Select Committee on Treasury Minutes of Evidence


Examination of witnesses (Questions 20-39)

WEDNESDAY 2 MAY 2001

DAWN PRIMAROLO MP, MISS MELANIE JOHNSON MP, MR IVAN ROGERS, MR PETER CURWEN AND MR RICHARD BROWN

  20. So basically the Government does not feel under a legal obligation of any sort to do anything about this apparent condemnation of our practice?
  (Miss Johnson) No, and, indeed, I think condemnation is putting it too strongly anyway.

  21. So basically there is nothing we have to worry about?
  (Miss Johnson) No, we do not believe that we have anything to worry about. The move into deficit in the medium term results from a more than doubling of net investment over the next three years and that investment is going into schools and hospitals, law and order, to address the long standing under-investment in the UK. At the same time as that we have actually been able to cut debt borrowing by £44 billion since 1997, which is an impressive record and indicates our ability to manage the economic situation.

  22. I appreciate that. What I am just asking is as we did commit ourselves to taking corrective budgetary action once we had an early warning, and this seems to be an early warning, the point is the Minister does not feel that has got any legal standing, it is nothing we need to worry about?
  (Miss Johnson) No, it is non-binding. It is a view and it is not a view that we feel we need to respond to. Indeed, I have sketched out, and I can sketch out in more detail if you like, why we do not feel that it is necessary to respond to that.

  23. I appreciate that but just a final question. Does the Minister appreciate that there is more than Ecofin expressing concerns about the budget? I just mention this report published by PriceWaterhouseCoopers, apparently quite remarkable accountants, they seem to have quite a good name, who have said that in their view the spending plans would involve substantial tax increases. Do you think that is just a lot of nonsense?
  (Miss Johnson) The fact is that the majority of recent major commentators have commented reasonably favourably on all the projections and our forecasting and the decisions that we have made, including the IMF and the OECD, both of whom have made recent favourable remarks on the economic climate in the UK and the decisions made in Budget 2001.

  Sir Teddy Taylor: Thank you very much.

Mr Fallon

  24. Why are we going to be the only European country in deficit in 2004?
  (Miss Johnson) We are in the position of having locked into fiscal stability and economic growth and we are making it plain that our policy, in fact, makes us much better placed in the face of global instability than governments have been in the past. As a result of that we have actually got a foundation of strength which is enabling resources to be released into the Government's priorities without putting at risk long-term stability. As I said, one of the ways in which we are doing that is to double the investment in public services and that investment is sustainable, it has shown that it is sustainable, because we have one of the lowest debt ratios in the EU.

  25. Why did you tell us at the time of the Budget that the Budget was in line with the Stability and Growth Pact and the Commission now say that it is not?
  (Miss Johnson) We believe that it is. The question is about the notion of significance—

  26. About what?
  (Miss Johnson) About the notion of significance in the Stability and Growth Pact formulation. We believe that it is not significant. They are saying that one per cent is significant and we are saying that it is not significant.

  27. They are also saying—and I quote—". . . the expected ratio of public sector current expenditure to GDP should not exceed . . . 37.3 per cent . . ." projected in the Budget 2001.
  (Miss Johnson) We do; we have the second lowest public expenditure in Europe.

Chairman

  28. Is that the 37.3 per cent?
  (Miss Johnson) And the third lowest debt to GDP ratio.

  29. That 37 per cent you are saying is the second lowest?
  (Miss Johnson) Yes, second lowest.

Mr Fallon

  30. The Commission in its statement on page 63 is saying—and as the percentage reminds me—that you should not exceed it in 2003, which you are planning to do.
  (Miss Johnson) As I said, the reason why we are planning to do that is because it is going into investment, it is not going into revenue expenditure. We are doing that because we know that we are on track to meet our fiscal rules, that we have got the frameworks in place which will tackle short term risks and unexpected events and will also lead to economic stability in the long term. We have been able to cut the public sector net borrowing by £44 billion since 1996-97. We have got net debt reduced by 12 percentage points and we have been able to reduce the percentage of debt to GDP down to 31.6 per cent from 44 per cent. All of these indicate that the public finances are in a good state of health and that we are able to afford what we are planning to do.

  31. What you are planning to do is break the Commission's rules?
  (Miss Johnson) We do not believe that it is a matter, nor indeed does the Commission believe, I think, that they are making rules in this context at all. It is a judgment and a recommendation, as I said earlier on. These things are non-binding. The fact is that they are making comment, others have made different comment, and we have taken a view about this and it is the view that is outlined in detail in the Red Book and indicates what our forecasting is for the UK economy over the next few years. We still stand by those forecasts. We are confident those forecasts are good forecasts.

