Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 320 - 339)



Mr Beard

  320. Chancellor, in the Budget earlier this year the growth in the public spending was predicted at 4¼ per cent, and in the Pre-Budget Review it is down to 3 per cent. Can you say what the factors are?
  (Mr Brown) Are you referring to the year 2001-02?

  321. No, I am talking about the year 2001. Budget 2001 gave growth in public spending this year as 4¼ per cent.
  (Mr Brown) Which Table are you referring to?

  322. In the Budget 2001 I am referring to Table B6, page 174, and in the Pre-Budget Report to Table A9 on page 160.
  (Mr Brown) I do not think you will find that the outturn for the year is much lower than the figure we gave at the time of the Budget for the rise in public expenditure as a whole. I think you will find that public expenditure is rising at quite a fast rate this year, and is supporting monetary policy in a way that I think is entirely beneficial. I do not think you will find that we are slowing down growth of public expenditure this year in the way that these figures suggest. If you are referring to certain items of public investment where there has been an underspend, I am quite happy to deal with that. I will write to you to correct it if there has been a mis-impression given.[4]

  323. Next year the estimate is that growth in public spending will be at its peak in 4¾ per cent. Are you confident that can be achieved?
  (Mr Brown) Yes, and one of the reasons why public spending in the coming year will be at that level is that we carry over (as we did not do previously) underspends in previous years into the next year. If a department has calculated, on a particular amount of spending, that by the end of the year it will have spent a little less then it can carry over that expenditure to the next year. We do not have what happened in previous years where at the end of the financial year there was a terrible rush to spend money just to get that money spent because it would be clawed back by the Treasury. That led to long road delays during February and March in previous years when people threw all their money into road repairs, perhaps not the best road repairs they wanted to make. We are trying to get a far more consistent approach to public expenditure where you can carry through underspends from one year and use that money in the next year.

  324. Can we move on from current spending to capital spending, where the Government's investment forecast is down in the Pre-Budget Report to grow at 21½ per cent this year, which is again lower than the Budget forecast in 2001 which was 43½ per cent. Why is the planned increase in public sector investment not being achieved?
  (Mr Brown) I think the increase in public investment is now happening, but it has been slower than we expected, partly because for some departments there has been no tradition of big public investment programmes over recent decades, and it takes time to develop the means by which these investment programmes move ahead. I think you will find in health, education, transport and so on that these investment programmes are now moving ahead. I think Mr Fallon in a meeting last week referred to an underspend in the Health Service. I think we have been able to assure him, and I will certainly write to him about this, that the figure he mentioned for underspend rested on the confusion between the Department of Health budget and the NHS budget.

  325. What are the factors behind the confidence now that this period of underspend is over? The underspend in 2000 of £6.25 billion was substantially larger than the underspend in 1999. What are the factors that are now giving confidence that that era of underspending is over?
  (Mr Brown) I do not think we should be saying to departments, "Whatever happens you must spend in March what you have not spent in the 11 months before March". I think the better system is where there is flexibility so that departments can maintain a consistent level of spending; and if they have not managed to complete a spending programme by the end of the financial year they can carry it over. I am not as worried as some people are about underspends being carried over into future years. I think it is more important that the departments make the right investments even if they make them after the end of March.

  326. Do you feel that things are on course now to increase public sector net investment to 1.8 per cent of GDP by 2003-04 as previously forecast in the Spending Review 2000?
  (Mr Brown) We are on course to raise it. It is not to raise it by 1.8 per cent, it is to raise it from a net 0.7 per cent. 1.8 per cent is the total. Net investment increased by one-third in real terms last year; there was a big rise last year. In the year to date net investment is £3.3 billion more than at the same stage last year. You can see the public investment programme is moving ahead. Obviously we are going to keep an eye on this because there are major investments in our country that we want to see made, and we want to see them made as efficiently and as quickly as possible.


