TUESDAY 20 MARCH 2001
_________
Members present:
Mr Giles Radice, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr Edward Davey
Mr Michael Fallon
Judy Mallaber
Mr James Plaskitt
Mr David Ruffley
Sir Michael Spicer
_________
THE RT HON GORDON BROWN, a Member of the House, (Chancellor of the
Exchequer), MR ED BALLS, Chief Economic Adviser, MR GUS O'DONNELL,
Managing Director, Macroeconomic Policy and Prospects and
International Finance, MR NICHOLAS MACPHERSON, Director,
Welfare Reform, HM Treasury, examined.
Chairman
242. Welcome, Chancellor. Would you like to introduce your team -
I think we know who they are - just for the record.
(Mr Brown) Thank you very much, Chairman. On my right Ed Balls, the
Chief Economic Adviser to the Treasury; on my left Gus O'Donnell, Managing
Director of the Macroeconomic and International Division; and Nick Macpherson,
who deals with the issues related to taxation and benefits.
243. Is there anything you would like to say to us?
(Mr Brown) I thought, Chairman, I would like to draw attention to the
new figures that have been published this morning, which may inform the
Committee's proceedings. First of all, the figures demonstrating the strength
of the public finances; and, secondly, the inflation figures, which show that
RPIX inflation in February was 1.9 per cent., and HICP inflation was 0.8 per
cent. which is the lowest in the European Union. The public finance figures
demonstrate that we are well within our two fiscal rules. The current surplus
in the year to February is now 24 billions; that compares with 19 billions
last year and less than 12 billions the year before. We remain on course to
balance the current budget over the economic cycle, even on the most cautious
of cases. Our second fiscal rule, which is the sustainable investment rule,
is that we keep debt at a prudent and sustainable level below 40 per cent. of
national income. Today's figures show that the ratio of net debt to GDP,
which was at 44 per cent. in 1997, had fallen to 36.1 per cent. this time last
year; it is now at this time, this year, 31.1 per cent. so we are on course
to meet the sustainable investment rule. In the year to date net borrowing
yielded a surplus of 4.6 billions higher than in the same period last year,
contributing to the large repayment of debt that we are making. The figures
also show that because we have cut debt and cut unemployment, we are not only
spending 10 billions a year more on education and on debt interest, we are
spending 30 billions more on the National Health Service than debt and
unemployment together. We have listened to the views in recent weeks of the
European Commission and the International Monetary Fund on our fiscal plans;
in particular their views on our proposals to double net investment over the
next three years. Building on our position of strong public finances, it is
right that we proceed with our plans. The European Commission and the IMF
acknowledge the need for more investment in our public services. The
Maastricht Treaty explicitly recognises the scale of public investment should
be taken into account in any assessment of a country's fiscal plans. Our
investment plans are not only affordable, but the last figures show that we
have the lowest ratio of cross debt to national income of any country in the
European Union, apart from Luxembourg. In three years' time we will be
spending an extra 12.5 billions a year on net investment across the public
sector; 3.5 billions of that on transport; 1.4 billion a year more on NHS
capital; 1.6 billion a year more on education and employment investment.
Indeed, we need to press ahead with our plans in a timely way without
jeopardising value for money; and that is why, to speed up investment, we
require each department to draw up their own individual department strategies;
and that is why, through their annual reports, departments will have to
explain the progress they are making in delivering their investment
strategies; how they link to the policy outcome in targets for improved
services outlined in the Public Service Agreements; how existing assets are
managed and disposed of when they are not needed; how systems and procedures
are being improved to deliver better value for money. I believe that this
extra investment is crucial for the future of our country; and it is only by
reversing this historic trend of under-investment, that we saw in previous
decades in the nation's infrastructure, that we will succeed in building a
stronger economy and delivering opportunity for all. Thank you, Chairman.
244. The figures you have announced on public finance today, how
do they compare with the ones you announced in the Budget?
(Mr Brown) They are very much in line with what we have announced in the
Budget. We expect there to be an underspend on capital investment, and we are
taking steps to improve the ways that departments manage the public investment
programmes that are their responsibility. As far as the overall effect on our
fiscal rules is concerned, we are well within our first fiscal rule. The
current balance is strong and, equally, as I said in the Budget and I repeated
today, debt is falling as a proportion of GDP towards 30 per cent., and it is
likely to remain at that level in future years. Therefore, the net repayment
of debt that we envisaged in the Budget is going ahead.
Mr Michael Fallon
245. Chancellor, Mr Dilnot of the Institute for Fiscal Studies
came before this Committee a week ago and drew attention to Table C23 in the
Red Book, which showed the tax burden, net taxes and social security
contributions (which I think is your favourite definition even including your
tax credits) at 35.2 per cent. in the last Conservative year; and you yourself
estimate in Table C9 that this year just finishing it will be 37.7. Mr Dilnot
pointed out that that was an increase of 2.5 per cent., or roughly 25 billion
in four years. Is he right?
(Mr Brown) Mr Dilnot is entitled to his views.
246. Is it a view or a fact?
(Mr Brown) He is entitled to his own view. In actual fact the figures
we inherited, on historical sequence, for the year to come would have taxation
at 38 per cent. In fact, taxation in the year to come will be 37.5 per cent.
I could refer you to the statements that were made in the Budgets before 1997
that confirm that the tax burden was due to rise to 38 per cent.
247. The tax burden has risen by 25 billion, that is a fact, is it
not?
(Mr Brown) No, the position is that, when we came into power (I have
said this to the Committee before and I do not think it needs to be repeated
at great length but let me just re-emphasise) as a result of the 1996 Budget
and I could quote what was said by the Chancellor at the time, he said then
that the tax burden was expected to rise in 2001-02 to 38 per cent. In actual
fact it will be 37.5 per cent. according to the projections in the Budget.
The last Conservative Government, which you have referred to, was on a rising
trend of taxation as a share of national income to rise to 38 per cent.
248. What is official now at the end of your fourth year is that
the tax burden is 25 billion higher, is it not? Whatever the previous plans
were, the tax burden is 25 billion higher in fact than it was four years ago?
(Mr Brown) What I am explaining to you, and perhaps for the benefit of
the Committee I should give more information therefore, is that because of the
decisions that had been taken by the previous Conservative Government, but
also because of the projections that they were making about the rising share
of tax burden to national income, the projection for 2001-02 was 38 per cent.
Ours is 37.5 per cent. and I think the Committee must note that. Of course,
one of the reasons was the projections that they were making as a result, for
example, of removing profit-related pay, the tax exemption that existed for
that, and they had other calculations that were resting on the escalators that
existed in relation to fuel and in tobacco - and, of course, as far as the
fuel escalator is concerned, we have removed that.
249. I am surprised to find you still denying that the official
tax burden has risen by 25 billion. Do you recall telling Newsnight on
20 January 1997, "I must repeat, there are no public expenditure commitments
that require us to raise taxes"? Do you recall that?
(Mr Brown) We froze public expenditure, as you know, for the first two
years, and we did not make public expenditure commitments for the first two
years and it was generally accepted, even by my Conservative opponent, that
the Conservatives would not, he said, have kept to the spending plans, but we
did.
Mr Ruffley
250. Chancellor, on Table C9 of the Red Book, the tax burden
measured by net taxes plus social security contributions is 37.7 per cent in
2000-01, is it not?
(Mr Brown) I have got Table C10.
251. Page 194. 2000-01 net taxes and social security
contributions, the figure is 37.7 per cent.
(Mr Brown) That is roughly what the last Conservative Government
predicted for this year.
252. That is your figure?
(Mr Brown) 37.5 per cent. is the difference between 37.5 and 38 per
cent.
253. Could you then turn to Table C23 in your own Red Book
Budget 2001.
(Mr Brown) It is really an historical series.
254. That is correct. 1996-97 net taxes and social security
contributions is 35.2 per cent. is it not, Chancellor?
(Mr Brown) This is Table ---?
255. Markedly slow today!
(Mr Brown) I am not markedly slow at all; I am getting to the different
tables. This goes right across the page.
256. It is your record; you should know your way around it.
(Mr Brown) This is the Table that starts with 1978-79, is that right,
and goes up to 38.9 per cent. under the last Conservative Government?
257. I am not asking, Chancellor, about 1996 or 1997, the year you
inherited.
(Mr Brown) Mr Ruffley, I am just finding the Table. If I may point out
to other people who do not have the benefit of this, there are nine columns
in this Table, stretching from 1970 to 1999-00. The figures start for the tax
as a share of national income at 1979 and the rise, as you may know -----
258. With respect, Chancellor, 1996-97 is 35.2?
(Mr Brown) They rise, as you know, to 38.9 per cent. -----
259. No, that year is 35.2.
(Mr Brown) ----- in 1982-83 and then they are at 35 per cent. in 1996-
97.
260. You are going a bit off piste here, Chancellor.
(Mr Brown) You have asked me, Mr Ruffley, to look at an historic -----
261. What we require is 1996-97, that is all, it is very simple.
(Mr Brown) Mr Ruffley, you have asked me to look at a Table that has
perhaps 300 or 400 separate figures on it.
262. You are meant to be a clever chap. You can read 1996-97, can
you not? Could you read it for the benefit of everyone in this room? It is
35.2 per cent.
(Mr Brown) You can read what you like. I will answer questions.
263. What is the answer to my question?
(Mr Brown) The answer to your question is that -----
264. 1996-97.
(Mr Brown) The answer to your question is that this is an historical
series. I have already explained to you that we inherited a situation where
the last Conservative Government was predicting that taxes would rise to
38 per cent. of national income.
265. So you will not confirm that figure your own Red Book? Could
you subtract 37.7 per cent. from that 35.2 per cent. and tell us what the
difference is?
(Mr Brown) I am not going to get into the business of this -----
266. It is 2.5 per cent.
(Mr Brown) ----- if you wish to put figures in this way.
267. It is a higher tax burden.
(Mr Brown) I have drawn attention to the fact that there are a variety
of reasons why the tax burden changes over time. One of the first is economic
growth; the second is fiscal drag; the third is better collection of income
taxes; and the fourth is historical decisions that are inherited by
governments from previous governments; and the fifth are decisions that are
made by these governments. There are a lot of factors which contribute to the
changes in the tax burden over time. I think it is material to this Committee
to draw attention to the fact that we inherited a situation where the last
Conservative Government was expecting the tax burden to rise to 38 per cent.
268. Chancellor, are you denying the tax burden between 1996-97
and 2000-01 has increased by 2.5 per cent? Are you denying that?
(Mr Brown) I am happy to draw attention to the figures that are in the
Red Book because the figures are accurate. The figures are accurate because
they reflect what has happened as a result of a series of different decisions.
269. Chancellor, you are denying the tax burden went up. You will
be denying next that you tried to save Geoffrey Robinson from the sack.
(Mr Brown) Mr Ruffley, if you want to reduce the tenor of this debate.
270. No, you are denying a basic fact in your own Red Book - you
will deny anything.
(Mr Brown) I said that the facts in the Red Book are accurate, and I
have said that every time I have come before this Committee. The idea,
Mr Chairman, I have given the impression that the facts in the Red Book are
inaccurate is wrong. The facts in the Red Book are accurate; but I am
pointing out to you that, as far as the inherited situation was concerned, the
tax burden was due to rise to 38 per cent.
Mr Davey
271. A quick supplementary to Mr Ruffley's. The figures you read
out of the tax burden as predicted by the last Conservative Chancellor, those
figures which you said go up to 38 per cent., are they calculated on the same
basis as the figures in the Red Book?
(Mr Brown) Yes.
272. On exactly the same basis?
(Mr Brown) Yes.
273. Thank you very much. Chancellor, will you be spending more
or less next year than previously planned?
(Mr Brown) I will be spending more over the next three years -----
274. No, next year.
(Mr Brown) I will be spending more over the next three years than we
planned in the Spending Review in July 2000.
275. Next year, will you be spending more or less than previously
planned?
