Session 2003-04 No. 9 20 January 2004
THIRD REPORT: THE 2003 PRE-BUDGET REPORT (HC 136)
***EMBARGOED UNTIL 0001 HOURS ON WEDNESDAY 21 JANUARY 2004***
The Treasury Committee publishes its Third Report of the 2003-04 Session, The 2003 Pre-Budget Report (HC 136) at 0001 hrs tomorrow (Wednesday).
A summary of the Report appears below. Mr John McFall MP, Chairman of the Committee, is available for comments on the Report today on 0773 0987802 (mobile) or 07644 004586 (pager).
The Report can be purchased from the Stationery Office Bookshops (0845 7 023474) and from the Parliamentary Bookshop, 12 Bridge Street, Parliament Square, London SW1A 2JX (020 7219 3890). The full text will be available on the internet at or before 3.30 pm on the day of publication at: www.publications.parliament.uk/pa/cm/cmtreasy.htm#reports.
The Committee notes that the UK economy's weathering of the recent economic slowdown has been achieved despite the weakness amongst its major trading partners in the EU. Despite a disappointing trend in investment and exports, the level of growth achieved for 2003 is likely to have been within the range forecast by the Government at the time of the Budget (although lower than that forecast at the time of the 2002 Pre-Budget Report). Economic activity has been supported by a successful complementarity between monetary and fiscal policies. Recent data suggest that the imbalances in the economy have been reduced but not removed.
For the future, it is vital that UK economic policy adapts as anticipated to the upswing in the global economy, to avoid potential problems flowing from the current imbalances. The Committee is concerned about the impact of the fall in the dollar, although some of the evidence received on this was reassuring. The Committee notes also continuing uncertainty over the impact of corporate pension fund deficits, given the lack of official information.
The Committee notes the Governor of the Bank of England's view that the switch to the new CPI inflation measure should not have major significance for monetary policy, given the focus for policy on inflation two years ahead, but that the change will need careful explanation in the short term.
Public sector finances: fiscal balance and the golden rule
The golden rule was introduced to ensure that borrowing over the course of a cycle is only incurred to fund investment. The Committee notes that there is scope for greater clarity in the way the rule is framed. The Government remains on track to meet the golden rule, but will only meet it if its central forecasts for economic growth, tax revenues, spending and the likely end of the economic cycle are met. The UK's fiscal position is comparatively strong in international terms and should remain so if it strengthens as planned.
Tax receipts have come in weaker than expected despite growth being on target. The Committee recommends research into why this has occurred, and calls for more information to be published on how receipts from the major taxes are forecast.
Income tax receipts have come in under forecast for the last 3 years. The Treasury's projections imply increasing numbers of people paying tax at the higher rate. The further information called for on how the major taxes are forecast should therefore include greater detail on how the income tax forecasts are made up.
The Committee notes that the margins provided against overruns in the coming years in "annually managed expenditure" (mostly social security payments and debt interest) are unusually low by historical standards and calls for an explanation on the reasons for this. In respect of capital expenditure, the Committee notes evidence that (despite increased end-year flexibility and three year planning) some departments are still failing to manage their capital spending programmes as efficiently as they might and also that some further transparency is needed over the classification of current and capital spending.
The Committee notes the importance of ensuring that increases in public expenditure result in improved outcomes rather than cost inflation. It agrees with the Treasury and commentators that the current measure of government output does not adequately reflect any improvements in quality and therefore welcomes the newly-announced Atkinson review of measures of government output, productivity and prices. Any under-estimate of the real growth of public sector output could affect estimates of GDP growth and the output gap.
Other issues in the PBR
On housing, the Committee notes and discusses briefly the interim Miles and Barker Reviews of fixed-rate mortgages and housing supply, and the preliminary announcement about proposals to allow self-administered pension funds to invest in residential property.
The Committee also makes brief comments on the taxation of small incorporated businesses (in the light of possible plans to address higher the high level of take-up of tax advantages from incorporation), on the balance needed in the attack on child poverty between direct financial assistance for parents and more indirect support for services, and on the future limits for ISAs.