TUESDAY 11 DECEMBER 2001
Mr John McFall, in the Chair
RT HON GORDON BROWN, a Member of the House, Chancellor of the Exchequer, MR ED BALLS, Chief Economic Adviser, MR GUS O'DONNELL, Managing Director, Macroeconomic Policy and International Finance, MR NICHOLAS MACPHERSON, Managing Director, Public Services, and MR NICHOLAS HOLGATE, Director, Welfare Reform, HM Treasury, examined.
(Mr Brown) Yes, Chairman. I also have a short set of opening remarks to enable you to know about the documents we have issued this morning. On my far right is Nick Holgate, who is the Director of Welfare Reform; next to me is Ed Balls, who is the Chief Economic Adviser to the Treasury; on my immediate left is Gus O'Donnell, who is the Managing Director for Macroeconomic Policy and International Finance; and on my far left is Nick Macpherson, who is the Managing Director for Public Services. Could I just say by way of helping the Committee, that in addition to our main Pre-Budget Report, I have published a set of additional consultation documents on issues ranging from our new research and development tax credit for larger firms, to new measures for the environment. On Thursday we will be publishing our final Pre-Budget Report consultation document which will set out our new approach to tackling child poverty, combining improved children's benefits with better education provision, greater support for parenting and encouragement of voluntary, community and charitable organisations crucial to family and child support. Can I also tell the Committee that, in line with our policy of transparency and openness, at 9.30 we published the concluding statement of the IMF's 2001 Article IV Consultation on the UK economy and we circulated copies to the Committee this morning. It may help the Committee to know that today also saw the publication of the latest inflation figures, showing inflation down to 1.8 per cent, which is the lowest inflation since 1963.
(Mr Brown) These, Chairman, are testing and challenging times for every country. As I said in the Pre-Budget Report, no country can be insulated from what is happening around the world. We do have a recession in America, a recession in Japan and in much of Asia; the European area of the economy is barely growing at all. It is hardly surprising that the effects on world trade in particular, which has fallen in its growth from 12 per cent to 1 per cent this year, are felt in every economy around the world. Why am I cautiously optimistic about the British economy - and to a large extent this is reflected also in what the IMF have said this morning about the British economy? First of all, we start with the foundations far sounder than they were ten or 20 years ago. In other words, we have low inflation and sound public finances. Secondly, we have had a proactive approach taken, particularly by our monetary authorities. We have had seven interest rate cuts during the course of the year. That has brought our interest rates down to the lowest for nearly 40 years. We are able to do that, in my view, not simply because we have the new arrangements in place with the Bank of England, but because they are operating a symmetrical inflation target which means that deflation is as worrying to them as inflation. Thirdly, I am cautiously optimistic because there has been a degree of international cooperation that has been greater than before; and countries have looked together at what they can do in each continent to make for a stronger world economy. That is why we have published our forecast for this year which is at 21/4 per cent and our forecast for next year is 2-21/2 per cent; and I believe that will increasingly become in line with what other people are saying about what is likely to happen.
Chairman: To explore this issue a bit further I will hand you over to James Plaskitt.
(Mr Brown) I think this is what most people are saying about what is likely to happen in 2003. If you look at the position of trade, I think it is true to say that trade was growing by about 12 per cent last year. I think the forecasts for 2003 are based on trade growing by about 6 per cent. Therefore, it is an expected recovery in the international trading position. I think most people feel that America by the second half of next year will be in a stronger position. I think it is true to say also that the forecasts coming from Europe are in the same direction. Therefore, I think it is a not unreasonable forecast of what is likely to happen in that period.
(Mr Brown) I think he was thinking about what we said as a Treasury in the Pre-Budget Report, that there are risks. Obviously the American economy could have a slower bounce-back. Equally, there are risks of a structural nature; oil prices have certainly gone down; but there are risks in the oil price, as we have known from the trebling of oil prices two years ago, to the virtual 50 per cent fall in oil prices in the last year. Therefore, there are risks of a structural nature about what is happening to oil prices. Equally, there are risks in the British economy if consumer spending grows too fast. Interest rates are extremely low historically at the moment. There are risks, of course, if we do not make the productivity improvements that we want to see. All these are cyclical and structural factors which make this an uncertain and testing time, as I said at the beginning. I think that the balanced approach is the one we have given in the Pre-Budget Report.
(Mr Brown) It depends. What I said in the Pre-Budget Report, that the US economy was in recession for two quarters when there has been a negative growth, I do not think our projections or forecasts for the new year will be changed as a result of these two sets of figures. I think there are certain features of this downturn that are both interesting and make me more optimistic about the future. Consumer spending has held up in the United States of America. Equally, in certain production categories like cars, sales have held up; equally, house purchases have held up. So there are certain things happening in the US economy not too dissimilar from what is happening in the British economy where consumer spending, car sales and home sales have held up well. Therefore, I think the balanced approach is the set of forecasts we have given.