(Mr Brown) Next year the figures will be 393.7, compared with 392.9. I
may say for the benefit of the Committee, what has actually happened over the
course of the last year is something I hope the Committee will want to draw
attention to. We have substantially cut, above even the projections in the
Comprehensive Spending Review, the amount of money that is being spent on debt
interest, and we have cut the amount of money that is being spent on
unemployment. As a result of that, there are considerable savings, and the
savings are being used to fund a rise in pensions; to fund a rise in
children's benefits; and to fund the increased spending in health, education
and in public services. For the benefit of the Committee -----
276. Thank you, Chancellor, for your answer. Can I ask you
another question, please.
(Mr Brown) For the benefit of the Committee, should I not draw attention
to these figures so that people do know. 393.7 rising to 417.8, rising to
442.6 in 2003-04.
277. This saving and this underspend that you have just been
helpfully telling the Committee about, are you fully reallocating this
underspend, or are you paying off the debt with some of it?
(Mr Brown) We are paying off the debt as a result of very substantial
savings from unemployment and debt interest. Equally, we are spending more
over the course of the next year. If you would like the figures for health
and education, I am very happy to give you them, to show the additional amount
of money we are going to be spending on these areas.
278. Could I just ask you a particular question - you may have
this figure. What was the average spend by the Government on health in the
last Parliament as a proportion of national income? Do you have that figure?
(Mr Brown) I do have the figure.
279. You have the figure of the average spend by Government on
health in the last Parliament?
(Mr Brown) If you will allow me to get to it. What I can say is that
the real annual growth rates in Health Service expenditure in the last
Parliament was 2.6 per cent; in this Parliament it will be 4.9 per cent. As
a result of the Spending Review 2000 it will be 5.6 per cent. In other words,
it will be twice the rate of growth of the last Parliament, and twice the rate
of growth of the Conservative years.
280. Thank you for those figures; they were not the figures I was
actually asking for.
(Mr Brown) What figures would you like. If you want the share of
national income then the expenditure was 5.7 per cent. in 1996-97; and next
year it will be 6.4 per cent. rising to 6.7 per cent. In both cases, to be
absolutely clear, there are substantial increases taking place in spending on
health. I was able to put additional expenditure into the National Health
Service in the Budget so the spending figures for health in 2001-02 will now
be 59.1 billion - and that compares with 40.8 billion the year we came into
power; and in the year after that 2003-04 it will rise to 69 billion.
281. Chancellor, thank you for that. The figures I asked you for
were the average spend in the last Parliament as a proportion of national
income. The figure I have from the House of Commons Library is 5.5 per cent.
If you ask the House of Commons Library for the average spend by this
Government in this Parliament as a proportion of national income it is less
than that, it is 5.4 per cent. The Health Service over this Parliament,
compared to last Parliament, has had on average a smaller share of the
national income. Could you confirm that?
(Mr Brown) No, I do not accept that. I have just given you the figures
showing that the growth rate of health in the last Parliament was 2.6 per
cent; the growth rate in this Parliament, even taking into account our first
two years when we had to deal with problems of the deficit, is 4.9 per cent.
As a result of the Spending Review, it will be rising by 5.6 per cent. As a
share of national income, I think you would agree with me, when you have
figures that show that the share of health in national income is rising from
6.2 per cent. to 6.4 per cent. to 6.7 per cent., it is now quite wrong for you
to deny that there is an increase in spending taking place both in cash terms,
in real terms, as a share of national income and as a growth rate as compared
with the previous Parliament.
282. Chancellor, you accuse me of doing something I was not trying
to do. What I was trying to ask you for was a figure of the average in the
last Parliament and the average for this Parliament. The figures I gave are
from the House of Commons Library and they show that, on average, we are
spending less than we did in the last Parliament. Can I give you the figures,
Chancellor. For education in the last Parliament -----
(Mr Brown) You do not want to continue to talk about health?
283. My question is about education, Chancellor.
(Mr Brown) Can I just put into the record the figures on health. In
1996-97 - and this is the most generous to the previous Government, the last
year - 5.7 per cent. In 2000-01 the figure is 6.2 per cent. of national
income. 2001-02 6.4 per cent. of national income. 2003-04 6.7 per cent. of
national income. I hope that the questioner will accept that is a rising
trend of national income.
284. Now we can go on to education. The average spent in each
year as a proportion of national income on education in the last Parliament
was 5 per cent; in this Parliament to the end of this financial year it is
4.6 per cent. How can you explain that on average in this Parliament we are
spending a smaller share of national income on education?
(Mr Brown) The figures I have for expenditure are 5 per cent. in
2001-02, and 5.4 per cent. in 2003-04. The reason that that is the case is
because education expenditure (and I do hope you will look at the actual
figures) is rising from the 36 billion we inherited to 46 billion in 2000-01,
that is this year, and then rising again to 49.8 billion in 2001-02; and
rising to 58.1 billion in 2003-4. The growth rate for educational expenditure
is 5.4 per cent. as a result of the Spending Review, compared with 1.6 per
cent. in the last Parliament and 1.5 per cent. in the Conservative years. You
can produce as many figures as you like, Mr Davey, but you cannot deny the
fact that educational expenditure is rising by something in the order of œ4-5
billion a year, and it is going to do that consistently for the next four
years; and that is far higher than could ever have been achieved simply by a
one pence change in Income Tax, but is twice as much as could be achieved by
that.
285. Chancellor, the only reason I was drawing attention to the
figures as a share of national income was because in your manifesto you said
you would increase them and in the first three years of this Parliament it
actually fell.
(Mr Brown) The figures I have got, Mr Davey, are 4.7 per cent., which we
inherited, then rising to 4.9, then 5 to 5.4.
286. I would like to know which years you are quoting.
(Mr Brown) These are figures rising to 2003-04, 2001-02, 2000-2001, but
starting in 1996-97.
287. Chancellor, you have read out your series, can I just read
out my series. I agree with you that in 1996-97 it was 4.7 per cent. of
national income; it then went down to 4.6; it then went down to 4.5; and in
1999-2000 it was 4.5. In this year, and in the years that you have predicted
for the future, is it increasing?
(Mr Brown) Can I read out the figures for the future years?
288. No, you have already done that.
(Mr Brown) You accept my figures.
289. What you have done is cut expenditure in the first three
years and then you are having a boom at the end. Schools and colleges are
being deprived of money for the first three years of your stewardship, and now
you are giving them money. I am afraid that the standards have fallen for the
first three years and you have deprived the schools.
(Mr Brown) It seems to me that this member of the Committee is working
on the assumption that it would have been right to do nothing about the
deficit we inherited, and right to do nothing about the overall level of debt
we inherited. I do not apologise to the Committee for taking the action that
was necessary to deal with both deficit and debt. The result of that is that
we have a solid foundation on which to build; and the solid foundation is
shown by the figures that he did not read out, which is that educational
expenditure will rise to 5 per cent. and then to 5.4 per cent. of national
income. The actual figures for expenditure are 2001 46 billion; rising to
2001-02 49.8 billion; rising to 2003-04 58.1 billion. That is a very
substantial rise in educational expenditure over the next few years built on
a solid platform from which we can actually have sustainable rises in
educational expenditure. I would like the Committee to note that, as far as
my view is concerned, it would not have been possible to have these
substantial rises in educational expenditure if we had not dealt with the
problems of the deficit and debt in our first two years.
Mr Plaskitt
290. Chancellor, at the time of the pre-Budget Report 2000 you
estimated total managed expenditure to come out at 371.6 billion. You told
us in the Budget that would in fact be 368.3, an undershoot of about
3.3 billion. What money was not spent, and what were the principal reasons
for the undershoot on that?
(Mr Brown) The numbers result obviously, first of all, from the
substantial cut in debt interest payments, and that has made it possible for
us to reallocate resources to health and education; but it also comes from the
substantial cut in the amount of money we are spending on unemployment
benefits. There have been two big changes that have diminished the pressure
on one section of our budget. They are actually set out on page 27, Table 2.3
of the Budget Report. They show that over the period we have saved about a
billion on social security benefits, indeed, 2 billion in 2001-02; and on debt
we have saved something over 4 billion. These are big changes as a result of
a reduction in the share of debt in national income.
291. There were no significant instances of spending departments
failing to deliver on their programmes?
(Mr Brown) We had an issue that I raised right at the beginning of my
opening remarks, where we are determined to push up the levels of public
investment in those services that have been under-invested in over a long
period of time. That is why we have departmental investment strategies. We
have to do more, and we have to do better, and our aim is to raise the share
of national income taken by public investment to 1.8 per cent. We are making
progress, but there is still more to do.
292. That is on the capital side rather than on the revenue side.
(Mr Brown) On the revenue side, if this were under the old system and
there was nowhere near flexibility, one might be disappointed if there was
money left at the end of the year; but this is money that can be carried over
by the departments. We are avoiding a end year rush to spend money perhaps
not on the best projects, so the money is carried over. The important thing,
as I said to Mr Davey, is that expenditure on health, education, policing and
transport, all the key public services which people rely on, is rising very
substantially this year, next year and the year after. Indeed, I might have
made the point to Mr Davey that expenditure in real terms on education in the
last year has risen by more than 10 per cent.
293. Is it fair to say that the money the Treasury is saving as a
result of lower unemployment and lower debt interest payments is money
released and made available for spending on health and education? Are you
simply transferring savings from that area to those services?
(Mr Brown) I have made the point in the Budget itself that, whereas in
the years 1979-1997, of every additional pound spent 42p (and indeed in the
early 1990s it was 50 per cent. of every additional pound) went to debt,
unemployment or social security - it is now only 17 per cent; therefore that
leaves 80 per cent. free for health and education. Can I just emphasise one
comparison: the average for the years 1979-1997 was that more money was spent
on debt and unemployment than on the National Health Service. We are now able
next year to spend œ30 billion more on the National Health Service than the
combined requirements for debt and unemployment. We are now spending twice
as much on the Health Service as we are on the bills for debt and
unemployment. It is that change in the composition of overall spending that
is making it possible to answer the points that have been made to put more
money into health and education.
294. Is the Treasury adding more to the spending on health and
education, for example, than the amount simply released by the saving on lower
debt interest payments and unemployment?
(Mr Brown) Overall, yes.
295. Is it a transfer from one saving account to another spending
account?
(Mr Brown) Overall, yes, because as you know we plan public spending to
rise by 3.7 per cent. a year over the next three years. The substantial
additions in Health Service spending of around œ5 billion a year, and then the
extra money on top of that, that was put in in the Budget, and the extra money
on education I have just read out the figures for, are in excess of some of
the savings we made on unemployment and debt. There is a reallocation of
money, but of course there is more money going to public spending as a whole.
296. As you say, average annual public spending is set to rise
3.7 per cent. a year for a number of years through the next part of the
Comprehensive Spending programme - that is considerably higher than the trend
rate of growth in the economy. Are you comfortable with that difference?
(Mr Brown) I think it is the right thing to do. As you know, current
spending is rising but public investment is rising even faster. I think that
is the necessary means by which we correct the long-term under-investment in
Britain's infrastructure, in our hospitals, in our schools, in transport
generally and even in policing and in other areas. I believe it can be both
justified in macroeconomic terms, because we meet all the fiscal rules that
are required of us; but also it is an essential element of rebuilding the
fabric of British society.
Mr Fallon
297. Chancellor, you will recall a couple of years ago that this
Committee reprimanded you for triple counting. Just to confirm we have got
you off this habit - the education spending of a billion is over three years,
that is right, is it not?
(Mr Brown) The educational expenditure is over three years as I have
made absolutely clear in the Budget Statement.
298. It is also right, is it not, that the Secretary of State has
written probably to you as well as me. He wrote to me on 14 March,
"Dear Michael, As a result of the Budget there will be 100 million more per
year for direct grants to schools, and 100 million more for capital funding".
That is right, is it not?
(Mr Brown) There is actually around œ300 million more a year for
eduction. Some of the money is going to direct payments to the schools, and
this is to increase the direct payment that was announced in the last Spending
Review. So some schools will get about œ110,000. Additional money will go
to the recruitment of teachers. You will have seen the measures announced by
the Secretary of State for education.
299. The capital funding that the Secretary of State says will
boost schools' capital, for example, for new classrooms - how does œ2,000 get
you a new classroom?
(Mr Brown) The capital funding allows some of the renovation work to be
done. Equally, he has announced a new programme of PFI credits, a new
programme of increasing the amount of repair work and renovation done in
schools. I think it is now the case that nearly 20,000 schools have been
repaired and renovated under the New Deal Programme, which is in addition to
what you are talking about.
