Select Committee on Treasury First Report


WORK OF THE TREASURY COMMITTEE

The Committee's remit

3. Like other departmental committees, our remit is to examine the policy, expenditure and administration of specified government departments (the Treasury, the Inland Revenue and HM Customs and Excise) and "associated public bodies". We have interpreted this to include the smaller departments responsible to the Chancellor of the Exchequer, as well as such organisations as the Bank of England and the Financial Services Authority.

4. However, because of the Treasury's role at the centre of the Government machine, our remit also includes the whole economic system and the levels of public receipts and expenditure. This means that the Committee is expected to take evidence on the Budget and on announcements of Government spending plans, and now on the Pre-Budget Report introduced by the current Chancellor. In addition, the Committee is consulted on changes in the form of the estimates of Government expenditure presented to Parliament, which in this Parliament have consisted principally of the changes necessary to move to Resource Accounting and Budgeting. This oversight of the economy and the public sector part of it accounts for a large part of the Committee's time.

5. We were given a further task when, very shortly after the 1997 election, the Chancellor announced new arrangements for the conduct of monetary policy, transferring responsibility for setting interest rates to a new Monetary Policy Committee (MPC) of the Bank of England. This announcement envisaged that the Committee would be responsible for holding the MPC to account. Our first Report of the Parliament was devoted to describing how we would do this, and we report progress below.[3]

6. We have decided that our regular scrutiny programme ought to cover the work of other bodies for which Treasury ministers are responsible to Parliament, including the International Monetary Fund (IMF), and the European Union Council of Economic and Finance Ministers (ECOFIN). We also decided that we should take regular evidence from the Financial Services Authority, which was set up by the Government in 1997 and is given its full powers by the Financial Services and Markets Act 2000.

7. Increasingly, therefore, the Committee finds that much of its time is taken up in a regular monitoring process, and we realised early in the Parliament that we needed to consider carefully how to strike a balance between this work and the conducting of one-off inquiries. Accordingly we asked the Liaison Committee for permission to hold a short (24-hour) residential seminar away from Westminster, which was held at Mansfield College, Oxford, on 6-7 April 1998. This involved participation by some outside experts, but also sessions at which we discussed with our own staff the various roles which the Committee needed to fulfil, and how best to arrange the programme in order to do this. Another result of this seminar was the setting up a Sub-committee with the role already discussed in paragraph 2. We have since held seminars at Westminster to plan our future programme in general terms, as well as other seminars (involving outside experts) on monetary policy and developments in the national and world economy.

8. Other individual inquiries which we have undertaken were on the Barnett Formula, Public Service Agreements, the World Economy, Pensions Mis-selling, Financial Services Regulation, the Private Finance Initiative, Demutualisation, and two on Economic and Monetary Union. We have also had two recent hearings with the London Stock Exchange and are about to resume our inquiry into Banking.

Monitoring of previous recommendations

9. For many of the Committee's regular inquiries, progress on recommendations can be taken up at subsequent hearings on the same subject. We do this, for example, at budget hearings and in our inquiries into the MPC. For this Report, however, we asked the Treasury for updating on those specific past recommendations which appeared to require it, and the response is printed as Appendix 1 to this Report. We did not ask for information where the Committee had come to a conclusion rather than a recommendation, or had expressed satisfaction with existing arrangements, or where a recommendation had been overtaken by events or by conclusions in later reports. We examine below some of the issues raised, and list in Annex 1 our recommendations and responses in three principal areas of our work: Budgets; Spending Reviews; and the work of the Monetary Policy Committee.

Budgets

10. A particular concern we have had over the years is the clarity with which figures are shown in the Chancellor's Budget Reports. This has become particularly important where Budget measures may not take effect for several years, and therefore increases or decreases in taxation (or expenditure) in any one year may be the cumulative result of changes made in several Budgets, and possibly also changes made between Budgets. It is therefore rather disappointing to read that the Government believes it is "not practical to show the cumulative effects on the public finances of all past Budgets,"[4] but we will continue to make such calculations ourselves where it is relevant to do so.

11. The total level of taxation as a percentage of GDP, and whether it is increasing or decreasing, depends partly on whether tax credits are counted as negative tax or (as they are for national accounts purposes) public expenditure.[5] As we have recommended, both methods of calculation are shown in Budget and Pre-Budget Reports (and in our reports on the Budget). The Chancellor recently confirmed that the treatment of tax credits was currently under discussion with the OECD.[6]

12. We have also recommended the publication of further details of the effect of the Budget measures as a whole on households grouped by income decile and on different types of households, and welcome the Government's undertaking to produce a range of statistics of this type.[7]

13. Many tax changes are designed to affect behaviour, and we have repeatedly recommended that their effects should be regularly assessed. The Government has assured us that the effects of all tax changes are monitored, but we will look forward to seeing details in future Budget Reports of the results of this monitoring process and how the results have been taken into account in further decisions on tax policy.

