Members present:

Mr John McFall, (Chairman)
Mr Jim Cousins
Mr Michael Fallon
Mr David Laws
Mr George Mudie
Dr Nick Palmer
Mr James Plaskitt
Mr David Ruffley
Mr Andrew Tyrie


RT HON GORDON BROWN, a Member of the House, Chancellor of the Exchequer, MR ED BALLS, Chief Economic Adviser, MR NICHOLAS MACPHERSON, Managing Director, Public Expenditure, and MR ADAM SHARPLES, Director, Public Services, HM Treasury, examined.


  1. Good afternoon, Chancellor. Welcome to this evidence session on the Spending Review. For the Hansard writer, can I ask you to introduce yourself formally?
  2. (Mr Brown) Yes. With me is Ed Balls, the chief economic adviser to the Treasury; Adam Sharples, who is in charge of the Public Spending Review, and Nick Macpherson, who is the chief executive of the Public Services and Spending Division.

  3. We had a good session with the same two officials yesterday on a number of issues. One of the aspects was the papers coming out. The public expenditure provisional outturn did not come out till Tuesday and we felt that all the papers should come out on the one day. More than that, however, the view has been expressed within the Committee and by our advisers about the short timescale for an exercise with such import as this. Is there not an opportunity to have more than six days' notice of an event of this significance? We have the Comprehensive Spending Review and we know the public spending envelope. There should be an opportunity surely for more time to be given so we can look at this in greater detail and also, given that the public spending envelopes are known well in advance, there should be the opportunity for the White Paper so you can discuss and consult on the areas where your spending and your targets and priorities will be?
  4. (Mr Brown) This is an interesting debate about the transparency and openness of the public spending process and obviously we have made significant changes. As you know, there is probably far more detail published even on that one day on Monday than ever before in previous spending reviews, whether they were annual or three years. As far as the outturn figures are concerned, I think we are to write to you on that, the officials agreed yesterday, with an explanation, but I think you will find that the major figures on which you were focusing were published in the documentation itself which came out on the Monday. As far as the general process of these public spending reviews is concerned, let me just put it in perspective for the Committee: we have moved from an annual to a three-year public spending process but the public spending process is not simply about inputs but also outputs. These outputs in the end are the responsibilities of individual departments to report on initially, and it is for them in the departmental reports to record the progress that they are making and it is only at the end of the process - and of course we are not at the end either of the CSR 1998 process or the SR 2000 process - that we could give you a final statement of the full progress that has been made towards meeting all of the targets that were set in these documents. What we are doing and what we did on that Monday was publish the allocations of expenditure till 2006, and no doubt you will want to ask me about the priorities that we chose and why we chose them. On the same day we did something that we did not do in the last spending round - and I do not think you complained about it in the last spending round - in that we published the PSA targets on the same day, but equally, of course, it is a matter for the departments themselves and they will be answering questions to all their departmental select committees, both about the targets and about the attainment of the targets. I would have thought our biggest responsibility is to publish the general figures about the fiscal position and, equally, the specific allocations to departments. Obviously, if there is any further information you would like, we would be happy to give it. This is an evolving process, but the one thing it is not short of is a great deal of documentation.

  5. I understand that and that is the issue: there is such a lot of documentation that one needs a lot of time to digest it.
  6. (Mr Brown) Well, it is a bit like painting the Forth Rail Bridge in my constituency - well, I actually share it with Mr Dalyell who has half of it - because the new Spending Review is really starting now for the next time, and it started two years ago to complete this, but our responsibility to the Treasury, so we are clear about it and so we do not go into a misunderstanding about where we are on this, is to publish the overall fiscal figures, to publish the allocations of these figures with the departments - and we are doing this jointly: we are publishing the public service agreements about the future - but the reporting on the implementation of these public service agreements will be a matter initially for departmental reports, and the departmental ministers are the people who are responsible for the implementation of these targets and they will be interviewed and asked questions, no doubt by the departmental Select Committees on this matter. I think it is very important that we understand the different responsibilities of each in this process. There may be a public spending debate next week on these matters but there will be departmental debates going over the next three years about the use of resources and the meeting of targets.

  7. I understand that. I think you produced another 130 targets in your speech on Monday which added on to the more than 300 targets that were in the 1998 Comprehensive Spending Review. Accompanying your targets was the Spending Review book, and if I refer to page 11 it says, "New resources must be matched with reform to deliver results in which the modernisation of public services is crucial". To the outsider that would appear rather bland and there is no detail there. Could I ask you why the number of targets has been reduced from 1998 quite dramatically, and also are you satisfied that these targets allow Parliament to monitor properly the performance of departments? We have some of these targets coming out that are pretty woolly to say the least. We have the Foreign Office which says here that we have seven major objectives, including making the world a safer place, and you have still to report on them?
  8. (Mr Brown) The only problem I say to the Committee is, because these are targets that are proposed by the individual departments and agreed eventually with the Treasury, that of all the other targets of the Foreign Office that you list none of them actually pointed to what is a fundamental function of diplomatic and foreign policy and that is to make the world a safer place, so I think you have to bear that in mind when you look at the desire for quantification at particular points in time. Can I just say about targets, because there has been a debate in principle in the House of Commons over the course of this week with the Treasury and then the Education Department and then the Home Office and now, today, the Department of Local Government, the department headed by the Deputy Prime Minister, and today for example during the debate on the Deputy Prime Minister's statement the point was put by the Opposition that they were against targets altogether, and that seems to me to be a debate that has to be had. We believe that it focuses the work of departments on the priorities and that there is nothing essentially wrong in that - indeed, it is a good thing that that focus happens - but obviously there is a debate about which of the targets you choose and why you choose them. So we believe that the improvement that has been made in the public spending process is this: we have moved from simply inputs which I am afraid was the position under the last government to a consideration not just of what the input is but what the output is, and it is only when you have decided that that is a good thing that it is worth then debating which targets you have chosen. I would like to put the case, and we have put the case, for a focus on outputs as opposed to simply what used to be under Labour and Conservative, since the Plowden Report, an annual focus on really ad hoc and incremental decisions about public expenditure that really was less - and we should be honest with ourselves because it happened under previous Labour governments - focused on results and more focused on the annual process of persuading people that your department was worthy of extra funds. I hope the Committee is in favour of the idea of targets and a focus on results and outcomes but I recognise that is still a matter of controversy between the parties.

  9. I certainly do not have any bother with the aspect of the targets but there has been concern that these will be central targets, centrally motivated and dependent on a command control structure and some people have put it to me that there are so many targets that maybe reminds them of Stalin's Russia and Gosplan where we have those responsible for the targets deliriously happy because they were achieving the targets but the country was falling apart at the seams at the same time. How can you reassure us that these targets are not going to be command and control? That there is going to be sufficient flexibility for delivery on the ground and not overwhelming interference from central government?
  10. (Mr Brown) There has been a very big process of devolution of decision-making power and the flexibility given to local service providers about the manner in which they use the resources that are made available to them. If you take primary care trusts in hospitals, for example, more than 75 per cent of the money will now be spent once the process of devolution is completed by the primary care trusts themselves as they buy and negotiate services from the hospitals usually in their own surrounding area. As you can see with schools - and again it is controversial but I think most people having looked at this agreed this was the right thing to do - there is a far greater devolution of responsibility with the power to make decisions through money being made available directly to the head teacher and the school management, and that is why we announced on Monday that not only would we continue the process of direct links to the headmasters but we would have the leadership initiative where, if schools were facing challenging circumstances, we would give them extra resources to meet these challenges, so there is far greater devolution of responsibility but also of power to the local school, and that is a process going on elsewhere. Of course, in each department I think the departmental committee will want to question the ministers about how far they have managed to achieve that devolution, but the principle on which we are based is to move from what you called a central command model - I do not think it was but there was a great deal more Whitehall control of the process in the past under both the political parties. Now there is a great deal more emphasis on local decision-making, local responsibility and local flexibility.

  11. I will just leave you with the thought, Chancellor, that the transparency of these targets is uppermost and also perhaps a central register of targets so we can follow them going on, because there has been a phenomenon where we have seen targets, and then they have fallen off and others have been picked up, so the idea of being able to follow these targets is extremely important.
  12. (Mr Brown) I agree. The transparency is absolutely crucial to this. I have always said that the three principles that governed our approach to fiscal policy, as they now govern our approach to monetary policy which includes the inflation target, are the setting of clear objectives, the devolution of decision-making power - because we gave away the power in monetary policy to the Bank of England but that is true also in the delivery of our targets in public expenditure - and accountability in transparency, and the very fact that so much information is now available and is being examined not just by your Committee but I suspect by all the departmental committees is a signal of the changes that really are under way. It is a far more open process and one which is susceptible to greater public accountability in the long run.

    Mr Tyrie

  13. Is it not correct that the Treasury have said themselves that it has not proved possible to measure aggregate Treasury output, in which case, since the Treasury is the home of the PSA target and is unable to measure its own output, how can it expect other departments to measure theirs?
  14. (Mr Brown) How do you suggest you measure Treasury output? We have a number of different targets the Treasury has to meet and it is meeting these working with different departments on child poverty, on international development, with the DTI on productivity - that is the way we believe we should be tested over the longer period of time.

    Mr Tyrie: We will come back to productivity in a moment, Chancellor.

    Dr Palmer

  15. When I used to work in a multinational, we always had the same debate about targets, and the danger that a lot of people felt was that we would over focus on targets which were capable of numeric expression and I wonder if that process is not a little evident in this statement, because I notice in education in particular, where I know that the department is very anxious to increase diversity in secondary schools and there is a wide range of objectives, nearly all the targets relate to examination results. I wonder if you feel that there is a danger that the pressure to achieve targets is going to focus attention too much on the numerically measurable ones?
  16. (Mr Brown) That is obviously a debate but in having that debate, do you conclude it is wrong to have any targets? I do not think anybody would. I think it is common ground between the political parties and I would hope that in your deliberations and your conclusions the Treasury Committee could reflect that. Just as Harold Macmillan in the 1950s said he was going to be in a position to build 300,000 houses, and he had a target at that point and he achieved it and it was important to the government, so too other governments subsequently have had targets as well. I think the difference now is that, in the setting of a target, we are also trying to give far greater flexibility to our local service provider to get on with it. For example, therefore, we are signing public service agreements with local authorities. You might think that local authorities would resist the idea of a public service agreement on the grounds that it was somehow an interference with their local autonomy. But quite the opposite. Local authorities, given the nature of the relationship between them and central government over many years under all governments, are very keen to sign these public service agreements because in return for them saying, "Look, here are the general targets we want to meet over the next few years", we say, "We can have a light touch inspection regime which is central government giving up power; equally we can give you more flexibility in your decision-making and equally we can have resources that are less tied so you are in a position to get on with the job". Now the public service agreements are moving forward with local government and I hope the Committee can conclude this is good.

