Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 220-239)



  220. On the tax, do your plans assume an average increase in council tax for inflation?
  (Mr Brown) I think what has been happening in recent years is roughly the same as what happened under your government. There has been a rise in council tax but that is a matter for councils to decide, not central government.

  221. But you must have made some assumption about the increase in council tax over the next couple of years?
  (Mr Brown) I think you will find it has been based on the historic trend.

  222. So what is it?
  (Mr Brown) That is what happened under both your government and our government.

  223. So what is the figure?
  (Mr Brown) I think we would have to write to you about what the historic trend is based on but remember, these decisions—and you would not like it to be different—are for local government to make, not us[3].

  224. I am just wondering whether you are assuming that there will be an above-average increase for council taxpayers next April?
  (Mr Brown) Can I put it the other way? We fund local government and I have announced the figures for the funding of local government for future years, and we will not be providing any additional money. It is for local government then to make its decisions within that context and, therefore, if you are asking me what implications it has for future spending requirements, we have set our figures for future spending for local government but, equally, it is for local government to decide whether it wants to raise additional sums, and that is its decision.

  225. So there could be big council tax increases next year?
  (Mr Brown) I am not saying that at all. I want local government to act in the same prudent way that national government does.

Mr Plaskitt

  226. Returning to the three-year aspect of the Spending Review, it is indeed a three-year plan but not necessarily with equal amounts in each of the three years—there is quite a bit of lumpiness to the profile within those three years. For example, we have some of the big spending departments—Trade and Industry, Home Office, Transport—and in all of those cases their increase in the first year of the three is very significantly larger than the increase in the subsequent two years. In the case of the DTI it is up by 7 per cent in the first year; the Home Office is up by 12 per cent; DEFRA is up 15 per cent in the first year; and Transport is up by a massive 35 per cent in the first year. Yet, when we look at the outturn booklet for 2001-2, all of those departments actually reported underspends. I know the responsibility for spending that money is with the department and not with the Treasury, but you clearly settled on that allocation across the three years which suggests you have reached the view that all of that money can be spent by those departments in the first year. Given the track record of some underspending, however, are you confident that those very large first year increases will be spent in full?
  (Mr Brown) Yes. You rightly raise points both about end-year flexibility and what happens to underspends and, equally, about the different rises for some of the departments in the first year. In all cases there are changes in the figures because of resource accounting, and I think one should recognise that there are some quite big changes in the numbers which I think people accept are nothing to do with anything other than that we moved to resource accounting, and if the Committee wants a briefing on resource accounting in more detail, which is a very complex subject, we would be very happy to do that.

  227. I realise that, but we have these four that go up even more.
  (Mr Brown) On Transport, I think you will find it is related to the profiling of the Underground expenditures. On the question of underspends, I think you will find that what is happening as a result of this three year process is not that departments are failing to spend and should be penalised: it is that departments, first of all, ought to be carrying their own reserve—in other words, if you have a three year budgeting process, you ought to be in a position to be able to deal with eventualities and contingencies as they arise. If, for example, the Health Service has underspent it may be because they have laid aside money in case something happens with the winter flu epidemic but that has not happened and therefore they have the additional money to carry over. If a department has not spent the money by the end of year, it is good that they do not get into the situation that happened previously particularly with roadworks, where all your roadworks happened in the last month of the financial year so that the money could be used just before the end of the year; people are able to plan their expenditure properly and it is not wasted, and therefore the end-year flexibility is the means by which, if you are doing things properly, you can see that your money can be passed over into the next year and used in that next year.

  228. Nevertheless the unevenness of the profile across the three years, rather than it simply being the same proportion each year, clearly suggests that there is still an element of annual budget setting, otherwise why is it not an even pattern across all three?
  (Mr Brown) If you take some of our projects, some of the investment is concentrated in a particular period of time. I have mentioned what we would like to see happening in relation to the Underground as one example. If you take where we have got to use the reserve, as in extreme circumstances such as when we are financing defence commitments that are unforeseen, then you will see expenditures rising at particular points in time, but generally I think the three year system is working and I will be interested to hear from the Committee if they think there are any other areas you think we should be looking at.

  229. But you remain confident that those four departments I have mentioned will get the money out and spend it on the programmes in those years?
  (Mr Brown) I think in terms of capital investment it has been a challenge because there has not been a tradition of investing in capital projects built up over a period of time, and departments are now getting used to doing this. If you take the schools budget, for example, on the capital side, the figures that I was able to announce to the House of Commons on Monday are really an increase in schools capital expenditure from £600 million in 1997 to, if I remember right, £4.5 billion by 2006 and these are huge increases in capital expenditure and repair and maintenance in renewal of schools. You are taking about thousands of schools across the country, many of which are PFI projects, and obviously we want to see this money moving into the schools as quickly as possible but we are learning all the time how best things can be done.

Mr Tyrie

  230. You were asked earlier what happens if performance deviates from its central forecast, and you made great play of the phrase, "We have put an end to boom and bust". I wonder whether we could add some precision to what this means. For example, is there any difference in your mind between a "bust" and a "recession", as defined as two quarters of negative growth?
  (Mr Brown) I think when people talk about "boom and bust" which is—

  231. Let us just stick with "bust".
  (Mr Brown) "Recession" is defined around the world in the way you describe it.

  232. But is that a "bust", Chancellor?
  (Mr Brown) I think "bust" is something a bit more than that.

  233. How much more?
  (Mr Brown) I would give the example of 1990-92, but you will then say I am being political!

  234. If there is negative growth of less than that we have not arrived at a bust, is that right?
  (Mr Brown) If you are saying to me that "bust" is—

  235. I would just like an estimate, Chancellor. You have used this phrase literally hundreds and hundreds of times. You must have some idea of what it means.
  (Mr Brown) That is because, if I may say so, the history of British economic policy under all governments has been one of—

  236. You want to reduce the amplitude of the cycle, so I am saying when does a "recession" become a "bust"?
  (Mr Brown) The history of all governments has been one of "stop go"—call that "boom bust" or "stop go"—and that has been high levels of growth followed by quite deep recessions and, of course, the deepest ones since 1945 were 1980-82 and 1990-92. But what I mean by "boom bust" and "stop go" is running a policy where you allow the economy to grow too fast and then it sinks far further than it has in other countries, even when there is a world downturn, and that is what we mean in Britain by the history of "stop go". I do not think anybody siting around this table denies that the history of British economic policy over 30 or 40 years under both governments, both parties, was one of stop go.

  237. Let us just give you one more go: how much more than negative growth in two quarters does negative growth need to be for it to be a bust?
  (Mr Brown) If I am right, GDP fell 1.5 per cent in 1981 and 1.4 per cent in 1991.

  238. So that is the minimum definition of a "bust"?
  (Mr Brown) Yes, but I talk about "boom bust" and "stop go", and it is the acceleration of growth to unsustainable level followed by the downturn—

  239. You have answered the question, Chancellor. Now I would like to try the other ones. When does above trend growth become a boom? By how much more than above trend growth does the economy have to grow to arrive at a boom?
  (Mr Brown) I think when the inflation rate has gone into double figures.

3   Ev. 47. Back

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