Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 285 - 299)

WEDNESDAY 24 APRIL 2002

RT HON GORDON BROWN, MR ED BALLS, MR GUS O'DONNELL, MR NICHOLAS HOLGATE, AND MR ALEX GIBBS


Chairman

  285. Chancellor, can I welcome you and your team to this question session this afternoon on the Budget. For the sake of the shorthand writers, although we have seen quite a number of them already, your officials were here yesterday, can we ask you to introduce them.
  (Mr Brown) Yes. With me is, on my left, Mr Gus O'Donnell, head of macro-economics, Mr Holgate, head of tax and benefits, Mr Ed Balls, the Chief Economic Adviser to the Treasury, and Mr Alex, who is in charge of taxation. Alex Gibbs, sorry.

  286. Thank you very much. We had a good session with Mr Gibbs and Mr Holgate yesterday. Welcome, again, to this session. There is a lot to discuss on this particular Budget. If one was looking at the press comments this weekend we would see comments such as tax and spend, that the horsemen of the Apocalypse are back and are riding across Suburbia with tax and spend, perhaps the business community has fallen out with Government, the money for the NHS will go down a black hole. There are an awful lot of issues that we wish to look at this afternoon. I know that you would like to make a quick contribution to the debate. Could I ask you to do that and then we will start with the questions.
  (Mr Brown) I will be very brief, Chairman. I think the Committee would like to know how we plan to proceed to move from the Budget to the conclusions of the Spending Review. The approach of matching money with modernisation leading to results that guided our approach to health funding in the Budget will also guide the precise allocations for departmental expenditure limits in the forthcoming Spending Review. First, we must set clear targets for results and national standards with proper accountability; working with hospitals, schools, police forces and local government to agree tough, output based targets and independently audit, inspect and report on performance so people can see that the money invested is producing results. Secondly, demanding national standards and accountability must go together with local devolution of delivery matched by the right incentives. The best way that a national standard can be met is by giving the people who provide the service the flexibility and the incentives to shape services around the needs of the local community. Our third principle is that devolving power and responsibility must be accompanied by increased rewards for staff who perform well and the removal of needless bureaucratic rules. But just as sustained economic growth demands responsibility in setting private sector pay, so a sustained commitment to better public services demands responsibility in setting public sector pay. Finally, we need to give people more choice in the way they receive their services and, where relevant, involve the voluntary and private sectors in delivery. So, as in health, before committing the Treasury to additional expenditure we need to know of all departments whether spending is a priority, whether there is a clear strategy for reform to deliver value for money, and the track record of increase resources leading to improved results. Working with managers, staff and consumers we will match money with modernisation and we will build strong public services on the foundation of economic stability.

  287. Thank you very much. At the time of the PBR statement in the House you stated that you remained cautiously optimistic about the prospects for the British economy. Is that still your position or are you now more certain given that the expected growth in 2003 is above trend and that in particular, in receiving evidence from our experts, has elicited some surprise?
  (Mr Brown) I think you will find that independent forecasters are moving towards our estimates for growth this year. We estimate 2 to 2Ö per cent. I see that the European Commission, who have criticised our spending plans unfortunately, have said that they expect growth in Britain this year to be at 2 per cent. Independent forecasters are moving towards us on this. I was at the meeting of G7 and the International Monetary Fund at the weekend and it is clear that America has been able to revise upwards its forecast, that G7 growth will be faster than people thought at the time of November, that while Japan is still in recession, and will continue to be in recession, both the European Union and America will grow over the course of this year. I see the forecasts we made in November being sustained by the evidence that has come since then. I also see our own forecasts of 2 to 2Ö per cent, and then next year 3 to 3Ö per cent, as being realistic for the economy.

  288. Some commentators have mentioned that the Budget has done little to constrain consumer spending and it will be left to the MPC to sort that out. Would directing more of the tax measures at consumers have a greater effect on slowing consumer spending and thereby helping balance the economy?
  (Mr Brown) It was clear that last year world trade grew by nothing, in fact there was no growth in world trade at all, compared with 13 per cent the year before. What was necessary to achieve growth in the British economy was, first of all, consumer spending and, secondly, the public investment that we had put into the economy. That is one of the main reasons why we managed 2.2 per cent growth last year. It is also clear that many people have been worried this year that the growth would slow and therefore people would be worried if we raised taxes this year, which we have not done, as you know. As for next year, we are confident that as world trade grows, as our exports start to come back in a way that reflects the growth in world trade, that the economy is capable of producing more balanced growth and that will mean higher levels of business investment will be taking place and that will also mean that manufacturing output which has started to grow will grow during the course of that period of time. Although there are uncertainties in the world economy, particularly the volatility that comes from the price of oil and the questions about the durability of the US economy, I believe that we will have more balanced growth over the course of the next year.