  17. A different aspect of the planning process is the trade-off between long term confidence in the direction of funding and long term uncertainty in what is going to happen to the economy.
  18. (Mr Brown) Absolutely.

  19. Do you feel that the three year cycle is perfect? Is there not a case for annual reviews of this whole process?
  20. (Mr Brown) In a sense we are getting back to what is the set of questions that the Treasury Committee would normally wish to put - and I mean that because it seems to me that there is a tendency here for the Treasury Committee to want to take up the issue of whether the Health Department is meeting its targets. That is a matter for the Health Department, and no doubt the Health Select Committee.


  21. Chancellor, there should not be any shred of doubt on your part. We are not interested in what the Health Department does but things start in Treasury, and that is where the footprint is.
  22. (Mr Brown) Well, I would not put it that way, ever - under any government! The fiscal position, however, is exactly what I think is important to set out to you today. I believe that the old Plowden system, essentially the one that all governments since the early 1960s were following, was the wrong system for modern times because basically it was an annual system, ad hoc, incrementalist, based on inputs, investment always suffered - and I do not know why Mr Tyrie is so clear that that was not the case --

    Mr Tyrie

  23. It was a rolling three year programme.
  24. (Mr Brown) It was not, in practice, because effectively decisions were having to be made every year, and the cancellation of vital transport programmes was a very good example of that, and the fact that there was very little capital spending taking place by 1997 was also a very good example of that.

  25. This is not the floor of the House --
  26. (Mr Brown) I am explaining my understanding of the Plowden system, and what we tried to do was move from that old system to a new system, which was three years, not incrementalist - in other words, we looked overall at what a department was doing and also interdepartmentally, so there are cross-cutting reviews that have governed this review; investment now is a very important feature so the balance between investment and consumption has changed quite dramatically over the last few years in terms of our projections about what we would like to spend on investment in the future. One matter that is controversial too is that, instead of there being very little relationship between public and private sector projects and investment, the private/public partnerships are central to this process as well. So I would say there has been quite a big change. Then the question is whether the figures add up over three years, and we meet our fiscal rules and will meet them over the cycle.

    Dr Palmer

  27. But, very specifically, how confident on a range of zero to one hundred per cent are you that you will not need to revise these plans at any time during that three years?
  28. (Mr Brown) Our plans to 2006 are funded by the decisions we made in the Budget. We did take a controversial decision which has not had all-party support to raise National Insurance. We do so from next April, but that is to fund our policy of public service improvement, particularly the Health Service in the spending plans to 2006. Indeed, our Health Service plans are funded to 2008 and I am confident that the two rules we have set down - to balance the current Budget over the cycle and to have a sustainable level of debt - which have already been met each year for the last five years, will be met.

  29. The final question from me for the moment is this: what impact do you see the global stock markets having on the United Kingdom economy? There is a lot of speculation; they go up and down. How much does this concern you?
  30. (Mr Brown) This came up at Treasury Questions today and the question I ask all the time is whether, given the changes that take place during an economic cycle and the ups and downs, so to speak, in the world financial markets that obviously happen from time to time, the monitoring fiscal regime that you are operating is capable and good enough to withstand these difficulties. In other words, have you built a system of monetary and fiscal management that is for the good times but also for difficult and challenging times. I believe that the changes we made by making the Bank of England independent, and by holding to the fiscal rules that we have, mean that we are capable of withstanding the difficulties that face us. When these things happen you have to ask yourself whether you have a monetary regime delivering low inflation - and we have the lowest for thirty years. Have you got fiscal rules that are capable of being met? Have you built in the necessary caution so you can meet new rules, and we believe that is what we have done - not with easy decisions but by taking quite difficult ones.

    Mr Ruffley

  31. Chancellor, to what levels would GDP growth have to fall in this year and the next four years before you had to raise borrowing or raise taxes to cover this Spending Review?
  32. (Mr Brown) We will --

  33. The GDP figures would have to be what?
  34. (Mr Brown) We will meet our rules over the economic --

  35. No. That was not the question.
  36. (Mr Brown) Sorry, let me finish --

  37. That was not the question.
  38. (Mr Brown) We will meet our rules over the economic --

  39. That was not the question. To what levels would GDP growth have to fall this year and the next four years before you had to increase borrowing or raise taxes?
  40. (Mr Brown) Mr Ruffley, you should allow me to finish --

  41. You were not answering the question.
  42. (Mr Brown) I was not allowed to finish the first sentence.

  43. An answer would be nice.
  44. (Mr Brown) What I said is we will meet our fiscal rules over the economic cycle and the cautious case and the cautious assumptions that we build in allow us to do so even when we are in a position where we are away from the -- well, even in a position where the - well, what is the table that is in the document? Mr Balls, if you want to take Mr Ruffley through that, you can.

  45. You prefer not to do it? I just want a figure for the GDP growth numbers. To what levels would they fall?
  46. (Mr Brown) So that members of the Committee understand the position, we base our fiscal figures on both a cautious case and cautious assumptions. The cautious assumptions are, for example, that we do not assume falls in unemployment, we do not assume privatisation revenues before they appear, we do not assume indirect effects from, for example, investor save measures but merely the direct effects. Our VAT revenues are based on a declining share of VAT and GDP and these are all the cautious assumptions that have been audited by the National Audit Office and we are the first to bring in an independent office, so the key to our ability to meet our fiscal rules starts with these cautious assumptions that we laid down in 1997 and are audited - continuously - by the National Audit Office. These include, for example, the oil price. As far as the cautious case is concerned, which is what you are raising in addition to the cautious assumptions, that goes back to the point that Mr Balls is drawing attention to in this table.

  47. If you can just give me the table, I want to move on to other questions.
  48. (Mr Brown) No. I think he should explain it to the Committee because you have asked a question.


  49. Mr Balls?
  50. (Mr Balls) The economic cycle is measured by the output gap and chart B4 in the Budget documentation, because obviously the full fiscal arithmetic and the spending envelope was set at the time of the Budget, shows the output gap which we forecast to be a little over three quarters per cent of GDP this year, and it shows the path by which we return to trend, and on that basis we meet the fiscal rules with a margin of some billions. What we then do is an estimate if the output gap is 1 per cent of GDP worse than our forecast based on cautious assumptions, and on that basis we still meet both of the two fiscal rules in that more cautious case. Clearly in any one year the economic forecast can change but what matters is the forecast we make over the economic cycle, and the economic cycle is set out, as I say, in chart B4.

    Mr Ruffley

  51. Let us try something else. Tax revenues. Andrew Dilnot has said, "If... we were to see an unexplained deterioration in tax revenues that matched the unexplained improvement in tax revenues [that we all know about] we saw in the first parliament of the Labour Government, then I think there is more chance of a problem. So I think there is more of a gamble than there was in the first parliament, simply because the forecasts for the economy on which the public finances are based are no longer [now that is] systematically pessimistic, but they are much more central, so if something goes wrong, the risks have become greater". He is right, is he not? You have become "gambling Gordon" in this Parliament?
  52. (Mr Brown) Not at all. What Mr Dilnot was reported as saying seems to be something quite different from what you are saying he said --

  53. This is a transcript, Chancellor. Mr Balls is happy to look at it if you will not.
  54. (Mr Brown) The fact of the matter is, once you take both the cautious case and the cautious assumptions together we are not in danger of making the mistakes that the previous Conservative government made, and the reason is this: that we do not assume revenues that are not there. We have our revenue figures audited properly by the National Audit Office for the things I have talked about. Other governments previous to us assumed unemployment would fall and took the social security savings from that and built them into the figures and we do not do that, so on all these points we have both the cautious assumptions and the cautious case. Can I just add one other point on our current balance over the economic cycle? We say we must be in balance: in fact, there is quite a considerable surplus in the figures we have laid out before the House, and I think it goes from three to seven to nine to seven to nine, and these are the surplus figures on the current balance. So if you are asking what we have done to ensure that we are in a position to meet our public spending figures over the years to 2006, first of all, we work on the cautious case, as described by Mr Balls - and I refer you again to that table: secondly, on the cautious assumptions; and, thirdly, the margin for prudence, as I said on Monday, includes the surpluses that we are able to estimate for the current balance.

  55. So you will give a clear and unambiguous promise that you will not have to raise taxes to cover this Spending Review?
  56. (Mr Brown) What I --

  57. Middle Britain, which is sick and tired of your addiction to taxes, really want to have this question answered: you are going to promise us now that you will not have to raise taxes to cover this Spending Review?
  58. (Mr Brown) Mr Ruffley, it has just been pointed out to me that you were not at the meeting where Mr Dilnot made all these points.

  59. I was having lunch with the Queen, as a matter of fact, which was explained by the Committee, so do get your facts right before you make cheap political points, Chancellor.
  60. (Mr Brown) I thought the meeting took place at 10.00 in the morning.

  61. I had to go to my constituency.
  62. (Mr Brown) As far as the public spending figures, we have set down in the Budget - and, of course, I came before this Committee after the Budget and we had a similar sort of discussion --

    Mr Ruffley: Come clean. Tax increases.


  63. Chancellor, just feel confident and go ahead.
  64. (Mr Brown) Is this going to be a discussion, or are you going to be heckling from your position?

  65. Chancellor, can you briefly answer?
  66. (Mr Brown) We set down in the Budget, and I came before the Committee on this, our figures for both revenues and expenditure until 2006. These were figures that showed, with the National Insurance changes we were bringing about, the freezing of the personal allowances for one year; how our revenues would be raised until 2006; and, equally, we showed what the overall public spending figures were, and we showed how we could meet through the revenues the expenditures on the cautious case, with these cautious assumptions and with the margins that I had just given --

    Mr Ruffley

  67. You are promising Middle England you will not raise their taxes?
  68. (Mr Brown) What I am saying is --

  69. You are not giving that promise?
  70. (Mr Brown) Mr Ruffley, you know perfectly well --

  71. You are not giving that promise.
  72. (Mr Brown) You know perfectly well --

    Mr Ruffley: You are not giving that promise. That is fine.

