UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 27-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

PRE-BUDGET REPORT 2008

 

 

Tuesday 9 December 2008

MR DAVE RAMSDEN, MR JAMES RICHARDSON, MR EDWARD TROUP,

MR MIKE WILLIAMS and MR CLIVE MAXWELL

Evidence heard in Public Questions 103 - 241

 

 

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Transcribed by the Official Shorthand Writers to the Houses of Parliament:

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 9 December 2008

Members present

John McFall, in the Chair

Nick Ainger

Mr Graham Brady

Mr Colin Breed

Jim Cousins

Mr Stephen Crabb

Mr Michael Fallon

Mr Andrew Love

Mr George Mudie

John Thurso

Mr Mark Todd

________________

Witnesses: Mr Dave Ramsden, Managing Director, Macroeconomics and Fiscal Policy, Mr James Richardson, Director, Public Spending, Mr Edward Troup, Director, Business and Indirect Tax, Mr Mike Williams, Director, Personal Tax and Welfare Reform, and Mr Clive Maxwell, Director, Financial Services, HM Treasury, gave evidence.

Q103 Chairman: Mr Ramsden, good morning to you and your colleagues. Welcome. Can you introduce them for the shorthand writer, please?

Mr Ramsden: Good morning, Chairman. On my right I have got Mike Williams, Director of Personal Tax and Welfare Reform and then James Richardson, Director of Public Spending. On my far left is Clive Maxwell, Director of Financial Stability and Edward Troup, Director of Business and Indirect Tax. I am Dave Ramsden, Chief Economic Adviser to the Treasury.

Q104 Chairman: For individual banks it makes sense for them to keep their capital and not lend collectively, but that is what the banks need to do, lend together and take that first step collectively. The Governor of the Bank of England when before the Committee said: "the single most pressing challenge to domestic economic policy is to get the bank system to resume lending in any normal sense". Do you agree, and what is happening?

Mr Ramsden: We certainly agree that getting the banks lending is a critical factor, that is why the Lending Panel is meeting tomorrow and that is why, as we stressed in our PBR forecast, the return of credit conditions, both in terms of the price of credit and the quantity of credit, to what might be considered a more normal position is absolutely critical to achieving the forecasts that we set out. Indeed, it is the key assumption on which the forecasts were based.

Q105 Chairman: Given the huge increase in public borrowing of the Government over the past six months and the future projections on that, how worried are you about the creditworthiness of the UK Government as we go forward?

Mr Ramsden: Our assessment is that the public finance position as was set out in the PBR is one of sustainability. As you heard from the experts that you had before you last week, the price that we pay for raising debt has continued to fall across all maturities. That has been an established trend that has continued since the PBR. Short-dated gilts are currently at historically low levels and the 10 year benchmark is at 3.6%, so there is a lot of demand for government debt at the moment and in the economic conditions and credit conditions that we face we think it is appropriate to allow government borrowing and government debt to rise to compensate for the fact that private sector borrowing is being reined in sharply globally through the process of de-leveraging.

Q106 Chairman: It has been reported that the UK has seen the biggest rise in credit default swaps on sovereign debt of any major economy in the last two weeks. Some of these figures seem quite striking. It says it costs 110,000 to insure 10 million of UK debt against default over five years, 50,000 more than the middle of last month, and if you go back to February it cost 8,000, so it is a rise from 8,000 to 110,000 to insure 10 million of UK debt. Is that not quite alarming?

Mr Ramsden: Our assessment is that the most important indicator of credit risk is an entity's credit rating and the UK Government remains at a Triple A. Some commentators have drawn attention to conditions in this new derivatives market for credit default swaps on sovereign debt. This is an incredibly thin market, quite often with the prices quoted not really reflecting even any traits but notional traits, so I do not think we would consider prices in this market to be an accurate reflection of a risk of a credit event for the UK.

Q107 Chairman: You still have great faith in the ratings of the credit rating agencies?

Mr Ramsden: All I am trying to give you is some background information on how this credit default swaps market has developed.

Q108 Chairman: The debate in the past weeks has moved from savers to borrowers in terms of interest rates, or at least that is coming on the agenda. Is there anything in the Pre-Budget Report to counter the redistributive effect of interest rate cuts with resources moving from savers to borrowers?

Mr Ramsden: I might ask Clive Maxwell to give you more detail on that. The whole macro picture is predicated on the fact that early on in this recession unlike, for example, in the early 1990s recession we are seeing very sharp cuts to very low levels of interest rates. This is intended to ease the burden on borrowers. That is the key macroeconomic instrument that we want to see working at this time. I have set out what the position is at the macro level, but at the micro level we do recognise that this will have distributional impacts depending on whether you are a borrower or a saver, and also for different parts of the community. If your interest is particularly in the impact on pensioners then I could ask Mike Williams to say a bit more about the detail on pensioners.

Q109 Chairman: I have had a few emails on that from pensioners particularly.

Mr Williams: On pensioners, I think we need to bear in mind that many pensioners, unfortunately, have either no or relatively little in the way of savings and for them the pension credit provides additional support because it is being increased by more than indexation to 130 a week for a single pensioner from April 2009. You will be aware, Chairman, that many pensioners continue to receive their bank or building society interest with tax deducted in circumstances where they could fill in a form and get the tax not deducted or make claims to get some of the tax back afterwards. We are about to run a new campaign to raise awareness of the ability to get the interest paid gross or to get back some of the tax in circumstances where savers at the 10p tax rate apply.

Q110 Mr Fallon: Mr Ramsden, the Chancellor told the House at column 492 that the economy would start to grow again on 1 July next year. Which other economic forecasters agree with that?

Mr Ramsden: Well, ---

Q111 Mr Fallon: Could you just name them.

Mr Ramsden: I can tell you that the shape of our forecast is very similar to the shape of the Bank of England's forecast which was published at the beginning of November which also expects to see the economy picking up through the second half of next year, which is consistent with our judgment. Can I just amplify on that in terms of talking about our forecast in particular. There are four factors that we think are going to underpin a recovery in the second half of next year. These are four factors which have a strong bearing on our judgment. The first is the very sharp fallback in commodity prices that we think will feed through into lower inflation rates as we have forecast, and you have seen in this Monday's data on producer prices how sharply now producer prices are falling back. Earlier this year that really weighed on households' purchasing power and I am sure you have had many letters to that effect. That factor is going to unwind which will support household incomes through next year and really give a boost to purchasing power. Second, as I have already mentioned, the very sharp fall in interest rates where we have seen interest rates having coming down by 75 basis points over the 10 months from last December and have now come down by an additional 300 basis points since October, that is just in the last nine weeks. Third, there is the fiscal stimulus and the discretionary measures that we announced at PBR which amount to 1% of GDP. Fourth, there is the factor that you discussed last week with the experts, the significant depreciation in sterling which we think will contribute to a rebalancing of the economy and in particular stimulating activity away from imports. None of this is to underestimate the recession's impact. We are forecasting a pretty sharp fall in output intensifying in this quarter and then we see output continuing to fall in the first half of next year, and we recognise that is going to have a significant impact on businesses and individuals but we do think there are forces there which will lead to recovery from the second half of next year. As I said at the outset of my answer, the Bank of England is also forecasting a recovery from the second half of next year.

Q112 Mr Fallon: Thank you. That is a very long answer but it has not given you time to name any other independent forecasters who think the recession is going to end on 30 June.

Mr Ramsden: The last time I looked the Bank of England was independent.

Q113 Mr Fallon: That is the only forecaster, is it, that agrees with you?

Mr Ramsden: No. Morgan Stanley, and David Miles is the chief forecaster there, he is a well-respected forecaster, is expecting growth of about 13/4% in 2010 the last time I looked. We set out in the Budget document that there are ---

Q114 Mr Fallon: But I asked you about 2009, not 2010. The Chancellor said that the recovery would start on 1 July 2009.

Mr Ramsden: We forecast half-year by half-year, so the Chancellor said that the recovery would start in the second half of 2009 for the reasons I have given you and gather pace into 2010. In response to this Committee's recommendations we have tried to set out a lot more detail, including the risks to that prospect, and we are not underplaying those risks at all. We are conditioning our forecasts on credit conditions returning to a new norm, as I said at the outset of this hearing. Also, we have published at the back of Annex A a lot of detail on the risks and we have set out forecasters who do not think recovery is going to be as strong in 2010. There are forecasters such as Citigroup, HSBC, who have a much weaker recovery. We recognise there is a very significant range of views on 2010 because of the exceptional uncertainty we are dealing with.

Q115 Mr Fallon: I was asking you about 2009. Let us move on now to 2010-11. Your PBR shows that growth in the UK is faster than all the other G7 countries. What is the evidence in this book to support that assumption? Why will our growth be faster than the rest of the G7?

Mr Ramsden: If you go through the factors that I have just highlighted, those apply to the UK and they also apply to some extent to the G7 economies but, for example, as your witnesses told you last week, in the four factors I emphasised we have seen compared to the euro area a more significant fall in interest rates. Also, other countries such as France over the weekend have announced fiscal stimulus and Germany before them. Our fiscal stimulus is already in play with VAT reduced from last Monday and we have seen the depreciation in the exchange rate that I mentioned. We see all these factors, including the fact that in the UK we saw significant increases in inflation and we now see inflation going down further, so that will boost real incomes in the UK, meaning that we can make that forecast judgment that we have made. The experience of the UK is that we do have relatively flexible markets and that means it is reasonable to assume that they will adjust relatively quickly following a recession with growth picking up, but I do not think that our forecast of growth in 2010 of 11/2 to 2% in 2010, while I am happy to acknowledge it is at the top end of the range of outside forecasters and is close to the Bank of England's, is anything other than achievable.