(Mr Brown) The key change, of course, is what has happened to interest rates where they have fallen very substantially by seven times in the course of a year. It is true to say that the performance of manufacturing everywhere is disappointing. Manufacturing output has fallen by something in the order of 11 per cent in Japan, 6 per cent in America and fallen by something of the order of 3 per cent in the United Kingdom. If you look at what has actually happened within manufacturing, as you say, there are sector differences. Information technology/electronic equipment has seen a dramatic fall in output right across the industrialised world. It is something of the order of 20 per cent in some countries, and it is not far below that in Britain. If you look at some of the other industries that make up manufacturing - I mentioned cars earlier - the output of the vehicle sector is up something of the order of 7 per cent; the output of chemicals is up; the output of tobacco is up; the output of durable consumer goods is up. There is a huge effect as a result of what started in the IT sector in America and it has had an effect on Britain; but there are some sectors of manufacturing that are doing better. One of the measures we have taken in the Pre-Budget Report is building on what we have done previously and that will help productivity in these areas . Certainly what we are doing in terms of helpful investment, permanent capital allowances, regional venture capital funds, what the Regional Development Agencies can do, what we are doing in terms of technology and innovation, research and development, small business tax credit, the larger tax credit now already in place as a consultation document, what we are also trying to do in workplace skills, is improve not only the numbers of apprentices going into key sectors for the future, there has been a dramatic increase in the number of apprentices in the last few years but, equally, we are trying to get to a new position of workplace skills where there is more encouragement, particularly for small businesses, to give people the skills that are necessary for the future. In other areas, like competition policy and planning policy, we are trying to create far greater flexibility than in the past; and independent competition authority, and new attention to flexibility in planning laws for business. All these changes, I believe, are important to stimulating the greater enterprise culture in the country.
(Mr Brown) We certainly do not. We want to devolve that power.
(Mr Brown) We have given them greater flexibility. Obviously in the first few years of their lives the Regional Development Agencies have been dealing with existing essentially urban regeneration programmes; but what they are moving towards is a far greater interest in the microeconomic and supply side factors that are influencing the regional economies. I believe their attention is increasingly on innovation in the region and what has been done to stimulate new businesses and high technology businesses, and levels of investment in the region and, of course, the provision of infrastructure. With all these things you will see the Regional Development Agencies taking a far greater interest in the years to come, and with the funds and flexibility to do so which does not exist at the moment. I regularly meet all the chairmen of the Regional Development Agencies, and we talk about how they can actually move using this greater flexibility to increase productivity in the regions. I hope you will see the effects. I think in some industries which are experiencing problems, in the textile industry as well as other manufacturing industries, they can do so much; but in terms of the long term development of the entrepreneurial economy I think they can play a very important part in years to come.
(Mr Brown) Perhaps we should do a technical note for you on why there is a range. Under the previous government there was not this range, but was just one figure that was given. The range is because of what we anticipate are potential effects of supply side changes in the economy, productivity, growth. These are not cyclical factors, these are structural factors that will depend on what really is the trend rate of growth of the economy and, therefore, there is a level of uncertainty about that. Therefore, I saw no reason to vary the forecast in the way you suggest in having a wider range. We are dealing with the long-term factors of the economy as they impinge on annual growth rate.
(Mr O'Donnell) We made this clear in the November 1997 Pre-Budget Report and the November 1998 Pre-Budget Report when we introduced the ranges to say that they were opportunity ranges. To quote from that PBR we say, "The ranges are not an indication of the degree or forecast uncertainty".
(Mr Brown) I do not think it is bizarre. Anybody looking at both what we are saying about the British economy and what others are saying about the British economy accept that it had been an effect from what has been happening around the world but, equally, they believe that the monetary action we are taking is going to have the effect that that will raise growth in future years.
(Mr Brown) I am not saying it is wholly the responsibility of the MPC.
(Mr Brown) I said the monetary action will have an effect and I do not think anybody disagrees with that.
(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.
(Mr Balls) Our inflation forecast is set out on page 160 and shows that inflation is forecast to be 21/4 per cent by the end of 2001, 21/4 per cent by the end of 2002 and then rise back over that year to 21/2 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 we are saying that it will be better to have the inflation target below 1/2 per cent, you have to have a forecast which has a period above trend. You probably are not saying that. Probably this is the forecast for the output gap which meets inflation targets.
(Mr Brown) No.
(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.
(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 21/4 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.
(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!
(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 Brown) I am afraid I do not have it.
(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.
(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 questions, 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 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.
(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.
(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.
(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.
(Mr Brown) You cannot say what the position is going to be in 2006-07.
(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.
(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.
(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 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.
(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.
(Mr Brown) Maybe I should just sum up what was said in the manifesto!
(Mr Brown) You can read the manifesto like me. We have said we will not raise the basic rate of tax, and not extend VAT to children's clothes, to food and to other items like transport costs, and that is a matter of record and certainly said that in 1997 as well.
(Mr Brown) Books and newspapers. For gentlemen and ladies of the press here I can repeat that. What I also said in the manifesto is that we would make no other promises about taxation because these are matters for Budgets. I made that clear during the General Election campaign at successive press conferences; and I made it clear under questioning in a large number of debates. We are not going to make promises on every item of taxation, whether it tax allowances or tax relief - these are matters for the Budget.
(Mr Brown) I do not think it is a surprise, Mr Ruffley. I have been saying this for the last year.
(Mr Brown) We said all these things in 1997 as well.
(Mr Brown) We thought that was the right thing to do.
(Mr Brown) In relation to income tax we said in our manifesto that it was right to do this because we wanted to reward work in the ways that we are doing; and we sent a signal through the tax rate both at the top rate and the basic rate.
(Mr Brown) I think the history of VAT in this country is a very interesting one, and those who try to extend VAT to fuel, which we opposed at the time, I think recognised that where particular low income households had high costs in the Budget associated with food, transport, with newspapers and fuel, that it was a very difficult way of raising tax, when you were going to penalise middle and lower income households. That is why I think most people around the country thought that the proposal of the last Government to extend VAT to fuel was a mistaken one.