    Chairman: Let us move on.

    Mr Ruffley

  73. No promise given. Thank you.
  74. (Mr Brown) I must finish this answer, Chairman. We have set down our figures for both revenues and expenditure; we have shown how our public spending programme will be costed; we have shown the figures for public expenditure until 2006. In fact, in the case of the Health Service we have shown how our expenditures on health care can be costed till 2008, and I believe that is more than any previous governments have done to show how, over the long term, the programme is costed for the future.

    Mr Fallon

  75. There are two difficulties with that answer. One is you add to your spending programmes each Budget - indeed, each pre Budget report you make additions inside the three or the two years. The other is that the last Spending Review you said was fully sustainable on the Budget decisions you had taken, the 2000 Spending Review, but then you had this big NHS black hole and put up National Insurance. Why should we believe you this time?
  76. (Mr Brown) What we did at the time of the 2000 Review was set up the Wanless Review which reported in November last year and recommended that, if we were to have proper planning and health care expenditure right through till 2008 - in fact right through until 2020 - we should put more money into the Health Service, based on demographic, technological and other trends, and this was a review that had taken place over a very long period of time. I would hope that we could build all-party consensus around the need to finance our Health Service properly for the future - if we cannot that is unfortunate - but all these figures were laid before the House at the time of the Budget and were the result of a review that started in 2000.

  77. So there is nothing in this year's spending review, this extra 90 billion, that is not fully provided for by your existing Budget?
  78. (Mr Brown) Our figures for public spending until 2006 are set down. Equally, the revenues we can expect based on the assumptions I have talked about are set down also until 2006, and I think we have had a debate in this Committee about these figures already.

  79. On the tax, do your plans assume an average increase in council tax for inflation?
  80. (Mr Brown) I think what has been happening in recent years is roughly the same as what happened under your government. There has been a rise in council tax but that is a matter for councils to decide, not central government.

  81. But you must have made some assumption about the increase in council tax over the next couple of years?
  82. (Mr Brown) I think you will find it has been based on the historic trend.

  83. So what is it?
  84. (Mr Brown) That is what happened under both your government and our government.

  85. So what is the figure?
  86. (Mr Brown) I think we would have to write to you about what the historic trend is based on but remember, these decisions - and you would not like it to be different - are for local government to make, not us.

  87. I am just wondering whether you are assuming that there will be an above-average increase for council taxpayers next April?
  88. (Mr Brown) Can I put it the other way? We fund local government and I have announced the figures for the funding of local government for future years, and we will not be providing any additional money. It is for local government then to make its decisions within that context and, therefore, if you are asking me what implications it has for future spending requirements, we have set our figures for future spending for local government but, equally, it is for local government to decide whether it wants to raise additional sums, and that is its decision.

  89. So there could be big council tax increases next year?
  90. (Mr Brown) I am not saying that at all. I want local government to act in the same prudent way that national government does.

    Mr Plaskitt

  91. Returning to the three-year aspect of the Spending Review, it is indeed a three-year plan but not necessarily with equal amounts in each of the three years - there is quite a bit of lumpiness to the profile within those three years. For example, we have some of the big spending departments - Trade and Industry, Home Office, Transport - and in all of those cases their increase in the first year of the three is very significantly larger than the increase in the subsequent two years. In the case of the DTI it is up by 7 per cent in the first year; the Home Office is up by 12 per cent; DEFRA is up 15 per cent in the first year; and Transport is up by a massive 35 per cent in the first year. Yet, when we look at the outturn booklet for 2001-2, all of those departments actually reported underspends. I know the responsibility for spending that money is with the department and not with the Treasury, but you clearly settled on that allocation across the three years which suggests you have reached the view that all of that money can be spent by those departments in the first year. Given the track record of some underspending, however, are you confident that those very large first year increases will be spent in full?
  92. (Mr Brown) Yes. You rightly raise points both about end-year flexibility and what happens to underspends and, equally, about the different rises for some of the departments in the first year. In all cases there are changes in the figures because of resource accounting, and I think one should recognise that there are some quite big changes in the numbers which I think people accept are nothing to do with anything other than that we moved to resource accounting, and if the Committee wants a briefing on resource accounting in more detail, which is a very complex subject, we would be very happy to do that.

  93. I realise that, but we have these four that go up even more.
  94. (Mr Brown) On Transport, I think you will find it is related to the profiling of the Underground expenditures. On the question of underspends, I think you will find that what is happening as a result of this three year process is not that departments are failing to spend and should be penalised: it is that departments, first of all, ought to be carrying their own reserve - in other words, if you have a three year budgeting process, you ought to be in a position to be able to deal with eventualities and contingencies as they arise. If, for example, the Health Service has underspent it may be because they have laid aside money in case something happens with the winter flu epidemic but that has not happened and therefore they have the additional money to carry over. If a department has not spent the money by the end of year, it is good that they do not get into the situation that happened previously particularly with roadworks, where all your roadworks happened in the last month of the financial year so that the money could be used just before the end of the year; people are able to plan their expenditure properly and it is not wasted, and therefore the end-year flexibility is the means by which, if you are doing things properly, you can see that your money can be passed over into the next year and used in that next year.

  95. Nevertheless the unevenness of the profile across the three years, rather than it simply being the same proportion each year, clearly suggests that there is still an element of annual budget setting, otherwise why is it not an even pattern across all three?
  96. (Mr Brown) If you take some of our projects, some of the investment is concentrated in a particular period of time. I have mentioned what we would like to see happening in relation to the Underground as one example. If you take where we have got to use the reserve, as in extreme circumstances such as when we are financing defence commitments that are unforeseen, then you will see expenditures rising at particular points in time, but generally I think the three year system is working and I will be interested to hear from the Committee if they think there are any other areas you think we should be looking at.

  97. But you remain confident that those four departments I have mentioned will get the money out and spend it on the programmes in those years?
  98. (Mr Brown) I think in terms of capital investment it has been a challenge because there has not been a tradition of investing in capital projects built up over a period of time, and departments are now getting used to doing this. If you take the schools budget, for example, on the capital side, the figures that I was able to announce to the House of Commons on Monday are really an increase in schools capital expenditure from 600 million in 1997 to, if I remember right,,* 4.5 billion by 2006 and these are huge increases in capital expenditure and repair and maintenance in renewal of schools. You are taking about thousands of schools across the country, many of which are PFI projects, and obviously we want to see this money moving into the schools as quickly as possible but we are learning all the time how best things can be done.

    Mr Tyrie

  99. You were asked earlier what happens if performance deviates from its central forecast, and you made great play of the phrase, "We have put an end to boom and bust". I wonder whether we could add some precision to what this means. For example, is there any difference in your mind between a "bust" and a "recession", as defined as two quarters of negative growth?
  100. (Mr Brown) I think when people talk about "boom and bust" which is --

  101. Let us just stick with "bust".
  102. (Mr Brown) "Recession" is defined around the world in the way you describe it.

  103. But is that a "bust", Chancellor?
  104. (Mr Brown) I think "bust" is something a bit more than that.

  105. How much more?
  106. (Mr Brown) I would give the example of 1990-92, but you will then say I am being political!

  107. If there is negative growth of less than that we have not arrived at a bust, is that right?
  108. (Mr Brown) If you are saying to me that "bust" is --

  109. I would just like an estimate, Chancellor. You have used this phrase literally hundreds and hundreds of times. You must have some idea of what it means.
  110. (Mr Brown) That is because, if I may say so, the history of British economic policy under all governments has been one of --

  111. You want to reduce the amplitude of the cycle, so I am saying when does a "recession" become a "bust"?
  112. (Mr Brown) The history of all governments has been one of "stop go" - call that "boom bust" or "stop go" - and that has been high levels of growth followed by quite deep recessions and, of course, the deepest ones since 1945 were 1980-82 and 1990-92. But what I mean by "boom bust" and "stop go" is running a policy where you allow the economy to grow too fast and then it sinks far further than it has in other countries, even when there is a world downturn, and that is what we mean in Britain by the history of "stop go". I do not think anybody siting around this table denies that the history of British economic policy over 30 or 40 years under both governments, both parties, was one of stop go.

  113. Let us just give you one more go: how much more than negative growth in two quarters does negative growth need to be for it to be a bust?
  114. (Mr Brown) If I am right, GDP fell 1.5 per cent in 1981 and 1.4 per cent in 1991.

  115. So that is the minimum definition of a "bust"?
  116. (Mr Brown) Yes, but I talk about "boom bust" and "stop go", and it is the acceleration of growth to unsustainable level followed by the downturn --

  117. You have answered the question, Chancellor. Now I would like to try the other ones. When does above trend growth become a boom? By how much more than above trend growth does the economy have to grow to arrive at a boom?
  118. (Mr Brown) I think when the inflation rate has gone into double figures.

  119. So it has nothing to do with the trend rate of growth?
  120. (Mr Brown) You see, I have always referred to "boom bust" together and meaning what I talk about "stop go".

  121. It is a meaning of sense perhaps. I am just trying to extract some meaning here.
  122. (Mr Brown) Not at all. Mr Tyrie, the one thing you cannot deny about British economic policy over 40 years, including your governments as well as Labour governments over 40 years, is that there was a history of stop go and there were very violent economic cycles not repeated in many of the other countries with which we want to compare ourselves. If you want to deny that was the reality of British economic --

    Mr Tyrie: Of course not. I am just asking for definitions. I do not think there is any sort of denial.

    Mr Ruffley

  123. There is only denial going on from that side of the table.
  124. (Mr Brown) I talk about boom and bust together, and it is the combination of the two that has been the problem for British policy.

    Mr Tyrie

  125. We have a definition of "bust". Are you prepared to give me a definition of "boom"?
  126. (Mr Brown) I said when inflation went into double figures, and therefore was unsustainable growth.

    Mr Tyrie: Well, I expect you will have put an end to "boom and bust" on those definitions. Thank you.

