Select Committee on Treasury Minutes of Evidence


Examination of Witnesses(Questions 200-219)

RT HON GORDON BROWN MP, MR ED BALLS, MR NICHOLAS MACPHERSON AND MR ADAM SHARPLES

THURSDAY 18 JULY 2002

  200. No. That was not the question.
  (Mr Brown) Sorry, let me finish—

  201. That was not the question.
  (Mr Brown) We will meet our rules over the economic—

  202. That was not the question. To what levels would GDP growth have to fall this year and the next four years before you had to increase borrowing or raise taxes?
  (Mr Brown) Mr Ruffley, you should allow me to finish—

  203. You were not answering the question.
  (Mr Brown) I was not allowed to finish the first sentence.

  204. An answer would be nice.
  (Mr Brown) What I said is we will meet our fiscal rules over the economic cycle and the cautious case and the cautious assumptions that we build in allow us to do so even when we are in a position where we are away from the—well, even in a position where the—well, what is the table that is in the document? Mr Balls, if you want to take Mr Ruffley through that, you can.

  205. You prefer not to do it? I just want a figure for the GDP growth numbers. To what levels would they fall?
  (Mr Brown) So that members of the Committee understand the position, we base our fiscal figures on both a cautious case and cautious assumptions. The cautious assumptions are, for example, that we do not assume falls in unemployment, we do not assume privatisation revenues before they appear, we do not assume indirect effects from, for example, investor save measures but merely the direct effects. Our VAT revenues are based on a declining share of VAT and GDP and these are all the cautious assumptions that have been audited by the National Audit Office and we are the first to bring in an independent office, so the key to our ability to meet our fiscal rules starts with these cautious assumptions that we laid down in 1997 and are audited—continuously—by the National Audit Office. These include, for example, the oil price. As far as the cautious case is concerned, which is what you are raising in addition to the cautious assumptions, that goes back to the point that Mr Balls is drawing attention to in this table.

  206. If you can just give me the table, I want to move on to other questions.
  (Mr Brown) No. I think he should explain it to the Committee because you have asked a question.

Chairman

  207. Mr Balls?
  (Mr Balls) The economic cycle is measured by the output gap and chart B4 in the Budget documentation, because obviously the full fiscal arithmetic and the spending envelope was set at the time of the Budget, shows the output gap which we forecast to be a little over three quarters per cent of GDP this year, and it shows the path by which we return to trend, and on that basis we meet the fiscal rules with a margin of some billions. What we then do is an estimate if the output gap is 1 per cent of GDP worse than our forecast based on cautious assumptions, and on that basis we still meet both of the two fiscal rules in that more cautious case. Clearly in any one year the economic forecast can change but what matters is the forecast we make over the economic cycle, and the economic cycle is set out, as I say, in chart B4.

Mr Ruffley

  208. Let us try something else. Tax revenues. Andrew Dilnot has said, "If . . . we were to see an unexplained deterioration in tax revenues that matched the unexplained improvement in tax revenues [that we all know about] we saw in the first parliament of the Labour Government, then I think there is more chance of a problem. So I think there is more of a gamble than there was in the first parliament, simply because the forecasts for the economy on which the public finances are based are no longer [now that is] systematically pessimistic, but they are much more central, so if something goes wrong, the risks have become greater". He is right, is he not? You have become "gambling Gordon" in this Parliament?
  (Mr Brown) Not at all. What Mr Dilnot was reported as saying seems to be something quite different from what you are saying he said—

  209. This is a transcript, Chancellor. Mr Balls is happy to look at it if you will not.
  (Mr Brown) The fact of the matter is, once you take both the cautious case and the cautious assumptions together we are not in danger of making the mistakes that the previous Conservative government made, and the reason is this: that we do not assume revenues that are not there. We have our revenue figures audited properly by the National Audit Office for the things I have talked about. Other governments previous to us assumed unemployment would fall and took the social security savings from that and built them into the figures and we do not do that, so on all these points we have both the cautious assumptions and the cautious case. Can I just add one other point on our current balance over the economic cycle? We say we must be in balance: in fact, there is quite a considerable surplus in the figures we have laid out before the House, and I think it goes from three to seven to nine to seven to nine, and these are the surplus figures on the current balance. So if you are asking what we have done to ensure that we are in a position to meet our public spending figures over the years to 2006, first of all, we work on the cautious case, as described by Mr Balls—and I refer you again to that table: secondly, on the cautious assumptions; and, thirdly, the margin for prudence, as I said on Monday, includes the surpluses that we are able to estimate for the current balance.