(Mr Brown) I do not have the figures here.
(Mr Brown) I do not have the figures here, but we will send you a note.
(Mr Brown) I make it absolutely clear that we have ruled out the tax issues that I have raised; but we leave it open to ourselves in the Budget - and any sensible Chancellor would leave himself in that position.
(Mr Brown) For very good reasons which I have given you.
(Mr Brown) No, it was not responsible for the -------
(Mr Brown) Because in 1992 the then Conservative Government made a promise that they would not raise any taxes and they would not change any rates, and that was a mistake, because Chancellors and people responsible for the nation's finances must have the discretion to make decisions that are right for the interests of the country at a particular point in time. We sent a signal about the importance we attach to work; about what we said about the basic rate of income tax and the higher rate of income tax; we were concerned about the effect of VAT on lower and middle income families for basic consumer goods and we sent a signal in relation to VAT; but it is not responsible to go through 250 tax allowances ------
(Mr Brown) The reason is the reason I have given you. As far as work is concerned and the reward of work, which is an essential part of the Government's strategy in encouraging and reinvigorating the work ethic, we sent a signal about the basic and top rate of tax in terms of VAT on food and other items. We were concerned, as you ought to be yourself after the effect that people saw by raising VAT on fuel on lower and middle income families, and in some cases on pensioners on fixed incomes; therefore, we sent a signal in that area but it is not responsible, and no Chancellor sitting here should ever get himself into the position that the last Conservative Government in 1992 got themselves into when they made promises on 250 different separate items related to income tax or other taxes. That is not a responsible thing to do if you have got to manage the nation's finances from year to year.
(Mr Brown) I do not know, because that is a point you have raised with me and I said I would write to you about it.
(Mr Brown) Because, as I have said before, we have sent a signal about the importance we attach to work.
(Mr Brown) I am not going to make the mistakes. I think the last Chancellor but one to me, Lord Lamont, in his memoirs said it was totally irresponsible of the Conservative Government, facing the 1992 Election, to rule out tax increases in every area. He said he told John Mayor, the Prime Minister at the time, it was a terrible mistake for him to make. I think you were around for some of these discussions during the period after that and you know the Conservative Government then had to break a series of promises it made in 1992. It is not responsible for a Chancellor any finance minister to go through 250 tax items and make promises on each and every one of them, as happened in 1992. I am not going to get into that position, nor would you want, on a bipartisan basis, Chancellors to be tied in that way. It was a mistake.
(Mr Brown) Mr Ruffley, I do not think people will be puzzled at all, because we said it in our manifesto; we actually said it in our 1997 manifesto. If people have been puzzled then they must have been puzzled for almost five years. We have made these promises consistently in 1997 and 2001. We have made them to send out a signal about the importance we attach in the areas I have mentioned; but no Chancellor is going to get himself in the position of going through 250 or more tax allowances. I think if you reflected on it, it would be a mistake for your Party to return to the mistake and error that was made in 1992 ever again.
(Mr Brown) Mr Ruffley asked me two questions and then read out what he appears to have had from the Treasury's Ready Reckoner, and I will write and give him a copy again.
(Mr Brown) Are you referring to the year 2001-02?
(Mr Brown) Which Table are you referring to?
(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.
(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.
(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.
(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 before the end of March.
(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.
(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.
(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.
(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 Brown) Not only are we enthusiastic about it, but we are achieving it.
(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.
(Mr Brown) I do not know him.
(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 ----
(Mr Brown) Exactly. We are meeting this target.
(Mr Brown) I have not seen that.
(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.
(Mr Brown) It is not a pamphlet yet?
(Mr Brown) Mr Mandelson spoke from the back benches on the day of the Pre-Budget report and actually supported what I had said.
(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 ----
(Mr Brown) He then has to pay a top-up charge, and then has to take out private insurance in a lot of cases to pay for that top-up charge. So the social insurance system that operates in France is a mixture of large premiums for employees and employers based on the social insurance model, plus top-up charges (effectively, that is what happens), plus a large measure of private insurance. I think what happens is that when you look at the individual characteristics of each country you find that in France's case it is administratively expensive, it is not fully equitable because there are large numbers of people who cannot afford to pay their hospital or health bills and who are not covered by this social insurance system and there has to be another form of arrangement devised for them. Equally, France is moving towards a revenue-based system where more money is actually taken through the tax system than through the social insurance system now than previously. So if you are looking at the French model there are certain drawbacks that have to be borne in mind, including large individual expenses that have to be met by people every time they go to the doctor or the hospital.
Are you sure you do not want to keep an open mind on these matters?
(Mr Brown) To take your second point first, it is not clear that the social insurance system does necessarily mean a far greater degree of choice. It is not clear and I think that has to be investigated. Every system of health care, including the system in the United States of America, is a third-party payment system; it is where someone else, in the end, pays most of the health charges for the people. Equally, you raise the first point about, essentially, hypothecation. This is a debate, obviously, that will go on in the country, but the idea that we should tie the future of our National Health Service - which has to have sustainable, long-term funding guaranteed year-to-year - to some twist in the economic cycle, or to the fate of one particular tax depending on behaviour changes or changes in the performance of the economy, seems to me not to be the way that most people would want us to proceed.
