Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 183-199)




  183. Good afternoon, Chancellor. Welcome to this evidence session on the Spending Review. For the Hansard writer, can I ask you to introduce yourself formally?

  (Mr Brown) Yes. With me is Ed Balls, the Chief Economic Adviser to the Treasury; Adam Sharples, who is in charge of the Public Spending Review, and Nick Macpherson, who is the Chief Executive of the Public Services and Spending Division.

  184. We had a good session with the same two officials yesterday on a number of issues. One of the aspects was the papers coming out. The public expenditure provisional outturn did not come out till Tuesday and we felt that all the papers should come out on the one day[1]. More than that, however, the view has been expressed within the Committee and by our advisers about the short timescale for an exercise with such import as this. Is there not an opportunity to have more than six days' notice of an event of this significance? We have the Comprehensive Spending Review and we know the public spending envelope. There should be an opportunity surely for more time to be given so we can look at this in greater detail and also, given that the public spending envelopes are known well in advance, there should be the opportunity for the White Paper so you can discuss and consult on the areas where your spending and your targets and priorities will be?

  (Mr Brown) This is an interesting debate about the transparency and openness of the public spending process and obviously we have made significant changes. As you know, there is probably far more detail published even on that one day on Monday than ever before in previous spending reviews, whether they were annual or three years. As far as the outturn figures are concerned, I think we are to write to you on that, the officials agreed yesterday[2], with an explanation, but I think you will find that the major figures on which you were focusing were published in the documentation itself which came out on the Monday. As far as the general process of these public spending reviews is concerned, let me just put it in perspective for the Committee: we have moved from an annual to a three-year public spending process but the public spending process is not simply about inputs but also outputs. These outputs in the end are the responsibilities of individual departments to report on initially, and it is for them in the departmental reports to record the progress that they are making and it is only at the end of the process—and of course we are not at the end either of the CSR 1998 process or the SR 2000 process—that we could give you a final statement of the full progress that has been made towards meeting all of the targets that were set in these documents. What we are doing and what we did on that Monday was publish the allocations of expenditure till 2006, and no doubt you will want to ask me about the priorities that we chose and why we chose them. On the same day we did something that we did not do in the last spending round—and I do not think you complained about it in the last spending round—in that we published the PSA targets on the same day, but equally, of course, it is a matter for the departments themselves and they will be answering questions to all their departmental select committees, both about the targets and about the attainment of the targets. I would have thought our biggest responsibility is to publish the general figures about the fiscal position and, equally, the specific allocations to departments. Obviously, if there is any further information you would like, we would be happy to give it. This is an evolving process, but the one thing it is not short of is a great deal of documentation.

  185. I understand that and that is the issue: there is such a lot of documentation that one needs a lot of time to digest it.
  (Mr Brown) Well, it is a bit like painting the Forth Rail Bridge in my constituency—well, I actually share it with Mr Dalyell who has half of it—because the new Spending Review is really starting now for the next time, and it started two years ago to complete this, but our responsibility to the Treasury, so we are clear about it and so we do not go into a misunderstanding about where we are on this, is to publish the overall fiscal figures, to publish the allocations of these figures with the departments—and we are doing this jointly: we are publishing the public service agreements about the future—but the reporting on the implementation of these public service agreements will be a matter initially for departmental reports, and the departmental ministers are the people who are responsible for the implementation of these targets and they will be interviewed and asked questions, no doubt by the departmental Select Committees on this matter. I think it is very important that we understand the different responsibilities of each in this process. There may be a public spending debate next week on these matters but there will be departmental debates going over the next three years about the use of resources and the meeting of targets.

  186. I understand that. I think you produced another 130 targets in your speech on Monday which added on to the more than 300 targets that were in the 1998 Comprehensive Spending Review. Accompanying your targets was the Spending Review book, and if I refer to page 11 it says, "New resources must be matched with reform to deliver results in which the modernisation of public services is crucial". To the outsider that would appear rather bland and there is no detail there. Could I ask you why the number of targets has been reduced from 1998 quite dramatically, and also are you satisfied that these targets allow Parliament to monitor properly the performance of departments? We have some of these targets coming out that are pretty woolly to say the least. We have the Foreign Office which says here that we have seven major objectives, including making the world a safer place, and you have still to report on them?
  (Mr Brown) The only problem I say to the Committee is, because these are targets that are proposed by the individual departments and agreed eventually with the Treasury, that of all the other targets of the Foreign Office that you list none of them actually pointed to what is a fundamental function of diplomatic and foreign policy and that is to make the world a safer place, so I think you have to bear that in mind when you look at the desire for quantification at particular points in time. Can I just say about targets, because there has been a debate in principle in the House of Commons over the course of this week with the Treasury and then the Education Department and then the Home Office and now, today, the Department of Local Government, the department headed by the Deputy Prime Minister, and today for example during the debate on the Deputy Prime Minister's statement the point was put by the Opposition that they were against targets altogether, and that seems to me to be a debate that has to be had. We believe that it focuses the work of departments on the priorities and that there is nothing essentially wrong in that—indeed, it is a good thing that that focus happens—but obviously there is a debate about which of the targets you choose and why you choose them. So we believe that the improvement that has been made in the public spending process is this: we have moved from simply inputs which I am afraid was the position under the last government to a consideration not just of what the input is but what the output is, and it is only when you have decided that that is a good thing that it is worth then debating which targets you have chosen. I would like to put the case, and we have put the case, for a focus on outputs as opposed to simply what used to be under Labour and Conservative, since the Plowden Report, an annual focus on really ad hoc and incremental decisions about public expenditure that really was less—and we should be honest with ourselves because it happened under previous Labour governments—focused on results and more focused on the annual process of persuading people that your department was worthy of extra funds. I hope the Committee is in favour of the idea of targets and a focus on results and outcomes but I recognise that is still a matter of controversy between the parties.

