Examination of Witnesses (Questions 360
WEDNESDAY 24 APRIL 2002
360. So it is additional per school?
(Mr Brown) It is additional per school, yes.
361. What do you think the additional burden
per school is of National Insurance?
(Mr Brown) National Insurance does not come in until
362. But your extra money goes through to 2003-04?
(Mr Brown) But most of the expenditure on that is
not on additional staff; it is probably on equipment and other
facilities that are being developed for the school. Obviously
we can look at that matter but I think you will find that most
of the additional expenditure is not on employing staff, who are
usually employed by the education authority.
363. But it was you who said that they could
use it to employ staff?
(Mr Brown) Indeed, they could.
364. So that school could be faced next year
with an increase in National Insurance of around £5,000,
and that would wipe out the additional money you are giving them.
(Mr Brown) Yes, but I have not announced the results
for the spending review for education yet at all. I think you
will have to be patient.
Mr Fallon: I see.
365. On productivity, we have had a submission
from the National Institute of Economic and Social Research which
stated that the Budget has very few measures specifically tailored
to closing the productivity gap with our main competitors, the
main exception being of the R&D tax credit which was announced
in advance. They go on to say that "Britain continues to
lag our main competitors in terms of output per hour worked and
also lags the US in terms of underlying total factor productivity."
Is that not disappointing for you, given it is one of the major
(Mr Brown) There are a number of measures in the Budget
designed to advance the productivity in our country, and they
are side by side with the measures we have announced in the last
few months, including the independence of the Competition Authority,
a new competition policy, including reform of the physical planning
laws, including a reform of the work payment system and obviously
the work we are doing to improve standards and skilling of the
work force. What I did announce additionally, however, in the
Budget was the new research and development tax credit which applies
to large companies as well as small companies, and if you remember
one of the big gaps between ourselves and other continents is
that spending on research and development is 1.8 per cent of GDP
in Europe as a whole, and it is lower in Britain. It is about
3 per cent in Japan and about 3 per cent in America. So R&D
tax credit for small and large firms at a cost of something of
the order of £400 million is designed to boost our research
and development effort, and I think you will find that it has
been widely welcomed by business. Capital gains tax has been reduced
to 10 pence for two years of holdings in business assets, and
that was from 40 pence when we came into power, and I think most
people recognise that that is a boost to productivity itself.
We also announced a new measure for skills with money to back
it up in the Budget so that we can find a better relationship
between employers and employees and Government in improving work
place skills, and, of course, the measures that the Budget announced
for small businesses include reducing the taxation from 20-19,
abolishing the ten pence rate and, therefore, it is a zero rate
for the first £10,000 in profits, and the performance implication
of VAT took away a whole series of what were well-established
but unnecessary burdens for business. So the productivity agenda
is advanced by a number of measures in the Budget.
366. But productivity in the public sector will
not be affected much by many of those business tax changes. Wanless
had some very important things to say about productivity in respect
of the Health Service in paragraph 5.31 in his report where he
takes a central case on productivity in the Health Service, and
then looks at what would happen if that productivity performance
were to vary, either up or down by 1 percentage point, and it
makes a huge difference tracking out over the 20 years of his
programme. On the pessimistic scenario you get the health output
that we are looking for but it costs 13.1 per cent of GDP; you
get the same output, 9.4 per cent of GDP, if productivity rises.
How confident are you, therefore, that, laying the tax measures
which affect private sector to one side for the moment, you can
get a productivity breakthrough into the public sector?
(Mr Brown) This absolutely is the challenge for the
National Health Service, and I think you will find that Mr Wanless
believes that there are demarcations that can be changed within
the Health Service. He identifies jobs that doctors are doing
that nurses can do; jobs that nurses are doing that others can
do; and a changing relationship between GPs and consultants in
the operations that could be done, surgical procedures in GP surgeries,
and certainly in day case admissions rather than people who have
to stay in hospitals overnight. So the productivity improvements
he is looking for will form part of the discussions relating to
the contracts for GPs and for consultants and the agenda for change
for nursing. I think it is also true to point out that, when he
gives these figures for relative growth rates in future years,
he is also looking at how public health can improve, so he is
looking at how the health of the nation rather than the sickness
of the nation can be measured, and whether we can make advances
in smoking, in alcohol, in drugs, and in general keep fit and
healthy living so that the demands on the healthcare system can
be reduced as a result of that. So he has public health very much
in his mind as much as productivity improvements, which I agree
with you are very much part of the negotiations that Alan Milburn
was talking in his speech today about to the Royal College of
367. Will the productivity performance inside
the National Health Service be part of your regular monitoring
of the progress of this traditional investment?