14. In its paper, the Treasury pointed out that narrowing the productivity gap between the UK and other countries (the US, France, Germany and Japan) was a specific target under the Treasury's Public Service Agreement (jointly with the Department of Trade and Industry) and that progress would be reported in the Pre-Budget Report.[8] Although both previous and new measures to improve productivity are listed in the Pre-Budget Report and are analysed in greater detail in a separate document,[9] we hope that more analysis will be published in due course of the effects of individual tax changes.

15. For many years the Budget Report has been accompanied by a leaflet summarising its main measures, and there have been plans to increase substantially the number of copies distributed. We have been anxious to ensure that the leaflet is objective. In our most recent Report, on the 2000 Budget, we concluded: "We accept that the current Budget leaflet is drafted with care, to draw attention to revenue-raising as well as revenue-reducing measures. Nevertheless, we continue to believe that if the leaflet is to be distributed to all households as the Government proposes, a body fully independent of Government should be closely involved in its preparation to guarantee its impartiality".[10]

Monetary Policy

16. Many of our recommendations have been aimed at ensuring a high level of transparency in the operation of the MPC and in public understanding of its role. An early recommendation of the Committee, which the Bank of England was able to accept, was to reduce the time between an MPC meeting and publication of the relevant minutes.[11] The interval has been reduced from about five weeks to a fortnight. At our request, the Bank publishes in the quarterly Inflation Report the key economic assumptions underlying its forecasts. The Bank also prepared at our request a paper on the transmission mechanism (the way in which changes to monetary policy feed through into the economy and affect inflation).[12] The Court of the Bank has told us that they have acted upon our concerns about the level of public understanding of the Bank's work.[13] We recommended that the Bank should obtain information about the public impact of the MPC, and they agreed to undertake quarterly public opinion surveys.[14] In addition they have organised jointly with The Times a competition for schools—"Target 2 point 5", supported by a section on their website.[15] In response to another recommendation, the MPC now publishes, in its August Inflation Reports, an annual assessment of its own forecasting record.

17. Another concern of the Committee has been the accuracy of the information on which the MPC works. Following our recommendation about reliability of statistics on private sector earnings, there was a joint Treasury and Bank review and the Office for National Statistics published revised data. We were also worried about reports in late 1999 of concerns about the numbers of staff allocated to assist individual MPC members with research. We were glad to discover, by the time of our hearing on the November 1999 Inflation Report, that arrangements had been put in place.[16]

18. The Government has not accepted our recommendations that the terms of office of MPC members and of members of the Court of the Bank (three years, in each case) should be increased.[17]

19. We have made two reports about the work of the MPC, and intend to publish another one in the spring. This will enable us to look back on over three years' experience of the MPC's work and of our system of monitoring it, and make recommendations for the future.

Confirmation hearings

20. In our report on Accountability of the Bank of England,[18] we recommended that the new Bank of England Bill should give the Committee the role of approving the nominations to the MPC. We did not expect to choose candidates ourselves, but to satisfy ourselves that those nominated by the Chancellor of the Exchequer or the Governor fulfilled two characteristics which we considered essential for work on the MPC, namely demonstrable professional competence and personal independence (specifically, independence from the Government).

21. The Government rejected the idea of statutory confirmation hearings, either in the form of giving the Committee a veto or in empowering us to require the Chancellor to think again,[19] but we decided (as we had said we would) to conduct such hearings on a non-statutory basis. We took evidence from all nine MPC members in June 1998, the month when the Bank of England Act 1998 came into force, and also for four appointments and one reappointment since, and in only one instance have we felt it necessary to ask the Chancellor to think again about an appointment.

22. One possible objection to confirmation hearings, which may have arisen out of experience in other countries, was that the Committee would use the power to refuse a candidate as a pretext to inquire into matters which were irrelevant to the choice. We recognised the strength of this objection, and so decided to operate clearly on the basis of the two criteria mentioned above, passing a resolution to this effect in February 1998.[20] The Chancellor, when commenting on our hearings in 1999, said "I do think you are asking the right questions and I do think the fact that people have come before you preparing in great detail for their appearances shows the extent to which those people who have been recommended and appointed to the Monetary Policy Committee take this hearing very seriously and I think we all benefit from this open exchange of views".[21] The Governor has recently raised concerns about the tone of questioning at some of our confirmation hearings, though he accepted that we had not exceeded our remit.[22] We will return to this and other matters in our next report on the MPC.