300. Did you read, Chancellor, yesterday that after four years of
Labour Government 200 13 year-olds were sent home from Holywells High School
in Ipswich at 11.15 in the morning because they were six teachers short. Did
you read that?
(Mr Brown) I did read the newspapers this morning, and I read them most
days. I am not in a position obviously to answer for what is happening in an
individual school in an individual education authority. I think the figures
I have read out, about the additional amount of educational expenditure that
is available, are ones that show we are putting more money into schools and
education generally. I think the determination of the Secretary of State for
Education to deal with what have been recruitment problems that build up over
a long period of time, partly through the numbers of people not doing teacher
training in previous years, and the efforts he is making and the additional
package he has announced to encourage people and to recruit people is
something I think he would welcome.
301. If it takes one year to train a graduate teacher, you have
been in power for four years, this is your failure, is it not?
(Mr Brown) It takes a number of years to build up the expectation that
teaching is a career that more people want to go into. It takes changes in
both salary arrangements, and in the recruitment of people to colleges, as
well as changes in the schools themselves. I think most people would agree
the changes that the Secretary of State for Education has brought in, starting
with primary schools and now moving to secondary schools, they are showing
results; but, as we have said on previous occasions, a lot has been done but
there is still a lot to do.
302. This billion pounds is not going to raise teachers' salaries,
is it?
(Mr Brown) The billion pounds is over three years, and it is an addition
to the rise in teachers' salaries that was announced in the Public Sector Pay
Review Body. There is additional money in his recruitment package for people
returning to education immediately - money to help them do the refresher
courses, and back to teaching bonuses that are available for people if they
come back to teaching in the next period of time. Yes, there is additional
money to recruit people back into teaching in his package that was announced
on Monday of last week. I think, if I am right, that the total recruitment
package was worth 200 million over three years.
303. If you are so short of teachers are their salaries right?
(Mr Brown) The Public Sector Pay Review Body made recommendations which
we have accepted. We did not phase in the awards; we accepted the awards.
Equally, over a period of time the Secretary of State for Education has been
trying to recruit more people with the promise of higher salaries for head
teachers and also higher starting salaries. He is trying to address these
issues. I can only repeat, that the amount of money going into education now
compared with what it was under the previous government is very substantial
indeed. Education expenditure will rise from 46 billion this year, to 49.8
billion next year, to 58.1 billion by 2003-04. I had thought the complaint
of the Conservative Party was that we were spending too much on these public
services, not too little.
304. Can you recall when children were last sent home from school
at 11.15 in the morning?
(Mr Brown) These are matters that are relevant to how local education
authorities are dealing with problems that they have.
305. It is their fault?
(Mr Brown) These are matters that local education authorities are
dealing with in relation to recruitment of staff in their areas; and they are
being helped by the measures that the Secretary of State for Education is
announcing.
Mr Cousins
306. Box B3, Chancellor, on page 177, deals with the US economy.
In the text of Box B3, which is extremely illuminating, it says "... investors
may be unwilling to finance the current account deficit [of the United States,
obviously], leading to a sharp correction in the dollar". Do you think the
same thing could happen to the pound?
(Mr Brown) As you know, I never got into the position of speculating
about the future movements of sterling. In the medium-term we believe the
exchange rate will reflect the fundamentals of the economy.
307. I asked that question really because there is an element of
speculation about the course of the dollar. It seemed to be logical
to -----
(Mr O'Donnell) Could I just add that for the US we are talking here about
a current account deficit of around 4.5 per cent. of GDP. In our forecast the
current account deficit for the UK only gets up to a peak of 2.5 per cent.
It is quite a lot lower.
308. Chancellor, you have referred in your reply to the long-term
economic fundamentals as determining the value of currencies, and of course
that must be right. Last year you were of the view that the weakness of the
euro relative to sterling could not be justified by any reference to long-term
economic fundamentals. Is that still your view?
(Mr Brown) The exchange rate for sterling did adjust in relation to the
euro over the course of the last year. Yes, it is still my view that over the
medium-term that the exchange rate will reflect the fundamentals.
309. Last year you said, and I am quoting from your James Meade
Memorial Lecture approximately a year go, the exchange rate cannot be
justified by any view of long-term economic fundamentals. That was the
euro/sterling exchange rate.
(Mr Brown) Yes, but that, if I may say so, was when the exchange rate
was the equivalent of 3.40 at the old Deutsche Mark/pound level. It is now
something in the order of 3.10; so it has come down quite a bit since the time
we talked last year so an adjustment has taken place.
310. Your view of that adjustment would be?
(Mr Brown) Just so you are clear, I am not speculating about when an
adjustment is completed, no.
311. Indeed, but if I could just summarise - last year you were of
the view when the exchange rate was at a benchmark figure of 3.40 Deutsche
Marks to the pound that that could not be justified by any view of long-term
economic fundamentals. It is now approximately 3.10 and you are not
confirming your view as expressed last year?
(Mr Brown) What I am saying is that in the medium-term it will move to
reflect the fundamentals of the economy; but I am not getting into a day-to-
day speculation about what the right rate should be.
312. I do understand. In Mr O'Donnell's very helpful and
interesting - incidentally, I am using the term "helpful and interesting" in
a certain naive sense of it being helpful and interesting, I am not making
some broad point in order to destroy Mr O'Donnell's career! I am simply
meaning that he came to the Committee and he was helpful and he was
interesting.
(Mr Brown) I hope you will say the same as we leave!
313. So far so reasonably good! He said that the first response
mechanism to a reduction in consumer demand, and that is not an exact quote
but the gist of what Mr O'Donnell was saying, would be on monetary policy
rather than fiscal policy; because the reaction times are faster on monetary
policy. Do you agree that there is scope for the MPC to reduce interest
rates, if it decided to do so, given the fiscal stance in the Budget?
(Mr Brown) That is, of course, a matter for the MPC. There is no point
in me making the Bank of England independent and trying to pre-judge or
presume what decisions it makes in the next few days. The Bank of England
reduced interest rates in February. It has taken, therefore, a proactive
stand in relation to the economy. Equally, the fiscal tightening that has
been locked in, in the Budget, is I think something that they would approve
of.
314. You do not feel that the Budget in any way inhibits the
decision of the MPC, should it wish to do so, to reduce interest rates?
(Mr Brown) No, I do not believe that that is the case. We have locked
in the fiscal tightening of the last Budget and the pre-Budget Report. We are
pursuing a policy for sound public finances. I believe that the difference
in America, Europe and elsewhere between what is happening now and what
happened in the late 80s and early 90s is that, generally speaking, we have
economies pursuing low inflation policies with sound fiscal positions. I
think the figures I read out at the start of this discussion from today's
publication shows that the fiscal position is strong.
Mr Beard
315. Chancellor, the latest Budget forecast of the GDP growth is
the same as in the pre-Budget Review. Why is it the view that the events in
America are not having an effect on prospects?
(Mr Brown) We looked at that very carefully, and there is absolutely no
doubt that any reduction in growth in the United States' economy will have an
eventual impact on Europe and on Britain, particularly with our larger share
of trade with the United States of America. We looked at the position of the
economy as a whole, and when Mr O'Donnell and his team drew up their budget
forecast they could see that the reduction in trade would be matched by the
improvement in consumer spending and consumer demand in the United Kingdom;
and, therefore, there seemed no reason to depart from the forecast that we
made of 2¬-2 per cent. for this year.
316. What is the basis for assuming an increase in the growth of
domestic demand compared with the pre-Budget Review?
(Mr Brown) I think if you look at the position last year, and if you
also look at the strength of the domestic economy, if you look at people's
purchasing power, if you look also at the changes we have made in the Budget
and in the pre-Budget Report you can point to that. It is a situation of
sustainable growth. I believe, when you see side-by-side with the growth
figures the inflation figures, that we have got inflation under control.
317. Is not the disparity or imbalance between the domestic
prospects and the international prospects for growth in trade a worrying
factor?
(Mr Brown) I believe myself that while the American economy is obviously
growing less fast than last year and that has an impact on Europe as a whole,
there is still substantial growth in the European economy. Our exports to
Europe, despite the exchange rate difficulties we faced, have been growing;
and we are able to benefit from Europe becoming more of an engine of growth
in the world economy as well as America has been in previous years. I think
the disappointing factor in the world economy is that Japan continues to fail
to grow; and that America has had a necessary slowing as a result of a very
high level of growth last year. We are still, while being vigilant,
cautiously optimistic about the future of growth rates around the world.
318. Are you not concerned about the higher level of balance of
payments deficit?
(Mr Brown) That is obviously a factor that one takes into account. If
you bear in mind what Mr O'Donnell said about the share of GDP taken account
of by the deficit, it does not rise to the levels we have got in the United
States.
319. The Budget is envisaging a rise in the real household
disposable income in the coming year of between 4¬-4« per cent. Is there not
a danger of stimulating a boom from that rise?
(Mr Brown) The difference between the position now and the position in
the late 80s is that we have clear fiscal rules that are being met. There
were no rules that were being observed at that time. We have inflation under
control, and it will meet its target; and we have a mechanism by which the
target will be met through Bank of England independence. We have not taken
reckless decisions in the Budget. We have pursued a balanced approach, where
we have balanced the needs of public investment and taxation but within a
context where we are achieving stability. I do not believe that we are in the
position that the country was in in the late 80s and early 90s.
320. The outbreak of foot and mouth disease has come along as an
unpredicted factor. What effect is that likely to have on GDP growth and on
inflation if it persists for some months?
(Mr Brown) While obviously this is very serious both for farmers
themselves who are affected and for the rural economy, and it has got
implications for the British economy, that is why we have immediately made
available the agri-monetary compensation of œ150 million or so; made
arrangements for the advance payment of that where possible to the farming
community; made changes in the advance payments we can make in the big
restructuring scheme as well so that livestock generally is dealt with by
better measures; and of course we are making available statutory compensation
which already runs to something in the order of œ115 million. Because of the
strength of the public finances, obviously we are in a position to meet these
additional requirements. As far as the effect on the British economy as a
whole is concerned, I think we have to bear this in context: that agriculture
is 1 per cent. of the economy, and employment is less than 2 per cent. of the
economy. It is very serious indeed for the farming community and the rural
communities, and it has implications for the economy, but I think we have to
get it in proper context as far as management of the economy is concerned.
321. Would you say the same about the knock-on effects, for
instance, on the tourist industry?
(Mr Brown) There are substantial issues that have been dealt with by the
Working Party that is being chaired by the Minister for the Environment, where
we are looking at the effects on the rural economy, on tourism and on other
aspects of the rural economy; and these are obviously very serious matters
that are being dealt with. I believe there is to be a report from this
Committee very soon. Clearly, as you would expect, the Treasury are in
contact and working in consultation with this group.
322. These payments in compensation, will they be given from
reserves or from the Ministry of Agriculture?
(Mr Brown) The additional money for agri-monetary compensation came from
the reserve. Obviously we have got to look at other matters as they develop.
Sir Michael Spicer
323. Chancellor, just in passing, now your boss has indicated that
he would like to go off and make some money are you going to make an open play
for his job?
(Mr Brown) I do not quite follow? I am beginning now to get the hang of
it, but I think that was rather similar to a question you put to me the last
time I was here. I can only give the same answer, that I am happy doing the
job I am doing.
324. Did you anticipate last year with your pre-Budget Report the
downturn in the American economy?
(Mr Brown) About November there was a great deal of talk obviously about
the orders that businesses in America were putting in for the first few months
of 2001. I would put it to you this way: the way we are managing macro-
economic policy is that, on the fiscal side we are cautious. With the Bank
of England responsible for monetary policy and meeting the inflation target,
we have also that additional built-in element of caution. We are putting
ourselves in a position where we cannot anticipate all the ups and downs
either of the British economic cycle or the world economic cycle, but we are
putting ourselves in a position where we are better placed to deal with these
difficulties when they arise.
325. Was that a yes or a no?
(Mr Brown) Yes, we knew that the American economy had a risk of slowing;
but obviously it is taken into account in the Budget forecast as a result of
what we have seen for the first few weeks of the new year in the United States
of America.
