Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 140 - 159)

TUESDAY 23 APRIL 2002

MR GUS O'DONNELL, MR NICHOLAS MACPHERSON, MR NICHOLAS HOLGATE, MR ALEX GIBBS AND MR JOHN KINGMAN

  140. If you had not revised up the trend related growth but still worked on the old figure, what impact would that have had on the projected deficits?
  (Mr O'Donnell) It adds a billion in revenues and it accumulates up, but we wanted to be very explicit about that so it is in the tables.

Mr Fallon

  141. Perhaps we could give you a little rest, Mr O'Donnell, and turn to tax policy and Mr Gibbs. What proportion of the rise in tax receipts since 1996-97 is due to policy measures?
  (Mr Gibbs) The rise in receipts from which year?

  142. The rise in tax receipts since 1996-97. What proportion is due to policy measures?
  (Mr Gibbs) I do not have a breakdown.

  143. You provided us with a breakdown before when we asked this question.
  (Mr Gibbs) I do not think so.

  144. I quote the then Director of Budget and Public Finances, Mr Colin Mowl, who said "about half might be due to policy changes". That was on the PBR 2000. Have you changed that estimate?
  (Mr Gibbs) I have not changed it. I am afraid I do not have it.
  (Mr O'Donnell) The reason it is very difficult to come up with these things is that they are by their nature very difficult estimates to come up with because they depend on all sorts of assumptions about behaviour and the like, so we have tended to say that these are not very reliable figures, and therefore we do not think we can make that breakdown with the degree of certainty with which we want to provide you with reasonable figures.

  145. So the 50 per cent was wrong, was it?
  (Mr O'Donnell) Well, it is subject to a very wide margin of error.

  146. What about the forecast change in the tax take? What proportion of that is due to policy measures?
  (Mr O'Donnell) There are various estimates of what individual tax measures will bring in, certainly, and they are all listed in the tables.
  (Mr Gibbs) Table A1, page 154-155, lists all the measures in the Budget, and it is possible, looking at the table, to see the revenue cost or the revenue yield of each of the individual measures.

  147. I understand but, looking at the total, C9, page 218, it shows current receipts going up from last year £383 billion to £520 billion. What proportion of that increase is due to policy changes rather than simple inflow from increased economic activity?
  (Mr Gibbs) I think to try to translate the first table into the second raises the same issues of uncertainty that Mr O'Donnell has just mentioned. I do not have that estimate.

  148. Mr Mowl was able to do it for us a year and a half ago.
  (Mr O'Donnell) Like I say, those figures are in our view not reliable because they are subject to excessive uncertainty. What I will say is that estimates of things like the change in trend growth we have made a stab at, and those figures are given to you, because that is quite important and we are more certain about that specific number.

Chairman

  149. Could you help us by providing us with a note on that?
  (Mr O'Donnell) Certainly.

Mr Fallon

  150. Who is the Director of Budget and Public Finances? None of you seems to be described as that. We asked this question a year and a half ago and it was answered by somebody called the "Director, Budget and Public Finances". Who is the current Director, Budget and Public Finances?
  (Mr O'Donnell) Colin Mowl is the Director, Budget and Public Finances.

  151. Why is he not here?
  (Mr O'Donnell) Because Mr Gibbs is perfectly capable of handling all the questions on tax policy.

  Mr Fallon: I see.

Chairman

  152. We had quite a discussion with expert witnesses on health spending. You will see I think John Appleby from the King's Fund was quoted in the papers today saying that perhaps 40 per cent of the increase could be taken up by pay and other measures. The Chancellor has announced plans to raise health spending by 7.4 per cent per annum for 2007 and 2008, but you have made tax projections to 2006 and 2007. Are the projections of the tax receipts currently understating the required level of taxation required to finance the spending plans?
  (Mr O'Donnell) No, I do not think so. Our numbers are there throughout. Given the spending plans and what we have done on tax as well, the deficits, the borrowing numbers, will be exactly as they are. I do not think there are any problems there. It all adds up; all the spending numbers are in there. We have gone out of our way to score all these numbers so they are in there, and our revenue projections are based on our projections for GDP. The only point I would emphasise there is that we are still using what we regard as a cautious growth estimate, and we build in caution on the receipt side by a number of the assumptions that are required under NAO auditing. I would point out, for example, that these are based on an oil price that is quite a lot lower than the current oil price, and we still assume that the effective VAT rate declines through time at around 0.05 per cent per annum. So we still believe we are erring on the side of caution in these numbers so the outturns may turn out to be somewhat better.