  187. I certainly do not have any bother with the aspect of the targets but there has been concern that these will be central targets, centrally motivated and dependent on a command control structure and some people have put it to me that there are so many targets that maybe reminds them of Stalin's Russia and Gosplan where we have those responsible for the targets deliriously happy because they were achieving the targets but the country was falling apart at the seams at the same time. How can you reassure us that these targets are not going to be command and control? That there is going to be sufficient flexibility for delivery on the ground and not overwhelming interference from central government?
  (Mr Brown) There has been a very big process of devolution of decision-making power and the flexibility given to local service providers about the manner in which they use the resources that are made available to them. If you take primary care trusts in hospitals, for example, more than 75 per cent of the money will now be spent once the process of devolution is completed by the primary care trusts themselves as they buy and negotiate services from the hospitals usually in their own surrounding area. As you can see with schools—and again it is controversial but I think most people having looked at this agreed this was the right thing to do—there is a far greater devolution of responsibility with the power to make decisions through money being made available directly to the head teacher and the school management, and that is why we announced on Monday that not only would we continue the process of direct links to the headmasters but we would have the leadership initiative where, if schools were facing challenging circumstances, we would give them extra resources to meet these challenges, so there is far greater devolution of responsibility but also of power to the local school, and that is a process going on elsewhere. Of course, in each department I think the departmental committee will want to question the ministers about how far they have managed to achieve that devolution, but the principle on which we are based is to move from what you called a central command model—I do not think it was but there was a great deal more Whitehall control of the process in the past under both the political parties. Now there is a great deal more emphasis on local decision-making, local responsibility and local flexibility.

  188. I will just leave you with the thought, Chancellor, that the transparency of these targets is uppermost and also perhaps a central register of targets so we can follow them going on, because there has been a phenomenon where we have seen targets, and then they have fallen off and others have been picked up, so the idea of being able to follow these targets is extremely important.
  (Mr Brown) I agree. The transparency is absolutely crucial to this. I have always said that the three principles that governed our approach to fiscal policy, as they now govern our approach to monetary policy which includes the inflation target, are the setting of clear objectives, the devolution of decision-making power—because we gave away the power in monetary policy to the Bank of England but that is true also in the delivery of our targets in public expenditure—and accountability in transparency, and the very fact that so much information is now available and is being examined not just by your Committee but I suspect by all the departmental committees is a signal of the changes that really are under way. It is a far more open process and one which is susceptible to greater public accountability in the long run.

Mr Tyrie

  189. Is it not correct that the Treasury have said themselves that it has not proved possible to measure aggregate Treasury output, in which case, since the Treasury is the home of the PSA target and is unable to measure its own output, how can it expect other departments to measure theirs?
  (Mr Brown) How do you suggest you measure Treasury output? We have a number of different targets the Treasury has to meet and it is meeting these working with different departments on child poverty, on international development, with the DTI on productivity—that is the way we believe we should be tested over the longer period of time.

  Mr Tyrie: We will come back to productivity in a moment, Chancellor.

