Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 100 - 119)



  100. But you have just told me you have the monthly returns from all the departments so presumably you have some idea?
  (Mr Sharples) We do have to apply a degree of judgment in making the forecast. Departments' records in forecasting are not always as good as we would like them to be so we have to apply a degree of judgment, and we publish the outturn department by department once we have the final figures in July.

  101. So you are not willing to comment on which departments you think are likely to be the ones not spending the targets?
  (Mr Sharples) I think we have to wait for the outturn figures available in July. As I say, they are published in the public expenditure outturn White Paper published each year.

  102. What impact do you think this underspending of £1 billion is likely to have on services?
  (Mr Sharples) I should emphasise that, as you will know, we have changed the rules on the carry-over of underspends from one year to the next so all the money that departments have not spent this year—and I would emphasise it is a tiny proportion of their total budgets—is available for them to spend in future years, so this will have no impact on the delivery of services—

  103. It may have an impact this year?
  (Mr Sharples) Well, as I said, there is very strong growth coming through this year in the spending on public services. Departmental expenditure limit spending is up by 6 per cent in real terms as compared to the previous year so very strong growth is coming through and strong growth is planned to continue through the years ahead.

  104. Are you worried that in some programmes—and we have commented in this Committee before particularly on the investment programmes—the government is having problems spending the money that has been allocated? Is that a worry? Why do you think that is happening?
  (Mr Sharples) As I said earlier, I do not think it is happening. There is a bit of a myth about underspend. The fact is that departments are increasing their spending in line with plans. It is perfectly normal to have a small shortfall compared to budgetary limits at the end of the year but, as I said earlier, we have changed the rules in pursuit of value for money to allow departments to carry over that underspend to following years. What used to happen was that departments tended to spend at the end of the year for fear of losing the money. Now we felt that that was leading to wasteful spending at the end of the year so we changed the rules and we allowed them to carry it over, so that leads to a smoother pattern of spending; it avoids the wasteful end-year surges and it allows the departments to plan their spending over the medium term. That is precisely what the government is trying to achieve by setting spending plans over the three years and by setting targets for outputs and outcomes that go with those spending plans so departments can plan their delivery of services in a business-like way.

  105. In the Budget the Chancellor made provision for extra spending on salaries for teachers and nurses, NHS staff generally. Why has it taken so long for the government to react to the labour shortages in the health service and our schools?
  (Mr Sharples) I do not think the government has been slow to react. This is one of a number of announcements that have been made which will provide extra resources for recruitment and retention of key staff in these services. These are simply some extra resources that are going in on top of the money that was already allocated in the spending review last year.

  106. I find it hard to square what you have just said with the experience in my constituency and in many other members' constituencies where there are large shortages of teachers and nurses and police and other NHS staff and vacancies in biomedical staff in the local hospitals. Given these quite significant shortages of staff, should the government not have reacted much earlier?
  (Mr Sharples) I think it is precisely because of its recognition of the fact there are problems in some areas and in some specialisms that the government has acted and put in extra money in this budget, and the measures that were announced last week will be coming through and will have a real impact reinforcing the measures that have already been taken and that were funded through the spending review last year. The fact is there are increases in the number of teachers coming through and in the number of nurses and doctors employed, and this extra money will allow those increases to continue and allow the government's targets for recruitment to be delivered.

  107. Will any of this extra money for staff be targeted at those areas, such as London and the south east, that have the greater shortages of staff?
  (Mr Sharples) The details of the recruitment measures were announced by the Departments for Education and Health last week. There is an element of targeting at shortage subjects and hard-to-recruit areas in those announcements.

Judy Mallaber

  108. Following on from Mr Davey's question, if there was a mismatch during the year on the monthly returns you were getting within a department, either under or over, is there a mechanism for that to be questioned and, if so, what would that mechanism be? Does the Treasury watch out for that and go back to the department and say "Pass that message on to ministers" or whoever else?
  (Mr Sharples) We are in constant dialogue with departments about these issues. We keep the situation under review and, if there were significant mismatches, we would certainly be going back to departments and discussing that.

  109. What would count as a "significant" mismatch?
  (Mr Sharples) I think it would depend very much on the size of the programme and the nature of the spending. Sometimes it is hard to predict precisely because the precise timing of certain payments coming through or certain initiatives coming through is sometimes a little hard to predict but, as I say, we keep this under review and we are in constant dialogue with departments.

  110. How much of that dialogue gets passed on to Treasury ministers? At what point of seriousness would you be passing it up the line?
  (Mr Sharples) We keep our ministers fully in touch with the situation.

  Chairman: That is good to hear!

Judy Mallaber

  111. Of the extra spending announced in the Budget, what proportion of that would be financing higher wages and how is that classified in the accounts?
  (Mr Sharples) The extra spending that was announced in the Budget was for certain specific measures in health and education and dealing with crime and drugs. The money is very much money for the front line: it is money going direct to schools, direct to hospitals and directly into recruitment and retention packages in health and education. In the case of education, therefore, what it means is that each school will get additional money paid direct to the head teacher—some of it current, some of it capital—for use within the school depending on what the head teacher regards as the priority. Similarly, on health, the money is going to be paid direct to the acute hospital trusts and it will be up to the management of the trust to decide how the money is used in accordance with local priorities.

  112. So there is no assessment of what proportion of the budget increases is likely to be going on wages?
  (Mr Sharples) Well, the assessment is that the money will be going for improvements in the delivery of services in those key services.