326. While on the American economy, if Mr Greenspan does decide to
bring interest rates down by, say, 0.5 per cent. later on today, would it be
true to say there is not similar scope here, because of what you said earlier
on in answer to Mr Cousins; that because of high spending, consumer spending
and low savings, the scope of reducing interest rates, even if the Americans
reduce theirs, is not so great?
(Mr Brown) If I may say so, Sir Michael, that is the opposite of what I
said. I said we have locked in the fiscal tightening that had been achieved
over recent years. We have a fiscal position as tight or tighter in future
years as in the previous Budget; and we have put the public finances in a
position where we can withstand difficulties as they arise. As far as the
Bank of England is concerned, I believe that they will find themselves
satisfied with our fiscal stance.
327. I was not on this particular occasion talking about fiscal
stance. You did say that consumer spending was high and rising. You said
that in response to a question which Mr Beard asked you. Commensurately you
would accept that savings are falling at the moment - certainly your published
documents say that. Presumably there is less scope here than there would be
in America for reducing interest rates?
(Mr Brown) I am sorry, I do not accept that either. You must remember
that interest rates were cut in Britain in February. You are speaking as if
there has been no cut in interest rates. There was a cut in February. I will
ask Mr Balls to read out the figures for consumer spending which paint a
different picture from what you are suggesting.
(Mr Balls) Consumer spending in Table B3 slows from 3 per cent. last
year to 3¬/3« per cent. this year, and then 2«-3 next year. The savings ratio
rises from last year to this year, this year to next year, and next year to
the year after. Our economic forecast has always been based upon a slowing
of consumer spending to trend and so have the Bank's decisions over the last
year. We are forecasting that happening over the next year as we were doing
last year.
328. Then I really do not understand your answer to Mr Beard.
When he asked about the American economy downturn and the effect on your
forecast, you said something to the effect that that was going to be made up
by consumer spending?
(Mr Brown) Yes, I am sorry, the growth of consumer spending was slowing
in the course of the next year, from what it had been in the previous year,
but not slowing as fast.
329. I will come back to that. Did you anticipate in your
forecast last year the very sharp downturn in the British Stock Market?
(Mr Brown) I will ask Mr O'Donnell to say something about that. We make
a number of calculations in these forecasts. I do not know which forecast you
are referring to. Are you referring to the November forecast?
330. I am referring to the November one, yes.
(Mr O'Donnell) Because we do not believe that it is possible to forecast
short term movements in the Stock Market, otherwise we would be very rich, we
use the NAO audited assumption which is that the equity market will move up
in line with money GDP over the medium term. That is the forecasting
convention we have been using for a number of years and that is audited by the
NAO.
331. In view of two responses that I have now had, one on the
American economy, which you partially anticipated but did not entirely and you
think is made up by consumer spending, in the light of what has been said
about the Stock Market and anticipated in the forecasts I really cannot find
how it is possible for you to argue that your pre-Budget forecasts should be
precisely the same - is it not extraordinary? - as your Budget forecast.
(Mr Brown) It is a range. It is between two and a quarter and two and
three-quarter per cent. I am not suggesting that there is absolute precision
to the last 0.01 per cent, but it is two and a quarter to two and three-
quarter per cent. I think you will find, Sir Michael, that that is very much
in line with what other people believe is likely to happen to the British
economy over the course of the year. I do not think you will find that we are
out of line with some of the independent forecasters that you might examine.
332. But do you not, Chancellor, find it extraordinary that even
the range has not been altered in view of these quite considerable changes in
affairs which have occurred since your November forecast?
(Mr Brown) No, I do not, for the reasons that I have described to you.
Of course, so that nobody is in any doubt, we are vigilant. We look at what
is happening in the rest of the world. It is clear that the growth rate of
the major industrialised countries, which was four per cent last year, is two
per cent this year, so there has been quite a major change in that position.
Equally, the major economy with which we trade, the rest of Europe, is
experiencing growth this year of above three per cent, and so if 50 per cent
of our exports and imports are with the European market we are still in a
position to go as a result of trade.
333. But you have said to us today that you have been rather
precise in why you think that the forecasts have been changed. You said that
the downturn in the American economy is made up by the decline in consumer
expenditure. That is a pretty precise answer. It indicates that you really
feel that you are holding very precisely to these parameters for growth.
(Mr Brown) I would say that we had to take into account that the growth
rate of the world economy, but particularly because of what was happening in
America, would be less this year than had previously been expected, but we
also took into account first of all that the European economy continues to
grow, and secondly that we detected that the slowing in consumer demand in the
United Kingdom economy, for whom the growth rate is going to be less this year
than last year, will not be as fast as we previously thought. I am not
suggesting - and nobody is when they are dealing with forecasts - a degree of
precision that gets you to the last 0.1 per cent, but the 2.25 to 2.75 I
believe is a fair reflection not only of what I have said about the forces at
work in the United Kingdom economy but also it reflects what other people are
saying as well. Perhaps the Committee may wish to look at the independent
forecasts that are available.
(Mr Balls) If you look on table B.2 you will see that the average
independent forecast for this year is 2.6 per cent, so it is not precisely in
the middle of our range of 2.25 to 2.75 but it is not far off. If you look
at independent forecasters since last year I would say that in the mind
independent forecasters last year were expecting consumption in the United
Kingdom to slow and the world economy to slow this year. What has happened
for all forecasters, including us, is that the consumption is slowing in the
United Kingdom but at a slightly slower pace, and the world economy is slowing
but at a slightly faster pace and those two things together mean that we along
with other independent forecasters have similar forecasts this year to what
we were expecting last year.
334. One thing you have already acknowledged that you could not
have anticipated is the effect of foot and mouth. Do you have any forecast
change that you can give us today as to the likely effect in terms of falling
demand, for instance, in the tourist industry as well as for agriculture,
which some people are anticipating to be anything up to œ10 billion?
(Mr Brown) We do refer to this in the Red Book and I will draw your
attention to page 165. We did note the impact of foot and mouth. I did give
you the aggregate figures without in any way diminishing the importance of
individual farms and the importance of agriculture as a whole to the rural and
national economy. At one per cent of the whole economy that is the way that
you can measure the effects of agriculture on the whole economy. As far as
tourism is concerned, it is a major industry but of course the figures also
show that a very substantial amount of the tourist industry is city based as
well as rural based, so it is not the whole of the tourist industry that is
affected. I think the message is going out from the various tourist boards
that tourism should continue and should not be affected in the way that some
people suggest by people cancelling their bookings.
335. But a number of estimates indicate that the effect on growth
will be one per cent less, in other words that your figures of two and a
quarter to two and three-quarters will come down to perhaps one and a half?
(Mr Brown) I do not accept the very big numbers that were mentioned in
one Sunday newspaper and I do not think that they have been proven to be
accurate figures for the impact on the economy. Of course, if this problem
continues over a long period of time it has got major effects on agriculture
and therefore on the rest of the economy, but we have committed ourselves not
only to the statutory scheme but to additional money for the agricultural
industries and of course if there has to be the reduction in the sheep herd
as a result of eliminating and eradicating the disease, then we pay for
compensation and for removal and disposal and we are aware of the figures that
we have to meet in that area.
336. When you say you do not accept the figures that have been
provided by some newspapers, what are your reasons for not accepting them,
particularly on tourism which is a very large sector of the British economy?
(Mr Brown) Because we take the view that the more we can do to continue
with the existing pattern of the tourist trade and the less disruption that
takes place, the better for the economy. I think you will find as a result
of the working party that the Minister for the Environment is chairing that
they will be taking measures to encourage people to continue with their plans
for tourism and not disrupt them, and I think that all of us in this Committee
would want to encourage that.
337. Chancellor, is not the truth that the Government plan to cut
and run to the electorate before the full truth of the impeding economic
downturn becomes apparent?
(Mr Brown) I had thought that this Committee was one where objectivity
and the search after truth dominated. I do not think I should be drawn into
discussions about elections. As far as the economy is concerned, the economy
is pursuing a stable course. The fundamentals are sound. None of the
questioning today has suggested that the fundamentals are anything other than
sound in terms of flow inflation, strong public finances, and the sustainable
growth in the economy is something I have pointed to throughout this
proceeding.
338. The only comment I would make on that is that on a number of
occasions I have asked why it was that changes have not been made to your
forecasts on the basis of considerable changes which have been introduced into
your autumn forecasts. I certainly do not think I have been given answers as
to why you have not made any changes and therefore I must assume that they are
over-optimistic and they are hiding something for the future.
(Mr Brown) I think you are doing a disservice to the Treasury
forecasters who have looked very carefully at these issues and who,
incidentally, were proven right about the way they saw the economy moving in
1998 and 1999. I think that yes, there is a slowing of growth from last year,
but it is roughly at trend, two and a quarter to two and three-quarter per
cent, this year and it is in a context where there is low inflation, as
everybody accepts, as well as strong public finances and, while being
vigilant, it is a picture that I thought the Committee might welcome.
(Mr O'Donnell) Can I just add that at the Budget hearing last year we
were forecasting for the year 2000 three per cent growth plus or minus a
quarter per cent, and the ONS figures tell us that the year 2000 growth was
three per cent.
(Mr Brown) So he was not only right for 1998 and 1999; he was right for
2000 as well. That is the point he is making.
Sir Michael Spicer: Let us hope he is right for 2001 as
well.
Mr Fallon
339. Chancellor, turning now to taxation measures for the Budget,
almost all the representations we have had complain about the growing
complication of the tax system. We have 22 rates of company car tax, we have
different rules for mini ISAs and maxi ISAs. There are families who have got
children's tax credit, child benefit, baby bonuses to come, all the clawbacks
and take-ups. Are you going to go down in history as Complexity Brown? Why
are you not interested in simplifying the tax system?
(Mr Brown) First of all, as far as these tax representations are
concerned I would have thought that from the vehicle sector, which you
mentioned, people should be pleased that we have reduced the hundred different
rates for lorry licences to seven and they are environmentally driven. As far
as the car licence sector is concerned, we are giving the benefit to people
because of environmental concerns, and I would have thought that this
Committee, and indeed the public, would want to welcome that. As far as the
tax credit system is concerned, which you are drawing attention to about the
children's tax credit, I believe that this is a fundamental reform that has
been long overdue in the country to integrate tax and benefits where we are
going over time, as we are already doing in many instances, to eliminate a
situation where people are paying tax on the one hand while receiving social
security benefits on the other hand. Instead of two separate transactions
done by two different authorities we are now in a position to look forward in
some of these areas to there being only one transaction. I think it is
important to recognise that it is not complexity that is going to be the
result of this. It is going to be a far more co-ordinated, cohesive and
integrated approach. Perhaps I may draw your attention to the fact that the
first Government that recommended the tax credit system was the Conservative
Government with a White Paper of 1972, and all the arguments that they have
used there for the tax credit system being simpler, being integrated, ending
an unsatisfactory relationship between social security and the tax system,
eliminating the old form of means testing and moving to a situation where
people had one calculation which they made of their tax and benefits, apply
to what we are now doing. I have also looked at the previous Conservative
Government on tax and benefits, and Norman Fowler, who was Minister for Social
Security, says this is exactly what he had wanted to do in 1986 but was
prevented by the Chancellor of the day from integrating tax and benefits in
his review of the social security system. We are doing what has been achieved
in some areas such as America in integrating tax and benefits through the
earned income tax credit as well. Far from it being more complex, the result
of this integration of tax and benefits will be that instead of people having
to have two transactions to get what they are entitled to, in most cases this
will become over time only one.
340. But the criticism is not of the credits in principle; it is
with the reliefs, the clawbacks, the takers. Arthur Andersen told us: "The
problem with so many of these reliefs is that they are complicated to claim
and difficult to administer." Help the Aged said that it is a massively
complex system, endless form-filling for pensioners. Why are you sending
pensioners a 43-page form that asks whether they are pregnant or on strike?
(Mr Brown) You know that that form, which I think existed under the last
Government, is being dealt with. Equally, on pensions I would have thought
that the most difficult situation for pensioners is the alternative policy
that I have seen presented over these last few weeks, where there is a
guaranteed winter allowance and a guaranteed free licence for the over-75s and
a guaranteed Christmas bonus to be backed up by the rise in the basic pension.
