward and is being used on provision
of health care in this financial year.
5. THE PREDICTED
At the 11 December hearing, Mr Laws inquired
into the decline in revenue from capital gains tax. The Pre-Budget
Report notes that capital gains tax receipts are projected to
yield £2.9 billion in 2001-02 and £1.8 billion in 2002-03.
This difference of £1.1 billion breaks down as follows:
about £0.9 billion as a result
of lower forecast equity prices B these are expected to be lower
in 2001-02 than in 2000-01 and this will impact on receipts in
about £0.2 billion as a result
of the higher costs of taper relief arising from the maturing
of the taper.
It should be noted that the cost of tax reliefs
are broad estimates and may have a wide margin of error.
The Pre-Budget Report also published the estimated
cost of the change to the capital gains tax business assets taper
announced in Productivity in the UK: Enterprise and the Productivity
Challenge (June 2001). The estimated cost of this measure, which
has been taken account of in the published projections of capital
gains tax receipts referred to above, is in £million:
6. STAKEHOLDER PENSIONS
At the 11 December hearing, Ms. Mountford inquired into the
success of pension provision. Latest figures from the Association
of British Insurers, released on 7 January 2002, suggest that
304,750 employers had designated a stakeholder pension provider
for their employees by the end of November 2001.
7. THE STAMP
At the 11 December hearing, Dr Palmer asked whether there
was any estimate available for the proportion of homes in disadvantaged
areas affected by this scheme. From 30 November 2001, all property
sales, assignments of existing leases and premiums on new leases
up to a price of £150,000, in almost 2,000 disadvantaged
areas throughout the UK, have been exempt from stamp duty. The
measure is designed to stimulate disadvantaged areas by attracting
development and encouraging the purchase of residential and commercial
property by individuals and businesses. It arose out of the Report
in June 1999 of the Urban Task Force chaired by Lord Rogers and
is part of a package of fiscal measures to help regenerate Britain's
Subject to negotiations with the European Union for approval
as State Aid, a second stage of the reform is expected to start
in 2002. The £150,000 limit will be raised significantly,
or stamp duty abolished, for all transfers of non-residential
property in the qualifying areas. Legislation to distinguish residential
and non-residential property for the purpose of the exemption
will be introduced in Budget 2002.
The table below provides estimates of property transactions
throughout the UK for 2001-02.
On the assumption that transactions in disadvantaged areas
broadly reflect the national trend, it is estimated that 45 per
cent of residential transactions and 43 per cent of all transactions
will benefit from the exemption as it currently stands.
ESTIMATED NUMBER OF UK PROPERTY TRANSACTIONS
|Price band (consideration)||Up to £60k
|Stamp duty rate||0%
|Percentage of residential transactions between £60k and £150k = 45
|Percentage of all transactions between £60k and £150k = 43
8. THE SAVING
This note expands upon evidence given by Mr Nicholas Holgate,
Director of Welfare reform, at the 4 December hearing of the Treasury
select committee. The issue was raised of whether people on low
incomes would be targeted by unscrupulous lenders, offering a
loan to allow them to take advantage of the matching funds offered
by the Saving Gateway. Mr. Holgate undertook to provide the Committee
with a note setting out the Government's response.
The first, and potentially most significant, design feature
of the Gateway will be the restriction on withdrawal of matching
funds until account maturity. As the latest consultation document
sets out, participants in the Saving Gateway will be able to access
their own contributions at short notice (which means that they
need not borrow from elsewhere if they need a source of funds)
but will not receive the Government's matching contributions until
the account matures.
Account maturity will occur after a total of £1,000
has been deposited B which, with a maximum monthly contribution
of £25 will take a minimum of 40 monthsor five years
from the opening of the account, whichever is the sooner. Therefore,
any unscrupulous lender wishing to take advantage of Saving Gateway
participants will have to tie up their "working capital"
for between 40 and 60 months before receiving a return. This is
likely to be unattractive to them: this point was confirmed by
attendees at a recent seminar on the Saving Gateway.
The second main feature of the Saving Gateway will be the
integration of education, to build financial skills and capacity.
Evidence from Individual Development Accounts (IDA) in the United
States shows that mandatory financial education has a marked effect
in increasing the levels of saving of individual participants.
Anecdotal, but widespread, evidence shows savers reporting that
they "came for the matching funds, but stayed for the education."
Many IDA participants started the programme in significant
debt, and for these individuals, debt reduction and credit repair
have been the priority for education. This has been one of the
successes of these schemes, allowing people to reduce the burden
of low incomes and debt that has hindered their ability to think
beyond the short-term to longer-term opportunities that they will
be able to secure through saving sustainably for themselves.
As Mr. Holgate said to the Committee, all of these proposals
represent the Government's latest thinking on ways to tackle the
problem of borrowing to save. We will be using the opportunity
provided by the pilots to test the operation of these features
of the account, and evaluate their efficacy in practice, as well
as continuing to think about new ways to limit the problem to
9. INDIRECT TAX
At their hearing on 4 December with HM Treasury officials,
the Treasury select committee asked for "as full a report
as possible" on the Government's approach to tackling fraud
in a number of areas of indirect tax. The two papers published
alongside the Pre-Budget Report, Tackling Indirect Tax Fraud
and Measuring Indirect Tax Fraud, are intended to provide
a comprehensive report on the Government's estimates of the levels
of fraud, the strategies for tackling it and the results achieved
to date. Copies of these papers are available in the House of
Commons library and on the HM Customs website (www.hmce.gov.uk).
The Committee also asked specifically about: (i) the Government's
estimates of VAT missing trader fraud for 2001-02 onwards; and
(ii) the impact of VAT missing trader fraud on the VAT revenue
In response to (i), estimates of missing trader fraud cannot
be produced for the current financial year because the data sources
used to make estimates of this type of fraud only become available
several months after the end of the financial year in question.
As made clear in Paragraph 2.4 of the Tackling Indirect Tax
Fraud paper, the Government sees no value in publishing premature
estimates which are not as robust as possible and which would,
therefore, give an inaccurate baseline against which to measure
fraud trends or the performance of anti-fraud strategies.
However, the Government also described its strategy for tackling
VAT missing trader fraud, introduced in September 2000, the objective
of which was to halve the revenue losses from this type of fraud
by 2003-04. If successful, it follows that this strategy would
reduce the revenue loss from this type of fraud to at least £0.75-£1.15
billion by 2003-04.
In response to (ii), fiscal projections for VAT are based
on current receipts and changes in the level of consumers' expenditure.
The key assumptions underlying all fiscal projections are audited
by the National Audit Office under the three year rolling review.
The key assumption for the VAT projections is that the ratio of
VAT to consumption falls by 0.05 percentage points a year. The
assumptions underlying the VAT projections were last audited by
the NAO in November 2000.
10. PENSION CREDIT
In answer to Mr Cousins' queries on 4 December, I refer the
committee to the Department for Work and Pensions document on
the long-term costs of the Pension Credit, attached for convenience,
which gives illustrative projections of the future cost and coverage
of the Pension Credit under various assumptions.
11. PENSION CREDIT
B ELIGIBILITY OF
At the hearing with officials on 4 December, Mr Cousins asked
whether two women who lived together and drew separate pensions
would be assessed for the Pension Credit separately; whether two
men would be; and whether a brother and sister would be. Mr Holgate
replied that he thought they would all be assessed separately.
This is indeed the case.
Pre-Budget Report, HM Treasury, November 1999. Back