Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 280 - 299)



  280. That monetary effect will lead you to go above trend output?
  (Mr Brown) There is a variety of factors involved in what happens to the economy over a period of time. We have the world trading position; we have the fiscal position; we have the monetary position—there is a variety.

  281. It sounds as if you are asking the MPC to raise interest rates?
  (Mr Balls) Our inflation forecast is set out on page 160 and shows that inflation is forecast to be 2 per cent by the end of 2001, 2 per cent by the end of 2002 and then rise back over that year to 2½ per cent in 2003 and 2004. What the Treasury does is produce a forecast for the economy consistent with meeting the symmetrical inflation target; and that forecast has a period of the economy below trend, then a period above trend as inflation returns to the forecast. Unless you are saying that it would be better to have the inflation target below 2½ per cent, you have to have a forecast which has a period above trend. You probably are not saying that. So this is the forecast for the output gap which meets the inflation target.

  282. A sceptic might suggest that the blip might have something to do with the reconciling of numbers on the fiscal forecast but I am sure the Chancellor will say that is not the case.
  (Mr Brown) No.

Dr Palmer

  283. The growth assumptions underlying the Pre-Budget Report deficit forecasts are the same as in the Budget—2¼ per cent—but there has been a drastic revision in public finance forecasts down by £10 billion. What is the reason for that?
  (Mr Brown) There are two reasons. First of all, what has happened to tax revenues over the course of the year, and it is undoubtedly the case that while consumer spending, output in certain key sectors has maintained itself, that profitability of corporate enterprises has been less this year and, therefore, corporate tax revenues are down. That is the main factor influencing what we have said. There is a change in income tax and stamp duty and so on as a result of changes in equity prices, as a result of changes in bonuses as a result of what has been happening to the economy as a whole. The second reason that it has got to be built into this forecast for next year is that we are cautious about what is likely to happen in future years; and, therefore, we audit all our assumptions. We obviously see the follow-through from lower equity prices in our expectations for revenues next year. We have audited assumptions for oil prices, for equity prices, for all these things; and these have a follow-through effect on the calculated revenues for next year.

  284. Is it fair to say that you are erring on the safe side?
  (Mr Brown) I think in everything we have done on the fiscal side we have tried to be as cautious as possible. First of all, our trend on growth rate is 2 per cent. We reduced that when we came in, and obviously that is an issue we will continue to look at. Secondly, if you look at the two rules we have to meet—our current balance is in surplus and comfortably so—although our rule is that over the cycle we must simply balance the current budget, but we are several billions in surplus. Therefore, that is another measure of caution. If you look at how we deal with our audited assumptions, then you will see that we will not make mistakes that were made ten or 20 years ago. If you take unemployment, for example, if unemployment is falling we do not include potential social security gains as part of our public finance forecasts. If unemployment is rising then what actually happens is we do not use our own forecasts, we take the average of independent forecasts; in other words, we take what is most likely to be the least favourable to us in making our calculations about what is the likely pressure on social security funding. Equally, we do not count, as we used to do in the past, indirect as well as direct savings from measures we take. We do not make assumptions as used to be in the past about privatisation or sales revenues that sometimes do not exist but were just thrown into the figures. We are far more cautious in estimating VAT revenues for the future. Oil price, equity prices, all these things we use them as cautious forecasts for that. It is for these reasons, I think, that the fiscal position has remained much in line with what we had expected over the last four years.

  285. In this morning's IMF report the author writes that ". . . revenue prospects are uncertain. The buoyancy of tax receipts in the last few years is partly unexplained and, thus, the revenue shortfall this year may not prove as temporary as expected". Page 3, section 5 of this report. That is bearing out very much what you have just said. He is actually speculating that this could be a phenomenon that lasts for an unknown period in the future. Would you agree with that?
  (Mr Brown) I do not necessarily agree with that; but the cautious assumptions we have made are, therefore, very much taking all that into account. Because there are uncertainties in both the world economy and its effects on the British economy it is more than ever the time to be cautious about what you expect in terms of revenues. Just to put the IMF report into context, however, it does start by saying in paragraph 2, that the remarkable performance of the British economy owes much to the Government's strong policy framework. Therefore, without labouring the point, I think your issue in relation to the revenues should be put into that context. I will not embarrass the Committee by reading more from the report at the moment!