The new proposal that I have seen from your Party is to have a choice between
the two. Mr Darling at Social Security says that would mean 3,000 additional
civil servants simply to administer that. Far from our proposals increasing
complexity and the proposals of the other side reducing them, I think it is
recognised that when you have to have 3,000 additional civil servants simply
to administer one separate policy of the Opposition, that is where complexity
arises. As far as pensions and the pensioner credit system that will operate
as an integrated tax and benefit system over time as well are concerned, I
believe that over time that will come to be accepted as well.
341. Why do you think it is that 670,000 pensioners out of two
million eligible have failed to claim the minimum income guarantee? Do they
not find it too complicated?
(Mr Brown) The reason that many people have been unable to benefit from
the minimum income guarantee until now is because of the capital rules that
we inherited from the previous Government, that where people had a limited
amount of savings they were deprived of the opportunity of getting the minimum
income guarantee. We have now changed these capital rules and over next year
and the year after these rules are being modified in such a way that more
people, even with modest savings, will be able to get the minimum income
guarantee. The fault was in the old capital rules. As far as the claiming
of these benefits is concerned, when the Social Security Department ran a
take-up campaign, they had, I think I am right in saying, half a million
people interested in taking up this benefit. One of the problems was the
capital rule and that is now being changed.
342. But a third of those we were told were eligible to claim have
failed to do so. That is the position.
(Mr Brown) I am not sure that that is the position, but obviously you
can consult the Social Security Department about these exact figures. What
I do know is that when campaigns have been organised for take-up there has
been a very big reply. Of two million pensioners who have been written to,
and of course the two million pensioners that we mention have been written to,
we could not know whether their savings or other attributes of their income
met the circumstances that would entitle them to this benefit, but 846,000 did
reply, which shows that there is an interest in taking up this benefit, and
846,000 is a very high figure compared with about two million in total who get
the minimum income guarantee at the moment.
343. Why are Help the Aged complaining about the massively complex
system and endless form filling?
(Mr Brown) Inevitably when you make a change in a system people take
time to adjust to it. I think that is true of any change that has taken
place, whether it is the working families tax credit or whether it is, under
previous governments, things like decimalisation to everything else. It takes
time for people to adjust to these changes. If you agree, as you say you do,
with the principle of a credit system, in other words the principle of
integrating tax and benefits, then the teething troubles in introducing that
system are, if regrettable, worthwhile so that we can get the end result that
you say yourself you seek. I am pleased to know that there is now all-party
support for the tax credit system that we are introducing.
344. You have told us this morning that you have had to modify the
pensioners' credit with the various capital rules.
(Mr Brown) Sorry; on this modification the minimum income guarantee is
what we are talking about initially and the capital rules that were depriving
people of the chance to claim the minimum income guarantee have been changes,
yes. As far as the pension credit is concerned, that will be introduced in
2003 and that will be available for pensioners who have income, including
income from savings, of less than œ200 if they are a couple and less than œ135
if they are a single person, and so the majority of pensioners will qualify
for this, or the majority will.
345. The working families tax credit, which people complain is
very complex, you are changing that as well, are you not?
(Mr Brown) The working families tax credit will become the children's
integrated credit and an employment credit over time. Again, that is to deal
with some of the issues that you yourself and others of your colleagues have
raised, that we want the money by 2003 that is available in children's
benefits to be paid to the main carer, and that is what will happen in 2003.
346. It does not sound to me as if it is simplifying it. I will
leave it there.
(Mr Brown) It seems to me, Mr Fallon, that if people support the
principle of tax credits, and the principle has now been introduced of course
in the United States of America for many years as an earned income tax credit.
France is now looking at the introduction of a tax credit. Other European
countries are now looking at it. It was the spirit of what was advocated in
1972, what Mr Fowler wanted to do in 1986. If we support the principle of tax
credits then obviously we have to deal with the hurdles that exist when you
are moving from one system to another, but in the long run an integration of
tax and benefits will be a fairer way of dealing with many of the problems
that particularly low income households face but generally households of
middle and more incomes also face.
Mr Ruffley
347. Chancellor, have you read the highly damaging allegations in
today's Daily Mail about the conduct of investigations into Geoffrey Robinson
and of the Minister? I ask that question because part of the hearing today
covers the Treasury remit and machinery of government questions inside the
Treasury.
(Mr Brown) Mr Chairman, I am going to deal with serious issues today.
I am happy to answer all the questions about the Budget and indeed about your
previous report and your investigations into other issues like Equitable Life,
but the Treasury has already issued a statement about this completely
misleading report in the Daily Mail and I propose to say nothing more than
that.
Chairman: Not all of us believe that the Daily Mail is necessarily a
fountain of truth.
Mr Ruffley
348. There are remarks in reported speech by Sir Terence Burns who
makes some highly damaging allegations. You are not prepared to answer those
today?
(Mr Brown) There are not statements made by Sir Terence Burns. If there
are statements made by Sir Terence Burns, who is now Lord Burns, perhaps you
will draw my attention to them.
349. Yes, I will, if I may. Do you remember a telephone call you
made from New York on 5 December 1997 to Sir Terence Burns?
(Mr Brown) That is nothing to do with statements made by Sir Terence
Burns, or Lord Burns, and I am not prepared to diminish this -----
350. You cannot remember a telephone call -----
(Mr Brown) Mr Chairman, I am not prepared to diminish this hearing on
the Budget by getting into arguments about gossip.
Chairman: We do not have to follow what the Daily Mail says.
Mr Ruffley: There are actually quotes, Mr Chairman, and I thought the
Treasury remit included in this hearing --- it is written down by the Clerk
about the Treasury remit and how the Department operates.
Chairman: That has got nothing to do with the allegations in the Daily
Mail.
Mr Ruffley: But the way in which the Chancellor has managed
ministerial responsibility -----
Mr Beard: This is a meeting about the Budget.
Chairman: We can look at the remit and then if you can ask questions
directly on the remit, that is fine, but -----
Mr Ruffley: I will if I may.
Chairman: Well, get on with it then.
Mr Ruffley
351. You had a discussion on 5 December 1997 with Sir Terence
Burns where you asked him to approve a statement where he approves the
registering of interests by Geoffrey Robinson; is that correct?
(Mr Brown) There are no quotations from Lord Burns among -----
352. Is that correct?
(Mr Brown) I said, if you could point to quotations from Lord Burns that
the Daily Mail had attributed to him correctly, -----
353. Yes.
(Mr Brown) But you have not done that, Mr Ruffley.
354. I will do that now, Chancellor. In a conversation he said,
"I refuse to be involved -----"
(Mr Brown) Mr Chairman, can I say first of all -----
Mr Ruffley: Did he say that to you, Chancellor, in that conversation?
Chairman: There are not any -----
Mr Ruffley
355. The quotation is, "I refuse to be involved ...".
(Mr Brown) Mr Chairman, I was invited along to this Committee to discuss
the Budget and related matters. This is nothing to do with -----
356. Are you denying Sir Terence Burns, as he then was, -----
(Mr Brown) This is nothing to do with this. I issued a statement saying
that this is fictional nonsense. You have been unable to point to quotations
from Lord Burns that are attributed to him directly because there was none ---
--
357. It is directly attributed to him.
(Mr Brown) ----- because there was none in the article.
358. Saying, "I refuse to become involved -----"
(Mr Brown) I am not in a position to answer based on non-quotations from
Lord Burns.
Mr Beard: This is nothing to do with the Budget.
Judy Mallaber: Chairman, this is not about the Budget.
Mr Ruffley: I think the record will show that he is not prepared to
answer that question. There is a quote about this given by Sir Terence Burns
on 5 December 1997.
Chairman
359. Let us get on to the remit. We have produced a report and
that was what I thought you were about to cover. You are actually just
dealing with a scurrilous article in the Daily Mail.
(Mr Brown) Mr Chairman, I have already issued a statement on this this
morning - in fact, the Treasury has issued a statement - saying that these
matters are fictional nonsense. I am prepared and happy to deal with the very
serious issues arising from the Budget and the management of the economy. I
am not prepared without prior notice to go into issues relating to gossip and
relating to fiction that I have no knowledge of -----
Mr Ruffley: Did you order an independent inquiry into Geoffrey
Robinson?
Chairman
360. He has just said he is not going to answer them.
(Mr Brown) ----- that I have no knowledge of and are not based on actual
quotations from Lord Burns at all, as is becoming clear as Mr Ruffley reads
this out.
Mr Ruffley
361. "I refuse to be involved ..." in relation to that
conversation on the 5 December 1997. That is the quotation.
(Mr Brown) I think, Mr Chairman, that Mr Ruffley is bringing the whole
of the Select Committee system, where we are examining the Budget, -----
Mr Ruffley: You would say that, would you not?
Chairman: It is clearly the run-up to the election. The Daily Mail is
very interested in muck-raking about the election. Unfortunately one member
of the Committee is prepared to act as the Daily Mail's -----
Mr Ruffley: I am quoting Sir Terence Burns.
Judy Mallaber
362. Chairman, can we return to the Budget?
(Mr Brown) These are not quotations from Lord Burns as you very well
know.
Mr Beard: This is out of order in a session on the Budget.
Chairman: The majority feeling is that this is out of order. The
Chancellor has made it quite clear he is not answering your question, so give
way to further questions.
Mr Ruffley: I have no further questions.
Chairman: That was not a particularly useful use of time, I did not
think.
Mr Davey
363. Mr Macpherson, you are Director of Welfare Reform in the
Treasury.
(Mr Macpherson) Yes.
Mr Davey: Is the Treasury more involved in welfare reform nowadays than
it used to be?
Chairman: That seems to me, if I can draw a distinction between these
two questions, a perfectly valid question to ask on the remit and it is part
and parcel of what we are doing.
Mr Davey
364. Good. Mr Macpherson: is the Treasury more involved with
welfare reform than it used to be?
(Mr Macpherson) The Government is committed to bringing the tax and
benefit systems closer together. It also is committed to raising employment.
It is inevitable that, given those objectives, the Treasury plays a bigger
role at the current time in these areas.
365. When we did our inquiry on the workings of Her Majesty's
Treasury under the Chancellor's stewardship we took evidence from Sir Michael
Partridge, the former Permanent Secretary at the DSS, and he made similar
comments to you, that the Treasury is more involved, but he did say:
"Particularly in the last five years the Chancellor tends to cook up ideas and
the DSS is either told at the last minute or not told at all. There is no
chance to work it through like a proper policy and say, 'Will this really
work? Is it feasible? Is it practicable? What is the best way to do it?'
It gets rushed in and things get done and they do not work." That is a former
Permanent Secretary of the DSS. Do you recognise that approach?
(Mr Macpherson) No, I am afraid I do not recognise it. I think
actually the unique nature of working over the last few years is that the
Treasury has worked more closely with other departments than it ever has
before. A very good example of that is the Taylor review which the Chancellor
set up in 1997, consulting his colleagues, where Martin Taylor ran this task
force and Treasury officials, DFEE officials, DSS officials and Inland Revenue
officials all worked very closely together, they produced a report, this
enabled a far better broader perspective to be brought to the problem which
cut across departments. You are working here on the tax system which is the
preserve of the Inland Revenue, and the benefit system which is the
responsibility of the DSS.
366. Can you think of no example then where the Treasury has taken
initiative within the welfare remit without informing the DSS and has just
gone ahead with it?
(Mr Macpherson) All I can speak about is from my experience where I
work extremely closely with DSS and DFEE colleagues.
367. In the area of pension reform, for example, there has been no
Treasury-driven initiative?
(Mr Macpherson) The Chancellor was responsible for working with the
Secretary of State very closely. I do not know if the Chancellor wishes to
say anything -----
368. I was coming to him.
(Mr Macpherson) The pensions system is one of the biggest areas of
public spending. There is a big tax aspect to pensions as well. For example,
the Chancellor announced in the Budget an increase in the personal allowances
for pensioners over the Budget period. I have worked in the Treasury since
the early eighties. I have worked on the Fowler review of the state earnings
related pension scheme and we worked very closely then with the DSS because
these are big issues. Nigel Lawson - I do not know if I am outside my remit
in terms of talking about what happened under previous governments -----
369. Oh, go on.
(Mr Macpherson) But Nigel Lawson and Norman Fowler worked very closely
together. If you read Norman Fowler's book, he did have some questions about
the extent to which Nigel Lawson would actually discuss tax issues with him.
