Opening the hidden ringfence: why the next public expenditure round needs to look at the Chancellor’s big “spending” programme

By Jill Rutter, Programme Director at the Institute for Government. Jill is a former civil servant who once, a long time ago, headed HM Treasury's Fiscal Policy Division.

A political debate is raging over whether or not to restrict child benefit to the first three children – with a potential, as the Institute for Fiscal Studies have pointed out to save £ 300m – in 18 years time. Child benefit itself is interesting – it was created to replace child tax allowances in the mid-1970s. Changing a tax allowance into a flat rate benefit had two advantages – the cash was the same whether you paid no income tax or were a higher rate payer. And the benefit could be paid to the mother even if she had no taxable income.

But the change had another consequence – it moved child tax allowances from the protected fiefdom of “tax expenditures and structural reliefs” into the vulnerable realm of welfare spending – and from Treasury responsibility into the Department of Health and Social Security – now Department for Work and Pensions.

Compare with the fate of another source of fiscal support for children. Since the introduction of VAT in 1972, children’s clothes have been zero rated for VAT. Generations of junior Treasury and Customs officials have had to deal with letters from the parents of oversized children who have to pay VAT on their children’s clothes – and some skinny small-footed women have benefited from being able to buy “children’s” shoes and clothes. That zero rate – compared with the 20% rate charged on adult clothes or crisps – “is costing” the taxpayer £ 1.65 bn in lost revenue. The benefit will rise with the amount the parents spend on children’s clothing. Our party leaders and their adorable moppets probably benefit rather more than the parents of a three or four child family in Newham who buy their kids clothes at Asda or rely on hand-me-downs.

If that were a DWP or Department for Education spending programme it would have been laughed out of court by the Chief Secretary long ago (you mean, you are match funding clothing purchases by parents to give them a discount on every item of clothing they buy, with the biggest sums going to those who spend the most. And you are spending over a billion and a half pounds on it. A year. You cannot be serious…).

That is one glaring example. But there are other sums of big money hidden in the fascinating HMRC table “estimated costs of the principal tax expenditures and structural reliefs”. The biggest sums are tied up in pensions tax and NIC relief – now being looked at as a potential slush fund to be dipped into to fund universities or lower national insurance contributions according to political taste is another one. But this opportunism does not answer the question of whether there might be a better way of helping Britain as a whole finance its old age.   There are also a range of business reliefs which run into the billions, whose impact is only patchily evaluated. One specific relief – on films, costs £ 230 m a year – 10 times the budget of the British Film Institute.

The National Audit Office has finally started to look at tax reliefs and tax expenditures. In two reports last year it slammed the failure of the Treasury and HMRC to manage, scrutinise or evaluate these reliefs – and indeed to forecast correctly how much they would cost. In one case “entrepreneurs’ relief, the NAO noted:

[the cost } has risen by over 500% since it was introduced in 2008-09. Costs have continually exceeded forecasts. Its estimated cost of £2.9 billion in 2013-14 is 3 times greater than published forecasts predicted”.

NAO head Amyas Morse said when the report was released:

“HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury’s administration of tax reliefs cannot be value for money.”

In the case of any other department, the Treasury would be leading the charge against such sloppy treatment of the general taxpayer. But when the NAO published its own report, the Treasury rejected the idea that the public spending watchdog had a locus to ferret around in their own, unmanaged, backyard, insisting that:

“The Treasury does not agree that the above paragraph reflects NAO’s powers in relation to tax policy and therefore the scope of this report and future reports. The Treasury’s position is that all tax reliefs reflect policy decisions about the incidence of taxation and distribution of the tax burden, taken by ministers and agreed by Parliament. As such the Treasury’s view is that the design and impact of a relief are questions of policy and therefore outside of the NAO’s remit.”

But if we are to close the deficit in the next Parliament, everything needs to be up for grabs.   The Treasury had its fingers burned in the omnishambles budget trying to sort out some minor anomalies so may think the effort is not worth candle. But picking off reliefs one at a time – rather than an across the board reform – may be harder to justify and present and in itself reflects the opaque way the Treasury manages tax policy making. In any case the Treasury has already asked departments to defend much tougher decisions – and will be doing so again in the next Parliament.

This is an opportunity for the Treasury to lead from the front rather than the sidelines and bring “tax expenditures and reliefs” out of their iron ringfence and subject them to the same process of scrutiny and interrogation that will be applied to spending programmes. That can be summed up in a simple question : if this were a departmental spending programme – would it survive?


Jill Rutter is Programme Director at the Institute for Government. Jill is a former civil servant who once, a long time ago, headed HM Treasury’s Fiscal Policy Division.


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