Treasury Committee Press Notice No. 8

Session 2004-05 26 January 2005



The Treasury Committee publishes its First Report of the 2004-05 Session, The 2004 Pre-Budget Report (HC 138) at 0001 hrs tomorrow (Thursday).

A summary of the Report appears below.  Mr John McFall MP, Chairman of the Committee, is available for comments on the Report today on 0207 219 3521 (Westminster office), 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:


G7/8 and EU presidency

The UK's joint leadership in 2005 of the G7/8 and the EU puts the Government in a strong position to play a positive role in advancing discussions on global economic institutional reform and fairer treatment of developing countries.

The economy

2004 has proved to be another year of solid economic activity in the UK, with evidence of some rebalancing of the economy. The Treasury growth forecast for 2005 is more optimistic than the external consensus, but the gap with other major forecasters probably lies within the bounds of forecasting error. Efforts to raise participation rates and the UK's skill base are vital to meeting the competitive challenges posed by the global economy. In the near term, the evidence many experts detect of a tightening labour market needs to be monitored extremely carefully.

The public finances and the 'golden rule'

On the Treasury's current forecast, the golden rule for current borrowing will be met over the current cycle (on the Treasury basis for calculating the rule). The margin for meeting the rule has nevertheless fallen further since the Budget and now stands at £8 billion (0.1% GDP). Many independent forecasters believe that this is too narrow a margin to be confident that the golden rule will be met.

Given the significance for the fiscal rules of dating the beginning and the end of the economic cycle, the Treasury should clearly inform Parliament in a timely fashion of its preliminary analysis that the cycle has ended. It is now also appropriate to review the current fiscal rules.

Revenues and expenditure

Despite strong economic growth and employment, tax receipts-although they have grown strongly by historic standards-are emerging below forecast for the fourth consecutive year. Even so, the fastest growth in receipts since 1997 is projected over the next two years. It is important that forecasts for tax receipts are accurately constructed and avoid an over-optimistic trend. Questions have been raised in particular about the trend for corporation tax receipts and the Treasury should review the assumption that financial company profits will grow as a share of GDP.

The Treasury's forecast for central government current expenditure in 2004-05 requires substantial spending restraint by government departments over the last four months of the financial year. The build up of End-year flexibility entitlement by departments has reached the point where it poses at least a theoretical risk to the achievement of the Government's fiscal targets.

The Treasury should provide more detail on the process by which key assumptions are referred to the NAO. We expect to give further examination to suggestions that outside scrutiny of a wider range of the key variables in the forecasts might enhance transparency and credibility.

Other expenditure issues

The Treasury should take further action to improve the management and delivery of public sector investment and monitor its effectiveness closely. We call for more detail on  breakdown of the sums re-allocated from central programmes to local authorities and other expenditure changes affecting local authority financing.

Although departmental plans for achieving the Gershon efficiency savings were the subject of advice from the NAO and the Audit Commission, the role of the central scrutiny panel sits uneasily with departments' accountability for this process. It is not possible to determine what advice was provided by the NAO and Audit Commission nor the extent to which this was acted upon by departments: this advice and each department's response should be published.

Savings and welfare

The Committee comments on a range of other issues relating to savings and welfare, including: the possibility of reviewing the plans to reduce the current ISA subscription limits, the extension of the Saving Gateway pilot schemes, the promotion of financial advice to consumers under the programme to tackle financial exclusion, changes to the savings thresholds for welfare benefits, and the plans for increased childcare provision.

Tax avoidance

The new tax avoidance disclosure regime is working both in terms of allowing the revenue departments to close off avoidance schemes earlier than was the case previously and in having disincentive effects on the tax avoidance industry. Some experts have indicated that the announcement that future legislation to outlaw future income/NIC avoidance schemes will be backdated to 2 December 2004 raises significant issues that could lead to challenge in the courts. The Inland Revenue should, without jeopardising their position, publish a paper setting out their thinking on the principles which will guide the way they implement this announcement.