This is something which has always been the case. These are big areas, huge
areas of expenditure. I do not have in front of me how much we spend on the
state pension scheme but we are talking œ50 billion. It would be astonishing
if the Treasury did not get involved in that. It would equally be astonishing
if I did not work very closely with my opposite numbers in the DSS. It would
equally be astonishing if the Chancellor of the Exchequer did not spend a lot
of time talking to the Secretary of State, which indeed -----
370. My point was that he might not be doing that sufficiently.
Can I ask the Chancellor to comment on whether he has read the Committee's
report on Her Majesty's Treasury, and when the Government expects to reply to
that report?
(Mr Brown) I would have been happier if, when you were doing your work
on the Treasury, you had asked me to give evidence on it. You did not seem
to think it was worthwhile before you had your report to ask one of the
Ministers to give evidence on how they thought the Treasury was performing.
As far as the individual points about the report are concerned, let me just
say that despite the suggestion in the report that there has been a degree of
centralisation around the Treasury, the fact that we have made the Bank of
England independent and we have set up the Financial Services Authority, we
have set up three-year spending reviews and not one-year spending reviews, we
are signing public service agreements which give flexibility not only to
departments but also to local authorities, we are setting up a new regime with
regional development agencies where they have flexibility as well, the public
sector pay is devolved to the departments, suggest that the Treasury has been
devolving responsibilities rather than centralising them.
371. That is helpful but you did not actually answer the question.
The question was, when are you going to reply in full to the report?
(Mr Brown) We will reply in the normal course of events.
372. Do you think we could have a reply before the election?
(Mr Brown) You will have a reply as quickly as possible. I would have
thought it would come quite soon, yes.
373. In paragraph 21, which is a summary of conclusions, (e): "We
are concerned that the Treasury as an institution has recently begun to exert
too much influence over policy areas which are properly the business of other
departments. This is not necessarily in the best interests of the Treasury
or the Government as a whole." Do you reject that?
(Mr Brown) I have just explained, and that is why I was answering the
question. The Treasury is exercising less influence in many areas. We do not
control monetary policy. The Financial Services Authority has been set up to
deal with all the issues of financial regulation when we come to these in a
minute. Public sector pay was traditionally an area where the Treasury
exercised such control that people complained about that. The departments
make their own decisions in relation to the pay review bodies, in relation to
teaching, in relation to nurses' salaries. All these are matters where
devolution has taken place and I believe that you have got to balance the need
to have an integrated approach on pensions and social security and work
related benefits, where we have been active, with the very big measures of
devolution that started the first few days that I was in the Treasury when we
made the Bank of England independent.
374. The criticism, we have heard from some of the witnesses, is
that through the public service agreements the Treasury is micro-managing the
other departments and getting very much involved in the minutiae of the work
of other departments. Would you reject that?
(Mr Brown) Yes, I reject that, because it is the opposite that is true.
Instead of the old days where every iota of public spending representations
was gone over in great detail by the Treasury, we have a three-year spending
plan, we have the targets that have got to be met, and within meeting these
targets there is a great deal more flexibility than existed before for the
departments, including end year flexibility in relation to spending. The old
public spending system that we inherited was essentially not dissimilar from
that created by Lord Plowden in the early sixties. It was one year, it was
ad hoc, it was incremental, it was based on failure to distinguish between
investment and consumption, there was very little relationship between the
private and public sectors in terms of investment programmes, and it was input
driven rather than output driven. As a result of the changes that we have
tried to make over time it is three-year and therefore long term, it is not
incremental; in other words when these spending reviews take place they look
at the different things that departments are trying to achieve and not just
at whether you have an incremental basis for awarding additional money. It
is driven by a distinction between investment and consumption. It is driven
also by a desire to bring private finance in where possible and there is a
degree of cross-departmentalism that was missing under previous spending
plans, for example, in Sure Start, the provision of services for the young,
or work amongst drugs or services for the elderly, all the departments that
have an interest in these matters are brought together. In all these areas
we have made big changes. These changes give the departments more
flexibility, not less, in a whole series of different areas. I just point to
this, which is totally unmentioned in your report, the measures of devolution
that took place as a result of the first decisions we made when we came into
the Treasury, which included making the Bank of England independent, creating
a new Financial Services Authority and then, latterly, devolving public sector
pay to the departments themselves.
375. Moving on to separate points in our report, Chancellor,
paragraph 57, we say: "Parliament lacks the resources necessary to hold the
Treasury fully to account". Would you be prepared to debate with the
Committee, particularly in your formal reply before or after the election, and
try to assist us in that and provide more resources to Parliament to hold your
department to account?
(Mr Brown) I do not quite know what you are suggesting. Perhaps you can
tell me what you are imagining.
376. You referred to a Liaison Committee report and indeed a
report by other Select Committees where we believe there should be officers
of the House set up to enable Select Committees and individual MPs to have
rather more information and rather more scrutiny of the accounts and spending
plans. That would require more resources. I do not know whether you as the
Chancellor would be keen to see that.
(Mr Brown) That is a matter for Parliament itself. If Parliament
decides, as it has in the past, that it wants to reform the Select Committee
system and it wants to reform the way the Public Accounts Committee works,
that is a matter for Parliament. If Parliament wishes to vote additional
resources for that to happen that is again a matter for Parliament.
377. What I asked you was for you to express a view on it.
(Mr Brown) I support parliamentary scrutiny. I support the maximum
parliamentary debate possible on these issues. This is a matter for which you
should not criticise the Treasury. It is a matter where you ought to be
looking at how you could improve or make suggestions for improving
parliamentary procedures. It is a matter in the end for Parliament itself.
378. With respect, Chancellor, the Liaison Committee, which is an
all-party committee, has produced a report and put that forward. I am asking
you whether you would look at those reform proposals seriously to assist this
Committee and other Committees to do their scrutiny job, which you said you
supported, more effectively.
(Mr Brown) Of course I am happy to look at it. I just stress to you
that if Parliament wants a greater role in these matters it is a matter for
Parliament to look at it in detail.
Mr Davey: We have and we are looking for your response, Chancellor.
Sir Michael Spicer
379. Can I just be quite clear, having chaired that Sub-Committee,
exactly what you are saying, Chancellor? Would you support something similar
to the Congressional Budgetary Office that they have in the United States to
look at Treasury matters?
(Mr Brown) I did not realise that you had recommended that. Is it your
recommendation?
380. It is one of the indications, yes.
(Mr Brown) We would have to look at that.
381. What we have said is that there is a range of options that
one could have.
(Mr Brown) Which one are you suggesting then?
382. I am asking you what your view would be about Parliament
having something similar to that operation in the United States.
(Mr Brown) As I said, Sir Michael, I find it quite surprising that you
have had an investigation into the role of the Treasury and you did not think
of inviting a Minister to give evidence, but that is a matter for you,
obviously. As far as your recommendations are concerned, we will reply to
your recommendations but I think you have misunderstood some of the changes
that are taking place in the Treasury. Perhaps if you had had a Minister
before you as you undertook your work you might have seen that we have
devolved a very substantial amount of our work, and rightly so, including the
independence of the Bank of England which I believe you support.
383. In that case presumably there is a case for you giving an
answer to this report as quickly as possible.
(Mr Brown) Obviously the priority over the last few weeks has been the
completion of the Budget and we will look at these matters and deal with them
as quickly as possible.
384. Within the next week or so?
(Mr Brown) I do not know about the next week, Sir Michael, but as soon
as practicable. We reinforce the view that I have put to you that there are
substantial numbers of things in this report that appear to be wrongly based
because you have not asked us in advance before you have made your
recommendations.
385. That is a matter of judgment and view. So far as
parliamentary accountability is concerned you would, from what I have just
heard you saying, approve of recommendations in principle which would
strengthen parliamentary accountability of the Treasury?
(Mr Brown) In general terms yes, but obviously you have now got a range
of proposals rather than simply one and we would have to look at them in
detail and give you our views if that was the right thing to do.
Judy Mallaber
386. Chancellor, I would quite like to return to the details of
the Budget, although it has been an interesting diversion.
(Mr Brown) I thought I was here to talk about the Budget actually.
387. You have already answered a number of my points that I was
going to ask on tax credits but I do have a couple of other questions. Mr
Macpherson told us that 3.3 million have already claimed the children's tax
credit. That leaves 700,000 eligible families who have not. Do you regard
that as a good take-up rate or are you concerned about it and what are you
going to do to catch those other 700,000 families?
(Mr Brown) We do not have all the detailed information about family
finances. Our estimate is in the order of four million. The take-up campaign
has been successful in getting quite a lot of people applying where they
previously have not done so. There is a history in Britain of people applying
anyway for these things at the last minute, so I expect there to be more
applications as we start the financial year. Generally speaking we are
introducing a new benefit. It does take time for people to understand this
tax credit and how it works because it is not simply a benefit; it is a tax
credit and therefore over time I believe that there will be a greater take-up.
388. A number of MPs like myself have made suggestions about how
to make the arrangements for other tax credits, particularly the working
families tax credit and the children's tax credit, more flexible. Are you
able to confirm what I thought was Mr Macpherson's extremely helpful statement
that you are shortly going to be looking very concretely at how to do this and
how to make it easier to claim those benefits?
(Mr Brown) Yes indeed. I think the integration of tax and benefits,
once it is understood that a tax credit system works in such a way that you
could receive money as well as pay money, there will be a greater public
understanding there of it as we move forward. As far as the working families
tax credit is concerned, we are making it easier for people to claim it. For
example, where there is a new birth in the family and where the numbers of
employees become one instead of two, we are making it easier for people to
claim that benefit.
389. What about the eligibility for child care tax credit, for
example, proposals that were maybe too limited in the range of child care
arrangements that were eligible?
(Mr Brown) The numbers of people claiming child care tax credit from the
original scheme under the last government have risen from something of the
order of 40,000 to 50,000 to 125,000, so there has been a substantial increase
in take-up, but obviously, as we said in the Budget documents, we are
consulting on the precise definition of child care, particularly this issue
of whether, if the child is being cared for in your own home, that could
classify as child care for the purposes of the credit.
390. I am very conscious, previously being on the Employment
Select Committee, of the detail of the evaluation that has gone on with New
Deal. What priority are you giving to evaluation and independent evaluation
of how the tax credit systems are working both in terms of their take-up and
of their impact?
(Mr Brown) As we introduce it we have been listening to what people have
said. There has been 30 per cent or more increase in the take-up of working
families tax credit compared with family credit. I think that is a
significant figure. We are listening to what people are saying and to what
employers are saying as well, because obviously it is a new system for them.
I believe there are substantial benefits for employers in this system but we
have got to help them make that work. We will listen to what people say. We
have a group of people who are specialists in issues relating to children
which meets regularly, as we do in relation to issues affecting women, so
again we will listen to the representations that are made.
391. What mechanisms do you have for detailed evaluation and is
any of that going to be conducted independently of Treasury?
(Mr Brown) There are studies being done but perhaps Mr Macpherson could
say a few words about it.
(Mr Macpherson) As I said the other day, the Inland Revenue have
commissioned a really quite far-ranging programme of evaluation using
independent experts. Inevitably it takes time for the results to come on
stream because you have to analyse precisely what is going on. That requires
surveys and so on. The Government I think is committed to publishing
independent results.
392. Moving on to broad maternity arrangements, what do you think
the net effect of those reforms is going to be on participation in the labour
market, and in particular, as part of that, do you think it is going to assist
where we have areas of labour shortage and has any evaluation been done on
this?
(Mr Brown) I do not know about the independent evaluation and perhaps Mr
Macpherson could mention that. I can give you my view.
(Mr Macpherson) On the evaluation there has been a lot of work around
the consultation process which has tended to confirm that the better the
maternity pay arrangements the more likely it is that women will remain in
contact with the labour market and therefore labour market activity will be
higher than if you did not have these arrangements.
