The Treasury Committee today publishes its verdict on the
Autumn Budget and Spending
Review 2021.
The report, which was unanimously agreed by the cross-party
Committee of MPs, explores the current tax burden, changes to the
health and social care levy and the pre-briefing of budget
measures to the media.
Levelling up policy is also considered, as well as departmental
spending allocations and changes to research and development
spending since the UK’s exit from the EU.
It comes as the Committee also publishes correspondence from the
top civil servant at the Treasury on the pre-briefing of the
national living wage increase announcement to the media.
In a letter to the Committee Chair, the Permanent Secretary at
the Treasury outlines that there was an unauthorised disclosure
of information, and the department responded by briefing the
press about the changes. The Committee today raises concerns this
pre-briefing could have breached insider information and market
sensitivity rules, as the change impacted certain sectors more
than others.
The Permanent Secretary previously told the
Committee that pre-briefing the announcement was not an abuse
of market sensitivity, as the change impacted the economy as a
whole.
Commenting on the report, Rt. Hon. MP, Chair of the Treasury Committee, said:
“With the nation recovering from the pandemic, November’s budget
and spending review were especially important. The Chancellor had
a difficult job on his hands, balancing calls for increased
spending from numerous departments with financing the
Government’s ‘net zero’ and ‘levelling up’ commitments, all the
while getting the public finances under control.
“With inflation rising significantly, concerns about pressure on
the cost of living are growing. While the Prime Minister’s
ambition to promote high wage growth is worthy, focusing on
increasing wages without improving productivity is likely to be
inflationary, and risks contributing to a wage price spiral.
“The Chancellor has stated his ambition to cut taxes before the
end of the Parliament. In October, there was little room for
manoeuvre, but there has been positive news from the public
finances since then. While further good news may help him achieve
this ambition, significant risks remain, most notably from the
impact of inflation.
“We thank everyone who gave evidence to our inquiry and look
forward to receiving the Government’s response.”
Report summary:
Fiscal rules
- The Chancellor's fiscal rules are reasonable in the context
of the pandemic and its effects. The Chancellor has set his
primary fiscal rule to target the overall stock of Public Sector
Net Debt, with a secondary target to run a balanced annual
current spending budget. We view both of the new targets as being
of equal importance, and meeting one but not the other would not
constitute success.
- According to the Office for Budget Responsibility (OBR), the
Chancellor has between a 55% and 60% chance of meeting his fiscal
rules. He has given himself less room to meet his rules than his
predecessors. The headroom may prove insufficient should one of
the many risks to the economy crystallise.
Research and development spending
- It is disappointing that the Government has pushed back its
target to spend £22 billion per year on Research and Development
by two years. However, the new commitment still represents a
significant increase and brings R&D spending above the OECD
average. While the target for R&D spending remains
historically high, there is a risk that at future fiscal events
(as was the case with this Budget), the Chancellor will again opt
to make savings by delaying this increase. R&D spending is
important and the Government should pursue this target with
considerable determination.
Inflation
- The public finances are highly sensitive to increases in
inflation and interest rates. Since the Budget, inflation has
already significantly exceeded the level forecast by the OBR in
October. The Bank of England raised interest rates to bring the
rate of inflation back towards its two percent target, and is
likely to increase them further. It is therefore likely that by
the next economic forecast, the Chancellor may be faced with
significantly higher interest costs than those included within
the October economic forecast.
- The OBR forecast states that the policy mix chosen at this
Budget will act as a boost to inflation, identifying in
particular the increase in employer National Insurance
Contributions, and the large fiscal loosening that took place in
the Spending Review. The Prime Minister has advocated high wage
growth. Setting out an economic policy of promoting high wage
growth that is not accompanied by increases in productivity will
be inflationary, and risks contributing to a wage price spiral.
The Chancellor showed that he is alert to the fiscal risks of
higher inflation and higher interest rates becoming entrenched.
The Treasury should keep these risks at the forefront of their
thinking when designing policies at future fiscal events.
Individual departmental settlements
- While some departments which had been significantly disrupted
by the pandemic, such as the Department of Health and Social Care
and the Department for Transport, received large increases, the
Department for Education, which was also affected, did not
receive such a generous settlement. School funding per head has
only now returned to 2010 levels.