  289. Are you concerned by the contrasting fortunes of the manufacturing and service centres in terms of profitability and growth? Is the task of addressing such imbalances primarily for fiscal or monetary policy?
  (Mr Brown) The figures that I gave in my Budget statement show that manufacturing was badly hit in every part of the world last year. What effectively happened, and I think it is worth noting this, was a problem that developed in the American IT and electronics sector which showed itself in a rapid fall in the value of their companies, but particularly a rapid fall in production, spread right across Europe and Japan and Asia. Although there were falls in the British manufacturing sector as a result of that last year that were quite significant, there were even greater falls in output in America, in other parts of Europe, in Japan, in East Asia. What is happening this year is that manufacturing output is starting to recover. Last year, in fact, there was considerable productivity growth in manufacturing in a number of sectors, from chemicals to food and tobacco, outside the electronics sector and I am confident that the same productivity growth that we saw the year before last in manufacturing can be repeated as we move forward into higher growth in the world economy. It is true to say that the shock in the information technology sector caused, for example, semiconductor production in Britain to be cut by 45 per cent, computer production came down very significantly, mobile telephone production came down by more than 60 per cent and that was reflected in the fall in manufacturing. It was a phenomenon that was happening, in some cases more seriously, in other parts of the world.

  290. At yesterday's evidence session Mr O'Donnell said that the Treasury still sought a stable and competitive pound over the medium term and that sterling has been stable. Has sterling been competitive against the euro and the dollar? Do you think that the current level of sterling against the euro is sustainable in the long-term?
  (Mr Brown) As you know, we are dealing with two different events. Sterling has fallen against the dollar but the weakness of the euro is such that sterling has risen against the euro. We are really dealing with a set of events that has been dominated by the weakness of the euro over recent years. We do want a stable and competitive pound. We do believe that the weakness of the euro is a factor that will change over time but, of course, we have seen a number of events, particularly in the American economy, over the last year, including the tragedy of 11 September, the fall in the information technology sector, the changes in equity prices that started from the States, and that has not made much impact on the relationship between the dollar and the euro.

  Chairman: Fine. I will ask James Plaskitt to address a few questions to you on public sector finances.

Mr Plaskitt

  291. Thank you. Chancellor, in the last Parliament there were significant gains for public finances from lower levels of debt interest payment and from flatter Social Security spending. In this Parliament do you think those gains are likely to plateau? Is there less to be had from those areas than before?
  (Mr Brown) Clearly if you reduce the amounts of money you are spending on employment it gets more difficult to continue to reduce the money as unemployment falls considerably. Given that we have now lower unemployment than America, lower unemployment than Japan and, of course, lower unemployment than the rest of Europe taken together, then we have made considerable savings in cutting unemployment and the scope for further savings is there but it is not going to be as fast as it was for the first period of time. If I give you a figure, I think it is that the unemployment bill per se was about eight billion, it has been cut to nearly four billion, we believe that there are savings in the future and we announced a number of measures tightening up the Welfare to Work programme, including 20 pilot areas around the country where people will be offered a job but will be forced to take that job and we have offered a programme of mandatory work interviews for long-term unemployed in other areas. We are hopeful of getting more of the long-term unemployed back to work and that will bring considerable savings but, of course, the big savings came with the very considerable increase in employment by one and a half million in the last five years. As far as debt is concerned, we have cut debt from about £30 billion for debt interest a year to about £22 billion and we think that will go down to £21 billion, so there are savings of one billion or so during the course of this year. Again, we have reduced debt to the lowest level of the major economies, it is 31-32 per cent over the course of the next few years, and that is far lower than America, it is far lower than Japan, it is far lower than most of the other European countries. Therefore we have made considerable savings, about £7 billion a year, which has been money we have been able to invest in health and education. Clearly while you can maintain these savings in most cases, you do not have enormous scope for huge additional sums of money coming, although that would be desirable if it could be achieved.

  292. Is that one of the reasons, therefore, why if we look at the five year projection for the public sector net borrowing figures we find a total of £72 billion of projected borrowing over that period? Does that mean that there is a lot less leeway if the economy slows?
  (Mr Brown) No because we have been very cautious in our assumptions and we have maintained the cautiousness of our assumptions about the gains from employment, about VAT revenues that come from every additional piece of consumer spending, about revenues from sales, about direct savings from the measures to cut down on avoidance and to improve the recovery of revenues for the public sector. In all these areas we have maintained all the caution. There were some people, including one or two of the institutes, who said that having shown that caution worked in the last Parliament we did not need the same margins of caution in this Parliament. I have rejected that advice and we still have considerable margins of caution. The two rules that we have got to meet will be met comfortably. The first is a surplus on the current balance and these surpluses are in Table C1 at 3, 7, 9, 7, 9, so that is a considerable leeway that is allowed on the current balance. As far as debt as a proportion of GDP, which is our sustainable investment rule, what you can afford to borrow for necessary public investment, again the debt ratio is stable at 31 per cent. The rule that we set was that it should be below 40 per cent. We have made considerable savings on debt interest but we are able to keep the debt rate stable at 30/31 per cent. Both our rules are met. They are met on the cautious case and they are met having based our assessment on cautious assumptions. I think that when people look at the figures they will say that we have left a great deal of room for manoeuvre.