(Mr Brown) Because if the revenues from one tax fall this year why should the Health Service have to lose money this year? If you want a pure hypothecation model, then the Health Service has to be dependent on something that is also, itself, dependent on the economic cycle. I do not think that that is really what you intend by putting forward your hypothecation model. We have, for example, said that where we raise cigarette taxes we will put the money into the Health Service; we have also said that where we raise fuel taxes in real terms (that is, excise duty on petrol) we will put the money into transport, but that is a long way from saying that the fate of a whole public service should be dependent on the twists and turns of the economic cycle. I do not believe that that is what you would like to see, and I do not think that is what you would want to put forward.
(Mr Brown) If you take France, the reason that France has got more stability in its health care funding is because they have moved more towards tax revenue guaranteeing the extra funding that the health care system needs, and they have not allowed themselves to be wholly dependent on a social insurance model. They have, as a result of the difficulties the health care system faced, moved towards a more revenue based system. As you know perfectly well, six per cent of American national income goes from the public sector into the private health care system. They have had to provide a huge measure of national government funding from general taxation revenues to support what is, essentially, a private health care system in America. Even then, 34 million people in America do not have private health care insurance.
(Mr Brown) Your point about health care outcomes is something that is going to be dealt with in a whole series of different reforms, and the modernisation of the Health Service is very important. Behavioural changes are going to be very important as well in the way people approach preventative health. As far as investment in the Health Service in future years is concerned, I think we all agree - and I am sure there is the makings of an all-party consensus round the table - that over 50 years we have under-invested in the capacity of our national health care system. We have under-invested in the buildings, in the technology and in the staffing, and these are things that I believe we have got to improve over the next few years by putting the Health Service on a stable long-term footing. I do not think pure hypothecation does that, I donot think the other proposals do that, but of course the debate on this is going to continue over the next few months, and if people have very specific proposals that would modernise the Health Service system of funding they should put them forward now.
(Mr Brown) I have not seen detailed proposals.
(Mr Brown) Everybody can put forward their proposals, including yourself. No doubt the Liberal Party will want to put its own proposal. I have not seen detailed funding proposals put forward either by any other organisation or any other party that has stood the test of creating a sustainable, long-term improvement in investment in the capacity of the Health Service.
(Mr Brown) I have said that over the next few years we are moving the health care proportion up to 7.7 per cent by 2003/4 and we will make all our decisions about future years in the spending round. That is what I have said.
(Mr Brown) All these decisions are going to be made in the spending round, but as the Prime Minister has said it is our policy to get up to that 7.9-8.0 per cent figure that has been named over the last two years.
(Mr Brown) These are decisions that we will make in the spending round about the absolute amount of money we are going to put into health care. I am sure you will not be disappointed.
(Mr Brown) What Wanless has said is that he wants to continue to look at this question of non-clinical services, but I may say - so that nobody is in any doubt about this - that on clinical services and charges, which is the main issue about charging for health care, he says "On equity grounds I do not think it right that some individuals should be able to access clinically necessary services through the NHS by paying for them when others whose need is at least as great could not simply because they could not afford to pay." Then he says "Flat rate, out-of-pocket payments are unrelated to income and therefore regressive. They relate access to health care much more directly to ability to pay than either general taxation or social insurance. There is evidence that charges discourage people from seeking treatment at all." So I think it is important to get the balance right in this; he does not favour clinical charges.
(Mr Brown) Some charges exist at the moment, and nobody has proposed in the course of our Government that we change that. You must remember that when Mr Wanless looks at these things he is looking at things like car parking or computers in hospitals and things like that. This is not clinical charges and I think we should be clear that Wanless went on to say "There is evidence that out-of-pocket payments increase inequalities in access to health care. One in four people in France declared they had been put off seeking care for financial reasons, with women, older people and the unemployed forming a large proportion of those not seeking care. This is clearly inequitable." So he has ruled out medical charges.
(Mr Brown) Hold on. What Wanless has said is that this is an issue he is looking at, he has not given us his final report yet. The examples he has given are computers in hospitals and car parking. I hardly think that these are controversial. Of course, when we did put forward these proposals about what we were doing in the ten-year health plan there was no objection. I think you have got to be very clear what you are saying here, Mr Fallon, and he has ruled out clinical charges.
(Mr Brown) That is not our proposal and I believe that Wanless is unlikely to recommend that, but we will look at his report.
(Mr Brown) I will return to the words that the Prime Minister used in the House of Commons two weeks ago. "It is our policy to reach that".
(Mr Brown) I am interpreting his words as our policy.
(Mr Brown) It is our policy. I will use his words, and these are the words that he used, and I will repeat them.
(Mr Brown) It is our policy.
(Mr Brown) All the decisions on these figures will be published in the Public Spending Review. I do not think you would expect me to anticipate ----
(Mr Brown) I do not think you would.
(Mr Brown) Under the last government we had yearly plans for public expenditure. We publish our figures for three years ahead; we will publish our next set of figures when we publish our Public Spending Review. That is, surely, the right way to go about it and that is what we will do.
(Mr Brown) No, because the figures ----
(Mr Brown) The figures will be published at the appropriate time in the Public Spending Review. When we publish the Public Spending Review, as I said to Mr Fallon, I do not think you will be disappointed. That is if you, at the same time, as a Conservative Party, want to see public spending on health rise to that level.
(Mr Brown) The individual cash figures will be published in the Public Spending Review. They depend on the level of inflation, they depend on everything else, and they will be published in the Public Spending Review. As I have said to you, I do not think you will be disappointed. That is if you share our view that public spending as a proportion of GDP on health should be rising and Health Service spending generally as a proportion of GDP should be rising - which I did not think was the Conservative Party policy.