Q116 Mr Breed: Mr Ramsden, in response to Mr Fallon's question you indicated that you felt depreciation in sterling would actually assist the rebalancing of the economy. To what extent do you think that will happen bearing in mind that on previous occasions when we have had significant depreciation in sterling exporters have tended to increase their prices to build their profits rather than being seen in increased export volume? Are you not placing too much reliance upon any significant contribution from the depreciation of sterling?

Mr Ramsden: I think that is a fair point. In the economy annex, again as part of trying to explain the judgments underlying this PBR forecast, we set out in Box A6 on page 176 what were the potential factors at play and the effect that you allude to does seem to have been what happened after the UK dropped out of the exchange rate mechanism in the early 1990s. At first we saw it in prices with exporters improving their margins and then it came through later on in volumes. What we have assumed in this forecast is that principally in the short-term the benefit effects will be from import substitution rather than from some big increase in export volumes, that UK consumers will switch more towards domestic production rather than imported production because the price of imported production will go up and then over time you will get the export volume effects. We have tried to reflect those factors.

Q117 Mr Breed: But in the last 16 years or so domestic manufacturing of products and such has declined even further so the ability to purchase, if you like, home-grown products rather than import them has literally declined significantly. Your ability to go and buy potentially domestically produced goods as opposed to them being imported is significantly less.

Mr Ramsden: Obviously our forecasts are based on the size of the manufacturing sector as is and we have tried to factor in that effect.

Q118 Mr Breed: What are the prospects of the alternative scenario that Mr Bean, the Deputy Governor of the Bank of England, outlined to us of an old-fashioned sterling crisis occurring? We are seeing sterling fall even more in 2009 than is currently the case, we are about 20% down and it is still going down.

Mr Ramsden: We have a freely floating exchange rate that moves about on the international exchanges according to how the fundamentals and perceptions drive sterling, so we have seen the depreciation in sterling over the last year after a period of ten years when the global economy was pretty stable and sterling moved within a very low band. It has fallen out of that recently and that can happen because it is flexible. We know that the Government does not have any kind of policy or target towards sterling, unlike some of the previous episodes you have talked about. We had a discussion of this in paragraph A48, page 159, the various reasons why we think sterling has depreciated: UK growth prospects were being revised down; over the last year there has been increased expectation of substantial easing in interest rates in the UK relative to some of our main competitors, as I mentioned earlier, and also increased risk premia demanded on sterling assets. We have set out the potential factors. I am not going to give you a forecast of sterling for next year, that is not something that we would do.

Q119 Mr Breed: Have you done any scenarios? We are down about 20%, have you done any scenarios if sterling was to fall another 10% or 15%?

Mr Ramsden: We look at all kinds of scenarios for the economy to think about whether our forecast judgments are reasonable.

Q120 Mr Brady: The PBR assumes that the fiscal stimulus will reduce the size of the downturn by around half a percentage point. Why was that degree of reduction targeted?

Mr Ramsden: We started from a forecast that clearly showed, as I said earlier, the UK already on the data had moved into recession and we saw that recession intensify in Q4 of this year and then continuing into the first half of next year. Looking at that outlook one has to make a judgment as to the role of fiscal policy alongside monetary policy, as this Committee has emphasised and discussed with the MPC a couple of weeks ago. We looked at the economic and fiscal prospect and judged and advised ministers on this basis that a stimulus package of about 1% of GDP in 2009-10 on top of the stimulus already introduced in 2008-09 was appropriate and the key aspects to that stimulus package should be that it should be temporary so that you get the maximum effect over the period, something that the Governor of the Bank of England has raised, that it should be timely, which was why we went for the VAT reduction of 21/2% that could be introduced immediately as well as bringing forward existing investment projects rather than starting new ones. We wanted it to be targeted, so we saw that VAT could actually impact not only across all sectors of society who pay VAT but also would be of help to ensuring that volumes continued in the retailing industry and help the retailing industry through a difficult period in that sense, so we looked at the quantum of thinking that 1% was about appropriate. Remember, it was only a couple of months ago that people were suggesting any kind of fiscal stimulus was not necessary, so that was the judgment we made.

Q121 Mr Brady: But presumably a bigger fiscal stimulus would have reduced the size of the downturn more?

Mr Ramsden: If a bigger fiscal stimulus had met those criteria then it could have reduced the size of the downturn. We made a judgment that given the downturn that we were forecasting, given the recession that we were forecasting, this was the appropriate stimulus. Remember, for the UK relative to the debate in the US, for example, where there is talk of more significant fiscal stimulus, we have powerful fiscal stabilisers which are also operating in full through this period. Back to the point I made about temporary, of course to ensure, as the Governor highlighted, that your fiscal stimulus over the short-term has the maximum impact it is then matched by a credible consolidation plan over the medium-term to ensure that the fiscal position of public finances is sustainable.

Q122 Mr Brady: So you would have gone for a bigger fiscal stimulus but were constrained by the future shape of public finances?

Mr Ramsden: No, that is not what I said. I was just setting out that in a sense you think about this PBR as being both about fiscal stimulus in the short-term and consolidation in the medium-term. We went for the fiscal stimulus that we considered to be appropriate for the conditions at the time of the PBR, that is when you make your fiscal judgment. There will be another fiscal judgment made at the Budget in a few months' time and these issues can be looked at again.

Q123 Mr Brady: But the reason that you did not go for a bigger fiscal stimulus, therefore, was that you thought it was going to be more difficult to consolidate the public finances in the medium-term?

Mr Ramsden: No, not at all, that is to completely misinterpret ---

Q124 Mr Brady: That is what you just said.

Mr Ramsden: No, it is not what I just said at all. We judged both what we considered to be the appropriate size of the fiscal stimulus and appropriate size of the subsequent consolidation. I am very happy to say that those are judgments, but there is no suggestion that we were constrained in our judgments.

Q125 Mr Brady: Turning to that longer term consolidation, we know that consideration was given to introducing a higher rate of VAT in the near future. What were the pros and cons in deciding whether that was appropriate?

Mr Ramsden: As I said in response to an earlier question, we look at a range of different scenarios, a range of different options within those scenarios, for which policy to implement. Just as for the stimulus part of the policy we weighed up the advantages of a reduction in VAT alongside other measures that had been suggested, so for the consolidation phase I think you would expect us, rather than just to settle straight away on one instrument or on tax or spending, to look at a range of options. Where we ended up was with a consolidation package which I think, as Robert Chote described to you last week, is predominantly addressed towards reducing the real growth rate in spending beyond the CSR years and also there are some tax increases.

Q126 Mr Brady: I have no difficulty at all with you looking at a range of options, and obviously that is what we would expect you to do, but what I am asking is specifically regarding the possibility of an increase of VAT to 181/2 or 20%. What were the pros and cons in evaluating whether that was a good thing to do or not?

Mr Ramsden: The Chancellor in his Pre-Budget Report speech highlighted that we looked at that range of options and he concluded the judgment was made to go for the option that was fairest, and that has been set out very, very clearly.

Q127 Mr Brady: Yes, I realise that, but in terms of evaluating what the effect of an increase of VAT in a year's time would have been, what do you think the positives or negatives would have been had that been done?

Mr Ramsden: In a sense it would have been some of the opposite of the reduction in VAT except that any increase in VAT presumably would have been permanent so it would have increased prices for a temporary period and it would have potentially had wider impacts on the economy and on distribution.

Q128 Mr Brady: You would have expected a slow growth presumably?

Mr Ramsden: It would depend on what you think would be the overall impact of the fiscal consolidation on the public finance position and, if it was seen as credible, what that would therefore do to long-term interest rates.

Q129 John Thurso: Mr Ramsden, can I just go back to the Chairman's opening question about the banks and the need, above all, to get credit flowing and ask you one supplementary. What, if any, steps are being taken by the Treasury to put in place some kind of agreement, concordat, memorandum of understanding, call it what you will, between the Government and the banks on the principles for lending and lending costs over the period that the Government is a major shareholder in the bank?

Mr Ramsden: If it is okay with you I will hand over that question to Clive Maxwell who has been leading on these issues.

Mr Maxwell: It might be worth me taking a step back and running through the steps that are underway at the moment. As you say, in order for banks to lend they need the financial resources to be able to do that. That requires them to have access to capital and also to have access to funding. The recapitalisation scheme that the Government has introduced has been an important contributor to allowing some banks to raise capital. Other banks have raised capital through the markets. On the liquidity side, the funding side, the Bank of England has played a critical role in providing liquidity to the markets through open market operations, then through the special liquidity scheme and more recently the Government has introduced a credit guarantee scheme to allow banks to borrow on the wholesale markets with a form of government guarantee. The FSA has also clarified the arrangements for capital to make clear that the new capital levels the banks have are deliberately designed to allow them to have a usable buffer of capital into which they can eat over the coming period. That is the financial arrangements that banks require to be able to carry out their lending. There are then a series of issues about how banks deal with their customers, and that applies both to retail customers and to their business customers.