    Mr Laws

  127. When you finished your spending statement on Monday, we had seen an increase since you became Chancellor in 1997 in public spending from about 317 billion a year to 511 billion, which is a pretty large rise by anybody's standards - even by Liberal Democrats' standards!
  128. (Mr Brown) We may have to disagree early on in this questioning because I think I was being asked for more by the Liberal Democrats, even in the first few minutes after the statement!

  129. When you got back home that evening, over a quiet celebratory drink or just before bed, did you have any last minute concerns about whether this big spending plan to improve public services is going to work? What, in your mind, are the risks that you will put in this extra money and will not get a very significant tangible improvement?
  130. (Mr Brown) There are two questions here: one is whether it is sustainable in terms of the public finances - in other words, revenues and expenditures coming together, and I believe this is what we have been taking about earlier on.

  131. Yes. We have dealt with that.
  132. (Mr Brown) It is sustainable, and I do believe - and I hope I have not misunderstood what I have received as information about the witnesses to the Committee - that people were saying it was sustainable in the fiscal sense. On the question of the results, I do believe that in the last few years we have shown that public expenditures on, for example, primary education have yielded very substantial results and I do believe in, for example, the new areas where we have expended quite a deal of money, we have achieved results that have surpassed even some people's expectations about what could be achieved. So I believe experience has taught us that the areas where expenditure is clearly targeted, where we know what we want to achieve, and where we have efficiency, that we can get value for money and we can achieve results.

  133. Are you worried, Chancellor, that public sector pay will gobble up too much of this money or that some of the various departments involved which you cannot control directly (although you do to a certain extent) will not force through the reform agenda that you believe should go in tandem with investment? Are those two elements elements of risk to delivery?
  134. (Mr Brown) The measures we have put in place, which are by agreement with the departments, are designed to ensure that the reform is put in and the reform gets results. I know it is controversial and it has been commented on in the last few days, but the system of inspection that we are bringing in is a better guarantee for the public that standards will be met or at least if standards are not met people will be able to see what needs to be done and why it needs to be done. I hope that there will be consensus between all the parties on the need for this statutory inspection to be put in place in all the different areas where it has been reformed and where new measures have been announced. As far as pay is concerned, I said on Monday that just as private sector pay had to be linked to performance so, too, have those people looking at local authority or at the public sector in terms of pay have got to be responsible.

  135. Do you see any signs at the moment that public sector pay is rising unacceptably rapidly?
  136. (Mr Brown) The evidence of average earnings growth in this latest figures is 3.8 per cent in the private sector and 3.8 per cent in the public sector. There was a period of months where private sector growth was slower than public sector growth, but mainly in the period from 1997 public sector growth has been slower than private sector growth.

  137. To sum up, Chancellor, in these three areas - reform, inflation and growth - you are pretty confident and what you are saying to us is that in three or four years' time you have a very high level of confidence that the Government will have delivered a quite significant, massive, tangible improvement in public services?
  138. (Mr Brown) I would not be complacent at all. It is a huge challenge. I am confident that we have put in place a sustainable fiscal position to deliver improvement in public services and therefore the additional spending you mention, the numbers you mention, can be afforded. I am confident also that new systems of scrutiny, inspection and audit will allow us to have proper accountability of how the money is spent. The departments themselves are making the reforms. I believe that they are on the right track and I think each departmental committee will be looking at how these departments are performing.

  139. Can I ask you a final question on this point on a small area of spending. You will understand that now expenditure is increasing so rapidly, people are going to be looking very carefully at every item of expenditure to see whether it is justified. Do you personally believe that it is justified that the taxpayer should be subsidising an element of the proposed improved pay package for Members of Parliament in term of pensions?
  140. (Mr Brown) I do not know if you have looked at the Answer in detail. The Treasury was asked by the House of Commons after a vote to provide funds to move from one-fiftieth to one- fortieth on the final salary scheme, and we refused to do so.

  141. You are still going to be putting in subsidies if this pension scheme for MPs goes through. There is still going to be a contribution from the taxpayer in the early years.
  142. (Mr Brown) I am happy to write to the Committee on that but on that essential proposal which would be have been a costlier proposal we refused it.

  143. I am asking, Chancellor, whether personally you are happy that taxpayers' money is going to be going into subsidising part of the improvement in MPs' pensions?
  144. (Mr Brown) This has been a set of negotiations which arose, first of all, from a vote by the House of Commons. Then it was referred to the Salaries Review Board. The Salaries Review Board have now reported saying that the changes they will be making in the pension scheme will have to be taken into account when they make their next recommendation about salaries ---

  145. Chancellor, is the answer yes or no? You are evading the issue, I fear.
  146. (Mr Brown) I would not be happy if excessive amounts of public funds were put into the pension settlement.

  147. Are you happy that -
  148. (Mr Brown) We will have to see what happens when the Salaries Review Board reports on these matters.


  149. Chancellor, on the issue of productivity we have had a number of papers, one from the CBI in particular which stated that it was disappointed that the last four years of productivity have not been up to your expectations. In fact, they mention that between 1995 and the year 2000 productivity in the private sector was 25 per cent and productivity in the public sector was 17 per cent. To what extent, based on their figures, do you consider that the Spending Review will have to finance the inefficiency of the public sector?
  150. (Mr Brown) I think what we have got to recognise is that there are two parts of this process. First of all, when you are expanding either as a company or as a service often your employment is expanding ahead of your productivity. What happened in America in the 1990s was that employment expanded in the first few years, there was less productivity gain at that point as new employees were absorbed, and the next stage was the big productivity boost that came in the American economy. Obviously there are other factors at work in each different economy, but I do believe that the employment gains we have had should be noted and as employment increases in the private sector and the public sector, my own view is that we have put in place a number of the measures (there are more to go) - stability, a competitive environment, an education and skills policies and infrastructural improvements - that are necessary for productivity to expand in the future but, of course, we wish to see higher productivity and I believe there are still measures that have got to implemented to achieve higher levels of productivity.

  151. I ask that question against the background you have given a huge boost to the public sector. The CBI estimated we could be talking here about another half million workers as a result of that. You yourself said that when workers are taken on, to begin with, productivity is low and that productivity comes later on. Are you confident therefore that you can deliver the public services - you mentioned world-class public services - in the next few years against this background of low productivity and new entrants into the public sector?
  152. (Mr Brown) Every individual department - and again this will no doubt be picked up when the departmental reports come out - is looking at how they can get efficiency and greater value for money and therefore the use of skills they have for higher productivity growth. One problem with the public sector that I think we should be aware of is how you estimate or how you quantify productivity gains. Thus you can have reports that say, "We have tried to quantify this but we have not got no ability to estimate so far what has been the improvement in the quality of life as a result of this." It is quite important that we recognise that measures of public sector productivity are not in the most advanced stage and in some cases in quite an infant stage and that we will try to do better in finding measures for estimating productivity in the public sector in the future. We are not at a stage, and I do not think any government in Europe or America is, for having the best measures of productivity at the moment.

    Mr Cousins

  153. Can I bring you back to this question of public sector pay. My Liberal colleague here was tempting you to be rather tough about pay in the public sector, it would seem to me, and you seem to be going along with it. You would not want to be known as "Grudging Gordon" by the dinner ladies of Britain, would you?
  154. (Mr Brown) If you are talking about dinner ladies of Britain, the measures that we have put in as a Government, both to have pay rises that local authorities are negotiating that are above inflation and the Working Families' Tax Credit with the new Employment Tax Credit on the way, means that many, many people are better off. I do hold to what I said that there is an overall amount of money available for public services. We have set these figures to 2006. If the money to be used in public sector pay was not available to recruit new workers to improve the service that would be a loss to the country as a whole.

  155. That is fair enough. I would like to make clear that Bob Crowe did not buy my dinner today, but you do recognise that there is a need for increases in public sector pay to recruit, skill and retain public sector workers?
  156. (Mr Brown) I want to see everyone rewarded fairly for the work they do but, equally, we have got to understand that our process of setting down figures for what is available to the public services and setting that down to 2006, in other words for each year to 2006, shows exactly the limits of the offer that is made available. There is a choice at the end of the day between the money that goes on pay and the money that can go to employ more people and improve the facilities or services. That is a choice that each local authority and each service is making.

  157. Yesterday we had some discussion with Mr Macpherson about this very disappointing outturn in capital spending in some key departments last year, particularly in Education, the Home Office and Trade and Industry. There are some very key programmes with very significant underspend on capital. These are areas where you are planning to spend enormous sums of additional money in the next three years. Now, have you got some way of improving capital spending there?
  158. (Mr Brown) Yes. There are public service departmental investment strategies which are being produced. This is, and has been, an undeveloped area for public sector activity over the years. Public sector capital projects have never had the attention in the past that I think - whoever was in power - they deserved. Obviously there is a complicated factor now with the growth of PFIs and getting the right deals, where the transfer of risk or the managerial improvement is achieved. If you take education, where there has been an underspend I think you can see in place, whichever part of the country you look at, quite ambitious plans now for school building, school repair, college and further education establishments being expanded. The capital programme is getting into place. If there is some slippage, the answer would not be just to spend every bit of money before the end of the year, the answer under our three year spending regime, with end year flexibility, is to make sure the project is done well.

  159. You have mentioned various parts of Britain there. There is a very strong emphasis in the Spending Review on variations between regions and tackling inequalities which affect certain parts of the country. I just wonder, Chancellor, when can people in the North East from my region expect to have as much spent on health and education as the people of Scotland?
  160. (Mr Brown) We do wish public spending to be based on need. There is the historic Barnett Formula but equally I do point out that for areas which have low levels of employment over a period of time and high levels of work place poverty and low incomes, the New Deal, the Working Families Tax Credit, the Employment Credit, the Children's Tax Credit are putting very substantial additional sums into the region and that is as a result of us wanting to do better by those people who have either low pay or those people who have lower incomes. That is nothing to do with the Barnett Formula, it is entirely to do with the needs in employment and the needs in pay and the needs in family income.

