Treasury Committee: Press Notice

Treasury faces major challenge in meeting fiscal rules in face of market turbulence, warns Treasury Committee

Economic and fiscal prospects

The Treasury Committee, in its Report on the 2008 Budget, cautions that the Treasury may have given insufficient weight to the risks of continued financial market turbulence in making its forecasts for economic growth

The Treasury’s growth forecasts used for the latest fiscal projections are more optimistic than the average of independent forecasts.

And the Committee concludes that the margin by which the Treasury forecasts that it will meet the sustainable investment rule is extremely tight, especially considering the uncertainty surrounding the overall economic situation.

John McFall, Chairman of the Committee, commented:

"The Treasury’s forecast of economic growth in the next two years is more optimistic than the consensus view. Critical to this forecast is the resilience of the UK economy to shocks. Some of the very things that have kept our economy growing over the last decade may start to cause us problems, and the 2008 Budget may not have recognised this fully. The Government’s own forecasts show that it will be extremely tight as to whether, in future, it will meet the sustainable investment rule. There are significant downside risks to the economy, and therefore potentially to tax receipts. As such, the Government is going to have to be extremely vigilant in how it manages the public finances if it wishes to maintain its so far clean record in meeting its own fiscal rules.”

Child poverty

The Committee welcomes the measures on child poverty in this year’s Budget, but remains concerned that the Government has yet to provide a clear explanation of the linkage between its target to halve child poverty by 2010-11 and the proposed deployment of resources to meet that target. The Committee calls on the Government to make clear that the necessary resources to meet the 2010-11 target are available and that the Government is committed to deploying those resources directly to support low-income families.

John McFall said:

“The measures in the 2008 Budget will make a major contribution towards achieving the Government's target of halving child poverty by 2010-11. But there is no room for complacency and much still remains to be done if the Government is to win the battle against child poverty. It is crucial that the Government builds on the measures in the 2008 Budget and makes an unambiguous commitment that the necessary resources to meet the 2010-11 target will be found  and will be targeted on families in need.”

Fuel poverty

In view of the importance of measures announced in Budgets and Pre-Budget Reports to the progress of the targets to eradicate fuel poverty set by the Government itself and by the devolved administrations, the Committee recommend that the Government report in Budgets and Pre-Budget Reports on the effect of any measures announced at that time on progress towards meeting fuel poverty targets.

John McFall said:    

“The one-off payment additional winter fuel payment announced in the Budget will help 9 million pensioner households to deal with the challenges of keeping warm this winter. The Government now must assess how effective these short-term measures are and take steps to ensure that continuing rise of energy prices does not push more households into fuel poverty. The Government will have to work closely with the energy companies if they are to meet their target of eradicating fuel poverty in England by 2016 and support the devolved administrations in meeting their targets.”

The 10 pence rate of income tax and tax credit take-up

The Committee concludes that the group of main losers from the abolition of the 10 pence rate of income tax, those below the age of 65 with an income under £18,500 who are in childless households, seem an unreasonable target for raising additional tax revenues to fund the benefits of tax simplification and meeting the needs of children in poverty. The Committee also expresses a concern over the poor take-up rate of working tax credit among eligible families without children, especially given that working tax credits are intended to mitigate for low-income households the effect of this removal of the 10 pence starting rate of income tax.

John McFall said:

“While tax simplification is a laudable aim, it seems strange that the abolition of the 10 pence starting rate of income tax, disadvantages mainly low income households. As such, the Government must ensure that these people are identified, and appropriate help given to them to ensure they receive the benefits to which they are entitled.”

The tax treatment of non-domiciles

The Committee cautions that, as a result of the focus on wealthy individual non-domiciles, there has been insufficient consideration of the possible impact of tax changes announced in the Budget on the middle and lower income groups of non-domiciled taxpayers. Due to the complex nature of the policies on domicile and residence, and the distinction between how liability is incurred for the annual £30,000 charge and the loss of personal tax allowances, the Committee is concerned that the new policies will create a group of non-domiciled taxpayers who would be unwittingly in breach of the new law.

John McFall said:

"There has been too much focus on the very wealthy non-doms, and almost no notice taken of the low and middle income groups who will be affected by the changes. We have highlighted a serious risk that HMRC will be faced with the problems of potentially millions of foreign workers, either seeking advice or unwittingly in breach of the new law.”

Mr McFall is available for comments on the report today on 020 7219 3521 (Westminster office), 07730987802 (mobile) or 07644 004586 (pager). For all other media inquiries, please contact Laura Humble, Media Officer, on 020 7219 2003/07917 488489/