House of Commons - Pre-Budget Report 2008

Pre-Budget Report 2008 - Treasury Contents

5 Public expenditure issues

102. The Treasury has reported that efficiency savings of £30bn were achieved by departments over the 2004 Spending Review period.[243] The 2007 Comprehensive Spending Review announced that a further £30bn of efficiency savings would be generated by 2010-11.[244] The 2008 Pre-Budget Report indicated that this 2010-11 target would be increased by £5bn to £35bn of efficiency savings.[245]

103. The 2008 Pre-Budget Report offers no details as to where this £5bn will come from. Professor Colin Talbot, of the Manchester Business School, told us that he doubted the robustness of the figure:

this additional £5 billion that is being added on seems to me to be very much a sucking a finger and sticking it in the air exercise based on the fact that they have rolled forward spending from the end of that spending round period and now want to recap it towards the end.[246]

104. When we invited him to respond to this criticism, the Chancellor acknowledged that the Treasury had not allocated the £5bn across departments when the figure was published but expressed confidence that it was achievable:

We had not allocated the £5 billion across departments at the time of the PBR. That is something that we will do over the next few weeks and at that stage I am sure the Select Committee will want to look at it. What I would say is this, that if you consider that we spend over £400 billion in public spending on departmental expenditure I defy anybody to tell me it is not possible to find £5 billion worth of efficiency savings. … I think in terms of our back office operations we do not really exploit our position as a bulk buyer of goods and services. I think we could do a lot more.[247]

105. With regard to the scale of the £5bn additional savings, Professor Talbot told us that "we are talking about heroic numbers in terms of efficiency savings. I do not believe that they can be achieved without some serious impact on services."[248]

106. In a written submission to us, the TUC echoed this concern that efficiency savings present a threat to the quality of public services:

The TUC's long-standing opposition to the so-called 'efficiency' agenda, which has led, as stated in the PBR, to a reduction of 86,700 civil service posts between 2004 and 2007, remains. Unfortunately, this agenda has led to a serious deterioration in service quality … Other concerns include falling morale and productivity in Her Majesty's Revenue and Customs, and the cancellation of important initiatives, such as tackling knife crime, in the Ministry of Justice efficiency saving programme. In this context, we are concerned at proposals for an additional £5 billion 'value for money' target for 2010-11. We remain committed to genuine efficiency saving initiatives, such as better procurement. We will seek confirmation, in next year's Budget, that none of the £5 billion will be achieved through staff cuts. [249]

107. We note that the announcement of an additional £5bn of efficiency savings was made in the 2008 Pre-Budget Report without any supporting schedule showing the derivation of this figure. In order to demonstrate the robustness of this figure we recommend that the Government publishes details of where and how the additional savings will be made. In providing these details the Government should also set out the measures in place to ensure that public service delivery does not deteriorate.

Government support for small businesses

108. The deterioration in the availability of credit, particularly for small firms combined with the economic downturn has led the Government to outline a series of measures in the Pre-Budget Report to provide greater support for businesses, particularly smaller businesses. These include:

Measures to help small and medium-sized enterprises (SMEs) facing credit constraints. The Government has said it will:

Launch a new Small Business Finance Scheme, a new temporary guarantee scheme, to help support up to £1 billion of bank lending;

Offer a separate £1 billion guarantee facility to support bank lending to small exporters;

Make available a capital fund of £50 million providing equity or quasi-equity to SMEs who are overleveraged; and

Introduce a £25 million regional loan transition fund for small firms.

The introduction of a new HMRC Business Payment Support Service to allow businesses in temporary financial difficulty to pay their HMRC tax bills on a more flexible timetable;

The introduction of more generous tax relief for businesses now making losses, by allowing temporary additional carry-back of up to £50,000 of losses to be set against taxable profits from the last three years; and

The modification of a number of planned tax reforms, namely the deferral until 2010-11 of the planned rise in small firm corporation tax from 21% to 22%, and a temporary increase in the threshold at which an empty property becomes liable for business rates.

