Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 380 - 399)

TUESDAY 11 DECEMBER 2001

RT HON GORDON BROWN, MP, MR ED BALLS, MR GUS O'DONNELL, MR NICHOLAS MACPHERSON AND MR NICHOLAS HOLGATE

  380. You do not have an estimate of the ratio that would go in pay and prices as against improving services?
  (Mr Brown) I think you will find that most of the money is going to improve services.

  381. The only reason I ask that is—you have said "most will go" which means more than 50 per cent—that the King's Fund's view is that 75 per cent will go in pay and prices.
  (Mr Brown) I think 75 per cent of Health Service expenditure is on salaries. We are increasing the number of doctors and nurses, so it is hardly surprising that some of the additional money is going to hire more doctors and hire more nurses. Equally, I think the intention has been to get the money down to the hospitals and to get the money down to the health trusts so that they can spend it to best effect.

  382. I think the public will note that from thinking that more than half will go in increased services, now you seem to be saying that only a quarter will go. Presumably the rest will go in increased pay and prices, as the King's Fund suggests.
  (Mr Brown) Hold on. "Increased services" could mean an increase in the number of doctors, it could be an increased number of nurses, it could be an increased number of treatments provided by the purchase of more drugs. Pay and prices commonly refers to the pay bill, which includes the number of doctors and nurses, and prices includes the cost of drugs.

Mr Laws

  383. Chancellor, just one very quick question for you as well. Can I try and find some cross-party consensus on this health issue, perhaps. You have rejected the idea of pure hypothecation a couple of times now, but would it be reasonable, given the need to ensure that any increases in taxes that are necessary to fund your commitment meet with public approval, that if you were to have to put up taxes to fund higher health spending you might put up a specific tax—for example National Insurance contributions—and so all of that extra revenue is going to go to the Health Service? Would you consider that a sensible kind of move?
  (Mr Brown) First of all, we have still got to get the Wanless Report about the needs and resources that the Health Service requires in the future years, and we will have to make a judgment after we have seen that report about what is needed. Secondly, I have rejected pure hypothecation, which I think most people looking at the issue would want to do, but obviously you want to see the taxes that we pay linked to the services that are provided, and that is a debate that will go on. I am not proposing to draw any conclusion on that.

  384. That kind of impure hypothecation might be quite sensible?
  (Mr Brown) I am not in favour of pure hypothecation, but I think the debate is quite a different one; it is about whether people see the benefit in the services that they receive from the taxes that they pay, and how they see the link. That requires more information to the taxpayer as well as better services and it requires us to justify any changes that have been made. So the link means a number of different things, and that is what the debate over the next few months can be about.

Mr Beard

  385. Chancellor, can we move to your interview with The Sun at the end of November where the article that followed said "He [the Chancellor] insisted no cash would be spent until a shake-up of the NHS bureaucracy was complete. He said: `There will not be one penny more until we get the changes to enable us to make the reforms and carry out the modernisation the Health Service needs'". What value-for-money and efficiency measures are you considering over and above the Public Service Agreement targets with the Department of Health?
  (Mr Brown) What I meant there is that for the next spending round we will not provide the money until we have signed and agreed the new Public Service Agreements with the individual department. That is what I mean by money dependent on modernisation; the resources linked to the results that we expect to see. What are the changes that we do want to see? More local devolution is one thing; new contracts have still got to be agreed with the members of the staffing professions in the National Health Service; we want to see the primary care trusts, obviously, up and running and working well, and we want to see the modernisation that has been agreed as necessary in the Health Service actually taking place.

  386. Are you saying the extra cash is dependent on the reforms having been made, or is it sufficient for there to be plans for that?
  (Mr Brown) When we allocate money in the next spending round, we will have with it the new Public Service Agreement with each department, and that means that far more closely than ever before payment of money is linked to the outcomes, and that is why hand-in-hand goes modernisation and money, because you have got the Public Service Agreements with the departments at the same time you allocate the money.

Mr Fallon

  387. We have had two lots of Public Service Agreements so far: Comprehensive Spending Review One and Comprehensive Spending Review Two. What went wrong with those?
  (Mr Brown) What we have been doing, over a period of time, is both improving the health care system and, therefore, setting new targets for outputs for future years. It is hardly surprising that you start with one set of output targets and you move on, as you achieve some of them, to other things that are more pressing. The ten-year health plan really sets out what we want to achieve with the Health Service over a long period of time.

  388. Your reference, in The Sun, to "changes" that you want to see, those are changes in what you previously stated.
  (Mr Brown) Yes, because when we have the new spending round we will be agreeing new Public Service Agreements with the departments about what we ought to achieve over the next few years.

  389. If elements of the Health Service do not deliver, are you really saying they will not get the cash?
  (Mr Brown) What I am saying is that you do not pay out the money in the spending round until you have also signed, at the same time, the Public Service Agreements for future years. That is what links the money to modernisation.