(Mr Brown) I would agree with that. We are now seeing through the
participation rates, particularly for lone parents, that the numbers of people
taking up job offers is rising. Since 1997 the numbers have risen from 42 per
cent to nearly 50 per cent. We anticipate these figures rising quite
substantially in the years to come. In fact, we have set an objective of 70
per cent but that is over a long period of time. I believe the combination
of the working families tax credit and the helpful child care that is
available is making it possible for people to have real choices. You will
know, having been on the Employment Committee, that the new programme, New
Deal for Lone Parents, and the choices are coming in in April on a nationwide
basis, and the experience of the original pilot suggests that there will be
quite a marked take-up in job opportunities.
393. Would you accept that there is an argument for either
tapering the small employer's relief or extending the limit for that so that
you can scotch the suggestion that the new arrangements will actually deter
firms from taking that link?
(Mr Brown) We are happy to look at these things as we see the effects of
the introduction of the measure. I would say that for a small or medium sized
firm trying to attract new employees for the working families tax credit to
be related to the wage packet, in other words the money that people receive
at the end of the week or month, is an additional incentive that they can
offer employees as they start work.
Mr Davey
394. Chancellor, how much Treasury financial support, cash from
central government, will there be next year, 2001/2002, for the London
Underground?
(Mr Brown) We are in discussions at the moment through the Department of
Trade and industry's negotiations with the new London authority.
395. Trade and Industry?
(Mr Brown) It is DETR, sorry, who are in discussions at the moment. It
would be wrong to give figures that are part of our discussions.
396. How much was previously planned before these discussions?
(Mr Brown) What I can say is that the figures that we have set aside are
not going to change and have not changed.
397. The figures you have set aside have not changed and are not
going to change. Can you show me where these figures are?
(Mr Brown) These are market sensitive figures. We are in negotiation
that involves private companies at the end of the line.
398. You publish for the Budget for public spending in some
detail, as you remind us, so somewhere in this vast number of statistics
presumably you have made some arrangements. Is it a contingency fund? Where
would I find it if I were looking through the Budget Book? You are interested
in parliamentary scrutiny. Where would I find it?
(Mr Brown) If you are interested in getting the best arrangement for the
taxpayer at the end of the day you will respect the fact that these are market
sensitive issues. But of course the funding for the DETR is in the
departmental expenditure limit.
399. So somewhere in the departmental expenditure limit for the
DETR you have made some provision, some money that is not yet allocated, that
you have not identified yet, which will go to London Underground for next
year. Is that right?
(Mr Brown) The allocations are in the end a matter for the DETR
themselves. I know that this Committee has normally in the past respected
issues where there is market sensitivity. I think you would understand
yourself that when you are in negotiation these matters need to be recognised
to be market sensitive.
400. I would certainly accept that, Chancellor. What I am trying
to understand is, when you are making your prudent and careful long term
provisions for the future, where in these sums that you have told Parliament
you have provided for transport we will find it. You have said it is in the
DEL. You have said that it is up to the Deputy Prime Minister to allocate
that. You must in negotiations with DETR have given some indication to the
Deputy Prime Minister about what he would be able to spend next year on London
Underground. Do you give those sorts of indications to him?
(Mr Brown) We do have an understanding but these figures are market
sensitive and I think you have already said that you respect the fact that
they are.
401. That is why I am not pushing.
(Mr Brown) You are asking the question: is the money available to move
ahead with the investment that is necessary? The answer is yes.
402. What you have said is that it is in the DEL for the DETR.
Previously when the PPP was announced, and you confirmed this to this
Committee, there was going to be no extra funding from the Treasury. There
is only one conclusion from that and that is that other transport schemes will
be cut back in order to fund the money that you will have to agree in these
negotiations. Is that right?
(Mr Brown) No. The Treasury is making provision for these things. It is
understood in our discussions with the Deputy Prime Minister what level of
funding can be made available, that the departmental expenditure limit will
contain resources for that. Of course there are other means by which
resources are provided but these matters are, as far as the overall figures
are concerned, market sensitive. If you do say to me that you respect that,
then I hope that you will respect that.
403. I am, but I am trying to understand the workings of the
Treasury. You have said there are other means by which these resources are
provided. What other means are they, other than the DEL? Where is it going
to come from?
(Mr Brown) I think you can look at the different means by which the
overall Budget is made up, the overall spending figures.
404. Can you be rather more precise on this? The money is either
allocated within the departmental expenditure limit or it is in the annually
managed expenditure or it is in some other contingency.
(Mr Brown) Exactly.
405. So it is somewhere in those?
(Mr Brown) Exactly, but again, Mr Davey, you say you respect the fact
that these matters are market sensitive, but now you are virtually carrying
out a negotiation on behalf of one of the partners.
406. I wish I were carrying out such a negotiation because I would
not start from here. We have had newspaper reports, and I am not asking you
to confirm or deny them, -----
(Mr Brown) You do not need to put the question to me then.
407. I will come to that, Chancellor. Just be patient for a
second. We have had newspaper reports over the weekend suggesting that an
extra œ600 million is going to be put by the Treasury into London Underground,
possibly rising up to œ700 million, even œ900 million, over the next few
years, looking at a total bill of four billion pounds that was not currently
expected to be provided by central government coffers because, when the PPP
was originally announced to Parliament, it was said that there would not be
any extra money coming from central government. Therefore it is a rather
large amount of money and I am not asking you to deny or confirm the sum.
What I am asking you to give a clear indication of is where is this large sum
within your public expenditure plans that you have published? Surely you
cannot hide four billion pounds over the next few years within your Red Book?
(Mr Brown) First of all, you are not asking me to confirm or deny
figures, and I think you are respecting that they are market sensitive.
Secondly, there has always been an understanding - you are completely wrong -
that there is a public sector contribution to this. The third thing I need
say is that the whole purpose of the private finance initiative in relation
to the London Underground is that, given that we are spending as a country
something in the order of œ12 billion to œ15 billion on re-vamping the
Underground, that is roughly speaking six times as much as was spent on the
Jubilee Line, over the next few years, it would be far better for the country
if we could get a better arrangement than was the one that transpired when the
Jubilee Line was built when there were massive cost overruns, there were huge
delays, and the public sector (that is you and I and everybody else) ended up
paying far more than we ought to have paid under these circumstances. It is
the search for a better relationship between the public and private sector
that has been at the heart of these negotiations, but of course you would not
expect me to give figures that would be market sensitive.
408. Are you still happy that the PPP scheme, currently under
final negotiations, will represent good value for money for the taxpayer?
(Mr Brown) There is a comparator that has got to be met. Yes, I believe
that the proposals that we have put forward are good value for the taxpayer.
409. There is a possibility that the safety and maintenance
requirements that are clearly needed in such an operation as the London
Underground might be retained in the public sector. Would the Treasury
support that?
(Mr Brown) Safety is a matter that has been dealt with by the Department
of Transport. There is no risk contemplated to safety by the arrangements
proposed.
410. That was not what I asked. Would you be happy for safety and
maintenance arrangements to be kept in the public sector?
(Mr Brown) There is no risk to safety in the arrangements that we have
proposed. It is a matter for negotiation as to how the eventual relationship
between the private and the public sector is agreed.
411. Has the Treasury had any involvement at all with these
negotiations?
(Mr Brown) I have not personally been involved in the negotiations, but
obviously there are Treasury officials who are aware of what is going on. If
we are to properly manage public finances you would expect that to be the
case, would you not?
412. Have you have meetings with the Deputy Prime Minister or the
Prime Minister on these negotiations?
(Mr Brown) I have had meetings with the Deputy Prime Minister and the
Prime Minister many times.
413. Have you discussed these negotiations at these meetings?
(Mr Brown) Many times. You do not expect me to go into confidential
discussions I have had with the Deputy Prime Minister.
414. No, I am not asking you to tell us the content of the
discussions, I am asking you to confirm that you have had them.
(Mr Brown) If you are saying that London Underground is a matter that
the Government is interested in, the answer is yes.
415. When do you expect there to be a deal?
(Mr Brown) That is a matter for the people who are involved in the
negotiations.
Mr Plaskitt
416. Chancellor, what is your view of the productivity performance
of the economy over the last four years?
(Mr Brown) That there are improvements and we have got a great deal
still to do. We have embarked upon a course where the long-term benefits in
my view will come, but we have got to continue to work at these issues. That
is why the measures in the Budget included the competition policy changes that
were announced by the Department of Trade and Industry including, of course,
over time the setting up of an independent Competition Commission. That is
why we did more for research and development and for innovation, that is why
we tried to improve the situation in the tax reliefs as far as businesses are
concerned and that is why on infrastructure and skills and on the renovation
of inner city areas that are in need of improvement we are taking important
changes forward as well.
417. We have seen over a million new jobs created over the last
four years and we have, I think, an historically high participation rate now.
What has the impact of that been upon productivity? Has it been helpful or
unhelpful?
(Mr Brown) It is said that when you add an employee or add a group of
employees that these are not the employees who give you the greatest boost to
productivity as they start. It takes time for them to make their contribution
to the growth of the firm. I rather think that Britain is in the situation
that America was in in the mid-1990s. We saw in America at that time a big
boost to employment and we are seeing in Britain a big boost to employment.
It took time before the productivity gains came through to full effect but,
of course, in America they are estimating that productivity and growth in the
economy is something in the order of four per cent. We are seeing employment
gains, we are seeing some productivity gains. The latest whole economy
productivity figure is 2.6 per cent on the year to quarter three 2000, so we
are starting to see some of the gains, but of course we know we have got a
long way to go because there are sectors of the British economy that need to
be more productive and the economy as a whole needs to be more productive if
we are going to secure prosperity at the level that people want it.
418. Are you therefore expecting productivity growth to pick up
because there is a lag, as illustrated in the US economy, or do you still
think that there are further interventions or measures Government has to take
and not rely on the figures just coming right in the way they did in America?
(Mr Brown) There is no complacency, it is a continuing challenge. To
improve the productivity rate and the growth rate in productivity of an
economy normally takes time, it takes a number of different measures. We have
set up a Cabinet Committee that looks at all issues relating to productivity
and therefore it can look at issues that are not simply issues that would
normally be referred to in a Budget about taxation and about investment
incentives and everything else. It is looking at the work permit system, it
is looking at the system that governs planning laws so that we can make
changes where necessary, so that we can improve the way applications are
treated from new businesses because a lot of our planning law is based on
ideas that came from the 1940s. We are looking at the whole issue of skills
and how we can make the economy more productive. There is a range of measures
but those measures include many of the Budget measures that I believe will
make a contribution to productivity growth in the future.
419. Have you got a target in mind of where you would like to see
productivity growth get to?
(Mr Brown) Over the next ten years we want to see a faster productivity
growth than other countries because we have got a long way to go to catch up
with some of them. Equally, of course, we want to see improvements happening
if we are going to be the most competitive of countries in the European Union
and elsewhere. So there are labour market reforms, there is the Myners Report
obviously on capital market reforms and with the competition policy changes
there are product market reforms. So there is a big agenda of change taking
place that I hope will yield greater results as we move forward.
Mr Beard
420. Chancellor, you have just mentioned the Myners Report. How
much do you think the implementation of the Myners recommendations is going
to affect productivity growth and economic performance?
(Mr Brown) The Myners Report has now been published. We have said we
support its main recommendations. There is obviously a period in which there
is going to be consultation on some of these detailed proposals that he has
put forward. We have said that we would consider legislation if necessary,
but obviously many of the changes can be introduced by the companies, the
institutions, the organisations themselves and we look forward to that
happening. I think the debate that is now taking place in the media and
elsewhere shows the importance of some of the measures that he has put
forward.
421. Do you expect them to have a significant impact on
productivity when they are implemented?
(Mr Brown) I do believe that the role of the big institutions and an
enhanced role in the economy could lead to greater productivity, yes.
422. If legislation may be necessary, for instance, to deal with
the Minimum Funding Requirement, when may the legislation happen?
(Mr Brown) The legislation in the areas where we are committed to
legislation will obviously happen as soon as possible. I would like to see
some of the other changes that he has recommended coming in by voluntary
agreement.
