Budget 2011 - Treasury Contents

Conclusions and recommendations

General issues

1.  There may well be good reasons why the Finance Bill also contains provisions extending the period for which all Budget Resolutions have statutory effect to seven months, but we recommend that our colleagues on the Finance Bill seek a full explanation for this change. (Paragraph 3)

2.  It has been noticeable over many years under successive Governments that measures appear to have been trailed, sometimes accurately, sometimes in a way designed to place them in the most favourable light. Whether particular press reports are leaks or briefings or merely press speculation, we have no view, but we deprecate both leaks, and any advance briefing. Such activities are corrosive of good government. We will return to this issue at future autumn statements and budgets. (Paragraph 4)


3.  The combination of high inflation, some derived from external factors, and weak income growth is affecting the living standards of many in the UK. At the moment, the costs to the Government are rising with inflation-linked benefits but revenues—such as from income tax—are not keeping pace, as wage growth remains subdued. (Paragraph 13)

Forecasting general government employment

4.  We understand that the collection of workforce planning data across Government is difficult, particularly when radical changes are in progress. The Government is the best source of workforce plans to enable bottom-up forecasting of general government employment. Such information, if collated, would be of use to the Treasury in monitoring implementation and achievement of the consolidation, as much as it would be of assistance to the OBR in employment forecasting. We recommend that the Treasury does what it can to collect this information in a timely fashion, so that more is available before the next OBR forecast round. (Paragraph 27)

Output gap

5.  We recognise the importance of estimates of the output gap for assessments of the size of the structural deficit but we note the risks inherent in overreliance on this uncertain and imprecise measure as a basis for fiscal policy. (Paragraph 32)

Changes within the Budget

6.  In 2010 major decisions regarding public spending and tax were made in the Chancellor's Budget and Spending Review. It is therefore to be expected that the net fiscal effect of the policy changes announced in the 2011 Budget was minimal: to have done anything else would have contradicted one of the Chancellor of the Exchequer's stated objectives in the Budget. (Paragraph 37)

7.  In this Red Book, as in the last, the Treasury has included a considerable amount of additional analysis of the distributional impact of the Budget measures, in response to our requests. We are grateful for the Chancellor's responsiveness. This has become a regular feature of the Budget documents. (Paragraph 41)

8.  We note that the majority of the consolidation has yet to begin. In the coming year, for example, the total consolidation will increase over fourfold to £41bn in 2011-12 from £9.4bn in 2010-11. The consolidation of spending is £5.5bn in 2010-11 and £22bn by 2011-12. One concern expressed to us was that these future spending cuts may prove too difficult to implement. We agree with the Chancellor that it will be important to strive 'to spread the burden fairly' as the consolidation begins in earnest. Being seen to do so is important. (Paragraph 42)

Meeting the fiscal mandate

9.  The scenario and sensitivity analysis done by the OBR in trying to understand the risks surrounding the meeting of the fiscal mandate is welcome addition that will assist in explaining the thinking behind whether or not the fiscal mandate will be met. We welcome the fullness of the OBR Economic and Fiscal Report. It will be the task of the newly created and independent OBR rigorously to examine and explain progress in meeting the fiscal mandate and hence reinforce the fiscal plan's credibility. (Paragraph 48)

Alternative strategies

10.  Markets need to be confident that the Government is committed to its fiscal policy. A Government which talked of a Plan B as a substitute for that policy would prejudice that confidence. However, as we explored in our evidence, a responsible Chancellor is likely to have contingency plans to deal with a variety of scenarios where economic circumstances are fundamentally changing. Those plans should not be made public unless and until they are needed. (Paragraph 53)

The Plan for Growth

11.  We examine some of the proposals in The Plan for Growth later in this report; we urge colleagues on other Committees to evaluate the benefits of those within their terms of reference. (Paragraph 74)