  32. In ignoring the recommendation are you denying that the Commission is entitled to make those recommendations?
  (Miss Johnson) No, no. They are perfectly entitled to make comment but it is not binding on us. I have just located the couple of quotes I was looking for. For example, if we look at other comments on our fiscal strategy, if we look at the IMF recently in February they commented that "staff broadly agree with the authority's medium term strategy . . ." that is the UK ". . . particularly the need to enhance public infrastructure and human capital while maintaining a sound overall fiscal position". Again, they commented a week or so later, again in February this year that ". . . the strengthened macroeconomic and structural policies underpinned by improved monetary and fiscal policy frameworks have contributed importantly to the UK's achievements." They go on to talk about the value of the independence of the Bank of England, a clear inflation target and the increased transparency of monetary policy decisions, for example. There are different views around and, as I say, this is a view which one particular body has taken. It is not a binding view on the UK and we take the view, rightly, that we should proceed with our own forecasts and our own economic decisions as we have done up to this time.

  33. If you accept the Commission is entitled to take a different view, why did your official tell the Financial Times on 26 April "this is entirely a matter for the individual Member States. We believe the Commission has overreached itself, the Treasury has said"?
  (Miss Johnson) I am not going to comment on quotations in the paper because they are not always taken in context and they are not always absolutely accurate. What I would say about that is that I said they were entitled to make a comment on this matter if they so wished to do and I stand by that.

  34. They have not overreached themselves?
  (Miss Johnson) Whether they have commented entirely within their remit, they are entitled to make comments. Those comments are purely judgments that they are making. As I said, I have just given you a couple of very recent quotations from the IMF on a similar area of policy who are taking a very different view about this matter. Indeed, we feel very confident with what we have done in the Budget and the forecasts that we have there. Perhaps I could just add one thing. What is important in relation to their comments is their comments about the explicit levels of expenditure were probably beyond what would be normally considered right but they are, as I said, quite entitled to comment in this general area, and, indeed, that is one of their roles.

Mr Beard

  35. It is difficult to understand the background to the Ecofin comments. The resolution of the European Council in 1997 said the European Union Member States ". . . commit themselves to respect the medium term budgetary objectives of positions close to balance or surplus and to take corrective budgetary action". How does that medium term close to balance or surplus differ that much from the Government's idea of balancing the budget over the economic cycle? Are they saying that whatever the position in the economic cycle in three or four years' time the budget has got to be balanced? Is that what it implies?
  (Miss Johnson) All our projections are still consistent with the terms of the Stability and Growth Pact. Our Government debt is well within the Treaty reference value which is 60 per cent of GDP, obviously it is way below that, and as I said it is one of the lowest in all Member States. The third lowest, I think, in all Member States. The Government deficit is also under the three per cent reference value and remains close to balance throughout the projection period. We do not see a problem with this, therefore. What we are doing is entirely consistent with those things that we need to meet in this particular context.

  36. You are saying over the medium term the phrase I have just read out means the same thing as the Government's wish to have a budget balance over the cycle?
  (Miss Johnson) Obviously the medium term and the cycle are not necessarily the same depending on where we are in the cycle.

  37. The medium term could mean three or four years hence. It could be exactly the wrong point in the cycle to have a budget balance. The statement says it should be.
  (Miss Johnson) Sorry, whose statement says it should be?

  38. The statement I have just read out which is the resolution of the European Council Stability and Growth Pact of 17th June 1997. It is saying that it should be balanced and the phrase, the operative words are the European Union Member States ". . . commit themselves to respect the medium term budgetary objectives of positions close to balance or in surplus". The comments we are now focusing on are all based on that phrase because the essential reason why the United Kingdom has been singled out is because we seem to be the only one with a budgetary deficit, albeit one per cent, in the medium term. What I am getting at is that phrase could be interpreted as being consistent with the Chancellor's own policy of balancing it over the cycle or it could be interpreted as inconsistent. The Ecofin seems to be interpreting it as inconsistent.
  (Miss Johnson) I think the fact is that it is the definition of "close to" which is at issue here. As I said, it is a question of whether it is significant or insignificant earlier on. Basically we are talking about one per cent, we regard that as being close to. A different view has been taken elsewhere on this. We are still quite confident about our projections and about what we are doing. I have to say also that we think the peer review process is a good one in general. We believe in the multilateral surveillance and the greater openness that these processes involve and, indeed, that is why we participate in similar exercises involving the OECD and the IMF too. We think there is a benefit in general to these processes.

Chairman

  39. You are basically saying the European Commission is just one voice amongst this multilateral surveillance and there are other voices too?
  (Miss Johnson) There certainly are other voices. I have already quoted from the IMF and I can probably dig out some more quotes if you want me to. There is a very different perspective being offered elsewhere. I think it is an argument about nomenclature as much as anything. We are happy with where we are.


 
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