(Mr Brown) Absolutely. Productivity in the public
sector has to improve but it is a shared view within the Health
Service itself. It does not need the Treasury or the 10 Year Plan
to tell people this is an issue. People know this is an issue,
and there is a shared willingness to address these issues within
the Health Service itself.
368. Can I ask one further question on productivity?
With the Budget papers you issued the document "Developing
Workforce Skills". We have had a little note about that from
the National Institute for Economic and Social Research commenting
on the pilot schemes that are proposed and suggesting that the
cost per employer to the Treasury in support of a two week training
scheme will be £1,000 a year.
(Mr Brown) We have set aside some money for this project.
It is obviously a limited experiment in terms of the numbers of
people involved in the trial, but it is basically to see whether
a new relationship can be developed particularly for small businesses,
where in return for the employer giving time off the employer
may be compensated for the loss of wages and time. It is an attempt
to solve this free rider problem that exists in the whole business
of training where an employer does not see it as being in his
interest to train someone who might eventually be poached by someone
else. There has to be a new relationship between the employee
through the employee being concerned enough to get the skill,
the employer understanding that if he or she does not take action
then nobody may be involved in training, and the Government which
has a responsibility to bring people together to see if we can
solve what is a huge skills gap that has to be addressed. Most
of the people who will be in our work force ten years from now
are already in that work force.
369. If that thousand pound figure turns out
to be accurate, and if all of those skilled people in the work
force who will benefit from taking up the scheme do so, we are
clocking up to an £8 million programme. Is that the scale
(Mr Brown) We have set aside a certain amount of money
and we have a number of different trials or tests that will be
carried out. Some will be more successful than others. We will
learn from that and then reach a decision. I think the interesting
thing about this is that there is enthusiasm from the CBI for
this and from the TUC; it came out of our joint productivity discussions
where both were enthusiastic about moving ahead with this, and
if there is this goodwill then I believe that the £40 millionnot
£30 millionthat we have set aside for this project
would be money that would be well spent because it could give
Britain a new way forward where we can catch up with countries
like Germany which have already had training systems in place.
370. Chancellor, in some senses your decision
to raise National Insurance contributions has been surprisingly
successful, not least when we read in the opinion polls that you
are now even more popular than the Prime Minister, and I think
the most popular Chancellor since Dennis Healey. You do not look
very pleased about that!
(Mr Brown) I met Dennis Healey the other night and
we were joking about these things.
371. Could we look at a couple of fundamental
issues surrounding your decision to increase National Insurance
contributions as opposed to any other tax? One of the criticisms
that has been made of the decision in particular to increase employer
National Insurance contributions is the effect on jobs. We have
just had a submission from the CBI this morning which says "The
increase in employers' national insurance is regarded by many
businesses as the worst possible kind of tax increase. It affects
businesses of all sizes and sectors, but crucially takes no account
of their profitability. It penalises employment, and in today's
fiercely competitive, low profit environment businesses will be
forced to take offsetting action.", and we have been told
in a separate submission by the Centre for Economics and Business
Research that your decision to increase employer NICs by 1 per
cent is going to cost 20,000 jobs20,000 fewer jobs will
be created. Have you yourself carried out any impact assessment
of this increase in employer NICs?