  286. My final quick question, which we raised briefly with your advisers last week, this bias towards erring on the safe side towards caution, does that not give a policy difficulty for the companies and individuals trying to base their own plans on Government forecasts? Would it not be better to have a best estimate rather than a safe estimate?
  (Mr Brown) No, I do not think so. If you look at what happened at the beginning of the 1990s, for example, a surplus of 4 billion was turned within two years into a deficit of 50 billion; and that was because it was incautious assumptions that were being used by the government of the day. In other words, it was always tempting in the past, without rules, without audited assumptions, to fall back on a whole series of suggestions or hints about what might or might not happen; and, therefore, lots of figures were thrown in without being audited properly and without the independent auditing that the National Audit Office does. If I refer you to page 169 it lists all the key assumptions that are audited by the NAO. This was a new means of doing things that we decided on in 1997—privatisation proceeds, trend GDP growth, unemployment, interest rate assumptions, equity in prices, VAT assumptions about what level of VAT revenues you can expect from a given level of consumption, what is happening to the GDP deflator and the composition of GDP and oil prices, all these things are now audited assumptions which the NAO decree. Therefore, I would say at a time like this in particular safety and caution are the ways to proceed if you are estimating what public finances are likely to be.

Mr Laws

  287. Chancellor, just a quick question on this section. You were talking about cautious forecasts that you are using in your budget predictions for the current surplus. When we saw David Walton from Goldman Sachs last week he took a different view of some of your assumptions, which he thought were not actually very cautious. I refer you to his recent pamphlet entitled Throwing Budgetary Caution to the Wind.
  (Mr Brown) I am afraid I do not have it.

  288. There are two points he makes in that. The first is that he criticises you for not including the estimates of your two new tax credits in the estimates which the IFS have said may be up to 3 billion which would, therefore, reduce your surplus. The most significant criticism he makes is that in the next CSR period beyond 2003-04, you seem to be using an assumption of the growth in public spending which is extremely modest, it is around the trend rate of growth of the economy, and this would imply a very big slowdown in the growth of spending compared with the last CSR. What is suggested is that the outturn in terms of spending growth will be very much higher, and that is why he projects a much bigger deficit of 20 billion next year. I wondered what your comments were on those two areas?
  (Mr Brown) On the first, obviously I have said throughout and have been saying for the last two years since the last Comprehensive Spending Review that decisions about spending after 2004 will have to be made as a result of the Comprehensive Spending Review; and these are decisions we will have to take. There is a debate going on in the country at the moment about health in particular. We will always have to meet our fiscal rules. The requirement upon us is that whatever spending decisions we make, we must meet these two fiscal rules: the current budget must be in balance—in fact it is in surplus; and debt as a proportion of GDP, which is what we might call the sustainable investment rule—a level we have been following for investment that is allowable as long as you have debt in order—we have seen that reduce from 44 per cent of GDP to 32 per cent of GDP. We paid off more debt last year in one year than paid off by all governments together for over 50 years. We have met our two rules and the obligation upon us is to continue to meet these rules. If I just may remember the history of British economic policymaking over 50 years—politicians set rules for themselves that they never met. We are meeting these two rules; we have met them consistently over the last four years; then what happened in the past was, having failed to meet one rule, they changed them, adopted a new rule, and then there was another rule and another rule and these rules were never met. We are meeting our rules and that will be the context in which the Comprehensive Spending Review will be carried out.

  289. Do you think it is realistic to assume that in the next PSR public spending will only be growing at around 2½ per cent the same rate as the economy, which is growing at more like 4 per cent now?
  (Mr Brown) That is a debate we have to have over the next few months and we will make our decisions in the Spending Review. We have moved from an annual spending cycle which was chaotic for both Government and for pressure groups and everybody else trying to influence the process. We have got a three-year spending focus. I believe that has served us well over the last few years; but of course these decisions will be made at the appropriate time and will be a matter of public debate. I keep saying to you, the most important thing is, whatever decisions are made, we will meet these two fiscal rules and we will maintain a level of consistency in doing so that has not been true of past governments of whatever colour. On the second question, which was your first tax credits question, we do say in the Pre-Budget Report that these are matters we will consider. It is actually in two areas—research and development tax credit and the children's tax credit in relation to the Budget, and we will announce our decisions then. We are meeting the terms of our fiscal responsibility act by stating that in the Pre-Budget Report. On the research and development tax credit, of course we cannot reach a decision at the moment because we have got further consultation with business on the nature of that tax credit for large firms. There has been a considerable interest in the consultation period about volume versus incremental bases for the research and development tax credits. We are consulting further on that matter and we will announce our decision in the Budget. On the children's tax credit, we have just completed what has been a lengthy consultation on the new child tax credit. That led to 170 representations from organisations, from the Institute of Directors to the Child Poverty Action Group, consultations in each region of the country. We have just published the Bill. The Second Reading was debated last night. At least one person here spoke in the Second Reading Debate last night. So the tax credit proposals have led us to this consultation which has just been completed, publication of the Bill and, as I have said before, we will announce the greater details when it comes to the Budget and publish all the figures that are necessary then.