  327. Chancellor, there has been a hullabaloo about health in the past few weeks, and it is this issue to which we wish to turn our attention. I am mindful of the answers the Chief Secretary gave to us in questions last week on the Government's target for health spending. Could you confirm that the Government target for health spending as a proportion of GDP is equal to the EU-15 unweighted average of 1998, namely 8 per cent?
  (Mr Brown) Can I say, when you are talking about Government's ambitions and policies and targets in these areas, that there are two caveats which I think have to be understood. One is that everybody here must be interested in outputs not just inputs. When we have public service agreement targets with departments they are about what we want to achieve in terms of reduction in waiting times, numbers of doctors and numbers of nurses improving the service and the treatment of cancer and all the other different illnesses. All our targets are about outputs and not just about inputs. I think that has got to be borne in mind, a very important thing. Secondly, we set up Wanless precisely because we wanted for a long period of time to find out what were the needs of the British health service to meet British conditions over the next 20 years. Therefore, the Wanless Report is designed to report to us on what are the exact needs of the British health service, taking into account productivity improvements over the next few years, and is looking at demographic, technological, people's higher expectations about the level of service and about the quality of service they want. Wanless will report to us, and that will create the new context for the spending round, and indeed future years' spending planning—because we are looking at spending over 20 years in relation to the health service and getting a sustainable basis for a long period of time and that is what Wanless is about. I think these two caveats are very important. As the Prime Minister said in the House of Commons only two weeks ago, to repeat what he said in a well known Frost television interview, "It is our aim to get spending up to the European average". That European average has always been calculated in every year that this debate has taken place at around 7.9-8 per cent and that is what we will achieve. The reason we will achieve it is that we have raised spending from 6.9 per cent two or three years ago to 7.2 per cent, now 7.4 per cent, and will rise again to 7.6 per cent, and then in 2003-04 7.7 per cent. So we are moving towards that figure. That compares, if I may say so, with an average of 6.2 per cent (not 7.7 per cent) under the previous Conservative Government.

  328. If that target of 8 per cent had applied in 2002—03 how much greater in cash terms than the figure in the PBR would the government's health spend be?
  (Mr Brown) What the Prime Minister said in his interview on the Frost programme was not that. He said that over a period of years, and he mentioned the two spending rounds, five years, he hoped to move up to the European average. He did not say that he was going to reach that figure in 2002-03. What he said was, "Over a period of five years, if we continue the growth rate in public expenditure which was roughly 5 per cent on the health service, each year for the next few years, depending on economic success, we would by 2005 (the period he talked about) reach that European average of 7.9-8." The figures prove that out. It is 6.9, 7.2, 7.4, 7.6, 7.7 and then we have the future spending round decisions which show that we will reach that figure. I may add, it is the Wanless Report that will decide for future years the level of resources that people think are required for the British health service to meet British conditions; and we will look at the Wanless Report—obviously it will be published—and we will have a debate about that. I think that will inform debates not just for the next year or two but for debates about what is needed for the next five, ten or 20 years.

  329. In a memorandum to the Committee, the King's Fund[5] criticised the use of the arithmetic mean of EU health spending in this context, and pointed out that in their opinion it was not sensible to give Luxembourg's health spending the same weight as Germany's.

  (Mr Brown) The point about the unweighted average is that it is what has been used since the Prime Minister gave the interview at the beginning of 2000. It was always understood after that that the figure that people were talking about was 7.9 to 8.0 per cent. If I just read out what the EU average spending on health has been, it has been 7.8, 8.0, 8.1, 8.0, 8.1, 8.2, 7.9, 7.9 for the last ten years. So it has varied between around 7.9 to 8.0 and there has been very little difference over the last few years. When people have been talking conventionally about this over the last two years, that has been the figure that people have had in their mind.

Mr Laws

  330. Chancellor, were you happy and enthusiastic when you heard the Prime Minister on "Breakfast with Frost" make that commitment to get spending up to the European average?
  (Mr Brown) Not only are we enthusiastic about it, but we are achieving it.

  331. You have not yet.
  (Mr Brown) I then went on, in the Budget in March, to announce a huge rise in Health Service expenditure and, as I say, when we came into power the average for the last 20 years had been 6.2 per cent. It then went from 6.9 to 7.1, to 7.2, to 7.4 and it is going to be 7.7. So the measure of our enthusiasm is that we are actually achieving it.