Dr Palmer

  190. When I used to work in a multinational, we always had the same debate about targets, and the danger that a lot of people felt was that we would over focus on targets which were capable of numeric expression and I wonder if that process is not a little evident in this statement, because I notice in education in particular, where I know that the department is very anxious to increase diversity in secondary schools and there is a wide range of objectives, nearly all the targets relate to examination results. I wonder if you feel that there is a danger that the pressure to achieve targets is going to focus attention too much on the numerically measurable ones?
  (Mr Brown) That is obviously a debate but in having that debate, do you conclude it is wrong to have any targets? I do not think anybody would. I think it is common ground between the political parties and I would hope that in your deliberations and your conclusions the Treasury Committee could reflect that. Just as Harold Macmillan in the 1950s said he was going to be in a position to build 300,000 houses, and he had a target at that point and he achieved it and it was important to the government, so too other governments subsequently have had targets as well. I think the difference now is that, in the setting of a target, we are also trying to give far greater flexibility to our local service provider to get on with it. For example, therefore, we are signing public service agreements with local authorities. You might think that local authorities would resist the idea of a public service agreement on the grounds that it was somehow an interference with their local autonomy. But quite the opposite. Local authorities, given the nature of the relationship between them and central government over many years under all governments, are very keen to sign these public service agreements because in return for them saying, "Look, here are the general targets we want to meet over the next few years", we say, "We can have a light touch inspection regime which is central government giving up power; equally we can give you more flexibility in your decision-making and equally we can have resources that are less tied so you are in a position to get on with the job". Now the public service agreements are moving forward with local government and I hope the Committee can conclude this is good.

  191. A different aspect of the planning process is the trade-off between long term confidence in the direction of funding and long term uncertainty in what is going to happen to the economy.
  (Mr Brown) Absolutely.

  192. Do you feel that the three year cycle is perfect? Is there not a case for annual reviews of this whole process?
  (Mr Brown) In a sense we are getting back to what is the set of questions that the Treasury Committee would normally wish to put—and I mean that because it seems to me that there is a tendency here for the Treasury Committee to want to take up the issue of whether the Health Department is meeting its targets. That is a matter for the Health Department, and no doubt the Health Select Committee.


  193. Chancellor, there should not be any shred of doubt on your part. We are not interested in what the Health Department does but things start in Treasury, and that is where the footprint is.
  (Mr Brown) Well, I would not put it that way, ever—under any government! The fiscal position, however, is exactly what I think is important to set out to you today. I believe that the old Plowden system, essentially the one that all governments since the early 1960s were following, was the wrong system for modern times because basically it was an annual system, ad hoc, incrementalist, based on inputs, investment always suffered—and I do not know why Mr Tyrie is so clear that that was not the case—

Mr Tyrie

  194. It was a rolling three year programme.
  (Mr Brown) It was not, in practice, because effectively decisions were having to be made every year, and the cancellation of vital transport programmes was a very good example of that, and the fact that there was very little capital spending taking place by 1997 was also a very good example of that.

  195. This is not the floor of the House—
  (Mr Brown) I am explaining my understanding of the Plowden system, and what we tried to do was move from that old system to a new system, which was three years, not incrementalist—in other words, we looked overall at what a department was doing and also interdepartmentally, so there are cross-cutting reviews that have governed this review; investment now is a very important feature so the balance between investment and consumption has changed quite dramatically over the last few years in terms of our projections about what we would like to spend on investment in the future. One matter that is controversial too is that, instead of there being very little relationship between public and private sector projects and investment, the private/public partnerships are central to this process as well. So I would say there has been quite a big change. Then the question is whether the figures add up over three years, and we meet our fiscal rules and will meet them over the cycle.

Dr Palmer

  196. But, very specifically, how confident on a range of zero to one hundred per cent are you that you will not need to revise these plans at any time during that three years?
  (Mr Brown) Our plans to 2006 are funded by the decisions we made in the Budget. We did take a controversial decision which has not had all-party support to raise National Insurance. We do so from next April, but that is to fund our policy of public service improvement, particularly the Health Service in the spending plans to 2006. Indeed, our Health Service plans are funded to 2008 and I am confident that the two rules we have set down—to balance the current Budget over the cycle and to have a sustainable level of debt—which have already been met each year for the last five years, will be met.

  197. The final question from me for the moment is this: what impact do you see the global stock markets having on the United Kingdom economy? There is a lot of speculation; they go up and down. How much does this concern you?
  (Mr Brown) This came up at Treasury Questions today and the question I ask all the time is whether, given the changes that take place during an economic cycle and the ups and downs, so to speak, in the world financial markets that obviously happen from time to time, the monitoring fiscal regime that you are operating is capable and good enough to withstand these difficulties. In other words, have you built a system of monetary and fiscal management that is for the good times but also for difficult and challenging times. I believe that the changes we made by making the Bank of England independent, and by holding to the fiscal rules that we have, mean that we are capable of withstanding the difficulties that face us. When these things happen you have to ask yourself whether you have a monetary regime delivering low inflation—and we have the lowest for thirty years. Have you got fiscal rules that are capable of being met? Have you built in the necessary caution so you can meet new rules, and we believe that is what we have done—not with easy decisions but by taking quite difficult ones.

Mr Ruffley

  198. Chancellor, to what levels would GDP growth have to fall in this year and the next four years before you had to raise borrowing or raise taxes to cover this Spending Review?
  (Mr Brown) We will—

  199. The GDP figures would have to be what?
  (Mr Brown) We will meet our rules over the economic—

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