House of Commons - Pre-Budget Report 2009

Pre-Budget Report 2009 - Treasury Contents

4 Other topics

Child poverty

96. In 1999, the then Prime Minister pledged to eradicate child poverty by 2020, setting an interim target of halving it by 2010-11. The PBR points to "considerable progress in reducing child poverty", observing that "between 1998-99 and 2007-08, 500,000 children were lifted out of relative poverty" and that "had the Government done nothing other than simply uprate the tax and benefit system, there might have been around two million more children in poverty than there are today."[182]

97. This optimism has, however, to be balanced against a disappointing lack of progress towards the Government's ambitious child poverty targets in recent years. HM Treasury's 2009 Annual Report records "no progress" against the Child Poverty PSA with the number of children in absolute poverty (1.7m) and the number in relative poverty (2.9m) remaining constant between 2006-07 and 2007-08.

98. During our first oral evidence session, we asked our second expert panel whether the PBR—particularly the commitment to extend eligibility to Free School meals to primary school pupils in working families with a household income below £15,190—would put the Government's child poverty commitment back on track. Robert Chote replied that, with regard to the key relative child poverty indicator:

Our best estimate is that the measures in the PBR probably move the Government about 30,000 closer to the target for 2010-11, so that is clearly making a relatively small difference compared to the figure that was expected. It would mean that after rounding child poverty might be expected to be 2.2 million rather than 2.3 million.[183]

He concluded that the PBR "nudges you in the right direction but does not make a huge difference"[184] to child poverty.

99. When we asked Treasury officials about progress towards child poverty targets, Mike Williams pointed to measures announced "in and since Budget 2007, which are the ones that have not yet fed through into the statistics as measured", which the Treasury estimated would "raise around 550,000 children out of poverty".[185] He included in this figure, the impact of free school meals for primary children as announced in the PBR which, the Treasury estimates "will reduce child poverty by up to 50,000"[186]. However, given that the Treasury's base figure for child poverty in 1998-99 was 3.4m, even assuming this level of reduction is realised in addition to the 500,000 reduction already achieved, the Government would still be some 650,000 short of its 2010-11 target to halve the 1998-99 figure.

100. We have regularly scrutinised the Government's progress towards its child poverty targets, and have warned of the growing risk that it would fail to meet them. In our Report on the Budget 2009,[187] we concluded that on current indicators the Government will fail to meet its 2010-11 target by a significant margin, and we see no reason now to alter this judgement.

101. We also highlighted at that time the need to take into account a perverse consequence of the use of a relative measure of child poverty in a period of recession, namely that it might reduce the numbers of children deemed to be in poverty even though an increasing number were suffering actual hardship. With this perverse consequence in mind, the Government needs, therefore, to state clearly the extent to which any future reductions in relative child poverty are the result of a lowering of average income.

102. We remain convinced of the continued importance of the commitment to eradicate child poverty, notwithstanding the limited progress that has been made to date, and the UK's changing economic circumstances. We recommend that the Government clearly sets out the steps it proposes to take to move nearer to its 2010-11 target in the time available and to achieve the eradication of child poverty by 2020.

Additional efficiency savings

103. The PBR and Putting the Frontline First: smarter government,[188] which was launched on 7 December, flesh out, to an extent, previous Government commitments to achieve efficiency savings of £35bn by the end of 2010-11 (the PBR reveals that only £8.5bn has been realised to date) and to achieve further savings beyond the 2007 Comprehensive Spending Review period primarily through the Public Value (PVP) and Operational Efficiency (OEP) Programmes.

104. The PVP was launched at Budget 2008 to identify "smarter ways of operating and key policy reforms"[189] within major areas of spending. The PBR identifies £5bn a year of additional savings under PVP by 2012-13, including savings from reforming the criminal justice system and payments made to public servants posted overseas.

105. The OEP was launched in July 2008 to learn from "best practice in the private sector and spread best practice in the public sector".[190] The Programme comprised five independent reviews each led by a senior external advisor. Its final recommendations were published alongside Budget 2009 in Operational Efficiency Programme: Final Report[191]. The PBR identifies £12 billion additional savings under OEP—£11bn deliverable by 2012-13 through improving back office functions, IT, collaborative procurement and property running costs (altogether £8bn) and through more efficient waste collection and disposal, streamlining arms length bodies and energy efficiency (altogether £3bn).