(Mr Brown) No, but I do not believe that will be the
result of it. If I can put it to you that 200 million working
days were lost due to absence and 861,000 people not working for
a year is the equivalent of that. The average cost of absence
to the employer is £400 per employee, so the bill for British
business of an unhealthy work force is very considerable; some
people estimate it as ten billion a year. If I can draw the conclusion
from that, if you are devising a health care system of funding
for the future, there is hardly any system around the world where
employers do not have a role in contributing to health care. In
France it is £60 per week paid by an employer for a typical
employee; in America we estimate that the typical employee family
pays £100 a week for their insurance policy, and a considerable
amount of that under employer contracts is paid by employers,
and in Britain, even after the National Insurance change, the
average tax contributed in total taxation by the employer is £10.50
372. I would not question there might be a beneficial
impact on employment and lack of absence from work with a better
Health Service; the question is what is the most sensible way
of funding it. Are you arguing that your decision to increase
National Insurance contributions for employers will have no negative
employment effect at all? Is that what your assessment is?
(Mr Brown) I believe the decision is both the right
one for health care and can be accommodated within the economy.
373. Will it have no employment impact?
(Mr Brown) I do not believe it should have a big employment
impact at all. In fact, I would have said that, if you look round
the world at health care systems and you look at what employers
have to pay in other countries, in America the premiums are rising
by 13 per cent this year so that is £13 a week extra. The
National Insurance change that we are making is nothing like that
for the average employee in this country, and therefore I believe
it can be accommodated within the budgets that we are talking
374. Could you square that view that you have
that the increase in National Insurance contributions will not
have an employment effect not only with what outside bodies like
the CBI are saying but what the Treasury said in March 2000 after
you introduced the climate change levy, because obviously as part
of that equation you brought in the climate change levy and you
cut the employer National Insurance contributions by a smaller
amount than the one per cent you raised them. When you did that
you put out a press release from the Treasury which said that
"the lower National Insurance contributions will act to promote
employment", so two years ago you were telling us that cuts
in employer NICs will promote employment, and now you are saying
that increases in employer NICs will not cut it. Have you invented
some new economic theory?
(Mr Brown) I think you have to look at what has changed
over the last few years. It used to be said that National Insurance
would price people out of jobs. What we actually did over the
last few years is changed the whole basis of the National Insurance
system, so that for low paid workers we removed the initial flat
rate payment for every worker: we then made the first starting
point for payment of National Insurance not £56 but I think
it is now £85, and for any worker earning up to £300
a week or so the changes that we made in National Insurance which
cut the cost of employing someone set against the rise in National
Insurance we are bringing in next year, it is still cheaper to
employ that person than it was in 1997.
375. Chancellor, we understand the changes that
have been made in National Insurance contributions but two years
ago you argued that a smaller cut than we have just had a rise
in employer NICs would promote employment; today you are trying
to persuade us that the increase in employer National Insurance
contributions will not damage it. It does not really add up, does
(Mr Brown) In the economy over the last five years
there have been 1.5 million jobs created. My expectation is that
with growth in the economy over the next period of time, we are
still in a position to create jobs as an economy, and therefore
I take a rather different view from you about the employment creating
potential of the economy.
376. That is a different matter, with respect.
The question is what effect will this tax change have, not what
the employment creating effect of the economy is. That is different?
(Mr Brown) You are making an assertion that the change
we are making in National Insurance will lead to higher unemployment,
am I right?
377. I am saying you have an economic policy
that does not add up. You said one thing in 2000, that cutting
employer NICs will boost employment, and you are now saying that
raising them will not have any negative impact? It does not make
(Mr Brown) As far as the climate change levy, we always
said when we introduced the climate change levy that there would
be no net revenue gain to the Treasury, so we put it back to employers.
378. And said it would promote employment?
(Mr Brown) Yes, but we put it back to employers.
379. And did it create employment?
(Mr Brown) What I say to you isand I do not
think you are taking this into accountwe reformed the system
of National Insurance after 1997 as a result of the Taylor report;
these reforms have continued; and the reforms for people who are
employed at less than £200/250 a week meant it was cheaper
for an employer to employ that person and, even with the rise
in National Insurance that we are bringing in where I think it
is right that every employee should make some sort of contribution
to the Health Service, it is cheaper for an employer to employ
these people than it was in 1997.