Examination of witnesses (Questions 40-59)|
WEDNESDAY 2 MAY 2001
MP, MISS MELANIE
JOHNSON MP, MR
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 rulesyou
are well aware of what they areand 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 yearinto 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.
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
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
(Miss Johnson) I would not wish to put words into
Chairman: This may all be very hypothetical.
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 youthe
word is "should"to cap your public expenditure
at 37.3 per cent. You are ignoring the Commission ruling, are
(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 othersI have already quoted the IMF and we can
turn to the views of other international authoritiesare
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
(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
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
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.
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
(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.
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
(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.