  113. As you know, there is forecast a change in public sector spending in the sense that we move from a position of substantial surplus to a small deficit by the year 2003-04 and then in 2004-05. Is that accounted for mainly by the increases in education and health which have been announced?
  (Mr O'Donnell) The reason you move from the surpluses to the deficits in the numbers for later years is partly a consequence of the assumptions that we use. We are assuming, therefore, for those numbers you are coming up with that GDP only grows in line with our cautious view of trend of 2.25 per cent. By the time you get out to numbers like 2004-05 or 2005-06 this has a big impact because it has built up all the way through. Every single year we have lower growth forecasts than we think are likely to emerge so that is why you have these ratios and that is why it is somewhat annoying when the European Commission attack us for these numbers because what we are doing is building in caution there and coming up with these assumptions on those bases. If we had used, for example, the Commission's forecasts of UK growth, it would not show anything like the same sorts of stories. That is the GDP side; I will let Adam comment on the spending numbers.
  (Mr Sharples) On the spending numbers, as you know, the announcements provided for increases each year in departmental expenditure limits of about three quarters of a billion pounds adding up to two and a third billion over the three years, but because of off-setting changes in some of the elements of demand-led spending, total spending is very slightly below the plans previously announced.

  114. But it is the education and health bits which have led on the spending side to the deficit, as it were? Putting it another way, negatively, if the Chancellor had not announced the increases in the education spending in the comprehensive spending review last year and then the additional bits in both the pre Budget report and the Budget itself, we would not now probably, am I right, be having a deficit in the year 2003-04 and 2004-05?
  (Mr Sharples) If you cancelled the increases in education and health certainly the position on the current surplus would strengthen.

  115. We might well still be in surplus?
  (Mr Sharples) It is a hypothetical question. It depends how much you knocked off education and health.

  116. The argument that you are putting forward I seem to remember is that government's policy is not to run large surpluses, and there is not much point in that.
  (Mr O'Donnell) Yes.

  117. That sounded sensible. The converse of that is deficits can build up, can they not?
  (Mr O'Donnell) Indeed.

  118. There have been warnings by some experts that, although it is quite a bearable deficit, it could increase quite considerably over a period, particularly I know you are making a cautious assumption about 2.25. On the other hand, if we are hit by a recession because of what happens in the United States, they could appear too optimistic?
  (Mr O'Donnell) That is why the fiscal rules are formulated in the way they are because we formulate the rules in cyclically adjusted terms so if there were to be a slowdown in the UK economy so we grew below trend and, as a result of that, the automatic stabilisers kicked in with more unemployment benefits and less revenues, the fiscal rules would allow for that and they would say that is entirely appropriate. The main point to be sure of is, when you have these periods when you are going above trend, you do not let things get out of hand. We are now in a very strong situation where, if there is a slowdown, we have a situation where monetary policy can respond quite quickly but fiscal policy can stand it because our overall fiscal position is so strong and sustainable. For example, our debt ratio has come down 12 percentage points, so when we said we would try and keep the debt ratio below 40 per cent we are now looking at forecasts of it hitting 30 per cent, so there is plenty of room for manoeuvre. Given the strong policy position we have got, if things go wrong we can respond with both the monetary and fiscal policy. Looking internationally we see a big contrast with, say, Japan where they have great problems but they have done everything they can on monetary policy because interest rates are zero, yet their fiscal policy position is not really sustainable because they have been putting in injections all the time and people do not believe that would work. Every time there is a fiscal injection, therefore, consumers save more so it does not add to demand and that is when you get into problems. At the moment we are in a situation where the world has become somewhat more uncertain but both fiscal and monetary policy are in strong positions to be able to respond if necessary.

  Chairman: I think I said something of the same in my speech on the floor of the House of Commons but I thought I would test the other side of the argument.

Mr Cousins

  119. The forecast borrowing requirement in the Budget last year was a £6 billion surplus. By November that had got to a £10 billion surplus and in the Budget the estimate is over a £16 billion surplus. What are you doing to improve your forecasting, because these are pretty dramatic differences?
  (Mr O'Donnell) A number of people have mentioned our forecasts. What I feel about forecasting is that we are doing incredibly well. If you look back, one of the big forecasting judgments we had to make was when a lot of outside forecasters were predicting a recession as a follow-up to the Asian crisis, and we went well away from the pack and said there would not be and came up with pretty good forecasts for that year. This last year, in Budget 2000, we predicted that growth this year would be 3 per cent plus or minus a quarter of a per cent and the figures the ONS have put out for growth in 2000 are 3 per cent. One could infer from this that this is probably a good time to stop forecasting—you probably do not get it right three times in a row!—so what I am saying is that basically our central forecast is coming in right so our forecasting is fine but we are building in to the public finances, as you rightly say, explicit caution. We therefore have central forecasts for the economy but cautious assumptions on the public finances, and we do this on purpose because we think that, whereas monetary policy should be based on central forecasts with a symmetrical target because you can tighten or loosen monetary policy quite easily with the same costs either way, on fiscal policy it is much harder to tighten than to loosen so it is better to err on the side of caution. We build in, therefore, a whole list of NAO assumptions. For example, because we lost a lot of VAT revenue in the past and we could not quite predict that we built in an assumption that the VAT as a share of spending would decline every single year. The NAO audited assumption said that ratio will fall by 0.05 percentage points every year. If that does not happen and we get more revenue in, we will outperform our forecasts and this year we did that in a variety of ways. As I said to you, the oil price was higher than our NAO assumption requires us to put in; we have assumptions about unemployment; we assume, again, an NAO audited assumption that unemployment does not fall. If, as happened last year, unemployment falls quite dramatically now to below a million, then our forecasts will be wrong so, if the world turns out rather well, as our central projections say, we would expect to outperform on the public finance numbers, and this year that happened in a number of areas—including income tax.

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