  293. One test for those figures is whether they comply with the Stability and Growth Pact of the Amsterdam Treaty. Are you satisfied that they do?
  (Mr Brown) The prudent interpretation of the Stability and Growth Pact that was not taken by the European Commission but was taken by the European Council— You may remember the debates that we got into in this Committee before about the extent to which the Stability and Growth Pact values, for example, the debt sustainability of our policies, values a recognition that there are changes during an economic cycle, and values also the importance of public investment. The prudent interpretation of the Stability and Growth Pact which was taken by the European Council I hope will continue to be taken by the European Commission in future. Although we have had debates with the European Commission which seem to continue today with the Annual Report of the Commission, I believe a prudent and sensible interpretation of the Stability and Growth Pact would find us working within it.

  294. ECOFIN have encouraged you to be "alive" to any deterioration in the public finances, how do you react to that?
  (Mr Brown) But ECOFIN also, if I read out what was said by ECOFIN, says—I should put it before the Committee, there is so much that it says—it acknowledges that we are well within our current balance, it acknowledges that we have dealt with the problem of debt, it acknowledges the structural reforms that we are taking, it talks about a low and falling debt to GDP ratio, we are in a good position to beat the consequences of ageing populations and welcomes that the public finances are sustainable on current policies. That was the view of the European Council. It was a view that overturned the view of the European Commission.

  295. Finally, can I ask you about the letter you have written to the Governor of the Bank of England in which you re-establish the symmetrical inflation target of 2.5 per cent which you described in your Budget speech as desirable because it was pro stability and pro growth. Can I take it from that that you will not wish to see an asymmetrical inflation target pegged at a lower rate?
  (Mr Brown) There are different definitions, of course, for the symmetrical inflation target. For example, members of the European Central Bank, sometimes some members say that they have a symmetrical inflation target themselves but our symmetrical inflation target is 2Ö per cent. When we came into power it was 2Ö per cent or less, we changed that to 2Ö per cent and I think the results of doing that are shown in the proactive and forward looking policy which was adopted by the Bank of England during the course of last year. There were seven interest rate cuts in Britain, I think there were nine in the United States of America, monetary policy was as aggressive, it was forward looking and, because it was operating to a symmetrical inflation target where 2Ö per cent, above 2Ö per cent and below 2Ö per cent are both regarded as unacceptable, then it was able to deal with the problems which arose from the downturn in the world economy. I think most people would now say that the symmetrical inflation target which is pro growth as well as pro stability in its effect is something which has been good for Britain. But there is an academic debate about what a symmetrical inflation target is and there is obviously a debate about the targeting of inflation right around the world.

Mr Tyrie

  296. Chancellor, there is definitely an undeniable deterioration in public finances. You are forecasting higher borrowing and that in spite of the fact that you have increased the growth forecast and then taken a slightly more cautious growth assumption which is what enables you to say that you are being cautious. I would like to ask you about this Government's contingent liabilities and your estimate of what you think might be in the bottom line but not in the accounts. Do you have a view on the scale of the Government's contingent liabilities?
  (Mr Brown) Can I deal with the first part of your question?

  297. That was not a question, Chancellor. You are welcome to comment on it if you want.
  (Mr Brown) Can I comment on it? There is a tightening of fiscal stance over the course of the next period of time, not a loosening. As far as the public finances generally are concerned, I think the rules we have set are being met and the debt to GDP ratio is as tight as it was in previous forecasts, around 31 to 32 per cent.

  298. I was referring to borrowing, Chancellor.
  (Mr Brown) Yes, but that is one way of looking at the economy. Another way of looking at the economy is whether we are meeting credibly our fiscal rules. The two fiscal rules we have set are whether we have a current balance, and indeed we have a surplus on all the years that are mentioned, and whether we are meeting our debt to GDP ratio and we are comfortably at 31 to 32 per cent. I think that fiscal policy, a lot is to do with whether you can meet the rules that you set. The problems that previous governments have got in to were having rules that they never met and then resetting the rules and losing credibility as a result of it.

  299. There are many interesting questions that could be asked about the fiscal rules but I did not ask you about the fiscal rules, Chancellor, I asked you about the scale of contingent liabilities.
  (Mr Brown) You did comment on it.
  (Mr Balls) If I could just add a bit of clarification on that point. Last year, 2001-02, our level of debt to the economy as a percentage of GDP was lower in the Budget than we said at the time of the Pre Budget Report. It is lower this year, it is lower next year, the year after, the year after that. In 2006-07, it is the same level. Actually, the overall way to measure the stability of the public finances is the level of debt, the level of debt was actually lower last year, this year and to 2006-07, just to correct the point.


 
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