  161. Yes. The fact is that on one side of the border in the North East of England, the poorest region in mainland Britain with the worst educational achievement in the whole of Britain, people do not have their tuition fees paid for, they do not have personal care for the elderly, they do not have teachers who have special systems of pay and rewards whereas north of the border they do. Now how long are we going to go on with these great differences in fairness?
  162. (Mr Brown) This has been something which has been accepted by all political parties over the last 30 years since the Barnett Formula was introduced. Can I just emphasise the point that outside the Barnett Formula are a considerable, indeed a large number of expenditures that are based entirely on need. If you take the Working Families Tax Credit, 310 million is spent in the North East, that is 120 per person, whereas in Scotland it is 300 and it is only 98 per person, in Wales it is 109, so the North East benefits considerably as it will do when the Employment Credit comes in, the Working Families Tax Credit and all tax credits, the Child Tax Credit and the Employment Tax Credit. That is meeting the needs of the North East on the basis of a fair allocation.

  163. Chancellor, everybody gets those tax credits.
  164. (Mr Brown) No, no. Depending on need.

  165. Everybody in every part of Britain gets those tax credits if they are eligible. Now the point about this is in the Comprehensive Spending Review a great deal of additional money was made available for transport in London, over a billion pounds to transport in London. Now under the Barnett Formula there is a 10.23 dividend on that for expenditure in Scotland under the Barnett Formula comparisons. People in the North East neither get the extra tube lines nor do they get the benefits of the Formula spend.
  166. (Mr Brown) My point to you is, for example, if you look at the distribution of housing expenditure throughout the United Kingdom then those areas which have a high proportion of pre-war and post-war housing stock - and the North East is one of them - will get a considerable benefit from the housing expenditure. But what I was drawing your attention to is not all public expenditure is under Barnett. I do emphasise to you this point about the tax credits, that the North East gets proportionately more as a result of the condition of the North East than does London, Scotland or Wales.

  167. Only, Chancellor, because we have more people who are eligible because their incomes are low.
  168. (Mr Brown) That is exactly my point, that we are taking measures which are fair to people in the North East because we recognise there have been historic problems which have got to be addressed, including one of them, the low staying on rate, where I believe the educational maintenance allowances which we announced on Monday but will go nationwide have already proved themselves in pilots to be a successful means of persuading people to stay on at school. The North East has got the lowest staying on rate of any part of the United Kingdom. The educational maintenance allowances will be paid on the basis of need. The North East of England will benefit disproportionately as a result in my view.

    Mr Fallon

  169. Coming back to the underspending, Chancellor, the underspending is not new this year, it has happened in previous years. You have explained this afternoon some of the reasons for it. When Mr Macpherson appeared before us at the time of the Budget he said - and I quote - "There are big sanctions which the Treasury can use". Have you used them?
  170. (Mr Brown) I think the Chief Secretary has been in discussion with the different departments about their departmental investment strategies and it is our intention to work with the departments to achieve that: better forms of procurement, better forms of ordering, better forms of moving forward the capital project.

  171. This is the third Spending Review. We have had underspending in various departments over the last four or five years. Have you actually penalised any department and, if so, which one?
  172. (Mr Brown) I am pointing out to you that while we want to move very swiftly ahead with our capital investment projects that underspending by the end of the year is not always the problem that you say it is. It is a means by which the departments can carry over the money into next year . They do not lose the money and everybody knows that the capital projects, while good in themselves, have in some cases slipped. It is our intention to move them forward as quickly as possible and that is why this work has been done between the different departments.

  173. So there is not an example of any department actually losing out because of its underspending or being penalised in any review?
  174. (Mr Brown) We have got to decide the allocations in every three year review and of course we have to be satisfied that reforms are being put in place to deal with problems as they arise. You will see as a result of the decisions which we have made in this review, the increase in inspection will cover, for example, housing, and therefore we will have a better means of assessing the results in terms of housing expenditures. Equally, of course, decisions about future capital investment on housing will be made on the basis of knowing what has been happening.

  175. So far no poorly performing department has been penalised?
  176. (Mr Brown) I was asked about this, again, at Treasury questions today. The Prime Minister agreed a reorganisation of the Department of Agriculture immediately after the last election because it was felt that it ought to be more a Department of Rural Affairs, that it ought not to be exclusively concerned with farming issues and there were changes which had to be made there. Equally the system of performance pay applies to Permanent Secretaries and the system of ministerial change, you might put it like that, applies to politicians.

    Mr Mudie

  177. If we can go back to where we started, targets. Your officials told us yesterday that they had regular meetings, at least once a quarter, with departments to discuss their targets. Now you in your first response to them seemed to be defensive about the Treasury's part in these targets, they are really the departments' targets. Also you seemed to suggest that any opposition to targets was because you did not like targets. Now, one of our witnesses yesterday said that they were deeply flawed. I would have thought it is almost unanimous in the Committee after what we have gone through that there are flaws in them, intellectually flawed in numbers, the relationships, but we are intrigued with the starting point. Your officials have meetings with the departments once a quarter, what is the Treasury's part in these targets? Why are they not meeting with the Prime Minister's Policy Unit or Results Unit or whatever else he has got at Downing Street; why is it the Treasury?
  178. (Mr Brown) I think it is important that the department which writes the cheques and provides the other departments through tax revenues with the money has a role in monitoring whether performance is improving or not. As far as targets are concerned, I think, equally, there is a debate about the future of targets and how they are applied. There have been three different types of target. There has been an input target where you could say, "Let's have x number of people working in this area." There is a process target of how you get to where you want to be. But the main thing people want to focus on for the longer term is output and what is achieved as a result of your efforts. Certainly over the last few years we have been developing a system that is far more rational in the way that it sets the targets and, as I understand it ---

  179. I thought your answer was better until you got that note. I do not know who has passed you the note, but it went off.
  180. (Mr Brown) The note, interestingly enough - and it is always very helpful to have these notes passed to you -

  181. Aye!
  182. (Mr Brown) --- is the House of Commons Treasury Select Committee, third report of the session 2000-01 and it is about visits to overseas Treasury Ministries and it says: "... we are aware that the UK Treasury is one of the world leaders in implementing reforms such as resource accounting and budgeting, the private finance initiative and Public Service Agreements", so you did support us and say at that stage that we were one of the world leaders.

    Chairman: We are a new Committee, Chancellor!

    Mr Mudie

  183. We are not not supporting you. We are trying to find out the relationship. I thought you were very direct and up-front. It is an answer we did not get from your officials yesterday. The reason you are at the table is you write the cheques. Those were your words and I think that is first-class.
  184. (Mr Brown) I do not mean I write them personally!

  185. We were at pains to find out is if you write the cheques and if a department under-performs whether you write a smaller cheque? We see no relationship between the targets and spending reviews and we would like to know the mechanics.
  186. (Mr Brown) I think you are always deciding in a spending review when you are planning three years ahead whether you feel the money is best used in one direction or in another direction. So in a sense the experience of what you see in previous years, in consultation with the department, leads you to certain conclusions about what your priorities are. When I was asked, however, about sanctions, just as where there are failing services and organisations we have put in sanctions and penalties, I think it is true to say that there is now performance-related pay for permanent secretaries and whereas the ministers are not on performance-related pay, there are clear sanctions in relation to them as well.

  187. Take one of your targets, the eradication of child poverty by 2020, one of the witnesses we had yesterday said that his figures were that instead of taking a million and a half youngsters out of poverty you had only taken half a million and that as we are moving towards 2020 this early trajectory is too low. Do you dispute that? That is the first thing and, secondly, if you do not dispute it what steps are we taking to get back on course?
  188. (Mr Brown) In terms of absolute numbers and absolute poverty there are more than a million people less in poverty.

  189. These are children.
  190. (Mr Brown) I am talking about children. In terms of the relative definitions that are used, obviously the measures we brought in in the last Budget, and indeed in the Budget before that, are the means by which we will get more children out of poverty. So we believe we will meet what is the PSA target which is to reduce child poverty by a quarter by 2004.

  191. One of the difficulties - and you have just showed it verbally - is that anybody looking at the public service agreements and the targets does not know where they are. A lot of the children we are seeking to take out of poverty by 2020 on my estates will have children themselves in poverty by the time you are finishing your target. Why is there not produced, if you are part author of this and it comes out of the Spending Review, a position statement of where we are?
  192. (Mr Brown) The position on child poverty is we do recognise your point and it is a very important point. To have just a wholly long-term target that is unrelated to whether you can see performance in the short and medium term would be susceptible to the criticisms you have got. That is why we have got this target for 2004 to reduce child poverty by a quarter.

  193. But we cannot agree where we are and it is 2002.
  194. (Mr Brown) The Department of Work and Pensions has produced a report on the definitions of poverty and the things that they would like to take into account when measuring poverty. There is an income measure of poverty that is relative, an annual report is produced by what is now the Department of Work and Pensions. The last one was called Opportunity For All and that was published last autumn.

  195. This is a joint target between you and Work and Pensions. Why is, for example, the DFES not involved, Sure Start, the Children's Fund? A practical example might be a youngster with hearing difficulties who is not picked up because there are no psychologists available in the schools (and there is a very great shortage of them). That youngster will have the greatest difficulty staying the course educationally. Instead of a battle against child poverty, it is many departments all contributing. There does not seem to be an acceptance within the Treasury that they should pool everything together, that there should be transparency on the resources put in and who is contributing on the outcomes and how each is contributing. We have confined this in the public service agreements to two departments - yourself putting the money in and I presume tax credits, because that was the answer we got yesterday. Is that our joined-up government? Mr Macpherson shakes his head. If it is no why is this not demonstrated in the document?
  196. (Mr Brown) We are really dealing with two parts of the issue of child poverty. One is purely income and that is why it is the Department of Work and Pensions and the Treasury because, as was said yesterday, it is the combination of social security benefits and tax credits that we believe are the means by which large numbers of children will be lifted out of poverty. We do accept that the numbers of adults with children in work matters to this and we do accept that how well our programme for helping single parents get into work or get training and everything else matters too, so these income measures are the Department of Work and Pensions and the Treasury, but there are wider issues of poverty that you focused on rightly. Before this Spending Review was completed, there was an inter-departmental review of children's services and we looked at Sure Start, we looked at the case for children's centres, we looked at how the Children's Fund was going to perform. We looked particularly at the needs of vulnerable young people in their teens because that is an issue that has been raised by many people and the improvement of children's services is absolutely essential to this review. There is now an integrated budget for children dealing with service provision for children which will allow us to increase childcare places by a quarter of a million, maintain the expected increase to Sure Start to 300,000, and create a network over time of children's centres round the country. These are all important to the battle against deprivation amongst children.