Additionally, the Pre-Budget Report announced that UK small businesses should also be able to benefit from around £4 billion of lending from the European Investment Bank between 2008 and 2011.[250]

109. John Whiting told us "that small businesses are feeling very constrained in terms of credit and they see credit becoming more expensive to them, so various of the measures that are being discussed which might facilitate more credit flow will of themselves help, as will lower interest rates". [251]

110. John Whiting welcomed HMRC's planned measures to allow greater flexibility in the scheduling of tax payments for small companies. He understood that HMRC was devoting considerable manpower resources to this initiative. [252] Edward Troup, Director, Business and Indirect Tax, at the Treasury also drew our attention to the role of the Business Support Helpline which was currently dealing with a surge in requests from businesses having difficulty in meeting payments. Mr Troup rejected the suggestion that new resources were required to implement the Small Business Finance Scheme. He noted that HMRC had in excess of 80,000 staff and that "an organisation [of] that size does have flexibility over reasonably short time periods to reallocate resources".[253]

111. Mr Troup went on to explain that the support line was already working well, telling us that "Over the last two weeks … 4,733 arrangements had been reached with individual business and there were another nearly 2,000 under consideration". He also stressed that "this is not a new arrangement. It has always been open to businesses to do this but it has perhaps not being as widely publicised as it might have been, and very much part of the PBR announcement is to make sure that people are aware of the availability of this".[254]

DEFERRED RISE IN SMALL FIRM CORPORATION TAX

112. The Pre-Budget Report announced that the Government would defer for one year the proposed increase in the small companies corporation tax rate from 21% to 22%, which was due to come into force in April 2009.[255] Mr Whiting stressed that the deferral of the planned rise in corporation tax would be welcomed by small firms.[256] The Association of Certified Chartered Accountants (ACCA) also supported the deferral in the rise in corporation tax stating that "given the challenging economic circumstances, we think it is right that no changes are made in these areas". [257]

TEMPORARY CUT IN VAT

113. Our expert witnesses also discussed the impact of the temporary cut in VAT from 17.5% to 15% on small firms. Professor Talbot said that the change would adversely affect small firms because of the administrative cost of making pricing changes. [258] John Whiting expressed concern about the short-time period for firms to make the necessary changes, telling us that "business, I think, would have liked at least a month to prepare, possibly longer".[259] Mr Whiting expanded on this point in written evidence:

From a tax technical point of view, the main issue is the administrative effort that it requires. HMRC's own estimate of a cost for business of £300m is not insubstantial in straitened times. It is, after all, the first general VAT rate reduction the UK has experienced; four working days' notice is not ideal. For retailers, who nowadays mostly price to 'price points', there is a lot of repricing to consider; after all, they have been required to quote prices as 'VAT inclusive' for some time. For the service sector, who in some sectors at least quote prices with VAT to be added, things are easier.[260]

The Institute of Chartered Accountants in England and Wales (ICAEW) believed the Government had underestimated the cost to business of implementing the VAT cut:

HM Treasury impact assessment for the VAT reduction policy, which estimates a total cost of £300m on businesses' time using the standard cost model, may have considerably underestimated the true cost to business. For small businesses and retail businesses in particular, the administrative burden and transition cost of accommodating the change in the headline VAT rate is likely to outweigh any benefits which businesses might receive from increased sales.[261]

ACCA made similar points about the burden of the VAT change on business. They warned that "small and medium enterprises might be adversely affected by the additional administration for the temporary VAT cut" and that "forcing businesses to change their VAT, accounting, sales and purchase systems for just over a year is likely to cause significant and unwelcome additional costs, especially for SMEs".[262]

114. However, John Whiting pointed out that the VAT reduction also offered an opportunity to small firms who maintained existing price levels, thus potentially increasing their profit margins. Mr Whiting told us this that "is an option that I know many small businesses are considering". He went on to describe how small firms would have to be careful if they went down this route because:

many consumers as they walk through the shop door will be well briefed to know that VAT has been reduced so will ask ,"Are you reducing your prices?" There may be a number of challenges to the shopkeeper around but it is certainly something that small businesses are considering. [263]

LENDING SUPPORT FOR SMALL FIRMS

115. The Government has also put together a package of measures to support small and medium-sized enterprises facing credit constraints during the current economic downturn. Our witnesses broadly welcomed the support that Government was providing to small firms in this area, although Mr Whiting cautioned that some small firms might not take advantage of such lending support:

There is another small factor, and we are talking here of course about confidence and whether or not a small business actually wants to get further into debt. I agree with the fact that the money looking as if it is going to be more available is good but an awful lot of small businesses are inclined to put a blanket over their heads and hope that times are going to get better rather than go further into debt unless they really have to. [264]

The ICAEW also supported the Government's efforts to improve access to finance for smaller firms, but warned that:

given the relatively limited scale of intervention and the significant amount of time that it will take to set up and market new finance facilities, the ICAEW questions the overall impact on business confidence that the proposed measures will provide.[265]

