Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 360 - 379)

WEDNESDAY 24 APRIL 2002

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

  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 2003-04.

  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.

Chairman

  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 areas?
  (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.

Mr Plaskitt

  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 Nursing.

  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 envisaged?
  (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 million—not £30 million—that 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.

Mr Laws

  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 jobs—20,000 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 a week.

  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 about.

  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 it?
  (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 sense.
  (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 is—and I do not think you are taking this into account—we 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.


 
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