  197. But does that mean in a future public sector agreement that you will make some changes and bring together the figures and the performance?
  198. (Mr Brown) Yes in the sense that we will retain the income measure because we will be judged by that as well as all the other things, but we do plan to improve children's services and, for example, for children in care we recognise we have got to do a lot more as well, and I think you would agree with us.

    Chairman: Public sector agreements, Michael Fallon and David Ruffley to back up.

    Mr Fallon

  199. You have got a creditibility problem with some of these targets, have you not? If you look at your own document Chancellor, I do not know if you have read your own introduction you say: "Most targets have been rolled forward in line with adjustments, where necessary, to reflect experience. In some cases separate targets have been combined under a new headline target. Some of the existing targets have not been included. A small number of headline targets will not be carried forward when they have already been superseded by new targets or events." This is Alice in Wonderland stuff.
  200. (Mr Brown) That is surely exactly what a government should do. One, it should learn by experience. Two, where a target is met it is no longer a target. Three, where we can eliminate process targets and focus on the outputs and indeed where we can move from input targets to output targets, we should do so. You would be surprised if everything remained completely unchanged, either as a result of experience or as the result of our efforts. For example, we say we want to increase literacy amongst children at the age of 11 from 60 per cent to 75 per cent. Once we have achieved that do we say "that is it" or do we have a new target to do better?

  201. You are only taking targets you have met. There are targets you have not met. You said you would remove 30,000 failed asylum seekers a year, you removed only 11,000 last year so you scrapped the target.
  202. (Mr Brown) The Home Office has actually increased the number of people who are removed as a result of the failure of their asylum appeal but that is a matter obviously the Home Office Committee will want to look at.

  203. There is no target.
  204. (Mr Brown) The Home Office has increased the number of people who are removed.

  205. I think you will find there is no target. Chancellor, can I just pick up one other thing you said. You said earlier on that you were not running a command and control economy and that you were not trying to devolve. Are you aware that your Government is running something called a National School Fruit Scheme?
  206. (Mr Brown) Yes, I am. Can I say as far as the asylum target is concerned, the Home Office, it is on page 14 of the Public Service Agreement.

  207. Is it still 30,000 a year?
  208. (Mr Brown) It is there. No.

  209. Is it still 30,000?
  210. (Mr Brown) Sorry. Actually the target is set out in paragraph seven. If you would like me to read it to you I will but it is quite detailed.

  211. What is the number?
  212. (Mr Brown) What it says is to focus the asylum system on those genuinely fleeing from persecution, including by a fast turnaround of unfounded cases, ensuring by 2004 that 75 per cent of substantive asylum applications are decided within two months and that a proportion including final appeal are decided within six months and enforcing the immigration laws more effectively by removing a greater proportion of failed asylum seekers. That is to deal with both those people who are to have their appeal, those who have had their appeal and those who are to be removed. On the Children's Food Scheme ---

  213. Can I just come back on that first point. You have just confirmed the target of 30,000 has been removed.
  214. (Mr Brown) My point to you is that 75 per cent of substantive asylum applications have to be decided within two months, including final appeal, and that a proportion are decided within six months. Then obviously those who do not pass that are to be removed. That is the target that has been set by the Home Office.

  215. This is a new target. On the National School Fruit Scheme, you said you were not running a command and control economy but you have set up a scheme to deliver a piece of school fruit to every child under eight to every school in this country. Why should Whitehall be doing that?
  216. (Mr Brown) I know about the Glasgow scheme and that was not decided by us in the Treasury, and certainly was not decided by the Department of Health. As I understand it, it was decided in Glasgow by the local council but obviously if you feel there is another way that has been chosen to run it, but my experience is the Glasgow scheme is a local authority scheme. It was a Private-Public Partnership. It was between Glasgow and a number of the food chain stores. If you like I shall write you a further letter on these matters. I do not think there is any getting away from the fact that was a local scheme. Now, should it go national, the experience and the success may suggest it should and I believe that the Department of Health wants to do this.

  217. You may want to write to us on that, Chancellor.
  218. (Mr Brown) I am happy to.

  219. The fact is it is a national scheme piloted in Glasgow?
  220. (Mr Brown) Yes. These, of course, as you would be the first to agree, are matters not for the Treasury because we have not decided on the fruit scheme. It may be as part of the Department of Health's work in relation to health it wishes to put some of its resources into preventative health, and that would be a matter for the Department of Health. There has been no centrally driven decision, certainly, from the Treasury on this. As I say, my own experience of this is in Scotland where I may say it has been extremely successful in both nutrition and in encouraging attention by kids in the school classes. You may wish to see the evidence of that.

  221. You are taking credit for the pilot if it works but you are not taking responsibility if it does not.
  222. (Mr Brown) I am not taking credit for the pilot because I was not involved in setting the pilot, I just know of its existence. It was a local initiative. It was very successful. In fact it was, as I say, a Public-Private Partnership. I would have thought the whole Committee would want to welcome these initiatives when they are successful like that.

    Mr Ruffley

  223. Chancellor, on these fiddled PSA targets, there were 43 per cent of your 1998 PSA targets not met by June 2002. Clearly departments are missing the PSA targets, we understand that. What I would like to try and understand is when you were making funding allocations in this Spending Review, did you punish departments who failed to meet their PSAs when you were deciding their funding allocation because otherwise your system of controls is not worth the paper it is printed on, is it?
  224. (Mr Brown) No, we did decide our priorities on the basis of what we thought would be successful in the next round.

  225. The question was - to repeat it - departments which have missed their PSA targets in the last two years, were they adversely affected when it came to their funding allocation in this Spending Review for missing those PSA targets? Were they not or were they?
  226. (Mr Brown) Absolutely. When we decide as to whether resources go to particular departments in particular areas we bear in mind both the record of success and our estimate of what value for money would be achieved. Again these are matters for the departments themselves but it is quite clear in education that what has been achieved in primary schools can also be achieved in secondary schools and therefore more resources going into secondary schools was a good policy which I believe most of us would want to support.

  227. You are talking about rewarding success of the allocation. I am talking about punishing failure. Professor Colin Talbot said there was no evidence of any department being adversely affected in their allocations as a result of missing PSA targets. Can you give me an example of a department that has failed against PSAs being adversely affected when you were dishing out the money this time? Can you give me an example of a department?
  228. (Mr Brown) It is very difficult to give an answer to a question when you speak over me the minute I start to answer the question.

  229. Give me the name of a department.
  230. (Mr Brown) What I said to you was that the priorities for this Spending Review were decided on the basis of what we thought had been successful in the past and what would give us value for money in the future. That is the way in which I would think you would want to make decisions. Equally, we have decided in this review on a process of reform within the public services, and departments to get their money have signed up and jointly agreed with the Treasury a process of reform. I listed many of the reforms on Monday when I announced the Spending Review, including how we would deal with failing schools and how we would deal with failing colleges and failing institutions and services, what we would do to reward institutions which were successful and how we would improve the system of local inspection.

  231. You have talked about reward, I am talking about punishing failure when it came to the funding allocation. Now in the time since the last CSR in deciding what you are going to allocate in this Spending Review, can you name a single department that has had its funding allocation adversely affected because it has missed its PSA targets? Give me the name of a department and I will be a happy man.
  232. (Mr Brown) That is not the point I am making to you.

    Mr Ruffley: No. It is my point. What is the answer?


  233. Give the Chancellor an opportunity to answer.
  234. (Mr Brown) If you take schools, there are a large number of schools which are regarded as failing schools which during the course of the last few years have been taken over or have been closed down or have been reopened as city academies.

    Mr Ruffley

  235. This is pathetic.
  236. (Mr Brown) Where an education institution has been failing action has been taken. Equally, in this new spending round we are going to be far tougher where there are failing institutions. Where there are institutions where it is clear that reforms are not being made by the head teacher in charge, there will be, as Estelle Morris said in the House of Commons yesterday, the provision for these schools to be taken over by neighbouring schools, for there to be mergers as well as for the creation of city academies. It is not true that we have failed to deal with failing institutions in these areas where they have existed but the process will continue because the demands and the standards that are being set by the Education Department are higher than they were in the last round and equally the measures they are taking to both penalise failure and to reward success are stronger. I must point out to you that we must not penalise the children because a school is failing. It is our duty, also, to provide education for everyone and the idea that we should close the school and leave no provision whatsoever for the children would be totally anathema to the whole of the population.

    Mr Ruffley: That had nothing to do with the question I asked. I think everyone here knows the question I was asking you and you have declined to answer it properly.

    Mr Laws

  237. Can I follow up on this issue. You did say earlier in your introductory comments that as far as the PSAs were concerned transparency is crucial to this whole process. In your view, what proportion of the PSAs that you set in 1998 have now been met across government?
  238. (Mr Brown) The PSAs we set in 1998 were for the years to 2002 and some of them, for example the education ones, will depend on the 2000 school results ---

  239. What proportion have been met across government?
  240. (Mr Brown) What is going to happen, just so that you are absolutely clear about this as well, is there will be departmental reports by the departments concerned. They will tell you how they have performed in relation to the targets that go right through to 2002. When these report we will bring them all together and obviously we will be reporting to the Committee.

  241. Do you not think, in all seriousness, that it is very feeble that back in 1998 you told us that you were giving departments a load of money, you expected in return for that that they deliver on their targets and you would be closely monitoring this and pounding them if they did not deliver, and here we are four years later and we have not got, it seems, an idea of what proportion of these targets across government have been met?
  242. (Mr Brown) What is said is that 87 per cent of these have been met but these are recorded in the departmental reports and what will happen is these departmental reports will bring us up to date for the year ending 2002, they will publish their reports, and the debate can continue from there. I think the Committee is under some misapprehension. There was a Comprehensive Spending Review of 1998 and we set propositions until 2002. Then there was a Spending Review in 2000. We made some changes there and we set our targets through to 2004. It is for the individual departments to report.

  243. Who has measured the 87 per cent because it is very different not only to the figures you have heard from Mr Ruffley but the figures we have received from Parliamentary Answers from departments which show that more like a third to 40 per cent have been missed.
  244. (Mr Brown) You are misunderstanding the point. Some targets are set to 2004, some are set to 2006, and some are set to 2010.

  245. Who has measured that 87 per cent of the targets have been met? Is that the Treasury's estimate?
  246. (Mr Brown) What is going to happen is that the departmental reports will be published and then a final reckoning can be made.