116. Simon Kirby, Research Fellow at the National Institute of Social and Economic Research, stressed that the Government had to be prepared to put more money into supporting small firms in the future. Mr Kirby argued that the Government's assumptions "work on the basis that lending returns to some form of normality at the start of 2010 and if that does not happen then things like the Small Business Scheme will probably need to be extended".[266]

117. We asked Treasury officials about the progress of work being undertaken to get the Small Business Finance Scheme into operation. Edward Troup told us that the Treasury, together with the Department for Business and Enterprise, hoped "to get it "up and running "very early in the New Year".[267] Mr Troup confirmed that the scheme offered £1 billion specifically to help small businesses who were having trouble with working capital and explained that it would "sit alongside the Small Firms Loan Guarantee Scheme which, as you know, is a long-running scheme which is designed to help businesses that start up and grow".[268] Mr Troup also gave an indication of the timing of the injection of £4 billion from the European Investment Bank into the economy. He told us that four banks had already indicated to the Treasury their commitment to taking advantage of that facility and that the Treasury expected other banks to sign up early in the New Year. Mr Troup concluded that "there is no reason really why money cannot start flowing almost immediately".[269]

118. We asked Treasury officials whether, in the event that there is not a return to normal lending to small businesses in 2009, the Small Business Finance Scheme would be extended and increased. Edward Troup explained that the Government was:

forecasting a recovery beginning in the latter half of next year and the expectation is that this scheme and the recovery of the banks' lending will be sufficient to see businesses who are struggling from the lack of working capital through this period.[270]

The Chancellor told us that he would 'keep under constant review' the size of the lending support package for small firms:

We have a Budget in the Spring, we will have a Pre-Budget next autumn, and in between times, certainly in relation to the banks, this is something that, because of the urgency and importance of it, we will be looking at all the time. [271]

119. We broadly welcome the package of measures the Government has introduced to support small and medium-sized enterprises through the economic downturn and related credit crisis. That said, the Government must keep the size and duration of the Small Business Finance Scheme under constant review given the possibility that bank lending to small firms does not return to 'normal' during the course of 2009.

120. We also welcome the measures to ease the tax burden on small firms facing difficulties, but will continue to monitor whether HMRC are devoting sufficient priority to this initiative. With respect to the impact on small firms of the temporary reduction in VAT, we note that businesses argued that the short notice caused an administrative burden. We trust that the Government will take note of the concerns that small firms have expressed in their assessment of how the exercise impacted on small firms.

Unemployment

FORECAST LEVELS OF UNEMPLOYMENT

121. The latest OECD forecast places unemployment at 6.8% by the end of 2009, and 8.2% at the end of 2010, up from 5.5% in 2008.[272] In its submission to us the NPI noted the absence of any Government forecast of unemployment levels:

Since maintaining employment is one of the two principal reasons for contemplating a fiscal stimulus (the other being to sustain investment), we would have expected the PBR to have addressed this question. There is no doubt that the Treasury has such forecasts. They are, after all, an input into the financial projections while they are also part and parcel of a GDP forecast. Yet as far as we can see, the only reference in the PBR to the likely scale of unemployment is to be found in a list of assumptions audited by the NAO on the likely scale of the increase in the claimant count.[273]

122. The list of assumptions mentioned by the NPI can be found in Box B1 of the 2008 Pre-Budget Report.[274] The Treasury disclosed that, in preparing the 2008 Pre-Budget Report, it assumed that UK claimants of unemployment benefit would rise "from recent levels of 0.98 million to 1.41 million at the end of 2009, and to 1.55 million at the end of 2010, based on the average of independent forecasts".[275]

123. Treasury officials acknowledged to us that this assumption was used to generate forecasts:

We now publish an audited assumption which shows unemployment rising according to the independent average to 1.41 million at the end of 2009 and to 1.55 million at the end of 2010. That is the assumption. You have to make assumptions to produce forecasts and that is what is driving the forecasts that we have made.[276]

124. When invited to share his resulting forecast for unemployment with us, the Chancellor declined, insisting that "we do not publish Treasury forecasts, and no government has".[277]

125. We note that the Government has published a list of assumptions, but declined to publish any official forecast of unemployment levels. We accept that this has been the established practice of all governments but believe that the current circumstances demand maximum transparency. Accordingly, we recommend that the Government publishes its forecast for unemployment.