(Mr Brown) I think it is worthwhile establishing, in a Committee like this, whether there is common ground as to raising the amount of spending on the National Health Service. I have not heard a Conservative front bench spokesman say that they support the £1 billion that we have put into the Health Service over the next year. There has been no support from the Conservative Party for that at all. The issue will soon be between those who want to spend more on the Health Service and those who do not want to spend at all. I hope you are on the side of those who want to spend more.
Chairman: I think we can keep party politics out of this.
(Mr Brown) We are going to get the report of the Wanless group, and that will come soon. We will have to review what the position is as a result of that and we will make our decisions in budgets and in spending rounds. This is not the appropriate time to make these decisions. We have still got to receive the Wanless Report.
(Mr Brown) I am not going to speculate about that at all. We have not ruled out the need for tax rises. Of course, you would not make decisions without receiving, for example, the Wanless Report and then looking at what the needs are for future years, and then making a judgment on it.
(Mr Brown) I think, on what are relatively small decisions, but important decisions, on tobacco revenue and petrol, that was the right thing to do. As far as pure hypothecation is concerned, I have already said what I think are the difficulties of that. I do not think your party, either, has supported pure hypothecation.
(Mr Brown) What I am actually saying is that in the two specific instances where we have looked at it and made a decision, we think it was the right thing to do. Pure hypothecation, which is to hypothecate the whole of one tax or the whole of a set of taxes to one particular service and make that service dependent on the ups and downs of the economic cycle, or on some tax that could change as a result of behavioural changes, would be a mistake. When we have done the changes in, for example, tobacco, in one sense we want people to spend less on cigarettes, because we are discouraging the use of cigarettes, so we are trying to achieve behavioural changes as well.
(Mr Brown) I think there is nobody that I have talked to who supports pure hypothecation.
(Mr Brown) I think you will have to ask him yourself. I have said there is a debate about how you link the taxes people pay to the services they receive, and that is a rather different debate from pure hypothecation. That is showing people who are members of the general public that the taxes that they pay are actually usefully deployed to make for better services that the general public can enjoy. That is a debate that I think he and others, including me, are very happy to enter into.
(Mr Brown) We do not support pure hypothecation ----
(Mr Brown) I think you have got to be pretty rigorous in this debate, Mr Ruffley, and every previous government - and you worked in the Treasury yourself - has rejected pure hypothecation for precisely the reasons that I am making. The National Health Service needs sustainable, long-term funding, that is there irrespective of what is happening year to year to one particular tax or, indeed, to the growth rate of the economy; you cannot therefore support pure hypothecation.
(Mr Brown) I do not understand that point, Mr Tyrie, because we shall be publishing all our figures.
(Mr Brown) I am sorry, I have said we will announce the spending figures for future years in the spending round which finishes next year. We have moved towards three-year budgeting and we publish our figures three years ahead, and we will do so again next year. I do not think you would think much of a Chancellor who came along to a Committee and just said "I can now give you the cash figure for one part of one service for one part of the next three-year cycle". We will publish all the figures at the appropriate time and meet the policy objectives that we have set down.
(Mr Brown) You have the spending figures published for 2003-04. That is more than any previous government has done. Every previous government published annual figures, we are publishing three-year figures that we have tied ourselves to, and that we are actually meeting. As I say to you on health, so that people are in no misunderstanding about this, we have raised the share of national income taken by health from 6.9 to 7.2 to 7.4 to 7.6 and it will then go to 7.7 per cent, and we are on course to meeting the policy objectives that have been set down.
(Mr Brown) It was an annual round, as you know.
(Mr Brown) We have made a whole series of commitments on outputs and these are what we are trying to achieve. I think I prefaced all my remarks about health by saying that what people are interested in at the end of the day is the outputs achieved: the reduction in waiting times and the improvement in success rates in individual diseases, and we are committed to that. I do not think there is any doubt about the matter, that the ten-year health plan was about outputs and about what we are to achieve over the next ten years.
(Mr Brown) I think it was absolutely right to draw attention to the fact that we have fallen behind in health and we have got a lot more to do. The Wanless Report has now borne that out. To be fair to every political party, he said that the lack of investment has been over 50 years. I think there is a public recognition that we have got to put the Health Service on a sustainable footing for the longer term. So, yes, it was right to draw attention to the fact that there has been under-investment and right to draw attention to the fact that we have fallen behind, and it is now right to concentrate both on what resources are needed for long-term, sustainable funding and what these resources can achieve, which is what the modernisation and reform which is essential to the ten-year plan is all about.
(Mr Brown) I think the Health Secretary has announced the destination of the money when he made his statement last week. A great deal of it is going direct to the health authorities. You may remember in the last Budget we allocated the money directly to health trusts, to hospitals, therefore to improve services, and that is exactly what he is trying to achieve. When the new arrangements are in place 75 per cent of money is going to be spent by the primary care trusts in buying and purchases services from hospitals.
(Mr Brown) I think you will find that most of the money is going to improve services.
(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.
(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 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.
(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 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.
(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 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.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(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 Brown) No, but I will get someone to look it up. I think I can understand the point you are getting at.
(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. 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.