  247. Whose judgment is it that 87 per cent have been met?
  248. (Mr Brown) The departments have got to publish reports.

  249. Do you think it is adequate that departments are measuring their own performance?
  250. (Mr Brown) It is right that departments publish their record.

  251. Do you think it is right that departments should assess their own performance?
  252. (Mr Brown) There is a process of audit going on right across government.

  253. Is it right that in the auditing of this the departments judge for themselves that they have met their own targets? That is pathetic.
  254. (Mr Brown) Much of the auditing is independent. As you know very well, there is the National Audit Office that looks at how departments are performing -

  255. They do not look at this, do they? The departments are stitching it up and making judgments on their own targets. Is a joke, is it not?
  256. (Mr Brown) You would be reflecting on the failure of the select committee system if you said that.

  257. The Select Committee will want to come back to this issue, Chancellor.
  258. (Mr Brown) Let's be clear about this. There is a complete misunderstanding on your part about the process. The data that is produced by departments has got to be audited by the National Audit Office.

  259. There is no misunderstanding here at all. What is going on is departments are evaluating their own performance. Let me take you to one department in particular, which is the Home Office, to look at this in detail.
  260. (Mr Brown) You cannot mislead the other members of the Committee on this. As far as data is concerned -


  261. The nature of this exchange does not help the shorthand writers.
  262. (Mr Brown) It is audited by the National Audit Office. We have an independent system of audit which is in many ways the pride of Britain in relation to financial systems around the world and it is an independent system, and you are wrong to mislead people on that.

    Mr Ruffley

  263. The Committee will want to comment on this itself. Let me turn to how you are judging these PSAs to one department which is the Home Office -
  264. (Mr Brown) I think that is a matter for the Home Office.

  265. The scrutiny of the purposes to which the Home Office puts the money from you is a matter for you as well. You said that in 1998 -
  266. (Mr Brown) I said to you it was a matter for the Home Office to publish its departmental reports.

  267. That is not my question. You should have waited for my question. So far, according to Parliamentary Answers from the Home Office, they have missed 11 out of 16 targets. In spite of that, in the latest Spending Review you are giving them a real terms rise of 5.6 per cent a year, so you are rewarding Mr Blunkett for failure, are you not?
  268. (Mr Brown) Are you saying that the conclusion you reach is that no more police officers are needed because the conclusion that we have reached is that more police officers are needed?

  269. I am merely following through from what you said in 1998 when you said you would monitor closely how departments are proceeding, and if they failed on their targets you might hold back money. You are doing the opposite of that. A department that has cocked it up big time, worse than any other department, is being given a 5.6 per cent real terms rise in spending. It has been rewarded for failure basically.
  270. (Mr Brown) That is absolutely wrong. The Home Office is agreeing and implementing a very big programme of reform. It is as a result of that programme of reform that it is possible to give them additional resources for the next few years. For example, in relation to the police there is a Police Reform Bill going through the House of Commons. There are the basic units, command units, which are getting far more flexibility but also far more resources down to them so that they can do the necessary things. As far as the Home Office generally is concerned, you had the announcement of the Criminal Justice Reform White Paper yesterday by the Home Secretary. There have been major reforms agreed in the asylum system. The idea that there is not a process of reform in the Home Office to justify the resources they are receiving is completely wrong.

  271. I am surprised that you seem so happy with the Home Office's performance when it has been deliberately tight. Let me ask you one final question. In your latest set of Public Service Agreements that you published with the spending statement on Monday where you list these out by department, at the end of the Home Office's section it says "Who is responsible for delivery?" and it says the Home Secretary is responsible for delivery. What happens to the Home Secretary if he does not deliver against the targets that he has been set? Is he going to get sacked? Dock his pay or something?
  272. (Mr Brown) The Home Secretary has initiated a vast programme of reform.

  273. What happens if he does not deliver?
  274. (Mr Brown) That is a matter for both the Prime Minister and for the electorate. The important thing I think you should accept is that in the light of what we have known about the way the asylum and immigration system is working, the criminal justice system is working and also the reforms which were needed in the police system, there is a major programme of reform under way to justify the additional resources which are needed.

    Mr Tyrie

  275. Is there any level of failure to perform on the Home Office's target that might have led you to alter the 5.6 per cent real terms increase? Any level at all?
  276. (Mr Brown) Again, your point seems to be that the public should somehow suffer through having less police, that we are not meeting all our objectives. Surely the important thing is to bring in a process of reform which guarantees that the public will get the best service.

  277. The answer is clearly no. There is clearly no connection between what you began with when you said "Well, of course, the influence we have on it is we write the cheques" and these targets. They are completely disconnected.
  278. (Mr Brown) Mr Tyrie, once again, I do not quite see where the proposition you are making leads you to. Are you saying your conclusion would be that we should not finance the police service? What we need to do is make sure the reforms in the police service or in the prison service or alternatively in the asylum and immigration service - and these are the reforms that the Home Secretary is proposing - are put in place to deal with problems which arise. That is exactly what is happening. I told a previous questioner, also, that as far as performance related arrangements are concerned, that is a matter in terms of permanent secretaries' pay and of course there is far more performance related pay than in the past, and that is another process which is working within departments.

  279. Yes. It is flattering that you have asked me questions. All in good time, Chancellor. Just for the moment ---
  280. (Mr Brown) I think you have first got to persuade your own party.

  281. That is also very flattering. We have not yet found any answers. What we really want to know seriously as a Committee, and we have discussed this privately, I am not breaking any rules by saying that, is whether these targets have depth and meaning. So far we have not been able in exchanges we have had on this Committee to find any depth or meaning to them. They seem completely disconnected from the Spending Review.
  282. (Mr Brown) I think this would be a terrible mistake on the part of the Committee to draw that conclusion having two years ago drawn a completely different conclusion.

  283. We are learning.
  284. (Mr Brown) The National Audit Office reported in March 2001 and said "The introduction of public service targets and in particular the move to outcome focus targets..." which is what we are talking about today "... is an ambitious programme of change which puts the United Kingdom amongst the leaders in performance measurement practice." It would be in my view a very bad mistake on all our parts to conclude that the targets which have been set are wrong in principle because it is the one way that departments focus on the results that are necessary. It is leading to a very big process of public sector reform which I thought the Committee would want to welcome and targets are being achieved, for example in primary schools and in the health service and in other areas, and leading us to be more ambitious in the future about what we can achieve with public money.


  285. Chancellor, I understand that. We are not at variance with you on that.
  286. (Mr Brown) That is not what Mr Tyrie said.

  287. We are looking for clarity. The issue of the dividing line between the Minister, the department, the people who deliver on the ground and the integrity of the targets, that is the issue.
  288. (Mr Brown) That is exactly the point I was trying to make earlier on. Again, this is part of the debate between us and the Committee that in the same way as we made the Bank of England independent, the Government set the objective that those people who were charged with making the decisions were allowed to get on with the job and you built around that an open system of accountability where information flowed freely to the public. That is in a sense the model on which we are working with public service agreements. We set the objectives but it is up to the individual organisations, particularly now with local service providers, to get on with the job.

    Mr Mudie

  289. One of your partners, on the matter we have discussed earlier, child poverty, your only other partner, has stated in the book that Works and Pensions underspent (we got the figures a day late but we got them) 440 million on child poverty issues. Could you tell us what conversations Mr Macpherson and his colleagues had with Works and Pensions? That is a key one that you feel deeply about, child poverty.
  290. (Mr Brown) Mr Mudie is actually referring to the New Deal and it is actually because more people got back to work without having to use the New Deal. If the New Deal underspends it is a good thing because more people are getting back to work.

  291. Chancellor, you should not listen to these siren voices in your ear. You allocated the department much sought after public resources, so they saved on one thing, New Deal, but they have a 20-year target and we think they are well behind on their target. I would take a dim view if I were Chancellor of a department which was my partner in such a sensitive area underspending 440 million.
  292. (Mr Brown) I do not think that is a fair criticism, Mr Mudie, if I may say so, because the New Deal is financed by the windfall tax. It is in a sense a separate fund. It depends on the demand for it and we have been quite happy to put in resources to enable people to get the training to get back into work, but obviously, because of the condition of the economy being in a good state, it has been possible to get people back to work in many instances without having to use the New Deal or only to use the New Deal sparingly because they were quickly offered jobs. If we underspend on the New Deal that is money available in future for other employment projects, but to make decisions about child benefit and about child tax credits and about income for families, these are decisions that are made principally in the Budget in relation to child tax credits and in relation to child benefit by the reforms that we are making in the approach to children's benefits as a whole. I would regard that 400 million less as a failure and more as a success in getting people back to work more easily than we had expected.

  293. I would have regarded it as an opportunity to move it across to the Sure Start part of the programme to get more kids in nurseries.
  294. (Mr Brown) I am happy to talk about Sure Start.

  295. They underspent as well, Chancellor, if you want me to give you the figures.
  296. (Mr Brown) The important thing about Sure Start is that while it is working well and all the experiments and pilots in different areas have been successful, we are anxious as quickly as possible to extend it nationwide.

    Mr Mudie: We were also very united in our disappointment about the so-called new audit and inspection arrangements. We examined these and discovered that there were probably no new arrangements; there was a bit of rationalisation. This is the new people that you set up as part of the statement, the new audit and inspection arrangements. When we went into them in your Spending Review document, none of them is new. We are just wondering why it got such a big place in the announcement.


  297. There was an extensive exchange with Mr Macpherson.
  298. (Mr Brown) We commissioned a health care audit and inspection.

    Mr Mudie

  299. That was the one that worried us.
  300. (Mr Brown) It is bringing together in one single organisation the work that is done by a number of organisations at the moment, in particular the Commission for Health Improvement and the value for money work being carried out in the Audit Commission for the NHS. There was a very good reason for that, that as long as the work was carried out by these different institutions it was not properly co-ordinated and it was not yielding the scrutiny that was necessary. I hope that you can support that, although I am sure that there are very legitimate questions about how it is going to operate. It is a good idea in my view to have this inspectorate which brings together the existing functions of others.