Mr Fallon
423. Chancellor, we also took evidence on double taxation relief
which was in last year's Budget and attracted a barrage of criticism from a
number of British companies, including Vodafone who said you had got it
completely wrong. You then had to change it during the Finance Bill last
year. Now in this year's Budget you had further regulations, and the period
of consultation expired yesterday I think, and your Mr Gibbs told us that this
was a "final safety back check". Given that you made a complete horlicks of
double taxation relief, have you got it right now?
(Mr Brown) It was a change on double taxation relief that has been made
actually in relation to moving from offshore holdings in this matter to
dealing with it on-shore and I think that is an improvement. As far as the
Vodafone case you are referring to, that was not essentially double taxation
relief, that was about the use of controlled foreign companies, CFCs. That
was a change that we recommended that I think most people have accepted is
necessary.
424. If you have got it right now, your own Red Book shows on page
150 that you are gaining five million next year, five million the year after
and then losing 15 million in the third year. What is all that about?
(Mr Brown) We never said that the purpose of these changes was simply
revenue. The purpose of these changes was to create a better system for
multinational companies operating in the United Kingdom. We are discussing
the improvement of the system continuously with them. When you look at
changes as far as revenue is concerned, the whole problem of controlled
foreign companies, and to some extent of DTR, is the protection of revenue
that might otherwise have been lost if we did not take action and I think you
have omitted that when you read out these figures.
425. But if you are trying to protect revenue, why have you got a
net loss of five million over three years?
(Mr Brown) Because the danger was, particularly with the CFCs, that if
the practices that had been devised by accountants continued there would be
a massive loss of revenue over a period of time. So the measures we took were
to protect revenue. I think people who have worked in the Treasury know that
a lot of the measures we have to take in Budgets are measures to stop a
loophole developing that leads to avoidance and, therefore, to the loss of
revenue. These are measures to protect revenue that might otherwise be lost.
426. I understand that but if they are to protect revenue why is
the net loss five million?
(Mr Brown) Because we are looking at an improved system for dealing with
the treatment of what are essentially the big international companies in the
United Kingdom. The purpose of the measure was not just to either protect
revenue or, indeed, to increase revenue; the purpose of the measure was to
create a more modern system for multinational companies operating in the
United Kingdom. That is why we are discussing with them, for example, the
treatment of intellectual property. We need a more modern system of taxation
to deal with this issue of intellectual property. We are also discussing with
them, and there are detailed documents, the treatment of capital gains when
there are the sales of subsidiaries. Again, that is a modern issue that has
got to be dealt with properly so that we can have a more attractive system and
make us the best environment for international companies to operate in
throughout the world. So the change is, yes, to protect revenue but, yes,
also to create a more modern system for international companies to operate in.
427. You keep calling it modernisation but there is a net loss of
five million over three years.
(Mr Brown) But if you are modernising the tax system, for example,
giving a tax relief for intellectual property, which is one of the things that
we are proposing, then you will not get additional revenue from doing that.
You are prepared to sacrifice revenue to get a more modern system of taxation.
This is what the companies want and this is what we think is the right thing
for Britain to be the best environment for international companies to locate
in.
Mr Cousins
428. Chancellor, I wonder if I could ask you, in the Budget there
is a very helpful proposal to raise the VAT threshold on small business but
overall have you made any calculation both in terms of tax and the regulation
that goes with tax of the impact of the Budget on small business?
(Mr Brown) The small company taxation as a whole has been cut from 23
pence to 20 pence and there is a new ten pence rate for small company taxes.
Therefore, over a period of time the tax burden on small companies has been
reduced by something of the order of 20/25 per cent. The additional measures
that we are introducing in this Budget are essentially helping even smaller
companies that are not registered for corporate tax, they are often just
registered for income tax. There is a proposal to raise the VAT threshold
initially and then to deal with a more simpler system with the VAT
requirements of companies with turnovers of less than half a million pounds.
I believe that this could make it a lot easier for companies to operate. It
is itself a measure of deregulation. We are consulting with the companies now
on introducing it and we will be able to report back later on the progress we
make on that.
429. Do you have any idea when you will be able to report?
(Mr Brown) I do not know if we have got a timetable for that but these
discussions are taking place now. I can write to the Committee and tell you.
430. Can I just point out that I am going to ask the Chancellor a
question about life assurance, which is in the proposals for the Finance Act,
and then go on and ask a question about Equitable Life. I am drawing the
attention of colleagues on the Committee to that, if it might be helpful to
do so. The suggestion is, according to an Inland Revenue Budget Notice, that
there will be legislation in the Finance Bill to simplify the tax treatment
of shares and life assurance products and to require insurance companies to
give details of life policy gains to their policy holders. That clearly must
be a helpful thing, that policy holders are going to be kept informed of the
gains in the life policies that they have.
(Mr Brown) Yes.
431. But do you not think that perhaps other information as well
should be disclosed, for example about the policies on reserving and things
like free asset ratios?
(Mr Brown) I think you are absolutely right to draw attention to these
very important issues that sometimes we do not have time to discuss in detail.
It is true that we have taken a number of initiatives. There are proposals
on greater transparency and we have had the introduction of these better
standards, CAT standards, that I think are a means by which we can protect
people with policies. Can I just bring the Committee up to date. The FSA has
obviously told this Committee itself that it is going to carry out a review
of with-profits business. It has a report into an issue that you may want to
raise about Equitable Life. We are commissioning an independent review of
capital and information flows regarding personal investment products. That
is a broader scope than the FSA review. The FSA review will concentrate on
the amount of discretion management should have over with-profit funds and
about greater transparency in how they work. We are going to look with an
independent review at capital and information flows regarding personal
investment products as a whole. I hope that the Committee will welcome that
as a sign that we are taking seriously these issues in the modern context in
which they arise, and that is the protection of consumers.
Mr Cousins: Thank you very much, Chancellor, for that information.
Turning now to Equitable Life itself, and I am conscious of the time and I am
also conscious of the fact that the Committee is engaged in a number of
excursions already and I do not want to launch into another one, and I also
think there is a distinction to be made between scrutiny and knockabout.
Chairman: Which has perhaps not always been observed this morning.
Mr Cousins: That is for you to say, Chairman, I make no comment on
that.
Mr Plaskitt: You just have done.
Mr Cousins
432. The Committee finds itself in a genuine dilemma here which
Sir Howard Davies has described as being "new constitutional waters". You
have previously reproved the Committee, in my view correctly, for not inviting
ministers to comment on the report on the Treasury. Coming to Equitable Life,
there is a genuine dilemma for the Committee. The FSA is conducting an
inquiry into its own record on regulation with the Treasury's record on
regulation up to the point where the FSA took over as background. Mr Roberts
and Mr Allen, who were originally at the DTI, then went to the Treasury and
are now at the FSA and throughout were responsible for the regulation of
insurance companies. Mr Roberts has absolutely explicitly and directly
refused to answer questions from the Committee about what happened prior to
him moving to the FSA on 1 January 1999. Sir Howard Davies intervened to say
that in his view the Committee could not put questions to Mr Roberts about
that and described this as being "uncharted constitutional waters". I do not
intend to press you on this point this morning but could I at least invite you
to consider the situation in which the Committee finds itself which is a
difficult one. We must be in a position to make some enquiry into the
regulation and its effectiveness prior to the FSA assuming responsibility on
1 January 1999 and yet Mr Roberts, who was responsible for it in a practical
sense, is refusing to answer the Committee's questions because he regards that
as being part of advice to ministers which he cannot disclose to the
Committee. I do not intend to pursue the substance of this this morning but
you will readily see the dilemma that the Committee finds itself in. If you
could see a way in which you could assist the Committee to find a way through
that dilemma I think we would all be grateful.
(Mr Brown) Can I thank you for the way you have put this question
because we are dealing with quite a detailed issue here and it goes back a
number of years. The Treasury was responsible for the prudential regulation
of insurance companies from 5 January 1998 to 31 December. Then it went to
the FSA under contract to the Treasury and now, of course, to the FSA under
the Financial Services and Markets Act. The inquiry that the FSA is
conducting is into the events surrounding the problems that Equitable Life
have had. I can just report to the Committee - and this may help Sir Michael
in the issues that he raised with the Economic Secretary when she came to the
Committee on 1 March - the Economic Secretary has replied to Sir Michael
today, I do not know if he has got the letter yet, saying that "the FSA Report
will, according to the information that we have, set out the background and
events leading up to the point at which responsibility for prudential
insurance passed to the FSA". So that issue is not ignored in the report that
is being conducted. I have also said to you that the Treasury is going to
look in future with an independent review at capital and information flows
regarding personal investment products. That is a more general issue, not
precisely about individual companies. There is no suggestion that the issues
that have been raised are going to be left without any further investigation.
433. I do understand that and I do think that is helpful,
particularly, if I may say so, the last point. However, if it wishes to
enquire into the effectiveness of regulation of Equitable Life, which is an
issue of genuine public interest, before the period of the FSA's takeover, the
Committee has effectively been prevented from asking those questions by Mr
Roberts. I fully understand Mr Roberts' position, I am not in any way
criticising him, but there is a dilemma for the Committee.
(Mr Brown) Can I put it another way. We must await, and I think it
would be to the Committee's benefit also to await, the report of the FSA and
then we can draw conclusions once we have seen what that report has said.
What I want to point out to you this morning, which I think deals with at
least part of your point, is that the FSA Report will set out the background
and events leading up to the point at which the Treasury and then the DTI
passed over its regulatory responsibilities to the FSA.
434. And you would at that point ----
(Mr Brown) I think it is then for the Committee, having seen the report,
to consider what action is next appropriate. I just say on a more general
issue that we are looking at some of the general points, as are the FSA, that
arise from this instance.
Sir Michael Spicer
435. Two quick unrelated points. Chancellor, have you had any
second thoughts about IR35 in view of the disastrous effect it is having on
small contractors, particularly in the computing industry?
(Mr Brown) The IR35 proposals were subject to a considerable amount of
consultation and then they were amended in the light of the representations
that were made. I see no case for making a complete shift in the policy of
the Government. We will, of course, continue to listen to what people say.
We did analyse the effects that were likely to follow and it is not our
evidence that there have been large scale movements out of the country and I
do not believe that to be the existing position.
436. The other question, if I might, is just to ask you whether
you will lend your weight to publication by Customs and Excise of the Rocques
Report into the management of vast losses of revenue which seem to be apparent
there now? Particularly in the Sub-Committee we have been pressing very hard
on Customs to publish their report, and so has Mr Rocques himself. I just
hope that ministers will put their weight behind it as well.
(Mr Brown) I think you should know the background. The Chairman of
Customs and Excise has already made a full disclosure of the revenue losses
in the trust statement to the 1999-2000 accounts. As far as the Rocques
Report is concerned, ministers are considering this report. No decision has
yet been made on publication but I hear what you have to say on that. Let us
be absolutely clear, so that the Committee does know, this is dealing with
losses of excise duties in the years 1994, 1995, 1996, 1997 and 1998 that
amounted to the figures that were set out by the National Audit Office. So
we are dealing with a period that started quite a long time before we were in
Government.
437. That may or may not be relevant, but the fact is there are
management practices within Customs which the Committee has been quite
critical of and which relate to what we understand to be some of the Rocques
Report recommendations and the quicker these reach the light of day the better
for the future I would have thought.
(Mr Brown) Appropriate action has already been taken by Customs to deal
with the lack of controls. Obviously I hear what your proposal is. Ministers
are considering the report at the moment but the actual findings, in fact, of
the report as far as the losses are concerned are contained in the reports
that have been made by the Chairman of Customs and Excise and by the National
Audit Office.
438. I do not want to pursue this at this time of day but
"appropriate action" are words that have been given to us by Customs and
Excise on many occasions and we have found that the action has not been quite
as appropriate as they have said. I hope that this report will reach the
light of day very soon.
(Mr Brown) Just so that the background is fully understood, when these
losses were reported to the National Audit Office and to the Paymaster
General, she immediately commissioned an independent inquiry into the matter
and it is that independent inquiry we are now looking at.
439. Again, I do not want to pursue this but it was indicated that
the report would be published very early in the new year and it has been about
for some time now. I repeat, I hope that you will give your weight to
publishing this as soon as possible.
(Mr Brown) Ministers are considering the report at the moment.
Chairman: Thank you very much, Chancellor.