Q130 John Thurso: Can I save you a bit of time. All of that we know. My question is very specific. The Government, Chancellor and other ministers have expressed the aspiration that banks should maintain levels of credit, should continue to offer mortgages, loans to small businesses and should pass on interest rate cuts. Banks, on the other hand, have pointed out that as Libor is their cost they cannot do that and they are doing their own thing. Without a formal agreement on the principles involved we will have an aspiration on one side and the banks doing their own thing individually on the other side. We need a collective agreement. Has anything been done by the Treasury to achieve that?

Mr Maxwell: I point to two things that are being done. The first thing that Dave Ramsden mentioned was the establishment of a Lending Panel and other arrangements to pull the banks together. These sorts of agreements about how they will act with respect to existing borrowers and potential new borrowers are exactly the sorts of things that the Lending Panel will look at. The second thing in relation to those banks which have raised new capital that has been underwritten by the Government is that those banks have made commitments to maintain lending in certain key respects and that will be monitored by UKFI.

Q131 John Thurso: Can we expect a document that sets out these headlines that we can look at?

Mr Maxwell: On the latter or all of that together?

Q132 John Thurso: Any agreements that are reached.

Mr Maxwell: I do not know, I am afraid. I would expect statements and comments to be made if things are agreed.

Q133 John Thurso: Can I turn to the question of imbalances, and I am not sure who to direct this to. The recent path of the economy has seen several imbalances develop in both the domestic and global economy. To what extent do you think the current crisis sees those imbalances unwinding?

Mr Ramsden: I will start with the global economy and then I will come on to the UK economy. It is clear, as I said in earlier comments, that there is a process of deleveraging and of the shrinking of balance sheets taking place across the global financial system. This reflects, as we set out in chapter 3 of the document, our analysis of how the global financial system and global financial crisis has developed, which I think drew on earlier work that this Committee did, and that analysis is also shared by others, which sees asset prices having really been growing at what, with hindsight, look like unsustainable rates. What we are now seeing is that the adjustment to that has taken a very sharp turn for the worse since the summer, and since September, and that is now globally feeding through into the real economy, so that just in the last few days we have seen this very significant fall in US pay rolls and an intensifying recession there, German manufacturing output down 2% yesterday, Japanese GDP has overnight been revised down, and global confidence indicators are very negative. The Purchasing Managers Index is either at record lows or nearly at record lows for 27 countries. We are clearly seeing the impact of this global financial crisis now feeding through and we are going to see next year, at least on our forecast judgments, G7 GDP fall 0.75% and that is the first fall since 1982, so it is clear that we are in the middle of a global recession where we will, I think, through the way that it plays out, through the way that policymakers respond to it to try and limit its extent, expect to see rebalancing as part of that. That is certainly true when you then come back to look at the UK economy, as I have said. Our forecasts show rebalancing taking place throughout the forecast period. If you look at table A4 on page 169, contributions to GDP growth, we are expecting that UK private consumption, which contributed 2% of the 2.75% GDP growth between 2000 and 2006, is going to be -0.75% in 2009, whereas net trade, which in 2007 made a negative contribution of -0.75% - and this picks up on the earlier question from Mr Breed - that by 2009 we think that net trade for the UK will be making a positive contribution to growth, so we do think that there will be rebalancing. It is worth stressing that as we went into this period and before the global shocks hit, although the UK, like other countries, was experiencing strong asset price growth, actually the UK economy was pretty much on trend: inflation was not that far away from target and interest rates were only at about 5% or so. Unlike, say, the late 1980s where there was an unsustainable boom in activity, this time around it has been more of an unsustainable position on asset prices rather than on activity. I think that will also have a bearing on how the rebalancing plays out.

Q134 John Thurso: What do you think are the possibilities for protectionist action as a result of the unwinding of imbalances and the stresses that you have described that come from that? We have heard noises from America and we have heard noises from other countries.

Mr Ramsden: I was encouraged by the G-20 meeting back in mid-November where there was concern expressed about any return to protectionism. In a sense, this is an analogue more generally to how policymakers respond to this downturn, both in terms of macro policy and micro policy. One would hope - and I think that you see that, as I say, through the G-20 statements and through other statements from policymakers - that the lessons have been learned from previous downturns and that if you have a shift into protectionist action that actually prolongs the downturn rather than encourages the recovery.

Q135 John Thurso: The UK is particularly vulnerable to action by others because we are one of the most globalised and outward-facing economies and therefore we stand to lose more than we gain from any protectionist action.

Mr Ramsden: Which is why we are always at the forefront, I think, of making a case for free trade, for wanting to see progress on Doha and for stressing the risks and costs to a return to protectionism.

Q136 John Thurso: Doha leads me neatly to the Business Secretary where it has been suggested that he is drawing up a potential list of industries that should be saved from the current downturn. There have been various articles with the criteria that are being considered. Has the Treasury been involved in any of these discussions?

Mr Ramsden: What the Treasury has been involved in and what we have set out in the PBR is the steps that we are taking to support all businesses across the UK economy. That starts with the macro-level measures to limit the severity of the recession and to help to support the recovery. At the more micro level, the PBR announced a range of measures - the support to enable lending and measures to support working capital - and when you add in the use of the money available from the European Investment Bank, which I think amounted to a 7 billion package, and that has been the focus of our policy. I do not know if Edward wants to come in.

Q137 John Thurso: Can I just say that my question is more specific. Roger Bootle in his evidence to us said that it was a good thing to be thinking about what industries might be considered of such strategic importance that they should not be allowed to go under, and he particularly made the point that, for example in the States at the time of the Lehman crisis, people were thinking on the hoof about what was systemic and what was not and Lehman's was allowed to go under, which many people now think was possibly a mistake, and therefore he said it would be a good idea to be thinking about which industries are really of such importance that one ought to save them. Rather than general measures to help everybody operating in the economy to say, "That particular industry is so important that we do not want to let it go under." It is that specific point and what I am interested in is whether that is being seriously discussed at all and whether options are being reviewed and looked at.

Mr Ramsden: Just to pick up on the Lehman's point, it is clear, as we set out in chapter 3 of the PBR, that the financial sector plays a systemic role in enabling the economy at the macro level to grow at the kind of rates that we have seen in the UK, and so it has been absolutely right that government action has been comprehensive in trying to stabilise the banking system and the financial sector. The Department for Business, Enterprise and Regulatory Reform, as you would expect, is in very close and on-going touch with sectors right across the UK economy during times when the economy is doing well and then during times when the economy is in recession, as we are now. I am not really sure I can add anything. I do not know if Edward wants to say anything.

Q138 John Thurso: So far I think the answer is No but keep going.

Mr Troup: If you have had a chance to look at the Strategic Challenges document which we published alongside the PBR, you will see in paragraph 4.2 it says: "The Government has an important role to play in recognising those business activities in which the UK has relative strengths. By working closely with industry sectors the Government could help identify barriers to growth." I think that is almost exactly what the Secretary of State for Business, Enterprise and Regulatory Reform said at the Hugo Young lecture last week when talking about the phrase "industrial activism" when he said: "It means recognising that by investing the right way in people and infrastructure and joining up the relevant decisions taken by government, we can dramatically improve our chances of coming out ahead. We need to focus on areas of policy like technology, skills, regulation, investment and export markets and how we set the relevant conditions for business success." I think those two statements are almost exactly the same and I think they reflect the way the Treasury and the Department for Business are working together on this.

Q139 Mr Breed: Can we just turn to the national debt now. The PBR forecasts that public sector net debt will increase over the forecast period and then begin to stabilise at around 57% of GDP in 2013-14. I think you would agree that there are a number of people who believe that the forecast for economic recovery might be a little over-optimistic. If that proves to be the case, what might be the upper limit of the national debt which would be sustainable, and by that I mean the Government being able to meet its planned obligations?

Mr Ramsden: I must admit that my reading of the hearing that you had with experts last week was that they felt that the allowances that we had made in our economic forecasts for the impact of credit conditions, where, for example, relative to some estimates, we have assumed the impact will be a permanent loss of output of 4%, which is I think rather larger than some estimates, were realistic. My reading of, for example, the Institute of Fiscal Studies' reaction to that was that seemed like a realistic allowance, and actually Roger Bootle, who has been mentioned in the previous discussion, felt that that was rather an over-estimate. The reason I mention that is because those estimates of the economy's productive potential are what drive our fiscal estimates and our fiscal judgments, so I would argue that in addition to those kinds of assumptions and also the other assumptions that we have made, some of which are audited by the NAO, we have got a realistic set of fiscal forecasts and I believe the peak in debt that we are forecasting is a realistic assessment.

Q140 Mr Breed: In the past you have operated your forecasts on the basis of having fairly strict fiscal rules. Those have all been abandoned now so therefore you cannot pray in aid those and we have a completely fluid situation now, but you still believe that even within that your figures for economic recovery will not prove over-optimistic. If they did - and you must have done something on that - where is the national debt likely ultimately to become unsustainable?

