Doubts raised over deficit targets after tax revenue shortfall

George Osborne Speaking

George Osborne’s plans for deficit reduction have been questioned after parliament’s all-party spending watchdog found that tax receipts did not rise rapidly enough to meet the £126bn savings promised by the government.

Revenues did not increase as expected, according to the public accounts committee (PAC) following its annual examination of the government’s entire accounts. As a result, civil servants are unclear about where savings will be made, MPs said. This is despite the chancellor’s plans to ensure that £126bn of consolidation measures will be achieved from a combination of £100bn of spending cuts and increased tax revenues of about £26bn.

The committee’s findings will be welcomed by the shadow chancellor, Ed Balls, who argued last week that a huge shortfall in tax revenue had thrown deficit reduction plans into disarray.

Margaret Hodge, the chair of the committee, said the government had made progress in reducing the deficit, but current and future targets for eliminating the deficit looked “very challenging”.

The row over tax revenue was at the centre of early general election skirmishes between the two main parties. In last month’s autumn statement the Conservative party released plans for dramatic cuts in public spending. Labour claims that the plans would lower even further the revenue raised through tax.

It is understood that members of the committee, including Conservatives, signed off the report in December, before the issue of tax receipts became central to the row between Labour and the Tories this weekend.

In the report on the whole of government accounts (WGA), the committee also said the Treasury was failing to ensure discipline on some areas of public sector pay, particularly senior staff.

“The Treasury has not demonstrated sufficient oversight in ensuring that all parts of the public sector comply with the government’s expectations on pay restraint,” Hodge said.

The report criticises the use of “off payroll” arrangements, where individuals have their salary paid to a company to avoid income tax, which is still rampant within government. The National Audit Office identified 2,214 agreements in 2013-14, the report said – around 200 less than the number disclosed by Danny Alexander in May 2012 when the government promised to clamp down on the practice.

In more than a quarter of these cases, departments did not insert clauses into contracts allowing them to seek reassurances, the report found.

“Guidance from the Treasury and Cabinet Office now requires these arrangements to be reported in central government accounts and we welcome this improved transparency. However, we are concerned that there are no similar arrangements in the local authority and public corporations sectors,” the report says.

In response, a Treasury spokesperson said: “The chair of the PAC’s comments on progress and future policies to reduce the deficit are not based on the evidence presented, and are entirely outside the remit and expertise of the committee.

“The Office for Budget Responsibility has confirmed that this government is on course to halve the deficit this year. The level of transparency under this government has been unprecedented with the creation of the OBR to independently forecast and report on the public finances.”

The report also takes the Treasury to task for being slow in identifying and addressing “seemingly excessive pay awards” in the education sector. University vice-chancellors and so-called superheads have been given large pay increases with little oversight, MPs said. They noted that civil servants had only recently started to collate pay information from academy schools.

An assessment of the total money lost through fraud and error across government is due to be included in the 2014-15 WGA, as requested by the committee.

The Treasury estimated that in 2013-14 there was £2bn of fraud and error in tax credits administered by HMRC, £3.3bn in benefits and pensions administered by the Department for Work and Pensions and £42m relating to funds administered by other government departments.

The audited WGA for 2012-13 was published in June last year, combining the financial activities of 3,800 organisations across the public sector. It reported net expenditure for the year of £179bn, down from £185bn the previous year. Net liabilities had risen from £1.3tn to £1.6tn by 31 March 2013.

Powered by Guardian.co.ukThis article was written by Rajeev Syal, for The Guardian on Wednesday 7th January 2015 00.05 Europe/London

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