Older people and the 'grey pound'

126. The Pre-Budget Report included some increases to support for pensioners: the full state pension increased in line with prices and the pension credit was given an 'above indexation increase'.[278] An additional £60 payment for all pensioners was announced[279] and age-related income tax allowances were also uplifted.[280]

127. In its public response to the 2008 Pre-Budget Report, Age Concern welcomed these measures but stated that more could be done:

The increase of £5 for a single person and £7 for a couple in the Pension Credit is welcome and will make a real difference for many of the poorest pensioners in Britain. However, about a third of the eligible pensioners are still not receiving the Credit and it will not help many more pensioners living just above the breadline.[281]

128. Mervyn Kohler, Head of Public Affairs for Help the Aged, suggested that the 2008 Pre-Budget Report represented a 'truly skinflint' package for older people.[282] When invited to expand on this, Mr Kohler argued that the increases announced in the Pre-Budget Report reflected existing commitments and that the Government had missed opportunities to address fuel poverty:

The [use of the term] "skinflint" [reflects my view that] … really the only tangible contribution that was made was this £60 Christmas bonus which is going to be paid in January. The announcement about pension increases and pension credit increases were following more or less the statutory requirements, despite the fact that the Chancellor was presenting it as the largest rise that has ever been paid to our pensioner population.[283]

129. Teresa Perchard, for Citizens Advice, argued that one of the biggest gaps in the 2008 Pre-Budget Report was a commitment to increasing the take up of pension credit:

There is a huge issue underlying all of this about take-up of what is on offer. There is something in the PBR about promoting more take-up of tax credits for people in work and that is welcome. There is nothing about take-up of pension credit. There are 1.8 million pensioners missing out on pension credit at the moment. Getting maximum take-up of pension credit would improve the incomes of those pensioners by about £1,400 a year on average, so it blows the winter fuel payment apart, does it not? [284]

130. We note that 1.8 million pensioners are missing out on pension credits which they are entitled to and which would offer them additional financial support at this time. We recommend that the Government takes further steps to increase the take up of the support available, and we will be taking further evidence about the rate of take up in due course.

Helping Homeowners

HOMEOWNERS IN DIFFICULTY

131. In the 2008 "credit crunch" homeowners were faced with an unprecedented slump in house prices and sales coupled with the rising costs of food and fuel. The combined effect has left many homeowners struggling with mortgage payments. Press reports suggest that up to 45,000 homeowners were expected to have had their homes seized by the end of 2008 as workers lost their jobs and house prices continued to decline.[285] House prices have fallen by 16.2 per cent in the past calendar year, according to Halifax house price index.[286]

132. The 2008 Pre-Budget Report stated that:

The long-term challenge remains to meet the housing needs of an ageing, growing population, while helping families and first time buyers priced out of the property market. The Government is committed to promoting the long-term stability of the housing market and meeting the long term challenge of increasing the housing supply, including through releasing more public sector land for housing, while providing support to homeowners through these difficult times.[287]

133. When asked if the Pre-Budget Report had done enough to help homeowners, Teresa Perchard, pointed out that there had been many policy announcements relating to mortgages in the Autumn, although "a lot of it [had been announced] before the Pre-Budget Report". The Pre-Budget Report set out the action the Government had taken in September 2008:

In September, as part of a £1 billion package to support homeowners, first time buyers and the house building industry, the Government announced a new suite of mortgage rescue schemes, which aim to reduce by up to 6,000 the number of repossessions of vulnerable households over the next two years. The Government also strengthened the Support for Mortgage Interest system by reducing waiting times and increasing the maximum value of eligible mortgages, which could prevent up to a further 5,000 to 10,000 repossessions. The 2008 Pre-Budget Report takes further steps to support homeowners facing difficulties.[288]

134. The Chancellor also announced that that some of Britain's biggest lenders had agreed not to repossess properties until at least three months after borrowers first went into arrears. In a series of measures designed to boost the ailing housing market and keep people in their homes, the Chancellor said that repossession would only be sought as a last resort after other alternatives, such as a minimum payment plan, had been pursued. Repossessions jumped by 12% in the third quarter of 2008 and are expected to continue to rise as increasing numbers of homeowners struggle to make their mortgage repayments. Figures from the Council of Mortgage Lenders (CML) showed that by the end of September 2008, some 30,200 properties had been taken into possession by lenders, compared with 26,200 in the whole of 2007.[289]

135. The Council of Mortgage Lenders (CML) welcomed the Chancellor's announcement, stating it was "pleased that the Government has today acknowledged it has an increased role to play in helping lenders to minimise repossessions",[290] although it stressed that "the home guarantee scheme proposed by Government was not for everyone", noting it would need careful development with lenders and the CML "to ensure it is properly targeted to those borrowers committed to sustain their home ownership through short term periods of financial difficulty".[291]

