Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 40-59)



Mr Beard

  40. Could I just move on to what appears to be another contradiction between Government policy and the criteria that the Ecofin is applying in this respect. The Chancellor in a written answer on 12 February this year said that the opinion of Ecofin, "notes the United Kingdom is projected to move into deficit in the medium term. I made clear to the Commission that this reflects a more than doubling of net investment." If you take what Ecofin say at face value it rather implies that it does not accept that borrowing should be used for investment, it rather implies that a balanced budget has got to cover both current expenditure and investment and borrowing is inconsistent with the Stability Pact.
  (Miss Johnson) The deficit is as a result of a doubling of net investment over the next three years, as I mentioned earlier on. We believe that is necessary to redress the long standing under-investment in key public services. We have the public finances that will deliver that and we have the monetary and fiscal frameworks which are delivering an economy capable of doing so. The Government, by increasing investment as a share of GDP for a transitional period, is acting firmly in accordance with the current broad economic policy guidelines.

  41. I have no problem with the Government's policy, all I am seeking to do is to highlight that there is an inconsistency between the criteria that seem to be being applied in providing this opinion where the implication is that borrowing is not acceptable and Government policy is plainly based, reasonably, on borrowing to provide for investment.
  (Miss Johnson) We have set two fiscal rules—you are well aware of what they are—and we are acting in accordance with those fiscal rules. Those fiscal rules are part of the framework that has ensured that we have been able to deliver an exceptionally low inflation economy with very low interest rates and, as you know, we are able to make the investment that we have done in public services as a result of that, making this dramatic cut in debt as well at the same time. Therefore, for the first time we are able to put more money into education and health than we have into the costs in this country. Over the period of the last government more money actually went into the costs of unemployment and debt servicing than went into the money that was going into funding the health service or education. We are now putting much more—£30 billion more next year—into health than we are into the costs of debt and the costs of unemployment.

  42. I understand that and I accept it entirely. What I am seeking to point out to you is that there seems to be a difference in the criteria that are being applied in interpreting the Stability and Growth Pact in relation to the United Kingdom's economy between the Commission and the United Kingdom Government. The question is, if that is the case does the slightly censorious view that is being put really mean very much and what are we doing to sort this out because they are fairly fundamental differences?
  (Miss Johnson) I do not really think that they are fairly fundamental. In setting our two fiscal rules we have always emphasised, and indeed the Chancellor said in his statement to the House in October 1997, that "we will ensure that our fiscal rules and our deficit reduction plan continue to be consistent with the terms of the Stability Pact". That is what we believe we are doing. As I say, I think the main debate is about the question of whether one per cent is close to or significant, or not. That is what the only debate is to be about on this and I do not think it is a very significant debate.

  43. It does seem that we are being censured because we are the only country with any deficit at 2004.
  (Miss Johnson) I do not like the term "censure", and perhaps I should have picked it up when you said it earlier. The term "censure" is wrong. It is a judgment, it is a recommendation, it is an opinion. It is not a censure, it does not carry that force with it. They have expressed an opinion and obviously we are aware of that opinion.

Mr Kidney

  44. Could you just help me with the Commission's opinion. They are not saying that we should not invest in our infrastructure, indeed they say "allow public investment to double as planned as a share of GDP", but they say "while at the same time ensuring that the terms of the Stability and Growth Pact continue to be respected" and by that they mean have a balanced budget and not a one per cent deficit. What do you understand their opinion is of what action they think the British Government should take?
  (Miss Johnson) We would not be happy about them expressing a view about tax and spending, for example, because we believe that providing we are meeting the main rules of the Stability and Growth Pact it is a matter for national governments to decide in all cases what tax and spend policies ought to be. Therefore, I think it would be wrong to draw the conclusion that they are making any remarks about this. As I said, this is a non-binding opinion.

  45. Is it not obvious that they are saying that current public spending somewhere else should be cut in order to make way for the financing of the capital borrowing?
  (Miss Johnson) They do not actually say that.

  46. But is it not obvious that that is what they mean?
  (Miss Johnson) I would not wish to put words into their mouths.

  Chairman: This may all be very hypothetical. Michael Fallon.

Mr Fallon

  47. It is not just an opinion, is it? The Commission's job is to facilitate the strict, tight and effective functioning of the Stability and Growth Pact. They have required you—the word is "should"—to cap your public expenditure at 37.3 per cent. You are ignoring the Commission ruling, are you not?
  (Miss Johnson) No, it is not a Commission ruling at all. As I said, it is a non-binding opinion, it does not have that force. The opinion simply confirms that the UK is meeting its obligations under the Stability and Growth Pact and it has delivered a sound, stable macroeconomic performance. Indeed, the views of others—I have already quoted the IMF and we can turn to the views of other international authorities—are in line with the views that I have just quoted from the IMF.