Mr Ramsden: I am not sure I agree with the premise of your question because although we have moved to applying a Temporary Operating Rule on fiscal policy, and we have had to depart from the previous rules, actually the objectives which are framing fiscal policy have not changed and are as set out in the Code for Fiscal Stability, so sustainability of the public finances in the medium term, as I emphasised in response to earlier questions, and as I emphasised again in response to an earlier question, we think that the fiscal path that we have set out, which is underpinned by our new operating rule, is sustainable. It shows us that debt does increase sharply through the recession and in the early stages of the recovery. We think that it is the right thing to do as private sector borrowing is being reduced for government borrowing to come in. That is also happening in other countries. We are going to see US borrowing at a very high level. We are going to see other countries' debt rising. Our debt is going to rise, which means that we are going to go up, as we forecast, to 57%, but we do not think that that is in any sense unsustainable and, as I pointed out, there is a lot of demand for government paper at the moment as shown by very low levels of yields on government paper. I just think that we are in a position where our public finances are sustainable and are based on realistic forecasts and realistic assumptions.

Q141 Chairman: But on that 4% phased reduction to the trend level of productivity, when Roger Bootle was here last week, he said that was "Noddy economics" and no-one has a clue and he looked at the PBR for justification. What sophisticated answer do you have for us on that?

Mr Ramsden: I do not know if Noddy would have had a footnote (page 162) which said that: "External estimates of the impact of the credit and commodity price shocks on the level of trend output range from 2% up to around 6%, depending on the assumptions used. See, for example, The budgetary implications of global shocks to cycles and trends in output: impacts of housing, financial and oil shocks, Barrell & Kirby, October 2008, and then there are references there to analytical work by the OECD and the European Commission. That is a footnote to a passage where we try and set out transparently in paragraph A58 the assumptions that we have made and then there is a whole box, A4, with lots of references to economic shocks and potential outputs. Actually I think we in the Treasury, just as the Bank of England have done, have not only taken account of the demand side impacts of these shocks but also the supply side impacts of these shocks. If you compare that to debates in other countries you may find that they have not yet started to take account of the supply side impacts of these shocks, so I would not call that Noddy economics at all.

Q142 Chairman: So it is unfair to say, if you look at the footnote and the footnote says that the trend level of output ranges from 2% to 6%", that the Treasury might say, "Okay, we will go for half way"?

Mr Ramsden: We went for what we thought was an appropriate judgment. We have been criticised in the past for making this book too long. We could certainly make it longer if you wanted us to spell out these kinds of references.

Q143 Chairman: We do not want it longer but we want a sharper analysis. Maybe that is what it is.

Mr Ramsden: I think we have provided a sharper analysis, Chairman.

Q144 Chairman: Our experts do not agree with that but, there you are, we will move on.

Mr Ramsden: Economists do not agree on everything as we know.

Q145 Chairman: But that is why we have got them here so that we can question you so that we can get decent answers from you.

Mr Ramsden: I hope at least on that question I have given a decent answer.

Chairman: I think the jury is open on that. Nick?

Nick Ainger: Mr Ramsden ---

Mr Mudie: You cannot ask him; he is in the bad books!

Nick Ainger: Perhaps I will direct my question at Mr Maxwell.

Mr Mudie: It will be safer!

Q146 Nick Ainger: Mr Maxwell, Mr Ramsden in a reply to the Chairman's opening question said that return to normal levels of bank lending was absolutely critical. Last week and the week before the RBS and HSBC announced that they were going to do everything they could to assist the small business sector. Who is monitoring their performance?

Mr Maxwell: Performance of those two particular banks or more broadly?

Q147 Nick Ainger: All banks across the piece?

Mr Maxwell: As I mentioned earlier, I think this new Lending Panel will play a very important role in working with the banks and other interested parties, and that one of its roles will be to make sure it has sufficient information to actually understand what is happening. There are some issues about confidentiality. Clearly individual banks will not want to share data about precisely what they are doing with other banks, and that is understandable, but we will ensure that the Government has sufficient information to be able to understand what is actually going on in these markets.

Q148 Nick Ainger: I think it was on the floor of the House that the Chancellor, in response to a question from myself, said that he was prepared to publish the arrangements that have been made by the individual banks who had received substantial taxpayer funding. What progress has been made on publishing those deals?

Mr Maxwell: I understand that the agreements with the individual recap banks are available in the House Library. I will check that and confirm that in writing but that is what I understand. The Government will set out in more detail how the new body, UK Financial Investments, is going to work with the Treasury and its role in due course.

Q149 Nick Ainger: The PBR set out that there was approximately 7 billion available for funding small businesses from the new Small Business Finance Scheme, 4 billion from the EIB, another 1 billion from the Export Credits Guarantee Scheme and various other schemes administered by RDAs and others. If the lending panel and monitoring does not actually produce a return to normal lending to small businesses, do you expect particularly the Small Business Finance Scheme to have to be increased to make up the shortfall?

Mr Troup: We hope to get the Small Business Finance Scheme up and running very early in the New Year. The details are being worked out between the Treasury and the Department for Business and Enterprise. Obviously we will want to see how that goes over the first few months of its operation. As you say, it has 1 billion in it specifically to help small businesses who are having trouble with working capital. It sits alongside the Small Firms Loan Guarantee Scheme which, as you know, is a long-running scheme which is designed to help businesses that start up and grow. As Mr Ramsden has explained, we are forecasting a recovery beginning in the latter half of next year and the expectation is that this scheme and the recovery of the banks' lending will be sufficient to see businesses who are struggling from the lack of working capital through this period.

Q150 Nick Ainger: The 4 billion that is available through the EIB scheme will be coming through the high street banks. When do you expect that to start kicking in?

Mr Troup: We have already got four banks who are committed to taking that facility who will be on-line by the end of the year and we expect others to sign up early in the New Year, so there is no reason really why money cannot start flowing under that almost immediately.

Q151 Nick Ainger: But do you expect that if lending does not return then you are going to have to start increasing the size of these packages? That was the original question.

Mr Troup: We will have to see what happens and see how the path of the economy turns out. As is said on several occasions in this document, it is at a time of very considerable uncertainty.

Q152 Nick Ainger: In his evidence to us last week, Mr Whiting from PwC and the Low Incomes Tax Reform Group welcomed the package in relation to easing the tax burden on small businesses or the way that they pay their taxes. He indicated that he had been told by HMRC that they were putting quite considerable manpower resources into this rescheduling package. Mr Whiting told us that the success of that scheme will be contingent upon the human resources actually being put in to do that. Bearing in mind the announcement last week of further significant cutbacks in HMRC tax offices (which directly affected my own constituency and that of Mr Crabb) where are these resources coming from?

Mr Troup: HMRC have quite considerable resources available for their various helplines and call centres. The support to which I think Mr Whiting has referred is the Business Support Helpline which is part of the debt management unit in HMRC. What they have done is to reallocate temporarily the responsibilities of individuals there to allow them to deal with requests from businesses who are having difficulty in paying. It is not clear how long the demand will continue, and no doubt HMRC will look at their resourcing over time. What I can tell this Committee is that the support line has worked very well over the last two weeks. I would say that this is not a new arrangement. It has always been open to businesses to do this but it has perhaps not being as widely publicised as it might have been, and very much part of the PBR announcement is to make sure that people are aware of the availability of this. Over the last two weeks I am told - and I think this is to the close of business on Sunday - that 4,733 arrangements had been reached with individual business and there were another nearly 2,000 under consideration, that the lines had been busy but not overwhelmed, so depending on how the flow goes I think this will be manageable within existing HMRC resources.

Q153 Nick Ainger: But in relation to staff resources, if you put more resources into the helpline and into these rescheduling packages, then presumably something else is deprived of resources. Are you telling us that there are no new resources to deal with this; it is just literally transferring staff from other duties?

Mr Troup: I cannot answer for the detailed issues of HMRC staffing. There is no additional resource in HMRC overall but HMRC have in excess of 80,000 staff. I believe a few hundred are involved on the helpline and I think an organisation that size does have flexibility over reasonably short time periods to reallocate resources.

Q154 Nick Ainger: That is not what the trade union was telling us that everyone is under very serious pressure and that 70% of HMRC staff have got rock-bottom morale and are dissatisfied with the way their department is run. Do you not think, bearing in mind this is an important issue, that in fact there should be additional resources allocated rather than a transfer of resources?

Mr Troup: As I say, HMRC appear to be performing very effectively the task which the Business Support Helpline is designed to do and have been over the last two weeks.

Q155 Mr Crabb: Mr Ramsden, back in March you told this Committee that you saw the Sustainable Investment Rule as a "strict rule". What is your current view of the rule?

Mr Ramsden: My current view is that we have temporarily departed from it.

Q156 Mr Crabb: Is it your belief that the fiscal rules, that is the Golden Rule and the Sustainable Investment Rule as well, have bolstered the Treasury's credibility and, if so, how?