Tax reform and corporation tax

12.  We welcome the reduction in the headline rate of corporation tax and note the evidence provided that this has boosted business growth and tax revenues elsewhere. We will monitor closely the impact of this policy on corporation tax revenues in the UK. (Paragraph 81)

Enterprise Zones

13.  Enterprise Zones may have some effect in reviving particular areas, but we note that almost all the evidence received is unsure about the extent to which they will contribute to UK growth. It is clear that there is still much to be done on the details of this policy. We expect that our colleagues on the Business, Innovation and Skills Committee and the Communities and Local Government Committee will want to scrutinise this policy carefully as it develops further. To aid them in this, we recommend that the Treasury provide an analysis of the overall economic impact, including measurement of any frictional and deadweight costs. (Paragraph 93)

Housing and planning

14.  The Plan for Growth contains measures to stimulate demand from first-time buyers through the FirstBuy scheme, whilst also undertaking reform of the planning system, which may, in time, increase the supply of housing. If successful, the combination of these measures should both increase the supply of houses, and assist first-time buyers. However, if the Chancellor's expected supply side response fails to materialise, additional demand from FirstBuy could merely stimulate house prices. This could take house purchase out of the reach of more people. We recommend that the Treasury assess the impact of both the FirstBuy scheme and the wider planning reforms, and report back at each Budget. (Paragraph 98)

The moratorium on new UK regulation

15.  The plan to boost micro businesses and start-ups by a moratorium on new domestic regulation is intended to reduce the burdens on business. The Committee has taken limited evidence on this. We have however received evidence that the proposal may create problems. Several lists of regulatory exceptions and some administrative complexity could however be created by this apparently attractive proposal. Furthermore, if the Government succeeds in reducing new regulation overall, there may be less scope for the exemption of micro businesses and start-ups from such measures. Nor is it clear—where such an exemption is merited on welfare grounds—that it should be time-limited, rather than related to the size of the company. (Paragraph 106)


16.  The Budget may not lead to a net simplification in tax law—although this is difficult to quantify. We recognise that it is very difficult to simplify an already complex system and welcome the work of the Office of Tax Simplification and the establishment of a 'direction of travel' towards simplification. The rate of increase of complexity has certainly been slowed but much more work is needed on the tax system before it can be said to be moving towards simplification. We welcome the OTS's work in this area; however the primary duty for securing simplification should lie with the Government in its design and administration of the tax system. (Paragraph 131)

National Insurance and Income Tax

17.  The Chancellor is not proposing to merge National Insurance and income tax. The consultation is on the alignment of the operational aspects of these two revenue streams. Whilst this is likely to generate some benefits, it falls well short of the more fundamental merger that had been anticipated in the press in advance of the Budget speech. This is a complex issue and we understand the Chancellor's desire to move cautiously. The change appears to have been anticipated as a radical measure but turned out, at second glance, to be a modest one. (Paragraph 136)

Disguised Remuneration

18.  We draw the attention of colleagues dealing with the Finance Bill in Committee to the proposals on disguised remuneration. We urge them to ensure that the final legislation is properly targeted, proportionate, and achieves its desired impact without imposing undue burdens on businesses. (Paragraph 146)

Stability in the 2011 Budget

19.  We recognise that it will not be possible or desirable to consult on every tax increase ahead of the decision being made. Moreover, if the Government wishes to adjust duty rates in order to dampen the effects of oil price rises on end users, compensating revenue will need to be found elsewhere. The decision to increase the supplementary oil and gas levy by 12% without warning, less than a year after the Government had undertaken to provide a "stable" tax regime in the sector, may weaken the Government's credibility in seeking to establish a stable tax regime in this and other areas. Such reversals of policy in the absence of changes of circumstances that would warrant them is bad for business confidence and the credibility of government policy making. We note that the Government "is now talking to the industry quite intensively" and urge it to make sure that industry is properly consulted on the design of the "stabiliser". Colleagues on other committees may well wish to keep the effect of this tax change on investment under review. (Paragraph 157)

