Ministerial statement on excise duties (extract from column by Adrian Rudd of PricewaterhouseCoopers, Tax Adviser’s representative on the Technical Committee, published in the May 2001 issue of Tax Adviser). Ministerial statements 1: Indexation of excise duties
Stephen Timms the Financial Secretary to the Treasury, wrote to Stephen Dorrell MP, on 17 May 2000 as follows:
‘I am writing, as promised, to provide further information on the projections of the RPI inflation rate used for the indexation of fuel, tobacco and alcohol duties and the interest rate assumption behind that projection.
‘Projections of RPI inflation are based on the forecast for RPIX (RPI excluding mortgage interest payments) inflation and an estimate for the mortgage interest payments component. The Budget forecast for RPIX inflation was for it to remain below target throughout this year before returning to its target of 2.5% in early 2001. The mortgage interest payments component will be affected by
· changes in mortgage rates
· changes in mortgage interest tax relief (MIRAS)
· changes in the average size of mortgages
‘To project the path of mortgage interest payments forward, an assumption about future interest rates is needed.
‘Assumptions about the future path of interest rates form an important element of any projection of the public finances. Prior to the transfer of responsibility for setting interest rates from the Treasury to the Bank of England, they were based on the Treasury’s own forecast of the interest rate path deemed necessary to meet the inflation target. When the responsibility for the setting of interest rates transferred to the Bank of England, the Treasury adopted a new convention that interest rates will reflect information from the financial futures market and from the yield curve for United Kingdom Government securities. The change in the interest rate used in the mortgage interest payments component of the RPI are based on how 3 month market rates are expected to change in line with market expectations. For the last Budget, these market expectations were based on data for 14 March. The table below summarises the differences between the forecasts and outturns of short-term interest rates. The projection for September 2000 also incorporates an estimate of the impact of the abolition of MIRAS on the annual rate of the RPI from April onwards.
Forecast error in 1997-98 Forecast error in 1998-99 Forecast error in 1999-00
July 1997 Budget -0.1 0.4 1.4
Pre-Budget Report November 1997 0.1 0.8 1.4
March 1998 Budget - 0.4 0.9
Pre-Budget Report November 1998 - 0.3 0.1
March 1999 Budget - - -0.3
Pre-Budget Report November 1999 - - 0.0
Forecast error in projected short-term interest rate since July 1997.
‘As the assumption about the path for the future path of interest rates is a key component of projections of the public finances, this assumption has been audited by the National Audit Office (NAO) in July 1997 and again in March 2000, as part of the three-year rolling review of existing audited assumptions that the Chancellor has asked the NAO to undertake.
‘In July 1997, the Comptroller and Auditor General concluded that the approach “is a reasonable way of setting assumptions about interest rates for the purposes of the fiscal projections.” In March 2000, the Comptroller and Auditor General concluded “... the approach adopted by Treasury since July 1997 for projecting interest rates has been and remains a reasonable convention for estimating their fiscal effect.”’
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