Mr Ramsden: As I set out in answer to a previous question, since 1998 when the Code for Fiscal Stability was produced and appended to that year's Finance Bill, we have tried to frame fiscal policy by achieving three objectives: supporting monetary policy in stabilising the economy, and that is a particular issue now given that the monetary transmission mechanism is impaired; second, as I have stressed, the emphasis on sustainable public finances in the medium term; and then also protecting investment. I have always seen the rules as a means to an end to achieve those objectives. We set the two rules, the Golden Rule and the Sustainable Investment Rule for the last cycle. On the Sustainable Investment Rule we actually tightened the rule in 2003 when we moved from saying that debt had to be at 40% over the cycle to saying that debt had to be a maximum of 40% in each and every year. That was appropriate for that cycle. At this PBR the NAO has audited, as we told you that they would, whether that was a reasonable judgment about that being a complete cycle; they have concluded it was reasonable. We always made clear that those rules were set in the way they were set for that cycle. Since then we have been hit by these two global shocks and the credit shock is intensifying. Against that backdrop, as the Chancellor made clear in his Mais Lecture, it would be perverse to stick to rules that were not a means to an end, that actually required you to tighten fiscal policy during a recession. We have, as I said in my previous rather briefer answer, temporarily departed from those rules. We have the new Temporary Operating Rule consistent with what the Code for Fiscal Stability allows. I think it is paragraph 11 of the Code for Fiscal Stability which sets out the conditions under which you can temporarily depart and we have set out a new rule. We have said in this PBR the period over which it will apply in the sense that we see it applying until the shocks have worked through the system. Given the uncertainty we have not felt that it was appropriate to constrain that period definitely until the period when our forecasts showed that we are back on trend, which is 2013-14. I am very happy to accept that these judgments are ---

Chairman: We have time constraints and we want briefer answers.

Q157 Mr Crabb: I have a question to ask you about the Temporary Operating Rule in a moment, but the fact that it is a Temporary Operating Rule would imply, and indeed your answer a few moments ago would imply that you are thinking about a return to the previous fiscal rules, or do you think that once we emerge from the current downturn that a new set of fiscal rules will be required?

Mr Ramsden: By invoking the Code for Fiscal Stability that is very much in terms of a temporary departure. That is going to be over quite a long period. We are not saying now what will be the debt limit, for example for the Sustainable Investment Rule at some point in the future. What we have tried to set out now, as I set out in answer to a previous question, is what we see as the credible consolidation path, which is what the Temporary Operating Rule underpins, to get debts back onto a declining path, which we see as a critical factor, and to get the cyclically adjusted current deficit back into balance, again a critical factor, both of which are consistent with the three objectives which have been the basis for Government fiscal policy since 1997.

Q158 Mr Crabb: DeAnne Julius, writing about the Temporary Operating Rule, described it as "a hope based on an optimistic assumption about GDP growth, not a financial framework." Can you convince us that she is wrong?

Mr Ramsden: I have already said that I do not think it is an optimistic forecast. I think it is a realistic fiscal forecast. There is a debate about whether you use rules in fiscal policy as in other policies or whether you allow for complete discretion. What we have done with this Temporary Operating Rule is to be very clear, and this applies to how we have used it through this PBR. It is operational. The way we applied it - and this is set out in the fiscal forecasts for the medium term - was in a way that it has delivered a consolidation of at least 0.5% of GDP in terms of the cyclically adjusted balance in every year from 2010-11 when we think the recovery has started. That is sufficient to get us back into a deficit of 1% of GDP by 2013‑14. I would argue that that is, as I have already argued, a sustainable fiscal position and that it is a credible consolidation plan, and that the Rule has underpinned and helped to deliver that.

Q159 Mr Crabb: Would you not expect successive reductions of the cyclically adjusted current balance as the economy comes out of the downturn anyway, without having a Temporary Operating Rule?

Mr Ramsden: You would get some very small reductions relative to the reductions that we have judged appropriate from fiscal drag, as your experts told you last week. Also, in the case of our forecast, because we expect the more tax-rich parts of the economy, which are taking a real hit through this recession, as we have set out in detail in Annex B, to recover, but over and above that, the reason that I think this is a credible consolidation plan and that over time, as we refresh it and as it is developed, I think it will give enhanced credibility to the framework, is because, in addition to just those automatic effects, or those effects that come from judgement, we are announcing from 2010-11, the last year of the CSR period, additional of VFM savings of 5 billion. Then beyond the CSR period we have set out what I think are achievable assumptions for real spending growth falling in terms of totally managed expenditure, which is current and capital, to an average of 1.1% a year. That is a significant slowdown in spending growth which is the major part of the consolidation. Then, in addition to that, we have set out specific tax-raising measures in PBR documentation which we think will contribute to the consolidation. Obviously, time will tell on these things but from where we are now in this PBR, I think this is a credible consolidation plan and that we have a credible fiscal framework.

Q160 Mr Crabb: Do you consider that your understanding within your Department of the cyclical behaviour of the economy at this current time is sufficiently robust for this Rule to stand the test of time?

Mr Ramsden: It links back to an earlier exchange prompted by Roger Bootle's comments. I think there are a range of views on the cyclical behaviour of the economy, both in terms of on the demand side, which is what people typically look at, and then on the supply side, i.e., the degree of productive capacity, which, because of our focus on trend output, has always been something we have focused on. I do think our understanding is appropriate. I think it is adequate to do the job that we are being asked to do in terms of providing advice on both the fiscal framework and how it is implemented through fiscal judgements. That is not to say that we cannot enhance our understanding. Through reading all the other literature, such as the ones I referred to in the footnote, we have very intensive engagement with the National Institute, with the IFS, with the international organisations, and the National Audit Office, which I mentioned a minute ago, which assesses our assessment of the cycle, is also I think in future going to be taking a closer look at the way that we do our cyclical adjustment, the way we assess the cyclical part of the economy. One of the principles underlying our fiscal framework is to try and be as transparent as possible. We have tried to set out in the document and in supporting documents our analysis but we are very open to discussing that, to trying to enhance our knowledge, so that we can develop our understanding of the economy and the fiscal position.

Q161 Mr Crabb: Aside from the general guide around reducing the current Budget by 0.5% per year, there are no other constraints that the Rule implies for the Treasury?

Mr Ramsden: If you think that the rules are a means to an end, we will be judged over time on whether we achieve the kind of plans that we have set out. That is quite common, if you think about the track record for an institution in terms of whether it has a track record of credibility. That would be one way I would expect us to be held to account, just as we have been in the past on our track record, and we will be judged against whether these plans are achieved and if there are any departures from them, why. Secondly, as I mentioned right at the outset of this discussion, there is the market's judgement on the fiscal position. If you look at our end-year fiscal report, which we publish every year, which is one of our contributions to transparency, I think that shows how the yield... For fiscal policy, it is quite hard to come up with a summary measure of credibility. With monetary policy, you can look at inflation expectations. We tend to look at the ten-year bond yield. Over time that has come down successively and, as I have said, at the moment it is down at about 3.6%. So we suggest that people want to buy government debt and consider the position credible and sustainable.

Q162 Mr Fallon: Mr Williams, table 5.2 shows that you have increased the number of people facing marginal deduction rates of over 70% from 200,000 in the Budget at March up to 305,000. That is an increase of 50%. Why have you done that?

Mr Williams: It is the effect of one of the childhood poverty measures that were announced in Budget 2008 and which come into effect in 2009 and therefore are reflected in that number. It is the measure, which I think you will recall we discussed after the Budget, where we disregarded Housing Benefit in the receipt of Child Benefit. The effect of that is to give the benefit of Housing Benefit to more people and that then has the effect of putting more people on the Housing Benefit table.

Q163 Mr Fallon: Do you regret that increase?

Mr Williams: I think the increase is a consequence of the fact that we are giving our support through Housing Benefit to more people. There is not a way of doing that at the cost of that change that does not have the effect of increasing the marginal deduction rate for people who newly get that support as that part of the income is reduced.

Q164 Mr Fallon: So you do not regret it; you do not care about those people. Mr Whiting of the Low Incomes Tax Reform Group told us last week that the group hardest hit by all the changes in the PBR were those around the 40,000 level, where you are paying National Insurance at what will become the standard rate of 11.5% and you face going into the 40% income tax bracket as well, so it is that sort of level that will see the greatest loss. That is Middle Britain, is it not?

Mr Williams: If you look at the measurements as a whole to 2011-12, I think it is clear that the group suffering the greatest loss are those on the highest incomes, not at the 40,000 mark, because of the withdrawal of the personal allowance for people over 140,000 and because of the introduction of the additional 5% rate. Also, of course, the additional 0.5% on National Insurance; the effect of that becomes greater the more income you have subject to National Insurance contributions.

Q165 Mr Fallon: But there are millions more at the 40,000 level than there are at the 100,000 level, are there not?

Mr Williams: Yes.

Q166 Mr Fallon: So Mr Whiting must be right then that it is Middle Britain you are hitting hardest with these changes. There are more people suffering more from the impact on people earning 40,000 than there are on 100,000.

Mr Williams: There are more people on 40,000, certainly. Clearly, that is an area of the income distribution where there are far more people than over 100,000 but if you look, for example, at the measures in table B5, the measure to restrict the personal allowance, which of itself scores 1.3 billion, applies only to people above 100,000. That is the top 2% of the income distribution and the 45% rate only applies above 150,000.

Q167 Mr Fallon: We will come to the people over 100,000 in a moment. I just want to be clear: why are you attacking people on around 40,000? Why is the PBR hitting Middle Britain?

Mr Williams: The fiscal consolidation from 2010 onwards, 2010-11, applies only above 100,000. From 2011-12 the main route for the consolidation is the extra 0.5% on National Insurance contributions.

Q168 Mr Fallon: But Mr Whiting says those hardest hit will be those around 40,000.