Mr Ruffley

  153. Mr Macpherson, the IFS in their Green Budget this year said that for the year 2000-01 they estimated Government underspend was in total about £6.2 billion, of which £0.5 billion, in their estimation, was a Department of Health underspend, about £0.9 billion was Department of Transport underspend, and £1.4 billion was Department of Education and Employment underspend. Are those figures accurate in your judgment?
  (Mr Macpherson) What I can tell you is that table C14 on page 227 sets out our current estimates of the outturn for 2000-01 and our estimate of the outturn for 2001-02. Focusing on 2001-02, in total there is an overspend on resource budget of £0.2 billion but that is off-set by an underspend on the capital budget of about £0.9 billion which gives an underspend in aggregate of £0.7 billion. Obviously within that you get all sorts of off-setting effects. The one thing which is absolutely clear is that since 1998 we have had a system of end-year flexibility which means that departments can carry forward any underspend to future years, and our thinking on that is that it results in a far more efficient system of spending. Taking work in the public sector, in February and March of each year traditionally everybody went out and bought computers, say, which often led to bad purchasing choices, so I think we can be reasonably relaxed about the underspend. Inevitably they build up but as departments can draw them down you reach a steady state where any underspends are off-set by overspends, and I think we are approaching that steady state.

  154. That is a helpful reply because there is a big debate about underspend, certainly in the press. I understand end-year flexibility and I understand your answer on the policy. You said you were reasonably relaxed about those numbers: is it the case, then, that you would not be unrelaxed if, in future years—next year, the year after and year after that—there were underspends in the health budget of that order of magnitude?
  (Mr Macpherson) We set plans which we think are necessary to deliver the sorts of targets in the NHS plan and beyond. I would not expect structural underspends to emerge over that period.

  155. Just to clarify, you are saying that you would not expect that order of underspend that has been identified earlier in this conversation, in health for instance, to occur in future years?
  (Mr Macpherson) I think it is worth identifying where the underspends tended to emerge. They tended to emerge in the capital part of the Budget which reflected really a very rapid increase in available provision for capital spending in the last few years. Inevitably, following years of really quite low public sector investment, there was not the capacity in place to get those projects going immediately and possibly we underestimated how long it would take to get that capacity in place. We are pretty confident now that the capacity is there. It is very striking in the year just gone that capital spending did start rising very rapidly, and I think I have the figures somewhere. Net investment in 2001-02 is £12 billion which compares to net investment the previous year of £5.7 billion, so there was a doubling of net investment. As I say, I think capacity is in place: those investment plans are now increasingly realistic; and I am pretty confident that the systems are now in place in departments to ensure that those capital plans are spent in a sensible way. The last thing we want as the Treasury is for people to feel they have to get that money out of the door and build buildings in the middle of nowhere which are of no use whatsoever, which I understand has happened in the past. In the future we are increasingly optimistic.

  156. Finally, because those are helpful responses, could you outline for us what steps the Treasury is now taking to make sure other departments do what you have said you think they will do in future years, just looking at the mechanics? What steps in policy and management terms is HM Treasury taking to make sure these underspends do not happen again in the same way?
  (Mr Macpherson) We are working very closely with departments to ensure that they have the right systems in place to forecast spending and to manage spending. We have put particular emphasis on investment, asking departments to produce departmental investment strategies which set out their plans over the next three years in relation to investment, what they are trying to achieve, what they are spending, and so on. We have also worked very closely with the Office of Government Commerce who in turn are working very closely alongside departments to ensure that capital projects are managed even better than they are at present, so that the taxpayer gets a decent product in return.

  157. Finally, are there any Treasury sanctions over and above what you have just described to make sure departments deliver and avoid underspend?
  (Mr Macpherson) There are big sanctions which the Treasury can use. We are just entering a spending round: that spending round will agree allocations not only across health but also across all other departments. In agreeing new spending plans we will have very close regard to both the performance of departments in terms of how they manage their money, how they project the funds they need and so on.

  158. Finally, an underspending department might be penalised in the spending allocations if they are persistent underspenders?
  (Mr Macpherson) It depends very much on the reason for their underspends.

  159. But it is conceivable they would be punished?
  (Mr Macpherson) It is conceivable. If, for example, you took the view that a department was structurally underspending, ie to deliver the outputs which we want it to deliver but it needs less money to do it, then that is a perfectly legitimate choice in a spending review to reallocate that sort of surplus provision to a department which needs it.


 
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