  301. Mr Macpherson on your right, a very sound fellow, described the Audit Commission's work in health as very effective as of yesterday. Today we are talking about taking this work from a very effective (Mr Macpherson's word) organisation and setting up a new body. The first thing is, have you told the Audit Commission? Have you consulted with the Audit Commission?
  302. (Mr Brown) This was announced in the Budget. There was consultation with the Audit Commission and the work on this is proceeding well and it has been legislated for in the National Health Service Reform Bill, so these are measures that have been thought out in detail and are moving ahead as a result of parliamentary legislation, but it is to bring together the existing auditing work that is done by at least two institutions at the moment into one.

  303. Chancellor, we failed to get an answer, despite some gentle questioning on the cost of this, the additional cost. Do you have an additional cost? We agree that they have been costed but we were not going to be privy to the costs. Are you prepared to tell us? Was Mr Macpherson prepared to tell you to tell us?
  304. (Mr Brown) What I know is that by rationalising the operational processes of two institutions into one there is an expectation, indeed there is an understanding, that the administrative burdens will reduce and therefore there will be savings.

    Mr Mudie:: So you are saved.

    Mr Plaskitt

  305. For much of the last hour my colleagues have been trying to elicit an example of a department which you punished as without a PSA process and I am not sure how realistic an expectation that was. I just want to put an alternative view to you. It would be a pity to leave the Committee with the impression that the PSA process is divorced from the allocations. Would you agree, Chancellor, that if a department consistently failed to meet its PSA targets it would have a credibility problem when it came to making bids for new allocations, that this would be one way in which the PSA process would affect the next spending round?
  306. (Mr Brown) This is exactly why reform is brought in. If you are not satisfied with the way things are going and you think things can be done better, that is precisely why a reform agenda is agreed. I do not think anybody can say about this public spending exercise that there is an absence of reform. The inspection and auditing is one aspect of how departments are brought under greater scrutiny, but equally I described in relation to schools the process by which now departments are dealing with failing organisations at a local level - schools, hospitals, how they are dealing with prisons, how they are dealing with the Probation Service, how they are dealing with local authority housing departments, how they are dealing with social services departments. That is an example of how reform is being brought in to deal with the need for greater efficiency and value for money in the delivery of the health services. I have said, and I repeat, that as far as the departments themselves are concerned there has been a reorganisation of one department, the Department of Agriculture, because it was felt that it was too closely identified simply with farming and it ought to be for the wider countryside. These are matters for the Prime Minister, not for me. The Permanent Secretaries are now on performance related pay and these are changes that have been brought in.

    Mr Cousins

  307. Chancellor, in your spending plans you have slightly increased the reserve that you hold back, very slightly, as a proportion of total spending plans. By and large there is nothing left. You have not held much back. Are you comfortable with that, if something should go wrong?
  308. (Mr Brown) The new system of three year budgeting is basically that each individual department is supposed to take far more care of contingencies as they arise than they used to do when there was an annual spending round. You would expect a department, and I gave you the example of health, to have provision in case something was going to happen during the course of the year. Obviously, foot and mouth, Afghanistan and other problems that arise, that cause difficulties that cannot be foreseen, are to be dealt with by the reserve.

  309. Are you sure you have got a reserve that is high enough to deal with it?
  310. (Mr Brown) That is obviously an issue that you have to look at from time to time but, as I say, the new system is that departments themselves have got to plan for the provision of the services for any contingency that arises and that is why I was raising with you the question of an underspend, because sometimes a department is expected to make provision for things but that emergency does not arise.

    Mr Tyrie

  311. Chancellor, Peter Mandelson not long ago said that in an economic sense we are all Thatcherites now. Are you a Thatcherite now in the economic sense?
  312. (Mr Brown) I must say I thought this discussion was to look at the public spending White Paper. We are spending more money, not less. We are investing more substantially in improving our public services because we believe that in Health and Education the public services would do well. I think the policy pursued by her Government is not the policy that we are pursuing. As far as the expansion of enterprise is concerned, I believe that the fault in the past was perhaps that enterprise was felt to be only for a few and we are trying to open up the opportunities for enterprise, small business creation, the chance to be self-employed, to a far wider group of people so that the entrepreneurial economy that was talked about in the eighties we are trying to make more widely accessible to more people.

  313. So the answer was no really?
  314. (Mr Brown) I think the answer in terms of investment of public expenditure is that we are expanding it whereas here Government would like to have cut it. We are doing that because we believe in a free Health Service and we believe in education open to all.

  315. So if I can just turn the question on its head, does this mean that we can take it that this Spending Review is a Socialist Spending Review?
  316. (Mr Brown) It is a Labour Government Spending Review based on the principles we set down in our manifesto and it is based on enterprise and it is based on fairness, and that is the Government's political philosophy that I am putting across and that is opportunity for all.

  317. Are you a Socialist, Chancellor?
  318. (Mr Brown) I am a person who believes in fairness.

  319. Are you a Socialist, Chancellor?
  320. (Mr Brown) You have your own definition, I suspect.

  321. You are an expert on it. You have written books on it, Chancellor. I am a mere amateur.
  322. (Mr Brown) I believe in policies that advance fairness and equality of opportunity and some people would describe that as social democracy; some people describe it in different ways.

    Mr Cousins

  323. Are you embarrassed that we never got to be Brownites?
  324. (Mr Brown) I would be very pleased if the whole of the Committee unanimously were to be able to say that, but I somehow suspect that that is not the case.

    Chairman: I do not think so, Chancellor, and I will hand over to David Ruffley.

    Mr Ruffley

  325. Chancellor, when you announced the 1998 CSR did you increase the spending totals during the lifetime of that CSR? You added extra money on, did you not, after the original announcement?
  326. (Mr Brown) Yes.

  327. Yes, you did. When you did the 2000 CSR announcement you also did not stick to those firm totals you announced that day. You actually added more money on, did you not?
  328. (Mr Brown) We were able to put more money into schools and into the Health Service which I think was universally welcomed.

  329. So on those two precedents this CSR that you have announced this month, it is quite likely on your past form - you have got a bit of previous on this, have you not? - that you will not stick to those fixed spending totals? You might within the lifetime of this Spending Review allocate more money so that the figure could be higher, could it not?
  330. (Mr Brown) We have got to beat our fiscal rules. We have got to meet the rules that I set down, which means that there has got to be a current balance and also debt has got to be at a sustainable level. The spending plans I have set down are affordable and they are affordable on the basis of the revenues which we have raised.

  331. But they could be increased? That is what you did in the last two CSRs.
  332. (Mr Brown) The spending plans could only be increased if it was affordable to do so.

  333. But you might do it?
  334. (Mr Brown) We would have to base that on the meeting of our fiscal rules. As I say to you, Mr Ruffley, and I said earlier to you, we have set down our plans to 2006 and they are based on the revenues that we have also set down that are likely to be raised as a result of the measures that we have taken. The key question on this is, can you meet your fiscal rules? We have been fortunate enough to have done so over the last few years. I believe that it is a test of this Government that we will continue to meet the fiscal rules that we have set down over the next few years.

    Mr Laws

  335. Chancellor, on page 167 of the Spending Review document it shows real spending by department over the Spending Review period. That shows that in every year of the Spending Review in real terms defence spending would have been lower than it was last year in 2001/02. Does that mean that you have pulled a fast one in relation to the perception of the settlement and do you know if there is enough money in this Budget if we have to fight a war in Iraq?
  336. (Mr Brown) Again, I do think the Committee must look at how these things work in practice. Where the settlement is drawn on the Ministry of Defence, it is for the full spending round on the basis of the capability that they need to have, but where there is an exercise entered into, in other words where troops are sent to Afghanistan or alternatively to Sierra Leone, as happened, or to Kosovo or to Macedonia, then there will be money available from the reserve to meet the costs of this exercise that was not foreseen and was not previously planned. What we are setting out to 2006 is the spending plans to maintain and in some cases increase the capability of our armed forces with new equipment, with the proper staffing levels, with the investment in the supply services to them, and that is absolutely right to do, but we have also got to recognise that the spending figures will be affected by the contingencies that arise where you have got to finance the one-off or the decisions to have exercises in particular areas, and that is how defence spending has worked for quite a long period of time and it is a sensible way of doing it. We have got to have them capable of taking action where it is necessary, but equally where there is action we have got to be willing to make provision from the reserve.

    Mr Laws: I will take that as a yes.


  337. Chancellor, a last question. On the 1998 PSA targets and this issue of productivity, and I know it is very dear to you and indeed this Committee will be looking at the issue of productivity as we go round different parts of the United Kingdom, the target that was set down then was to put in place policies to narrow the productivity gap relative to other industrialised countries over the cycle, and the outturn is partially met. If it is partially met did it partially fail as well? What input has the fact that the Treasury only partially met this target had on departmental funding and performance?

(Mr Brown) I think this is a very important question. Our productivity target is essentially one for the years to 2010. That is actually what we have said publicly. It would be wrong to fail the Department of Trade and Industry because their target is for the years to 2010. What we are doing in practical policies is setting in place a regime for monitoring fiscal stability, which is absolutely crucial to productivity, and then setting in place - and this is the DTI's version of the Enterprise Bill, as I say, - the best competitive environment and that is the reforms in the Competition Bill. We have tried to create an environment that is inducive to investment and that is why we have reduced corporation tax and capital gains tax and small business corporate taxation. Equally, however, we know that the reforms that are necessary to increase productivity in skills and education will take some time and that is why the investment is going into education. Infrastructure is important to this and so too is the encouragement of enterprise. One of the things that we did do in this Spending Review in addition to the extra funding for education (important for productivity) was the extra funding for science. The science budget is going up I think by ten per cent in real terms, a very substantial additional investment in school, college and university science, because we believe that that is going to be a very big driver of productivity in the future. Yes, we have put in place a number of major reforms that are necessary if you are going to be able to have the stability and the competitive environment and the right environment for investment in place to get productivity and growth and to achieve our aims by 2010. Yes, in this review education is better funded, science is better funded, services to small business and therefore to enterprise are better funded. One thing I should emphasise is that enterprise, education and schools are better funded. No-one will say that what we did in 2001 or 2002 was going to yield a result in enterprise education for schools in 2003, but the measures are in place for the long term boost in productivity that we want to see.

Chairman: Can I say, Chancellor, that as a Member of Parliament with a constituency adjacent to Glasgow, the Fresh Fruit Initiative has been working well and I would like to see it open out just as well into the fruit yielded this afternoon. Thanks very much for your attendance. We look forward to meeting you again in the autumn.