23. In our reports on the work of the MPC we have reiterated our recommendation that confirmation hearings should be made statutory; the Government has declined to do this, and has repeated this in their report on progress, considering it "more appropriate for the House to consider the issue of official appointments and the role of Select Committees in general" first.[23]

The International Monetary Fund

24. Our predecessor Committee reported on the IMF in 1997 and recommended (amongst other things) that the Government should make an annual report to the House on its operations at the IMF;[24] when we examined the world economy in the autumn of 1998 we reiterated this recommendation,[25] and are glad that the Government accepted this. The first report was issued on 14 December 1999,[26] and we look forward to receiving the second one shortly, on which we will take evidence in the new year.

Other issues

Government (and other) replies to reports

25. It is a convention, rather than a requirement, that the Government should reply to all select committee reports within two months of publication. If the reply is in the form of a memorandum, the Committee then publishes it in the form of a Special Report. A disappointingly large number of replies have arrived outside the two-month deadline (even allowing for the understanding that if the deadline falls in a recess the reply should be received by the time the House next sits), and we took up this issue with the Chancellor last year and early this year. We have also had occasion to complain when a reply does not deal, point by point, with all our recommendations. We are pleased to report that both the timing and content of replies has improved recently.

Table: Timing of Government Replies, Session 1999-2000

Report
Published
Reply received
Time from report to reply
First, Research Assistance for Monetary Policy Committee Members (HC 43)
9.12.99
Not expected
  
Second, HM Customs and Excise (HC 53)
15.2.00
15.4.00
2m 0d
Third, The International Monetary Fund (HC 72)
18.2.00
26.6.00
4m 8d
Fourth, The Private Finance Initiative (HC 147)
23.3.00
3.7.00
3m 10d
Fifth, The 2000 Budget (HC 379)
13.4.00
12.6.00
1m 29d
Sixth, Government's Cash and Debt Management (HC 154)
25.5.00
27.7.00
2m 2d
Seventh, The Monetary Policy Committee of the Bank of England: Confirmation Hearings (HC 520-I)
24.5.00
28.7.00
2m 4d
Eighth, Economic and Monetary Union (HC 573-I)
28.7.00
31.10.00*
3m 3d
Ninth, Spending Review 2000 (HC 485)
3.8.00
9.10.00*
2m 6d
Tenth, The Monetary Policy Committee of the Bank of England: Confirmation Hearing (HC 940)
1.11.00
Not expected
  

* House returned on 16.10.00.

26. Not all our recommendations are addressed to the Government: they sometimes call for action by other bodies. In our report on Accountability of the Bank of England, we said that we hoped that the Bank would reply to those recommendations which concerned them,[27] and we are glad to report that such replies from the Bank have been received to several of our reports.[28] The Financial Services Authority has similarly responded to a report which concerned it.[29]

Obtaining evidence from Ministers

27. With the exception of the Committee on Standards and Privileges, select committees do not have power to require the attendance of Members of the House;[30] so we cannot summon Treasury ministers. We have, however, generally been able to arrange for them to attend on all appropriate occasions. We have sometimes been able to limit the number of occasions on which the Chancellor himself appears by taking evidence on two subjects at the same sitting, but even so the Chancellor has given evidence 12 times during this Parliament, or somewhere between three and four times a year.

28. The Liaison Committee has sometimes discussed problems other select committees have found in arranging for evidence from Treasury ministers or officials. With the increasing prevalence of policies explicitly involving more than one Government department, it is to be expected that other committees will wish to take evidence from Treasury witnesses from time to time. Provided that this does not conflict with our own work, we have no objection to this development.

Resource Accounting and Budgeting

29. We have been kept regularly informed by the Treasury of the proposals for Resource Accounting and Budgeting, and reported our views most recently to the Liaison Committee in a paper which was published as an appendix to their report on the subject.[31]

Conclusion

30. We believe that the Treasury Committee has established a pattern of working which has resulted in nearly all areas of our remit being examined on a regular basis, while leaving room for ad hoc inquiries. Not all our recommendations have been accepted, but we believe that the Committee's work has resulted in several policy changes and to improvements in the accountability to the House of the departments and other bodies for which we are responsible. We will continue to monitor our performance and the progress of our recommendations.