(Mr Brown) I think these are the figures that have just been read out, which we will send to you, to make clear what the distinction is between what is the major loss of revenues that is purely estimated as a result of the fall in equity prices. We do not know exactly what is going to happen to equity prices next year, but our audited assumptions are to take a cautious estimate of what is likely to happen, and obviously the change that has been made in the Budget we can provide the figures for.
(Mr Brown) It is true to say that any other proposal for capital gains tax, such as the one Mr Troup puts forward himself of halving the rate of capital gains tax, would have the same effects and he would have to deal with that in his own argument. We have made the best assessment possible of what is likely to both happen to income tax revenues and to capital gains tax revenues and we have already taken a number of anti-avoidance measures but we will take any necessary further anti-avoidance measures so that the revenue is not reduced.
(Mr Brown) We have made a whole series of assumptions about income tax revenue, that will be part of our thinking. I say to you that anti-avoidance provisions are already in place and if they were necessary we would take further anti-avoidance provisions. We do not anticipate losing revenue in that way through people misusing the reform that we have brought about.
(Mr Brown) We are assuming a whole series of things in relation to income tax and what is the revenue from the higher rate. That would have been taken into account in our calculations. I am saying to you we do not anticipate that happening, and if we did anticipate it would be happening I would be announcing to you further anti-avoidance measures today.
(Mr Brown) We do not believe that it will have a significant effect, no.
(Mr Brown) No, and if it were the case we would take further anti-avoidance provisions. I would just say to you that since we came into Government we have taken a whole series of anti-avoidance measures. One of the first sets of measures we had to take was in relation to training tax incentives where we had to eliminate what had become the practice of rather wealthy people getting their golf lessons subsidised through a training tax incentive.
(Mr Brown) No, we eliminated that. There was also a subsidy in tax relief that was going to night clubs and people were able to develop night clubs around the country on the basis of a business expansion scheme subsidy which we eliminated when we came into power as well.
(Mr Brown) If we did not know that there was a danger of this and it happened then we would take action anyway. Now that you have emphasised the point we will be even more vigilant. I do say that we have already taken this into account and have already got in place a large number of anti-avoidance provisions in relation to capital gains tax. If there are more needed to be taken, and no doubt you and others will draw our attention to it, including Mr Troup I hope, then we will be in a position to take the action necessary and would certainly take the action that was necessary.
(Mr Brown) I may say there were also subsidies for flying lessons, for diving lessons and for swimming lessons and we had to eliminate these as well.
(Mr Brown) Basically the research and development share of national income in America and Japan is about three per cent; in Britain and Europe as a whole it is less than two per cent. There is a big gap in the amount of national income devoted to research, development, innovation and new technology in Britain and in the rest of Europe compared with Japan and America. We are trying to look at ways of bridging that gap. We are looking at how the European system of treating research can be changed because to see this as a state aid that is unacceptable when you are actually trying to help innovation seems to us a backward and less than modern way of looking at it. In Britain itself our Small Business Research and Development Tax Credit effectively funds one pound in every three of research and development done by small companies, and that I believe is going to be successful and is already showing signs of success. As far as large companies are concerned, obviously we have got to avoid a situation where we are simply subsidising what would be done anyway and it has got to be shown to be the case that we will make a difference to the amount of research and development spending. We clearly want more to be done in the United Kingdom, we clearly also want existing UK companies, including the medium sized as well as the large companies, to do more research and development themselves, so we are looking both for behavioural changes in terms of the way British companies do their own research and we hope to encourage more research to be done in the UK. That is why we want to invest more in our universities as well.
(Mr Brown) The good textile companies are moving upmarket and they are developing niche, custom and fashion products in a way where they benefit not from low labour costs but from innovation and design and great British successes in terms of fashion. That is what we want to encourage obviously. If the textile industry has its own proposals about how we could work with them to increase the amount of expenditure on research and development we would obviously look at them.
Chairman: Kali, could you take on Pensioner Credits?
(Mr Brown) Clearly as far as pensions and the Minimum Income Guarantee is concerned, there has been an increase in take-up and we are making it easier for pensioners to get the benefits that they are entitled to. For example, a pensioner can now claim by telephone, the form has been made far less onerous and we are making changes in the way we treat capital so that it is a lot easier for pensioners to get the benefits they are entitled to, but clearly there is more to do. The Pension Credit is going to be introduced as a means of rewarding people who have savings and obviously we will do our best to get across to people the benefits of the take-up of that.
(Mr Brown) It obviously may be because people have made provision in other areas. Equally, we have managed to cut the costs of administration in purchasing pensions. We have still got to encourage companies that they want to take this up. It is partly getting information to employers, it is partly getting more information to employees and it is partly showing people that this is a cost-effective way of saving for retirement. I think these are questions that Alistair Darling, who is the Secretary of State for Pensions, is directing himself to so that we can have the higher take-up that we want to see.
(Mr Brown) I think I should be more worried than you. The Individual Savings Account, which we introduced some years ago, has had a huge take-up. It has been a cost-effective way of people saving for themselves and possibly also in time for their retirement. The incentives for taking up that Individual Savings Account are greater than they were before. We have also given a guarantee that we will not cut the limit during the course of the Parliament. We have put in a number of measures that are designed to help the take-up of Individual Savings Account. As far as the stakeholder pension, perhaps I should write you a note on this but the ABI, the Association of British Insurers, now estimate that around three-quarters of eligible employers had designated a stakeholder pension by the end of October. It is moving upwards. I will send you a note on precisely that point.
(Mr Brown) That is essentially a spending decision. Most of the other decisions, if you look down the column, are taxation decisions.
