Serious Money

June 11, 2010 7:12 pm

Making painful cuts from comfortable surroundings

Pooh-Bah, Sir Humphrey Appleby, Terri Coverley, Amyas Morse. Which of these civil servants is the odd one out? Yes, it’s Amyas. Unlike the others, he is not a fictional bureaucrat in The Mikado, or Yes Minister, or The Thick Of It. In fact, in his case, you couldn’t make it up. As Comptroller and Auditor General of the National Audit Office, Morse is the mandarin responsible for scrutinising all big public spending projects on behalf of parliament – from his desk in a building that has just had new marble floors, leather sofas and other furnishings installed at a cost of £80m to the taxpayer. In fairness, though, figures released in recent weeks suggest this outlay is neither the most chronic nor ironic.

At the Department of Energy and Climate Change, £715,000 was spent on flights last year. Carbon emissions are, of course, unavoidable when travelling to Copenhagen and other international climate change summits. But 676 of those flights were within the UK. At the Department for Communities and Local Government, £2.8m was spent on furniture – including designer chairs from Paris to create a “truly peaceful oasis”. Community centres and sheltered accommodation would no doubt benefit from this interior chic. But the oasis of comfy seating was for council tax officials. At the Department for International Development, £60,000 was spent on air freight. Aid parcels do have to be delivered promptly, after all. But this was just to send copies of the civil service’s in-house magazine across the world.

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However, this week, the most costly and oxymoronic spending decision (to date) has been uncovered: the Treasury is about to spend £2.5bn in order to collect £3.6bn-worth of tax on higher earners’ pension contributions. According to a detailed analysis by Standard Life, this cost is more than seven times the original estimate – mainly because of the level of complication involved.

New rules to reduce the tax relief available to those earning £150,000 or more were announced in the 2009 Budget – but have resulted in three separate sets of measures: a restriction in the amount that high earners can contribute now to £20,000-£30,000 a year (the so called anti-forestalling rules); the abolition of 40 or 50 per cent tax relief for those earning £150,000 or more from next April; and the taxation of pension contributions as a benefit in kind from next April.

In HM Treasury’s impact assessment document, the implementation cost for all of this is calculated as £345m. But Standard Life has worked out the employee advice and tax self-assessment cost to be £1.38bn, the employer cost to be £525m and the pension scheme costs to be another £525m. In comparison, HM Revenue & Customs’ extra costs of £75m – not including oases or sofas – seem a bargain. Add it up, and you’re looking at £2.51bn.

And that’s not including ongoing annual compliance costs. These are estimated by HM Treasury at £130m. Standard Life estimates the true annual burden to be closer to £435m. John Lawson, head of pensions policy at the insurer, says: “This is inefficiency gone mad – pension savers, their employers and their pension schemes will have to spend £2.5bn so that HM Treasury can collect £3.6bn of tax. Given the burdens faced by people as a result of the recession, adding further unnecessary bureaucratic cost adds insult to injury. The problem stems from the mind-boggling complexity of these rules.”

Fortunately, the Department of Work & Pensions is now looking at some more sensible figures. Tomorrow, the Centre for Policy Studies will publish a report by Michael Johnson, the former secretary to the Conservative party’s economic competitiveness policy group, on simplifying the UK
savings system. Encouragingly, it is entitled Simplification is the Key – and it has already been delivered to the unrefurbished office of pensions minister Steve Webb, apparently without recourse to airmail.

It is expected to make a series of common-sense recommendations for simplifying the savings regime, scrapping all these stupid rules, and bringing individual savings accounts (Isas) and pensions closer together. Possible proposals include creating a combined annual contribution limit for all tax-incentivised savings of £45,000, maintaining tax relief on pension contributions at the saver’s marginal tax rate – be it 20, 40 or 50 per cent – and allowing pension funds to be accessed early or bequeathed to others.

Under these alternative proposals, the report estimates that the Treasury could save up to £8.5bn on tax incentives – but without risking a sharp reduction in long-term saving.

So, even if this figure proves as inaccurate a forecast as the Treasury’s own, it will still deliver a benefit to both government and saver – what the report describes as a rare example of a policy “win-win”. Not even Pooh-bah, Sir Humphrey or Terri could argue with that.
matthew.vincent@ft.com

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