106. Professor David Heald questioned the extent to which previous programmes had delivered real and permanent efficiency savings that both reduced costs and provided more efficient services:

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107. Similarly, the Institute of Fiscal Studies' analysis of the PBR highlighted the fact that when the National Audit Office conducted an audit half-way through the Gershon programme, it concluded that 25% of the efficiency programme did not adequately demonstrate true efficiencies, and another 50% was questionable. Robert Chote, Director of the Institute of Fiscal Studies, during oral evidence questioned whether "the NAO in the future…are going to be any more confident that a higher proportion than 25% of these [proposed efficiency savings] are well-founded than otherwise".[193] He also drew our attention to the fact that the future efficiency plans announced to date look "relatively modest"[194] compared with the £26bn efficiency savings claimed under Gershon, and the £35bn efficiency savings targeted under the current comprehensive spending review round, observing that "in a sense, it is quite striking how much of the low hanging fruit the Government thinks has already been picked".[195]

108. John Whiting, Tax Policy Director, of the Chartered Institute of Taxation and the Low Incomes Tax Reform Group, and David Harker, Chief Executive of Citizens Advice, also drew attention to the risk of measures championed as efficiency savings resulting, in practice, in a lower standard of service. John Whiting told us that:

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Whilst David Harker observed that:

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109. We pressed the Chancellor and senior officials on the risks to delivery associated even with an ostensibly popular efficiency savings measure such as the PBR commitment to reduce consultancy and marketing—in this case the risk being that change programmes to introduce other efficiencies are not delivered because departments lack the expertise required to deliver them themselves. Andrew Hudson, Managing Director, Public Services and Growth explained how the Government was seeking to mitigate this particular risk:

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He did acknowledge, though, that "there is a big challenge".[199] We also pressed the Chancellor on the role that Ministers were expected to play in pursuit of further departmental efficiency savings. He replied that, even though Ministers might not be experts on efficiency programmes "you have to have some political commonsense at the end of the day" to judge the likely value for money of different schemes.[200]

110. In a recent previous report,[201] like the experts above we raised concerns about the measurement of Gershon efficiency savings. We reiterate our previous recommendation that, at a time when the public sector will be pressed to make further savings, it is vital that any savings made are properly recognised and quantified. We also stress again the importance of establishing robust data collection processes at the start of future efficiency programmes to assist evaluation.

111. Independent evaluation as well as the communication of best practice will become even more important if, as suggested by Robert Chote, efficiency savings will be harder to achieve in future. We therefore call again on the Government, in the interests of transparency and communicating best practice, to commit to publishing all information relating to efficiency in one document.

112. Finally, we re-confirm our support for Ministerial Champions of value for money within each department, but observe again the need for appropriate training and guidance to help them fulfil this role. We note the "big challenge" of building an internal capability to deliver efficiency savings and major change and seek a summary of the method to be employed in achieving this.

Asset and property sales

113. During our Pre-Budget Report oral evidence sessions, we probed in particular one aspect of the Government's future efficiency savings programme—its intention to deliver £16bn from asset and property sales by 2013-14. The intent, set out in most detail in its Operational Efficiency Programme: Asset Portfolio[202] document, published on 7 December 2009 alongside Putting the Frontline First: smarter government is to open up dialogue with the private sector to explore alternative options for the management, including partial or full sale where appropriate, of a number of public sector businesses, including British Waterways, NHS Professionals, Ordinance Survey and the Royal Mint. The PBR states that a number of transactions, including for the tote and Dartford Crossing, are already progressing.[203]

114. We asked Professor Heald for his views on the Government's asset portfolio. He replied that "if the public sector has got assets which it does not use well and it does not need then very clearly timely disposal of those assets is very sensible." He cautioned though that "if it is simply a matter of actually disposing of assets whatever the market value in the present circumstances, whether or not you need them in the longer term, simply to bring the borrowing numbers down—that is undesirable […] the idea that one can achieve a great deal by a fire sale of assets is just wrong."[204] Robert Chote similarly stressed that "the key issue is do you in the long-term believe that these things are more effectively used in the public sector than in the private sector. There is the additional issue of is now the worst possible time to be trying to sell them?"[205]

115. We pressed the Chancellor on this, and received reassurance that "we are not going to get into a situation where effectively people think you have got a fire sale. We are not going to do that."[206] He confirmed, for example, that there was no commitment to sell the tote if the Government did not feel that it was getting a good return, observing that "I think we would be subjected to justifiable criticism if we did that."[207] We welcome the Chancellor's assurance that asset sales will not take place if the Government does not expect a good return. The sales should anyway take place within a strategy which defines the purpose of the retention of assets and the value in achieving policy goals of any sale. We will monitor, with other Committees, the extent to which the implementation of the Government's asset portfolio plans observes this long-term value for money principle.