(Mr Brown) But if you ask me what is the distinction between measures announced in the Pre-Budget Report, the measures ----
(Mr Brown) That is a DEL decision. In other words, it is a Departmental Expenditure Limit that has been changed in the Pre-Budget Report by adding a billion pounds. Everything above that is included as additionally managed expenditure or for taxation, which is different.
(Mr Brown) Mr Tyrie, the money is not going missing, it is actually going to the health service.
(Mr Brown) As I said earlier, our consultation on the Child Tax Credit lasted until October. We had 170 representations, we are examining them in detail and, as I say in paragraph ----
(Mr Brown) 2.43, that is right, "Consistent with the requirements of the Code for Fiscal Stability, the forecast does not take account of:..." and it includes the proposals including the Child Tax Credit, "Decisions on these and other issues will be taken in Budget 2002..."
(Mr Brown) The consultation has just completed. We have not been in a position to make final decisions and, therefore, final estimates. The right time to do so as a result of the completion of consultation, the absorption of all the detail of it is not in a rush a few days after the consultation completes but, as I have said in this document, in the Budget. I would think you would approve of that.
(Mr Brown) Because the consultation has just completed. We have got to absorb what has been said and then we have got to make our decisions. It is not as if it is not explained in the Pre-Budget Report. We have explained that is what we are going to do, make our decisions in the Budget.
(Mr Brown) I do not accept that. We have had a period of consultation, the consultation has meant regional visits around the country with ministers listening to what people have got to say. We have had written representations from everybody, including the Institute of Directors and the child lobby groups that are very active in this field. I have met some of the groups who are involved in this and we have said we will look at the representations and then make our decisions. It seems by far the best way of moving forward. I think you would be the first to complain if the consultation had ended a few days ago and had we announced the decision without looking at all the detail that has come in the consultation period.
(Mr Brown) I do not think so, no.
(Mr Brown) That is a matter for discussion when we put the figures forward in the Budget. You have got to complete your consultation, and then absorb it and then make your decisions and that surely is the right way of going about things.
(Mr Brown) Exactly.
(Mr Brown) Quite the opposite. We say that where you cannot publish the figures because your consultation is not yet complete or whatever -
(Mr Brown) You note in the pre-Budget if there are risks, and we have noted this in the paragraph that we have just been talking about.
(Mr Brown) It might be better if you had read the whole thing out. "... where the fiscal impact of these decisions and circumstances cannot be quantified with reasonable accuracy by the day the projections are finalised, these in fact should be noted as specific fiscal risk" which is what I have told you we have done in the paragraph that we are talking about. I think this is based on a misunderstanding. You are assuming that the measures that we are talking about are going to be introduced in April 2002, they are not going to be introduced until April 2003, they are months away from their introduction. Therefore, to make the decision in the Budget seems to me entirely reasonable particularly since the consultation only finished a few days ago.
(Mr Brown) That, of course, is a matter for the Monetary Policy Committee because, as you know, they are independent.
(Mr Brown) I am going to ask Mr Balls to say something about this. It is, of course, an issue on which we are asking for further consultation but can I just point out to the Committee, so that there is no discourtesy to the Committee, the IMF mission only left the country last night. We were only given the report yesterday evening and, therefore, we published it at the first available opportunity. I could not have given it to the Committee any earlier than I did. We published it within the spirit of openness and transparency as quickly as it was available and I hope the Committee will understand that.
(Mr Balls) Just to say, Chairman, we published a first document on savings and the Savings Gateway a year ago. We published a more detailed consultation document around the time of the Budget. What we have now done is produce a further and more detailed set of questions for consultation on the Child Trust Fund because obviously, given it is something you can only introduce once and then it needs to be in operation for a number of years, is important, the design has to be absolutely right. As for the Savings Gateway, there are a number of difficult issues which need to be sorted out to make sure it works properly and we do not have any difficulties. That is why we have decided to have a range of pilots which will come in next year in a limited way which we can examine in detail before they are moving to a wider scheme. It is because we value the importance of consultation that we have taken this careful and staged approach.
(Mr Balls) That is exactly the kind of issue which we are looking at in the second round of consultation on the Child Trust Fund.
(Mr Brown) It is an attempt to get greater economic activity in areas which have traditionally had far less activity in the housing market and the business sales market related to property. We will have to see the effects of it over a period of time. I think it will make a difference, it will encourage people to develop in these areas, but we will have to review the evidence after a period of time.
(Mr Brown) I think it will be quite a high proportion but we will send you a note on that.
(Mr Brown) Obviously you are dealing with a large number of small areas which are eligible for this but I do want to emphasise that first of all this is a measure not just related to houses, it is related to commercial properties. We are going to produce further measures on this in the Budget because they will have to be legislated in the Finance Bill. The measures in relation to Stamp Duty are only one of a number of measures to try and resurrect activity in some of those areas which have had high unemployment and too little activity for too long. It is based on the principle that it is economic activity that holds the key to the future of these areas. We have, for example, reduced VAT on conversions in some of these areas from business premises to flats and everything else. We have also got higher allowances for cleaning up areas that have been derelict and we are trying to work through the local agencies which are trying to regenerate these areas. The Community Investment Tax Credit is another part of this where we are helping with a tax credit to encourage new enterprise in these areas. There is going to be a New Community Venture Capital Fund which I think will be coming at about £40 million which charities as well as business companies and Government are contributing to, so it is part of a package of measures designed to regenerate some of the areas in our country which for too long have been neglected.