  390. Given that you have had to improve your first two Public Service Agreements, is there any kind of sanction if they fail for the third time? If the Health Service fails to deliver on the third PSA, what is the sanction?
  (Mr Brown) In many ways the Health Service is delivering. Let us be clear about this, there are 600,000 more operations taking place, there are more doctors and nurses making possible improvements in the way we deal with cancer and the way we deal with heart disease, and there are specific targets agreed for these areas. The more you achieve the more you will sign agreements for the future that are more demanding about what we can do in terms of waiting times and in terms of other things. There is nothing wrong with the system that in each spending round you link the spending that you are prepared to make to the agreed targets for outcome that the departments are wanting to and then sign up to achieve.

Kali Mountford

  391. Chancellor, I have been concerned about a number of issues raised this morning. As you know, I have been long-term supporter of having three-year programmes for spending. I think some colleagues have forgotten that although we might have had projections for three years we actually still had a year-on-year spending round. Are you concerned that we now do experience—particularly on health spending—some problems with underspending, taking account of some of the answers you have given to us this morning and the expectation that the primary care trusts will be in place in the next three months yet, because of some PFI programmes, you have some overspend in some areas on the building of hospitals? Do you think the underspend should be measured against some of the over-spend, or should there be more targeted investment?
  (Mr Brown) I think it is very important—and I am grateful to you—to establish what actually happens in relation to a particular service during the course of a year, and why there are underspends. The NHS is managed by 600 different authorities—health authorities, primary care trusts, NHS trusts—so it is inevitable that when we take these 600 groups together there will be some underspending, which is not necessarily a bad thing if the money is transferred to the next year and not wasted in an end-of-year rush for spending, which turned out in previous years to be unproductive. Obviously, also, each health authority is going to take account of the need to plan for contingencies. If, for example, there is a particularly severe winter epidemic in a particular area—like flu or something else—then there will be additional costs. Now they have got to budget for that, and therefore they have to have a reserve ready to meet that particular contingency. So if, in one winter, there is less pressure than others it is inevitable that will change the final outcome of the figures. As far as the management of the capital programme is concerned, we are looking all the time at how we can improve the delivery of the capital programme, but again capital slippage, which was only £140 million last year, was spread across 450 different investors, NHS trusts and other health bodies, so it is hardly surprising that you do not get a mathematical result that is absolutely the same when you have so many different providers—600 in total—over the course of the year. Where there is underspend the most important thing to note is that these authorities and the Health Service as a whole can carry forward that money into the next year, so it is not money lost to the Health Service it is money that, in some cases, they can use more efficiently at the beginning of the next year.

  392. Chancellor, is it not a bit confusing for people, with strategic health authorities taking over from area health authorities, if they are inheriting an overspend from the area health authority, often due to capital expenditure which we might well want to applaud? It looks a bit confusing if the department as a whole has underspent, particularly in the context of the Wanless Report and the debate we are having now about how much investment there should be overall projected into the future against EU averages.
  (Mr Brown) I think you have got to put it in its proper context. The underspend last year was less than 1.5 per cent of the total budget, and a third of that was certainly money that was to be for contingencies—to meet particular emergencies that might have happened during the course of the year and, therefore, was a planned contingency. So the actual percentage of underspend is very low in relation to the total budget. As I say, it is spread over a large number of different authorities—hundreds of them. None of the money is, therefore, wasted, it all goes into the budget for future benefit of patients in the next year.

Dr Palmer

  393. Any large organisation which has a major reorganisation, however desirable that may be, also has costs associated with it, commonly postponement of other activity while they sort themselves out. Are you not concerned that a simultaneous drive to improve delivery and to shift responsibility down to PCTs is going to conflict?
  (Mr Brown) I think the plans have been laid for some time for this greater devolution of power. I do not think anybody wants to see the NHS as a central command and control organisation, and the Health Secretary for England (and, of course, the Health Ministers for Scotland, Wales and Northern Ireland) are intent on a far more devolved model of health care. I think it is the right thing to do. That will make itself for greater efficiency and better use of resources in the long-run. So I think these reforms have got to be made and the Health Secretary is certainly determined and successfully pushing these reforms forward.