136. Ms Perchard told us that Citizens Advice welcomed the three month moratorium on repossessions but that, in the experience of her organization, most lenders did not take action to repossess properties until after four months of arrears. She noted that some individual banks were already offering six month periods before repossession proceedings began.[292]

137. The Child Poverty Action Group (CPAG) supported the proposal on repossessions as well at the plan to increase further the capital limit for paying mortgage interest relief to £200,000 along with the previously announced shortening of the waiting period. They did though express serious reservations about "an unwelcome proposal to time limit relief to two years". They noted that time limiting benefits had been historically resisted by the Government and expressed concern "about a proposal which will result in support being determined by how long you have claimed, not your need for support". CPAG called on the Chancellor to "reconsider this move".[293]

FIRST TIME BUYERS

138. The Pre-Budget Report states that "since 1997 110,000 households have been helped into home ownership through shared equity and shared ownership schemes".[294] In September 2008 the Government announced further support for first time buyers, it offering 10,000 more people the opportunity to purchase a home through a new shared equity scheme. The Government also announced a one year stamp duty holiday for all purchases of houses costing up to £175,000.[295]

139. Mr Whiting told us that he viewed the concession in stamp duty as "a small gesture". He suggested that the scheme should be reviewed "at Budget time as to whether it has had any effect or is worth continuing, given that so many properties are still, despite problems, priced above the £250,000 point … but I would say the availability of mortgage finance is a bigger issue".[296]

140. We recognise that steps taken by the banks to rebalance their assets following the banking crisis late last year has resulted in reduced credit lines being made available to the public. It is clear that schemes introduced in the Pre-Budget Report, and the stamp duty holiday announced earlier, are not having any widespread effect. We recommend that the Government takes all possible steps to ensure that the banks lend fairly and responsibly to each other and consequently to the public. We are concerned that piecemeal measures introduced by the Government may not be adequate in the face of the crisis in lending.

Debt Advice

141. The level of consumer debt in the UK is estimated at £1.3 trillion. In October 2008, the ITEM club's forecast predicted that consumer debt problems were likely to increase proportionally with levels of unemployment despite the decline in interest rates.[297]

142. In May 2008, the Governor of the Bank of England stated "For the time being, at least, the 'nice' decade is behind us.[298] The credit cycle has turned. Commodity prices are rising. We are travelling along a bumpy road as the economy rebalances".[299] As levels of employment fall consumers who have based their budgets on the availability of cheap and easy credit will struggle to keep up payments on their mortgages and other debts. When we discussed this with the Chancellor, he told us that there would inevitably be a lag between the recovery in the economy and a rise in employment.[300]

143. The Pre-Budget Report published a commitment to ensure that every household struggling with debts could access free impartial debt advice.[301] Since April 2006, BERR has funded a face to-face debt advice project which has assisted an estimated 169,000 clients with their debt problems. The Government also provides £2 million funding a year to support telephone debt advice, through the National Debt line. The Pre-Budget Report announced further measures which included:

allocating an additional £5.85 million to increase the provision of free telephone debt advice which it estimated could assist 70,000 people each year with their debt problems;
the provision of a further £10 million in funding for Citizens Advice Bureaux to expand local face-to-face advice capacity which could assist a further 335,000 people each year; and
the establishment of an online webpage on www.direct.gov.uk to provide free and impartial sources of advice and support. Information on financial support, along with debt advice, would be further promoted from January 2009, as part of a campaign to promote www.direct.gov.uk services.[302]

144. When asked if the additional funding allocated to Citizens Advice would be sufficient given the sort of demand that was predicted at this time, Mr Mike Williams, Director, Personal Tax and Welfare Reform, HM Treasury, reported that the money given to Citizens Advice Bureaux, which would be £10 million to March 2010, was "quite significant extra amounts". The provision was designed enable local face-to-face advice capacity to be expanded.[303]

145. We welcome the extended provision of free impartial debt advice outlined in the PBR through the Citizens Advice Bureaux, and through online and telephone services. Citizens Advice is well placed to offer advice to those struggling with debt problems and the public is certain to benefit from the funding allocated to increase its capacity.

243 HM Treasury, 2004 Spending Review: final report on the efficiency programme, November 2008 Back

244 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, November 2007, p 4, para 1.12 Back

245 HM Treasury, Pre-Budget Report, November 2008, p 122, para 6.32 Back

246 Q 53 Back

247 Q 335 Back

248 Q 53 Back

249 Ev 87 Back

250 Pre-Budget Report 2008, p 67-69, para 4.6-4.15, Box 4.2-4.3 Back

251 Q 43 Back

252 Ibid. Back

253 Q 153 Back

254 Q 152 Back