  332. Yesterday I spoke to John Appleby, who you may know is one of the economists at the King's Fund.
  (Mr Brown) I do not know him.

  333. He said that this target you have got of the EU average is a bit of a silly way of targeting it because, firstly, it includes the UK itself and we are obviously trying to get up to the continental level, and, secondly, as the Chairman said, it gives the same weight to Luxembourg as it does to a big country like Germany. He was suggesting that a weighted average was a more sensible way of looking at it.
  (Mr Brown) If I may just intervene there, and you can come back to me, perhaps that is why the Wanless recommendations will be more important in the long-term. I think what he is really saying is that you need a measure of Health Service inputs and outputs that is appropriate to British needs for the longer term. That is why we have set up the Wanless report. It is looking at the demographic pressures—that are quite different in Britain to America or other parts of the world—on the British Health Service, it is looking at the technological backlog in Britain, which in many ways is higher than some other countries and we have got to meet that, and it is also looking at the pressure of expectations, which differ in some countries from other countries. All these things have to be taken into account, and that is why I would think that the King's Fund would welcome the fact that we had a British review looking at British needs. This is the first time that the Treasury, which has traditionally wanted to stop spending in certain areas—in the 1950s the one report set up by the Treasury was designed to stop spending—wants to spend on the Health Service. We want a rising share of national income to health. We set up the Wanless review, the Wanless review will report, and I think that will be British needs for British people—

  334. I take your point but it was the Prime Minister who set this target for you.
  (Mr Brown) Exactly. We are meeting this target.

  335. Mr Appleby did a supplementary note for me (supplementary to the note that he did for the Committee)—
  (Mr Brown) I have not seen that.

  336. He said that another way of looking at the Government's target of spending 8 per cent of GDP on health care in relation to the average for the European Union is to see when Europe achieves a weighted average figure of 8 per cent on the more sensible basis. Looking at his graph, he says that the rest of the EU—on that much more sensible definition—actually achieved that average in 1987. In other words, you are setting yourself a target for 2005 which the rest of Europe achieved in 1987.
  (Mr Brown) There is going to be a large exchange of information after this meeting because I have not seen this paper. If the Committee would like to send it to us we will happily look at it. I think you know perfectly well, Mr Laws, that during the whole debate that took place from January 2000 about European averages the figures that people were using for all that period of time was around 7.9 to 8.0 per cent. It was mentioned during the General Election campaign, it was raised immediately after Mr Blair's interview on the Frost programme and it was always understood in that light. Please feel free to send us that paper.

  337. We will send you that note. Chancellor, I have not been very successful so far with the various pamphlets I have produced, none of which you have read. I wonder whether you did have a chance to read Peter Mandelson's article in The Guardian on 6 December.
  (Mr Brown) It is not a pamphlet yet?

  338. I know that you follow very closely his pronouncements on economic policy, but Peter Mandelson is rather sceptical of the approach that you and Wanless take in terms of a publicly financed health system purely through taxation. He basically believes, as you have probably read, that there should be a stronger social insurance component. Do you think that there is something in what Peter Mandelson says, or have you ruled out a more social insurance based system completely?
  (Mr Brown) Mr Mandelson spoke from the back benches on the day of the Pre-Budget report and actually supported what I had said.

  339. That is not what he is saying here.
  (Mr Brown) I have not read this article, but I am going to have a lot of reading to do, with the Goldman Sachs weekly digest and letters from the King's Fund on health. As far as social insurance is concerned, I think we have to be clear what we are talking about here. The social insurance systems that are operated in France and Germany are actually quite different from each other. In France the social insurance premium is something in the order of £33 a week for the typical employee—so that is the social insurance premium paid for health. On top of that the employer pays something like £50 a week for the health care cover of the people. On top of that, of course, the individual goes to the doctor or a hospital, pays the bill and then claims it back but only gets 70-80 per cent back, and then has to—

4   Ev 63 para 3. Back

5   Appendix 4. Back

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