Bank payroll tax

116. The Government announced the introduction of a temporary bank payroll tax in the 2009 Pre-Budget Report. The tax would apply where bank (and building society) employees were awarded discretionary bonuses, in whatever form, above £25,000 in the period from the Pre-Budget Report to 5 April 2010 and would entail that banks paying such bonuses would pay an additional bank payroll tax of 50% on the excess bonus over £25,000. The tax would not be deductible in computing the taxable profits of affected companies.[208]

117. John Whiting explained how the tax would work. He claimed that the total tax rate on qualifying bonuses could be around 104%: "If a bank decides to give a bonus of 100, and I will leave you to put as many noughts after that as you wish, to a recipient then the bank is potentially paying 50, the individual has 40 in income tax, has 1 in National Insurance and, of course, the employer has another 12.8 in National Insurance, so one way of looking at it is there is a net flow of 104 give or take to the Treasury for that bonus".[209]

118. Treasury Officials explained the rationale behind the tax. Mr Edward Troup, Director of Business and Indirect Taxes, suggested that the tax had two primary objectives, namely to encourage banks to divert resources away from bonus payments and towards building up their capital base as well as to act as a catalyst for changing the bonus culture within the banking sector.[210] The Chancellor confirmed this, telling us that "The reason we have introduced this measure—and it is not a great revenue raiser; it does not bring in that much—is to send a clear signal that we need to change behaviour".[211] The Chancellor was then even more explicit, telling us that what he was trying to do was "encourage these bonuses either not to be paid or at lesser rates".[212] He went on to say that the tax was not about altering the structure of bonuses, but about affecting "the quantum of bonuses".[213]

119. Interestingly, despite stating that one of the objectives of the measure was to raise capital levels, Treasury Officials said that they had not done any explicit or implicit calculations as to how much capital levels would be raised.[214] The Chancellor reiterated Mr Troup's point that the Treasury had not conducted any analysis as to how much capital levels would be raised by, but said that he believed "the lion's share of capital will come from conventional capital raising measures".[215]

120. There has been much commentary about how some banks may seek to circumvent the new tax and we quizzed Treasury officials about whether the effect of the bank payroll tax would simply be to make banks defer bonus payments until April 2010. Mr Troup acknowledged that there was a risk of deferral, explaining that the tax would not prevent a banker waiving their 2009 bonus and trusting his employer to reflect the fact he had not been paid a bonus for 2009 in later years.[216] However, he went on to explain that, whilst the stated end date for the tax was 5 April 2010, if there was any evidence that banks were "simply deferring 2009 bonuses beyond that date then a necessary extension of the levy will be made for the 2009 bonuses". He concluded that, in addition, the draft legislation contained anti-avoidance provisions which would prevent artificial deferral by way of loans.[217]

121. We note that the Pre-Budget Report says "the one-off bank payroll tax will apply until 5 April 2010 but the Government will consider extending the period of the charge so that that the tax remains in place until the relevant provisions of the Financial Services Bill come into force".[218] Mr Troup told us:

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122. The Treasury has estimated that the new bank payroll tax will raise approximately £550m. Mr Mark Bowman, Director, Budget and Tax, HM Treasury, explained that this was a net figure which took into account the reduction in income tax and NIC receipts received by the Treasury in response to the anticipated lower payment of bonuses.[220] We sought clarification from the Chancellor and Treasury officials as to whether revenue raised by the Treasury might have been greater if the tax had not been introduced and the Government received income tax and NIC receipts from a larger bonus pool. In response, the Chancellor reiterated that the key objective of the policy measure was to encourage bonuses not to be paid or paid at lesser rates.[221]

123. There has been some confusion about how many people will be affected by the tax and exactly to whom the tax will apply. Treasury officials sought to clarify the situation, with Edward Troup explaining that the Treasury believed that the tax "would apply to somewhere between 20,000 and 30,000 individuals" and that the policy would apply to "banks and banking groups and financial trading companies within banking groups". He argued that most people would "have a good sense of whether that [the tax] applies to them or not", but acknowledged that banking was "a complex industry" and that therefore it was inevitable that there would be some cases at the margin where clarification and guidance would need to be sought.[222]

124. The Government considers that the purpose of the tax on bank bonuses is to change behaviour so that banks increase their capital, rather than providing large discretionary payments to employees. We urge the Treasury Committee in the next Parliament to assess how effective it has been in this, and to examine the effectiveness of any regime introduced by the Financial Services Bill, in terms both of its success in altering bank behaviour, and of its effect on the competitiveness of the UK financial sector.

182 HM Treasury, Pre=Budget Report 2009, p 81 Back

183 Q96 Back

184 Q97 Back

185 Q232 Back

186 Q233 Back

187 Budget 2009, Eighth Report of Session 2008-09 Back

188 Putting the Frontline First: smarter government December 2009 Cm 7753 Back

189 Evaluating the Efficiency Programme, Thirteenth Report of Session 2008-09 Ev 61 Back

190 Ibid. Back

191 HM Treasury Operational Efficiency Programme Final Report April 2009 Back

192 Q76 Back

193 Q77 Back