Mr Williams: I think that does not take into account the other changes, which mean that others will be hit more than at that level. At 40,000, for example, that is the crossover point. If you start with April 2008 and compare the position then with April 2011, that is where you see the crossover point, as we said in 5.9. People below 40,000 do not pay more if you compare the April 2008 regime - that is before the change that the Chancellor announced on 13 May - with April 2011. So I do not think, given that I have confidence in what we said in the PBR, that you can deduce from that that it is the people at the 40,000 level that are the hardest hit.

Q169 Mr Fallon: So you are conceding they are hit but you are saying the losses are greater for those over 100,000. You are conceding that those around the 40,000 level are worse off as a result of this PBR? Is that a "yes" or a "no"?

Mr Williams: You have to be very careful what the comparison is across such a large number of changes. Very broadly, if you compare the regime in April 2008 to the regime that will exist in April 2011, very broadly, people under 40,000 tend to gain and it is at about 40,000 that people start to pay more tax and National Insurance.

Q170 Mr Fallon: Thank you. So those over 40,000 worse off. Now, over 100,000 it was explained to us last week you have five different rates: 60% up to 106,475; 40% up to 140,000; 60% again up to 146,475; 40% up to 150,000; then the new 45% rate over 150,000. Who came up with a mess of having five different income tax rates over 150,000? Whose idea was that?

Mr Williams: They are not in fact five different income tax rates. In the Finance Bill Parliament will not be called upon to create five rates.

Q171 Mr Fallon: Effectively, they are five marginal rates, are they not?

Mr Williams: There are some people who will face the effect of those marginal rates, yes, but we also need to bear in mind that there are individuals who currently do not get personal allowances and, of course, they are not at all affected, whether their income is above or below 100,000, by the tapering down of the personal allowance from the 100,000 point in 2010. The taper mirrors the taper that we have for pensioners. You will know that pensioners get additional personal allowances and they are tapered in exactly the same way as the personal allowance will be starting at 100,000 down to the value for a basic rate taxpayer and starting at 140,000 to remove that personal allowance.

Q172 Mr Fallon: But over 100,000 there will be five effective marginal rates - yes or no?

Mr Williams: It is not as straightforward as that, Mr Fallon. There are some people who will face the effective rates that your witness from the IFS said last week; there are other people who start out without any personal allowance, for example, some of the non-domiciled, who will not face that. So I think it depends what group you are looking at.

Q173 Jim Cousins: Mr Williams, could I ask you first, is the Government proposing to vary this year the formula rent increase guidelines?

Mr Williams: For Housing Benefit?

Q174 Jim Cousins: No, the formula rent increase guidelines, which mean that council rents are closed on housing association rents. There is a penalty system for this on housing authorities and this produces well above inflation rent increases. Is the Government proposing to change that this year?

Mr Williams: I am afraid that, while I have expertise in Housing Benefit, Mr Cousins, I do not have expertise in local government finance. I think we will have to come back to you on that.

Mr Ramsden: We will provide you with a note on that.

Q175 Jim Cousins: You do see though, Mr Williams, the important interconnection of those two things. Mr Ramsden told us earlier that for home owners with mortgages, their housing costs are likely to go down because of the cuts in interest rates but for council renters, they are facing a continued increase in their housing costs, which is going to drive more people on to Housing Benefit and will catch more people in these very high tax rates brought about by the withdrawal of benefit and tax credits. Do you not see that that is a problem, a squeeze, a continued squeeze, on the incentives to earn of the least well-off earners?

Mr Williams: I think you are right to draw a link between Housing Benefit and local authority rents. I think equally it is the case that local authority rents go up, but in general people on Housing Benefit will get additional support given the way that Housing Benefit works. I think we would need to do more research to see if the impact is as you describe it in terms of putting more people on to marginal reduction rates. It depends exactly where they are on the income distribution and exactly what rent change they would face.

Q176 Jim Cousins: Yes, but you do understand that the cultural and psychological impact of this is far greater than the sheer mechanical working through of tax and benefit changes, that large numbers of low income earners are facing a continued squeeze on their costs because their rents are going to go up, and big disincentives to earn more money?

Mr Williams: I think in many cases, if you look back, for example, to Budget 1998, the number of people on very high marginal deduction rates has come down, although I accept, as Mr Fallon made the point, that if you look at the position for 2008 as compared to 2009, there has been some slight deterioration. Equally though, what that generally reflects is additional targeted support to those who needed help most, which help is then tapered out. As I think Mr Brewer said last week, there is not an easy way of avoiding the effect of the taper creating relatively high marginal deduction rates. It is a consequence of focusing the support that is available on people on lower incomes.

Q177 Jim Cousins: But, Mr Williams, at the present moment somebody on Jobseeker's Allowance is allowed to earn 5 a week without it being taken into account in their benefits. That is roughly 45 minutes at the Minimum Wage. If they work for more than 45 minutes, they either go on the fiddle and do not declare it, or everything they earn is taken into account in their benefit at 100%. It is withdrawn penny for penny. Do you not see - Mr Ramsden said it - that in the world of Waitrose, because fuel prices are going down and homeowners' mortgage costs are going down, we can look forward to the squeeze on costs lessening but in the world of Netto the squeeze on costs is not getting less; it is getting greater and the disincentive to earn more legitimately is actually going up, not down? Do you not see that there is a real difficulty there in the kind of world we live in?

Mr Williams: If you look at this table, as I think we made clear, this is about people working where you have a household with the person working at least 16 hours or more a week, so it is not focused on the Jobseeker's Allowance.

Q178 Jim Cousins: What about all the people in our wonderful, flexible labour market who are not working 16 hours a week? They were done in the 10p tax thing and they have never got it back.

Mr Williams: The 10p tax issue has, I think, been addressed by the Government in the Chancellor's statement of 13 March, and indeed again to settle the position for future years in this PBR. On the question of spending, Mr Cousins, I am sure you are right that lower income people are perhaps less inclined to go into stores like Waitrose but, on the other hand, they too buy VAT-able goods and the distributional analysis, our I think reasonable assumptions show that while lower income people spend less on goods with VAT, so the absolute amount that they save is smaller, proportionately the amount they save from the VAT cut on reasonable assumptions is greater than for, for example, working people on high incomes.

Q179 Jim Cousins: There are an awful lot of people in this country, Mr Williams - I do not like to shock you - who by their electrical goods in the pub, not in PC World, and that is VAT-free, and there is a good reason for it. Mr Ramsden, what about the people who are facing - let us not call them the five different income tax breaks for the top end of the earnings range. What about the behavioural effects on them of having such a complex tax system on people who earn a lot of money? They are all being told "Put your money offshore; switch it into capital, where it is all taxed at 18% rather than 45 in future, or bung it all in your pension, where you get higher income pension relief of 40%." Are those sensible behavioural signals to give higher income earners? We are giving poor signals to lower income earners; is it sensible to give higher income earners those sorts of signals: bung your money offshore, switch it to capital or bung it all in your pension?

Mr Ramsden: I do not recognise that we have given any of those behavioural signals in the PBR.

Q180 Jim Cousins: By the introduction of this very complex tax situation for the higher income earners?

Mr Ramsden: I think Mr Williams has set out---

Q181 Jim Cousins: Do look at the Sunday papers! There are pages of this stuff: bung your money in a pension, bung your money offshore, switch it to capital where it is taxed at 18%. It is all over the Sunday papers. You do not have to go to Morgan Stanley.

Mr Ramsden: I wish I had time to read the Sunday papers.

Q182 Jim Cousins: I think, Mr Ramsden, your policy making might be improved if you did.

Mr Ramsden: I am sure that is true. What we have done in the costings, particularly for the higher rate measure that you talk about, is to try and make sensible, prudent, behavioural assumptions. Those were discussed at your experts' group last week but I do not think in any sense are we sending any signals with those behavioural costings. We are trying to ensure that our costings are likely to be achieved so that our fiscal forecasts are based on policy costings which actually turn out to be the amount that the policy raises but that is not in any sense to send signals.

Q183 Jim Cousins: Mr Ramsden, are you really telling me that in the Treasury it is not acknowledged that tax changes behaviour, and that you can put tax rates up and no money comes in because people who can do something else with their money so it is not taxed?

Mr Ramsden: All I am trying to say, Mr Cousins, is that of course we take account of behavioural factors in all the costings we do and we set out in the ready-reckoner document that we publish alongside the PBR what those behavioural assumptions imply in terms of costings, but those are with a view not to sending signals about how the tax system should be interpreted but as an underpinning, consistent with the Code of Fiscal Stability, for our fiscal forecast. So we are not making any value judgements, which is probably what is happening in other commentary.

Q184 Mr Brady: Returning to the whole question of VAT and the temporary cut in VAT, there was a comment that you made earlier, Mr Ramsden, as well about the impact of commodity prices bringing down inflationary effects. What consideration have you given to the dangers that the temporary VAT reduction actually has a deflationary effect at precisely the wrong moment?