  48. Why do you think that the United Kingdom is the only country to receive this warning? Do you think it is because we are the only country in deficit or do you think there is another reason?
  (Miss Johnson) I cannot comment on why the Commission might do certain things because I am not in the mind of the Commission.

  49. Okay. What about the Ecofin recommendation that Ireland should amend its budget? Do you think that should be taken seriously or ignored as well?
  (Miss Johnson) Again, it is non-binding. It is important to recognise, I think, that individual Member States remain responsible for their own fiscal policies and I was just emphasising that in relation to the UK too.

  50. So you think Ireland should take notice of this?
  (Miss Johnson) The recommendation was issued under the broad economic policy guidelines in the Irish case as well, as you say, and those provide non-binding guidance on the orientation of Member States' economic policies, including their fiscal policies. As I say, their fiscal policies remain a matter for individual Member States.

  51. Ireland should take account of what the Commission has said but you can ignore it?
  (Miss Johnson) We cannot comment on what the Irish Government response might be, this is UK Government.

  52. Can I finally ask you whether you have made any initial estimate of the impact of the foot and mouth epidemic on growth? Have you been able to make any estimate yet?
  (Miss Johnson) We have a figure that you probably already are aware of in relation to the costs of foot and mouth, which is something in the order of half a billion pounds at the current time.

  53. Yes, sure, but I asked you whether you had made any estimate of the impact on growth yet?
  (Miss Johnson) We do not expect there to be a very significant impact on growth at all. The fact is the total cost at the moment to the UK economy is a bit over half a billion pounds as a result of the assistance we have given. We recognise that there is a very wide range of estimates on the question of the impact on growth in the UK and that very wide range of estimates suggests on the whole a modest impact on the economy relative to normal fluctuations and this is only one potential cause of a fluctuation against others. Obviously for the individuals concerned it is a very significant economic event at the level of households and farms and so forth, it is a very different experience, and I would not want to do anything to suggest other than that. If you are looking at the impact overall on the economy, we do not believe that that will be other than fairly modest.

  54. So it would not cause you to revise your estimate of growth in any way?
  (Miss Johnson) No. Indeed, our estimates are on the very cautious side just because they are designed to take account of any fluctuations that may occur. Obviously this was an unforeseen one but they do take account of fluctuations of this kind and they are cautious enough to do that.

Mr Cousins

  55. Looking back to this period in February which my colleagues on the Committee have been taking you back to, of course we have had a lot more information about the movement of the world economy since February and I just wonder if more recently there are indications of other European Union countries loosening their fiscal policy in order to respond to more recent economic information?
  (Miss Johnson) I do not have any indication of that at this moment, no, but I do not know whether Ivan wishes to add anything or not?
  (Mr Rogers) No.

  Chairman: If you have not got any further questions on this I think we are moving to Lamfalussy.

Mr Cousins

  56. Lamfalussy. Do you accept the case in principle for a single European Securities Regulator?
  (Miss Johnson) We are very much in support of the conclusions that the Lamfalussy Wise Men group came to. We believe that the answers that they have produced are the right sorts of answers. We think it is very important to see the completion of a single market in financial services and the Report did not actually advocate the creation of a single regulator. The Report, as you know, advocated a four level structure to deal with regulation across Europe in a way which I think is sympathetic to the needs of the financial services sector and the fact that it needs to have flexible regulation of the kind which will allow it to adapt and grow over a period of time. I think that is quite an important consideration and one that the Lamfalussy Report recognises.

  57. Do you not see the creation of a European Securities Regulators Committee as being the first step towards the creation of a single European Securities Regulator?
  (Miss Johnson) No.

  58. The Lamfalussy Report advocates if this cannot be produced by the private sector there should be a public sector involvement setting up a single European clearance and settlement system. Is that the policy of the Government?
  (Miss Johnson) We do not take a view directly on that matter. We are keen, however, as I say, to see the completion of the single market in financial services and the target for the capital markets and the other targets met on financial services so that we make progress on these matters.

  59. Indeed, but the Lamfalussy Report is quite clear that in the event of the failure of the private sector to create a single European clearance and settlement system that it may require public sector involvement. Does the Government accept that?
  (Miss Johnson) At the moment the concentration of work that we are putting in is into seeing that the Lamfalussy Report is appropriately implemented and that the benefits are, therefore, to be gained for financial services obviously in the UK but more widely across Europe in seeing those arrangements supporting the further development of a genuine single market, first of all in securities but then more widely in other aspects of financial services.

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