Tax: practicality

20.  we welcome the announcement in the Budget that HMRC's existing administrative burden reduction target will be expanded to include wider taxpayer compliance costs. It is crucially important that the wider costs placed on the economy by the tax system are taken into account and we will monitor the commitment that any increase in administrative burdens in the tax system will be met by equal reductions elsewhere in the tax system. (Paragraph 159)

21.  Whilst we welcome moves to allow businesses and individuals to handle their tax affairs online, making this mandatory without appropriate allowances being made runs the risk of leaving behind the significant minority who do not have reliable access to a computer or the internet. We agree with the Minister for the Cabinet Office, who has stated that "Every single Government service must be available to everyone—no matter if they are online or not", and expect that principle to be respected in the forthcoming consultation document. (Paragraph 162)

Tax: coherence

22.  The Budget contained a number of measures that have an impact on energy prices, ranging from the cancellation of the fuel duty escalator to the introduction of the Price Floor for carbon. Whilst we do not comment here on the likely impact of individual measures, we note that, as a package, they lack overall coherence. (Paragraph 169)

The Office for Budget Responsibility: process

23.  Transparency about the basis on which the forecast is made is essential. The Treasury now has to deal with an external and independent body in constructing the Budget. It needs to make allowances for that. However, the timetable agreed for this forecast and Budget required all decisions which would impact on the economic forecast to be made at least a fortnight before Budget day. We recommend that the timetable should be revisited to provide more flexibility enabling economic shocks and late political decisions to be accommodated. It is understandable that a number of adjustments to the process and timetable will be needed, given that this was the first full forecast cycle since the creation of the OBR. (Paragraph 173)

The reliability of the forecast

24.  In our earlier Report we noted "One of the ways in which we will judge whether the OBR is a success is whether there is greater public understanding of the purpose and limitations of the forecasting process, and realistic expectations of what it can deliver." While forecasts are useful tools, it is important that policymakers, and the public if possible, are aware of their limitations. It is important that the OBR plays its part by setting out as fully as possible each year the considerable limitations of the forecasting process and product. (Paragraph 175)

25.  We urge the OBR to reconsider the way in which asset sales are treated both in the Economic and Fiscal Outlook and in the forthcoming sustainability report. All economic forecasts deal with a number of specific and very uncertain outcomes to which numbers or assumptions are attached in the forecast. Asset sales are no different from many of these. We are concerned that caution in the treatment of asset sales may lead to a bias in the central forecast. A forecast is no longer central if decisions are made which have the effect of entrenching 'upside risk', a phrase used by Mr Ramsden. (Paragraph 180)

Responsibility for the forecast

26.  We understand the Chancellor's desire to preserve the OBR's independence. However, the uncertainty in forecasting means that the OBR's work will indicate a range of probabilities, not a precise prediction for each economic variable. It is reasonable for a Government to accept and adopt the OBR's forecast without necessarily agreeing with every single judgement in that forecast. (Paragraph 183)

Review of the OBR

27.  The review of the OBR's reporting performance provided in the Act is well short of our recommendation that there should be a fundamental review of the OBR's remit and operating model after five years. We welcome the provision for independent review of the reports from the Office for Budget Responsibility, and may well engage with the Non-Executive directors on the arrangements for those reviews. However, we continue to believe there is a need for a fundamental review of the Office for Budget Responsibility, which would not be confined to assessing the output of the new organisation, but which would consider whether the framework established by the Budget Responsibility and National Audit Act was the most appropriate one. A wide ranging review of the OBR is essential. There is, of course, no need for such a review to be statutory. (Paragraph 185)

28.  We welcome the Chancellor's commitment, subject to consultation, that there should be such an independent, external review. It should be led by someone outside the OBR, appointed for the purpose after consultation with, and with the agreement of, this Committee. We would like the Chancellor to come back to us after he has consulted Mr Chote to confirm the arrangements for this fundamental review. (Paragraph 187)

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Prepared 9 April 2011