Chairman

  394. Now we have all had our say on health, Chancellor, we will move on to productivity. Last week we had evidence from Martin Neale, amongst others, of the National Institute. We were looking at this as an issue and he said: "At the moment it has to be said that the policy [towards improving productivity] does not look as though it is succeeding". Given that this is a centrepiece of the Government's approach since 1997, why have the policies not produced any success so far?
  (Mr Brown) I do not accept that. I think we have had a very big increase in employment and we have still maintained an increase in productivity. In fact, in manufacturing the productivity increase last year was more than 5 per cent, but I do accept that we have got a long way still to go. To bridge the productivity gap, particularly with America but also with some of our European competitors, requires more investment, requires high level of skills, requires a greater degree of competition in the economy and requires support and encouragement of innovation and enterprise. On all these things we are moving forward with reforms that are actually taking place at the moment. I think we should look at what is happening in Britain as similar to what happened in America in the 1990s, where for the first year or two there was a big boost in employment and then after that employment and productivity moved forward together. Productivity is rising in this country and I believe we are creating the right conditions, with our competition policy, our innovation policy and some of the other changes where firms are able to do more in future years.

  395. When can we expect the gap between UK productivity and our main competitors to close? What further substantive policy measures are you intending to take to reduce the productivity gap?
  (Mr Brown) The aims we have set are over ten years, so we expect changes to produce a higher level of sustainable growth of the economy. That will be shown over the next period of time. We have made progress in closing the gap with Germany and France, and we will continue to make progress. The figures for productivity, given the rises in employment, encourage me that we can make even greater strides in the years to come.

  396. On the issue of Capital Gains Tax, Chancellor, a number of commentators have remarked that it is astonishingly generous; the UK is now ahead of the US with the long-term CGT. Some comments have been made that this could create tax avoidance opportunities by creating such a big incentive for gains to be taxed as capital rather than income, and what we will see (and it has been mentioned it would be right) is the emergence of tax planning schemes that will attempt to turn what should be income into capital gains, and that this could spread like wildfire. What comments do you have?
  (Mr Brown) That would certainly be a bigger problem if we abolished Capital Gains Tax altogether, as some people have been proposing, but that is not what we have done. What we have done is introduce a generous tax rate for business assets and for investments held for a period of time, and for investments held for two years we have got a far more generous tax rate than investments held for one year. We have a range of anti-abuse measures that would make it hard for people to take advantage unfairly of the new rules, which are intended to reward entrepreneurship and encourage investment. Of course, we could use anti-avoidance provisions that have existed for some time, where we found—if it was the case and there is no evidence of this—that people were just earning money as income and trying to transfer that into being seen as capital gains. We would be able to take action to deal with it. Generally, however, we should be proud of the fact that we have managed to make these changes in Capital Gains Tax which put our encouragement for entrepreneurship in relation to business assets on a par with—indeed, in some cases, better than—the United States of America. We could have, when we came into power, said "Let us not use any of our resources for a reduction in Capital Gains Tax; we should put all the money into education, health or pensions or something else". We decided it was important for the long-term productivity of the economy that we did more to encourage entrepreneurship, and that is exactly what we have done. We will not allow this measure to be abused.

  397. It was suggested to me by one City commentator that a simple ruse would be for an individual to remain an employee for as long as possible, so the business person who wanted to retire may, instead, opt to work part-time, say, for one hour a week so that he will still qualify for business asset rates of relief. Can you assure us that that type of ruse will be eliminated and, secondly, can you assure us that the share incentive scheme plan will not be damaged by this?
  (Mr Brown) On the second, we will be very vigilant to make sure that the share incentive plan is not damaged. I think you have already outlined an avoidance scheme that would be well-known to the proper authorities, and if there was any evidence of abuse of what is intended as a reward to entrepreneurship but not to encourage people to transfer their income to simply be treated as capital gains, if there was any evidence of abuse we would take every action where necessary. We want to encourage people to use the new system legitimately because we want to give greater rewards but we are not going to allow people to abuse the system.

Mr Laws

  398. Chancellor, on this point, on page 180 of the Pre-Budget Report, you have got the yield from Capital Gains Tax over the three years—last year, this year and next year. Do you have that with you?
  (Mr Brown) No, but I will get someone to look it up. I think I can understand the point you are getting at.

  399. You are probably aware that the difference between last year and next year has pretty much halved from 3.2 to 1.8. Obviously, some of that is because of the decline in share prices. How much of it is because of the lower rate that people will be able to get—10 per cent on capital gains?
  (Mr Brown) I am quite happy to send a letter to you, but almost all of this is due to the audited assumptions that we ourselves follow, therefore, when we are estimating revenues for future years.[6] So you know what has happened to equity prices; that is, therefore, built into the assumption for Capital Gains Tax revenue. Almost all of the change—and we can quantify it for you in a note—is due to the change in equity prices. I think we have the figure here, if you would like Mr Balls to read it out?

  (Mr Balls) The cost of shortening the business assets taper is 0, £10 million, £20 million, £40 million, between 2001-02 and 2004-05. The reason why shortening the taper does not have much impact is because the bulk of disposals are of assets held for more than four years anyway, so shortening the taper does not make any difference to that, they would have qualified for the 10p rate anyway.


6   See Ev 64 para 5. Back


 
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