Mr Ramsden: We flagged up in the document, again, trying to be transparent and trying to highlight the uncertainties, the risks around very low inflation rates but, as the Governor emphasised to you a couple of weeks ago, there is an important distinction to draw in economic terms between a very temporary reduction in price level on one measure, which is the RPI measure of inflation - and remember, VAT is contributing to that, as are the cuts in mortgage interest payments that Mr Cousins was just highlighting; they are contributing to RPI falling below zero but that is a temporary fall in RPI. Our forecasts show it picking up again consistent with the rise back in CPI towards target through 2010. In a sense, the VAT measure, by the very nature of being temporary, should give people reassurance that, whilst it will bear down on the price level in the short term, the price level will then go back up in the medium term, as highlighted in last week's MPC statement that accompanied their interest rate cut. That is one type of temporary movement in prices. That is very different from what would normally be recognised as a risk of deflation, which is a sustained fall in prices that impacts on expectations of future prices and therefore impacts on demand. That is very different from the kind of very temporary effect that we are seeing on one measure of prices, which, as I have said, is analogous to the impact on RPI from falls in interest rates. Remember, both falls in interest rates and the decline in VAT are there for the purpose of encouraging demand rather than the reverse, which is the implication you have with real deflation.

Q185 Mr Brady: Professor Colin Talbot on our experts' panel told us last week, "Certainly if I were buying a new car at the moment I would wait until the end of the VAT cut period and buy it then on the grounds that prices are likely to have fallen by that time." This is something that the Governor of the Bank of England also said in response to a question from me two weeks ago when we saw him immediately after the PBR, when he said any stimulus effect of this kind of temporary VAT cut is loaded towards the back end of the period. The effect of it is to bring forward expenditure decisions at the end of next year.

Mr Ramsden: As I said to Mr Cousins, I was too busy to read the Sunday papers this Sunday but my previous reading of the newspapers suggests that car prices have been falling for quite a while. I was interested in Mr Talbot's remarks because when you are thinking about a measure like VAT, there are two very important aspects to the temporary VAT cut. One is the income effect, which leads to an increase in consumers' real purchasing power throughout the 13-month duration of the VAT cut, and you could see that type of income effect being analogous to what you would get from other types of tax cuts. Of course, because we can do VAT straight away, we get it for the whole 13 months rather than having to wait, as with some measures, until next year. The second thing, which is I think what the Governor meant, if you like, that first aspect will mean that it is cheaper to buy goods; your purchasing power is stronger throughout the whole period of the VAT reduction, and you see that already in the shops, whichever shop you go to. Nearly all of them that I have seen are passing on the VAT reduction, and we assumed that they would pass on the majority of it over time. Secondly though - and this is what I think the Governor was talking about - you get a relative price effect, and that is why we chose VAT over other measures, because it makes the price of consumption cheaper now relative to the future. In the way that we have assessed the VAT reduction, we have assumed that that relative price effect will be particularly strong actually at the beginning of the recovery, i.e. in the second half of next year, and that was the experience in Germany. Before their VAT went up at the beginning of 2007 there was a bunching of consumption because the relative price effect was stronger then but the income effect, the first effect, will apply throughout, so you get these two effects. I am not quite sure which one Mr  Talbot was talking about but I did not recognise the implications he drew from that.

Q186 Mr Brady: It was deliberate, in that case, to choose a type of stimulus that was going to have an effect that was loaded towards the back end of that period?

Mr Ramsden: No, I said there were two effects. One, when it was deliberate to choose the type of stimulus that had the biggest multiplier effect on our analysis. We published the analysis in 2003 with the EMU assessment that suggested that the multipliers, particularly on temporary indirect tax changes, are bigger than on direct taxes. I think that Robert Chote referred to that analysis last week.

Q187 Mr Brady: Do you think the four to five days businesses had to implement the VAT change was sufficient?

Mr Ramsden: I think it was sufficient in the sense that, as far as I could tell, many of them were able to bring it into effect from 1 December. As I just said, in our assumption as to the pass-through of the VAT reduction, we assumed that it would be relatively gradual; it would not all happen at once. I have seen a lot of retailers, for example, rather than having to publish new material, have just been doing it at the till. I think we recognised that it was a challengingly short period but we were very keen to get the measure in as quickly as possible so that it could support the Christmas shopping period.

Q188 Mr Brady: One final question, turning to a different area, the Air Passenger Duty changes: one of the reasons why the aviation duty proposal has been unpopular with most of the industry, I think, was that it was likely to result in bigger diversion to European hubs. Why did you adopt a banded APD instead, which has precisely the same effect?

Mr Ramsden: If I may, Mr Chairman, I will ask Edward Troup to answer that.

Mr Troup: In the last PBR we did announce an intention to move to a per plane duty and there was extensive consultation. I think we had 170 replies to that. The Government is obviously committed to the environmental objectives of reforming air passenger taxation; by 2015 we expect aviation to contribute something like 35%...

Q189 Mr Brady: How will you achieve that by getting people to take their long haul flights from Paris rather than London?

Mr Troup: Can I just finish? We did hear considerable representations on a number of issues, which we listened to. The regional effect, which in a sense is related to this, was one which caused us particular concern, which is why we have gone back to reforming APD rather than a per plane tax. The banding, which is by final destination of the ticket, remains the basis of tax, which means that if I buy a ticket to Singapore with a stopover in Paris, I will pay the rate of duty applicable for a journey to Singapore. It is true that if I buy a single ticket to Paris and separately buy a ticket from Paris to Singapore, I will pay the Paris rate. To that extent there may be some marginal diversion, but this is a highly competitive industry and we certainly have not been able to measure a significant effect and overall the reformed APD will result in a significant saving of emissions over the period, which is the main intention of these reforms, alongside ensuring that aviation contributes a fair share to the Exchequer.

Q190 Chairman: www.TravelMole.com in their submission said that as a result, connections via European points will be much more attractive, and they give an example of a family of four able to save up to 292 from November 2010. It seems a no-brainer; people are going to depart from European hubs. I wonder if you could look at that and maybe give us your views on that submission, please.

Mr Troup: Can I respond specifically on that? If we do think that it is right, as we do, to link the taxation to the distance travelled, and if we are going to do this through a national tax base, there is obviously going to be a problem here. If it were a per plane tax, which would be by reference to flights, there would be no way or certainly no straightforward way in which we could capture that at all. By using Air Passenger Duty we are actually making it more difficult to fragment flights because it does require passengers actually to buy two separate tickets. So, to the extent that there is a problem of diversion, it is actually a greater problem under a per plane tax than it is under a reformed, banded APD. While, as I say, we recognise that there is a risk of diversion fragmentation, actually these reforms carry a lesser risk and unless we are to give up on any attempt to band APD and air passenger taxation to try and ensure a proper contribution with a greater degree of proportionality to emissions, I think that problem will always exist.

Q191 Chairman: OK, but these are considerable savings to families. As a result of that, could you give us your written response to that submission.

Mr Troup: We will do that.

Q192 Mr Mudie: Mr Williams, can we start off by agreeing the target for halving child poverty by 2010? What figure would we have to reach?

Mr Williams: In 1998-99 it was 3.4 million so we would have to reach 1.7 million.

Q193 Mr Mudie: And we are about 1.1 million now?

Mr Williams: About that, yes.

Q194 Mr Mudie: We are not agreeing, are we? This is a bad start!

Mr Williams: I fear that we are, Mr Mudie.

Q195 Mr Mudie: How many children were taken out of poverty in the PBR report?

Mr Williams: If you mean how many are affected in 2010, then, as I think Mr Brewer said last week, the effect is negligible because the measures announced in the PBR are about bringing forward increases which would otherwise have taken effect either in April 2009 or in April 2010.

Q196 Mr Mudie: So it is a fair way to go in a couple of years. Is it now accepted in the Treasury that the Government will fail to meet the 2010 target?

Mr Williams: No. As we made clear in the PBR Red Book, Ministers are going to take stock of where we have got to on the 2010 and 2020 targets in the Budget.

Q197 Mr Mudie: The IFS have continued to claim it will take 2.8 million to reach the target. Is there a disagreement in the Treasury about that figure?

Mr Williams: We do not ourselves forecast that figure but, as I think we discussed at the hearing after the Budget, I think that is about the right ball park.

Q198 Mr Mudie: Going on to unemployment, Mr Ramsden, you have been quoting our expert quite a bit, and you will recognise that they have failed to find a forecast of unemployment levels in the PBR. Can you give the Committee the Treasury's forecast, which we failed to find.

Mr Ramsden: Your experts failed to find any forecast because, consistent with usual practice, the Treasury does not publish forecasts for unemployment. What we set out very clearly - I am sorry.

Q199 Mr Mudie: Do not read anything into that sigh. You are being too defensive today. It was just a straightforward question. No tricks.

Mr Ramsden: I am not sure if the experts drew attention to this but we do set out the key assumptions in box B1. So the assumption, based on the average of independent forecasts, that we publish so that people can see what independent forecasters are saying and which we use for our fiscal projections are that unemployment will rise over the recession. Unemployment is already increasing, has increased from its very low level at the beginning of this year and is already rising.

Q200 Mr Mudie: I accept that. The experts actually, as you are aware, drew our attention to that, that you were using outside forecasts for unemployment, not your own. For example, elsewhere in the PBR you settle on estimate figures for JSA. You will also have to do some work on income tax, the lowering of income tax because of unemployment. So somewhere in the Treasury your model must work out the number of people that you anticipate will be unemployed in the coming financial year. Why will you not tell the Committee that?