(Mr Brown) I think there is a balance to be struck, obviously, between the simplicity of doing large areas and the need for targeting because in some cities such as London, they are side by side with very deprived areas and very prosperous areas so we have to get the balance right. We have tried to do that in the way that we have formulated the Stamp Duty exemption but obviously we will review this over a period of time.
(Mr Brown) The consultation is continuing on that, we have not made final decisions.
(Mr Brown) This is an issue we will have to take account of when we are making our final decisions but perhaps Mr Holgate will want to add to his answer.
(Mr Holgate) Yes. There are several features of the scheme which, I think, will mitigate the risk. I would not pretend, given how unscrupulous loan sharks are, that anything will avoid them entirely. The first point is that people will only be expected to save small monthly amounts of up to £25 so there will be quite a lot of shoe leather costs in undermining that. Secondly, there is a lock in of the matching funds to maturity of the fund, which means there will be at least 40 months before the saver realises any gains, so again there is quite a lot of working capital that will be tied up. There is also, of course, going to be education and information to be provided through the Savings Gateway which will reinforce the point that savings should be a regular and sustainable habit. This learns from evidence from the US IDA programmes which show the effectiveness of financial education. Then we are also planning to build in flexibility to the Savings Gateway so that savers can take payment holidays without the loss of potential matching which will reduce, again, the incentives for them to have to borrow in order to maintain a regular flow of payments into the Gateway. Finally, as I did say last week, obviously this is something that we will be hoping to learn more about from the pilots. I think you can see there are a number of attributes there which make it more difficult to undermine than it might otherwise have been.
(Mr Brown) The evidence that I think is useful in this, as Mr Holgate said, is from the United States where there has been the testing of these matched savings schemes in pilots for Individual Development Accounts. They have helped lower income individuals save. I think the latest findings show if you can combine the financial incentives that we are talking about with education about the merits and the benefits of savings with institutional support through the creation of savings accounts that are targeted at lower income groups then you can overcome the obstacles to saving that are clearly a problem and something that we as a Government ought to be doing some more about. That is why the evidence from the United States and the common sense approach says if you can combine the incentives with other measures that encourage savings then you might be able to make a difference, and we believe we can.
(Mr Brown) Yes. They will be addressed properly and sent.
(Mr Brown) We will listen to all the consultation during this period. You must remember that Mr Wanless is going to do regional visits around the country and, therefore, he will be hearing people at first hand, whether it is professionals in the health service or members of the general public who are patients.
(Mr Brown) You must remember what this consultation is about. It is about how we build the best health care system for the future, how we can put the National Health Service on a sustainable financial footing. I have said that my view, having looked at the evidence, is the same as that of Mr Wanless on these issues, that social insurance carries bigger administrative costs, raises issues about equity and in any case in the systems in which it is applied has other features that are not attractive to the United Kingdom, like the charging that takes place in the French medical system. But the wider debate is also about how you match reform to resources. So, yes, we will listen to people. Yes, if people have views about how we can reform, modernise, the health service as well as improve the financial footing of the health service we will listen, and that is what the debate will also be about. Obviously we have produced evidence on the social insurance system that makes us feel as a social insurance system, which is essentially an employers' insurance system in France, it is not necessarily the best way forward for us, but we will listen to what people say.
(Mr Brown) Representations from the readers of every newspaper, or any newspaper. I look forward to seeing the reasoned and detailed representation that comes from the Liberal Party about what policy you wish to pursue. By the way, the representations are being invited by 22 January and they can be by e-mail as well.
Mr Laws: There is still time.
(Mr Brown) We have advanced money through the DTLR to the Railtrack administrator. The administrator thinks that a considerable amount of additional money may be needed by the end of March. It equates to the amount that Railtrack was aiming to borrow over this period but was unable to do so. There is, however, no impact on public sector net borrowing from the short term loans to the administrator because they are loans and they score in DTLR's capital departmental expenditure limit, as do repayments which will effectively cancel them out.
(Mr Brown) Transport, of course, has a very large budget, not just for this year but over a period of many years. It is very much part of the ten year transport plan. Within that decisions will be made by the Secretary of State for Transport.
(Mr Brown) I think we have to put this in its context and this perhaps answers the detailed point. The administrator will repay the loans by borrowing himself and that is what is going to happen.
(Mr Brown) In our ten year transport plan, we did set aside provisionally amounts of money as the public support for the London Underground Modernisation. I think what we have to remember is this is the biggest single infrastructure investment that has taken place in London Underground. It is one of the biggest infrastructure programmes that we are seeing. It is the equivalent to six or seven times the Jubilee Line, which was itself a very large project. We have set aside large sums of money as a public subvention to this programme but obviously we want to achieve as the funder of this value for money and that is why the PPPs are being looked at.
(Mr Brown) I think the potential private participants were relatively happy with that arrangement. This is Government looking at things over more than a one year, three year, or even five year cycle, it is looking at it over a longer period of time. I think that we have shown ourselves willing to put large sums of public money. This is essentially a huge infrastructure project. There are a billion passengers on the London Underground. We are trying to raise the capacity of the underground - which is overused at the moment for the capacity it has - to 1.3 billion. It is essentially, therefore, a huge underground infrastructure and modernisation project. We do need to work with the private sector to achieve it and that is what we are doing.
(Mr Brown) Thank you. I will send these notes as quickly as possible with Christmas cards to the Members.
Chairman: Thank you.