Mr Fallon

  290. Chancellor, in your Pre-Budget Report you say you assume a fall in company taxable profits this year is temporary. That is right, is it not? But the CBI in evidence to us have pointed out that the tax burden is now higher than that not only in the United States but also competitors like Germany and the Netherlands. Does that worry you?
  (Mr Brown) I do not accept that. The tax burden on business through corporation tax has fallen from 3.8 per cent of GDP to 3.4 per cent of GDP during the period that we have been in office. There is a very simple reason why that has happened. We cut corporation tax from 33 per cent, which we inherited to 30 per cent. We have introduced a small business corporation tax rate that has fallen from 23 to 20, and then a 10p rate for profits in the run-up to £50,000. We have actually cut the tax rate for business, and we have cut the tax rate for small company corporation tax. We have also cut capital gains tax for business assets from 40p after two years to10p.

  291. But the question was about the overall tax burden, and not about particular rates.
  (Mr Brown) Which items are you referring to? I am talking about corporation tax here, and then I mentioned capital gains tax. On corporation tax the burden has fallen from 3.8 per cent to 3.4 per cent. Our corporate tax rate is actually the lowest of all the major industrialised countries and, despite what came out a few weeks ago, it is lower than Germany.

  292. You are talking about corporation tax here and not about the overall burden.
  (Mr Brown) What I am referring to are the figures for the corporate tax rates, which is 3.8 per cent down to 3.4 per cent. I think you will find that business finds that the corporate tax rates we have set for Britain, which are the lowest of the G7, are favourable to business activity in this country.

  293. Let us look at the overall tax burden. You published in Table B9 for the first time, I think, your tax burden for 2006-07 which, if you are re-elected and you yourself are still hanging in there, will be your tenth anniversary tax burden. It is 36.8 compared to 35.0 of 1996-97, which is where you started, so that is an increase of 1.8 per cent, is it not?
  (Mr Brown) If I just go through this with you. When we came into government we inherited a forecast of exactly the same nature which would have put tax at 38 per cent in 2001-02. That was the Conservative Government's forecast for taxation. In actual fact the figure is estimated to be 36.8 per cent, according to these figures. If I may just remind you, the highest tax burden in this country was under a Conservative Government of 38.9 per cent.

  294. I just want to be clear about the ten-year record which has gone up from 35.0 on these figures on page 175 to 36.8 in 2006-07. That is the ten-year record, is it not?
  (Mr Brown) You cannot say what the position is going to be in 2006-07.

  295. These are your figures.
  (Mr Brown) No, these are current estimates; but they are not based on Budget decisions that have still got to be made; nor are they based on what the actual level of economic growth is, which is one of the main determinants of whether tax revenues are high or low. If, for example, economic growth is high then tax revenues are high. Therefore, nominally the share of tax in GDP rises as a result of economic growth. Not all the figures that are published are the result of decisions of the Government, but the result of what happens to economic growth. I would just remind you for the record, if you want to use their figures the highest level of tax in this country was 38.9 per cent under a conservative government.

  296. Let us go to your best estimate. This excludes any increase in taxes to meet the 8 per cent increased target on health spend, does it not? There is no provision for that.
  (Mr Brown) This excludes any further decisions that have got to be made, either to lower or raise tax rates or taxes. It is a matter of what the current estimate is, based on what is happening at the moment, yes.

  297. It excludes any implications of the Wanless Report and health spending plans?
  (Mr Brown) I said in the Pre-Budget Report that, as you know, we wanted to increase the share of national income going to health. That is a matter of waiting until the Wanless Report gives us what it believes to be the situation for the future. If I may say on health, there are two aspects of this: one is more concerned about outputs and not just inputs; and, secondly, the correct level of expenditure for Britain in future years will be what we decided after Wanless and the debate about Wanless's recommendations on the technological, demographic and other expectational pressures on the health service for future years.

Mr Ruffley

  298. Chancellor, have you said you will not raise the basic rate of income tax in this Parliament?
  (Mr Brown) In our election manifesto we said that the basic rate of tax will not be raised; in fact the basic rate of income tax, as I have said before, was reduced in the last Parliament, and I hope people will give us some credit for that. The basic rate of income tax was 23p when we came into power; it is 22p now and we will not raise the basic rate of income tax.

  299. Have you said you will not raise the top rate of income tax?
  (Mr Brown) We have also said in our manifesto a number of other things about taxation, and one is that the top rate of income tax, which is 40 per cent, will not be raised.

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