Overall tax burden
- It was against the backdrop of the Covid pandemic that the
Chancellor announced a large increase in spending, with
real-terms increases for all departments. However, the Chancellor
also declared his intention to cut taxes later in this
Parliament. It already appears to be a significant challenge for
the tax burden, as a percentage of GDP, to be lower at the end of
this Parliament than at the beginning, because the Chancellor's
tax rises have already been announced, and his fiscal headroom to
reduce them is small.
- It is understandable that total departmental spending is
rising at present, and that the UK's tax burden will rise to
levels not seen during peace time, given that the country is
still in the midst of a global pandemic. However, not all
departmental spending choices that the Chancellor made were
pandemic-related. If the Chancellor wishes to be able to cut
taxes later in this Parliament while still meeting his fiscal
rules, he may have to identify areas of departmental spending
where he can reduce spending in real terms, even if this is in
the face of increased demand.
Levelling up
- The Spending Review described how levelling up was being
incorporated into many aspects of government policy. We await
more specific detail on how levelling up will be measured and
achieved. Rebadging existing programmes may not have the impact
the Government is seeking.
- The Government stated that the UK Shared Prosperity Fund will
be the successor to the EU Structural Investment Funds. However,
the Government is only providing 60% of the money provided by the
EU fund. If the new fund is intended to be one of "the
centrepieces" of the Government's ambition, it is surprising that
the size of the fund is being reduced to such an extent. The
Government will need to demonstrate how these reduced funds will
achieve their defined metrics for levelling up.
Social care
- Compared to the existing adult social care framework in
England, the Government's new policy proposals are more generous.
These changes are welcome. And compared to the Dilnot proposals,
the Government's measures are more generous to those who receive
care in their own home. In addition, the cap on how much a care
home can charge for weekly "living costs" has been capped in real
terms at a higher amount than under the Dilnot Review.
- However, the Government's proposals are less generous
compared to the Dilnot proposals in how they treat means tested
contributions made by local authorities. As a result, while most
people will pay less overall, those who have a longer care
journey and assets of between £20,000 and £106,000 will pay far
more towards their care than they would have under the Care Act
2014. People within this cohort will have to contribute £86,000
of their own money. It is regrettable that a such a large cohort
of people are still exposed to the possibility of incurring these
high costs, which make up a large proportion of their assets.
Compared to the original Dilnot proposals, this will be
regressive.
- The Government should wherever possible announce major
changes to the rates of existing taxes and the introduction of
new taxes at a Budget or other fiscal event such as a Spring
Statement. This allows Parliament to consider the measures
alongside an independent OBR forecast of the fiscal consequences.
- For both social care announcements, MPs were asked to vote on
new government policies that came with significant impacts for
households, without the usual distributional analysis that would
be provided alongside a Budget. That was highly unsatisfactory.
For major announcements such as this, the Government should
always provide Parliament, in good time, with the information
required to make an informed decision. Given these social care
plans had been under development for several years, it is not
clear why the necessary analyses were not provided at the time
MPs were asked to vote.
Universal Credit
- We welcome the reduction in the Universal Credit taper rate,
which will provide a stronger incentive for many to take on
additional work. However, the taper rate reduction will be of no
benefit for recipients of Universal Credit who are not able to
work. The Government should think carefully about how it intends
to support such people, given emerging increases in the cost of
living.
Pre-briefing of budget measures to media
- We are deeply concerned that the rate of the National Living
Wage was disclosed to ITV in an unauthorised fashion prior to the
Budget, and we agree with the Treasury that this could have
caused confusion in the market as to whether the information was
accurate.
- The rate at which the National Living Wage is set will
clearly affect companies and sectors which have large numbers of
staff at the minimum wage more than it affects those who do not.
Some of those firms will be listed on the stock exchange. Given
that the ONS deems retrospective wage data to be market
sensitive, we believe it is not unreasonable to conclude that the
announcement of the change to the National Living Wage might have
been market sensitive.
- The Committee acknowledges that certain Budget measures might
be released prior to the Budget, in line with the Treasury's
"Macpherson principles". However, under no circumstances should
market sensitive policies be able to enter the public domain in a
disorderly fashion.
- The Permanent Secretary to the Treasury has stated that the
Government will review arrangements for such policies ahead of
future announcements. Given the potential opportunity for
disruption that this unauthorised leak could have caused, the
Government should investigate how this policy came to be leaked
prior to the Budget and should publicise its findings.