3  First Report, Session 1997-98, Accountability of the Bank of England, HC 282. Back

4  Appendix 1, p 1. Back

5  This consideration applies mainly to the Working Families Tax Credit and the Disability Tax Credit. The Children's Tax Credit (which is similar to a tax allowance as it cannot reduce tax liability below zero) is treated as a tax allowance in the national accounts. Back

6  Minutes of Evidence, The 2000 Pre-Budget Report, 22 November 2000, Q 270. Back

7  Appendix 1, p 9. Back

8  Appendix 1, p 5. Back

9  HM Treasury, Productivity in the UK: The Evidence and the Government's Approach, November 2000. See particularly Table 4.1, p 33. Back

10  Fifth Report, Session 1999-2000, The 2000 Budget, HC 379, para 90. The recommendation was not accepted, although the Government drew attention to their aim that the leaflet should comply with the Cabinet Office guidance on the work of the Government Information and Communication Service (Third Special Report, Session 1999-2000, HC 572, para 29). Back

11  Seventh Report, Session 1997-98, Bank of England: Operation of Accountability-One Year On, HC 993, para 15; Seventh Special Report, Session 1997-98, Bank of England: Operation of Accountability-One Year On: Responses From the Government and the Bank of England Monetary Policy Committee to the Committee's Seventh Report of Session 1997-98, HC 1111. Back

12  "The Transmission Mechanism of Monetary Policy", Bank of England Quarterly Bulletin, May 1999, pp 161-70. Back

13  Minutes of Evidence, 12 December 2000, HC (2000-01) 42-i, Q 80 (to be published shortly). Back

14  Eighth Special Report, Session 1998-99, The Monetary Policy Committee-Two Years On: Responses by the Government and the Bank of England to the Committee's Eighth Report of Session 1998-99, HC 850. Back

15  http://www.bankofengland.co.uk/target2point5/. Back

16  First Report, Session 1999-2000, Research Assistance for Monetary Policy Committee Members, HC 43. See also Minutes of Evidence, 12 December 2000, HC (2000-01) 42-i, Q 6-18 (to be published shortly). Back

17  Appendix 1, p 1. Back

18  First Report, Session 1997-98, HC 282, paras 47-49. Back

19  See Official Report, 22 January 1998, col 1153-87, for a debate on a New Clause proposed by some members of this Committee, which was not agreed to at the report stage of the Bank of England Bill in the House of Commons. Back

20  "That, when the Committee is taking evidence at a confirmation hearing to consider the appointment or re-appointment of the Governor or a Deputy Governor of the Bank of England or a member of the Monetary Policy Committee, questioning will be restricted to issues of the appointee's personal independence and professional competence, including the possession of knowledge or experience likely to be relevant to the functions of the Monetary Policy Committee." Back

21  Eighth Report, Session 1998-99, The Monetary Policy Committee-Two Years On, HC 505, Q 114. Back

22  Minutes of Evidence, 28 November 2000, HC (1999-2000) 760-i & -ii, Q 45-52 (to be published shortly). Back

23  Appendix 1, p 5. Back

24  Fourth Report, Session 1996-97, The International Monetary Fund, HC 68, para 45. Back

25  Second Report, Session 1998-99, The World Economy and the Pre-Budget Report, HC 91-I, recommendation d.  Back

26  HM Treasury, Annual Report to Parliament on UK operations at the International Monetary Fund, October 1998-September 1999. The Report is available on the Treasury website (www.hm-treasury.gov.uk). Back

27  First Report, Session 1997-98, Accountability of the Bank of England, HC 282, para 59. Back

28  For replies by the Bank, see: Third Special Report, Session 1997-98 (Accountability of the Bank of England), HC 502; Seventh Special Report, Session 1997-98 (Bank of England: Operation of Accountability-One Year On), HC 1111; Second Special Report, Session 1998-99 (Office for National Statistics), HC 267; Eighth Special Report, Session 1998-99 (The Monetary Policy Committee-Two years on), HC 850. The Bank had also replied to a report on Barings Bank and International Regulation, First Special Report, Session 1996-97, HC 310. It is our practice to collate replies from the Government and the other bodies mentioned, recommendation by recommendation, for ease of reference. Back

29  First Special Report 1998-99 (The Mis-Selling of Personal Pensions), HC 140. Back

30  Additionally, no Commons select committee can require the attendance of a member of the House of Lords. Back

31  Liaison Committee, Third Report, Session 1999-2000, Resource Accounting and Budgeting, HC 841, Annex B. Back


 
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