  210. So you will give a clear and unambiguous promise that you will not have to raise taxes to cover this Spending Review?
  (Mr Brown) What I—

  211. Middle Britain, which is sick and tired of your addiction to taxes, really want to have this question answered: you are going to promise us now that you will not have to raise taxes to cover this Spending Review?
  (Mr Brown) Mr Ruffley, it has just been pointed out to me that you were not at the meeting where Mr Dilnot made all these points.

  212. I was having lunch with the Queen, as a matter of fact, which was explained by the Committee, so do get your facts right before you make cheap political points, Chancellor.
  (Mr Brown) I thought the meeting took place at 10.00 in the morning.

  213. I had to go to my constituency.
  (Mr Brown) As far as the public spending figures, we have set down in the Budget—and, of course, I came before this Committee after the Budget and we had a similar sort of discussion—

  Mr Ruffley: Come clean. Tax increases.

  Chairman: Chancellor, just feel confident and go ahead.
  (Mr Brown) Is this going to be a discussion, or are you going to be heckling from your position?

Mr Ruffley

  214. Chancellor, can you briefly answer?
  (Mr Brown) We set down in the Budget, and I came before the Committee on this, our figures for both revenues and expenditure until 2006. These were figures that showed, with the National Insurance changes we were bringing about, the freezing of the personal allowances for one year; how our revenues would be raised until 2006; and, equally, we showed what the overall public spending figures were, and we showed how we could meet through the revenues the expenditures on the cautious case, with these cautious assumptions and with the margins that I had just given—

  215. You are promising Middle England you will not raise their taxes?
  (Mr Brown) What I am saying is—

  216. You are not giving that promise?
  (Mr Brown) Mr Ruffley, you know perfectly well—

  217. You are not giving that promise.
  (Mr Brown) You know perfectly well—

  Mr Ruffley: You are not giving that promise. That is fine.

  Chairman: Let us move on.

  Mr Ruffley: No promise given. Thank you.
  (Mr Brown) I must finish this answer, Chairman. We have set down our figures for both revenues and expenditure; we have shown how our public spending programme will be costed; we have shown the figures for public expenditure until 2006. In fact, in the case of the Health Service we have shown how our expenditures on health care can be costed till 2008, and I believe that is more than any previous governments have done to show how, over the long term, the programme is costed for the future.

Mr Fallon

  218. There are two difficulties with that answer. One is you add to your spending programmes each Budget—indeed, each pre Budget report you make additions inside the three or the two years. The other is that the last Spending Review you said was fully sustainable on the Budget decisions you had taken, the 2000 Spending Review, but then you had this big NHS black hole and put up National Insurance. Why should we believe you this time?
  (Mr Brown) What we did at the time of the 2000 Review was set up the Wanless Review which reported in November last year and recommended that, if we were to have proper planning and health care expenditure right through till 2008—in fact right through until 2020—we should put more money into the Health Service, based on demographic, technological and other trends, and this was a review that had taken place over a very long period of time. I would hope that we could build all-party consensus around the need to finance our Health Service properly for the future—if we cannot that is unfortunate—but all these figures were laid before the House at the time of the Budget and were the result of a review that started in 2000.

  219. So there is nothing in this year's spending review, this extra £90 billion, that is not fully provided for by your existing Budget?
  (Mr Brown) Our figures for public spending until 2006 are set down. Equally, the revenues we can expect based on the assumptions I have talked about are set down also until 2006, and I think we have had a debate in this Committee about these figures already.


 
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