Mr Ramsden: It is a longstanding convention. As part of my preparation for today's hearing, I looked back at Budgets and Autumn Statements from the early Nineties, the last recession in the UK, and there was no mention of a Treasury forecast.

Q201 Mr Mudie: If we do not ask for a forecast because of convention but I say, "Right, what are the figures that you have based the income tax reductions on, what are the figures that you have put into JSA that reflect unemployment?" I think that is a legitimate question for the Treasury Committee to ask.

Mr Ramsden: We are completely transparent on this in the sense that the unemployment assumption that we use is audited by the NAO. They last audited it at Budget 2008 to assess whether it was a reasonable assumption. That is the basis for the fiscal work that we do and which underpins all the numbers in this document. At this PBR we have recognised the challenges that are going to be caused by the continued increases that we are going to see in unemployment through the recession, which explains why additional provision was made to DWP for the operation of Jobcentre Plus, amongst other things. That is set out again very clearly in table B5, that they are going to get additional funding.

Q202 Mr Mudie: I know that but that is not Jobseeker's Allowance. That does not tell us the number of claimants you expect. I think, with the greatest of respect, it is a straightforward question. You have presented us with figures for Jobseeker's Allowance and I am entitled to say how many claimants do you estimate you will have coming through the door?

Mr Ramsden: All I can say, consistent with previous convention, is that the Treasury does not publish its---

Q203 Mr Mudie: I am not asking you to publish. I am asking you to tell me. We are supposed to scrutinise expenditure. Here is a multi-million pound item - and we have been taught on this by experts that we should be very gentle with you but we should persist in asking you questions on the figures in the Budget. This is a multi-million figure for Jobseeker's Allowance. I just asked a straightforward question that any councillor or any Member of Parliament would ask of their treasury. You have this figure in the Budget - how many people are going to be unemployed that this represents? I think that is a straightforward question.

Mr Ramsden: I have set out - and I am very happy to go back and check this - that the figuring for his Pre-Budget Report is based on the NAO assumptions.

Q204 Mr Mudie: Yes, that is right. That is what our experts told you. The only figure in this PBR that is a figure that gives an analysis or an estimate of unemployment is a figure outside the Treasury. So you are basing the numbers in your book, the amount you put as Jobseeker's Allowance, on what outside experts say. That is very interesting. You have not done any work, you do not have a model, you do not have a figure - you are basing it on what you read in the papers, when you get time to read the papers.

Mr Ramsden: No, we are basing it on an assumption that the NAO audit - and compared, as I said, with the early Nineties forecasting, which I was involved in when I used to forecast the labour market in those days, we did not publish anything about the assumptions that we use for unemployment. We now publish an audited assumption which shows unemployment rising according to the independent average to 1.41 million at the end of 2009 and to 1.55 million at the end of 2010. That is the assumption. You have to make assumptions to produce forecasts and that is what is driving the forecasts that we have made.

Q205 Mr Mudie: So your assumptions in the Treasury are the same as the outside experts.

Mr Ramsden: I did not say that. I have set out very clearly the assumptions that we use for the forecasts. I am not sure what more I can tell you.

Q206 Mr Mudie: You can tell me your assumptions.

Mr Ramsden: I have told you.

Q207 Mr Mudie: I have asked you to confirm it and you said "No, I did not say that." You said that the assumptions in the Budget are based on outside forecasts. Right, so I said, "Will you confirm that these JSA figures are based on a 1.4 million figure published in the PBR which relates to outside forecasts?" Yes.

Mr Ramsden: That is my understanding.

Q208 Mr Mudie: You have no different figure within the Treasury?

Mr Ramsden: I have explained to you how the fiscal figuring is produced.

Q209 Mr Mudie: So you anticipate 1.4 million people being unemployed next year?

Mr Ramsden: You are asking me questions to try and get me to say - I did not say "I anticipate". I said the assumption on which our forecasts are based, as it has been for many years, as this Committee well knows, is the independent average forecast.

Mr Mudie: I just find it incredible that there may be conventions but it is hardly national security for me to say "Tell me how many people you reckon are unemployed."

Q210 Nick Ainger: Who deals with fuel poverty?

Mr Richardson: I do.

Q211 Nick Ainger: We have seen crude prices fall from a peak of $147 a barrel in July to now around $40 a barrel, if not below. We have seen pump prices on the forecourt fall accordingly but for electricity, mains gas, heating oil, and LPG for heating, consumers have not seen any falls. Teresa Perchard from Citizens' Advice told us last week she did not think much of Ofgem's performance. She said, "I think the ball is in the court of the regulator at the moment to act decisively and quickly to protect consumers, and I do not think we have seen decisive, quick action by the regulator." Do you agree with her?

Mr Richardson: I should say at the start clearly the falls in energy prices in the spot markets are good news for fuel poverty. The Government has asked---

Q212 Nick Ainger: Hang on. The prices have not fallen yet. She is critical of Ofgem in failing, as a regulator, to ensure that the substantial falls in wholesale prices of energy have been passed on to retail consumers, both in terms of fuel poverty but there is also the wider issue here of industry as well, because they have not seen any significant falls yet in their energy costs. Do you agree with Teresa Perchard that we have not seen decisive, quick action by the regulator?

Mr Richardson: My point was about the spot prices. Can I come on to answer your question?

Q213 Nick Ainger: You have made a point but you are here to answer questions.

Mr Richardson: I was just about to get on to answering your question, if I may. The Government has asked Ofgem to publish quarterly reports looking at the relationship between wholesale and retail prices. Clearly, these are not simple markets. Energy providers engage in hedging behaviour. They do not necessarily buy their inputs on the spot markets at which we have seen prices fall, so understanding those relationships is a complex matter that Ofgem are looking into. I think we need to have the facts to establish whether there is a divergence between the prices that we might expect to be seen in the markets and those that we do see before leaping to conclusions.

Q214 Nick Ainger: It is a peculiar market where a supplier of energy, in passing on very quickly the rises in wholesale energy prices, quotes those wholesale energy prices as the reason for the rise in the retail price, but when the wholesale price starts to fall, suddenly it becomes a very complex issue and they find it incredibly difficult to find any justification to pass on that fall to their retail consumers.

Mr Richardson: It is not for me to speak for the energy companies.

Q215 Nick Ainger: It is an abuse, quite frankly. Is not the market acting almost as a monopoly? Not one energy supplier has made a move, despite the fact that we have seen these huge falls - and remember, it is not just from the $147 a barrel in July; when they put up their prices, in one case by 36%, the price of crude was less than $120 a barrel. It is now $80 a barrel less than that, yet still not one energy supplier has made a move to cut prices.

Mr Richardson: As I said, I cannot speak on behalf of the energy companies but the Government has asked Ofgem to look at these relationships, and we need to have the facts before us before jumping to conclusions.

Q216 Nick Ainger: Let us move on then to the social tariff and prepayment meters. The Chancellor announced that negotiations were taking place with the energy suppliers about prepayment meters and a social tariff or an extension of the social tariff. Again, last week I asked Teresa Perchard if the Citizens' Advice had seen any significant change in relation to social tariffs and prepayment meters and she said, "I do not think we have." The informal compulsory social obligation, which is the new social tariff, is supposed to cost 225 million. Companies are supposed to spend it on social tariffs but basically Citizens' Advice have not really seen any significant change. What is your view?

Mr Richardson: The Government has agreed social tariffs with the energy companies. As you say, the latest agreement on that added 225 million over the CSR years to the social tariffs, bringing them to a total of 375 million over the CSR period and that is obviously one of a range of factors contributing to reducing fuel poverty.

Q217 Nick Ainger: Are you monitoring this? Certainly the evidence which we had from Citizens' Advice is that they have not actually seen any significant change yet. Who is actually monitoring the performance of the ICSO?

Mr Richardson: The Department for Energy and Climate Change are responsible for the Government's approach on fuel poverty and, as the Committee will know, they publish an annual report looking at the position on fuel property.

Q218 Nick Ainger: You have told us that the PBR is now requiring Ofgem to publish quarterly reports. Is that not an indication, as Ms Perchard indicated, that in fact Ofgem have actually failed in their job to properly police the energy market?

Mr Richardson: No, I do not agree with that but it reflects the fact that there is concern around this issue and the Government wishes to ensure that the full facts are in the public domain, and we have therefore asked Ofgem to produce these quarterly reports so that the full information is available to people who are concerned about these issues.

Q219 Nick Ainger: Has work started on preparing any legislation to deal both with the operation of the energy market and social tariffs to address what are clearly major problems in terms of fuel poverty?

Mr Richardson: Social tariffs are a matter of voluntary agreement between the Government and the energy companies. They do not have a legislative underpinning. What the Government has said is that it stands ready to consult on legislation to tackle unfair pricing differentials between methods of payment for energy, should that prove necessary. Obviously, our hope is that the discussions between Ofgem and the energy companies bring that matter to a satisfactory voluntary resolution.

Q220 Nick Ainger: To address this winter's fuel poverty the Winter Fuel Allowance has gone up by 50 for the over-60s and 100 for the over-80s but it is a one-off. The PBR does not give any indication whether this is going to be replicated in 2009. Is it likely to be replicated in 2009?

Mr Richardson: That will be a matter for future fiscal events.

Q221 Nick Ainger: It is strictly a one-off?

Mr Richardson: The policy is for it to be a one-off. Clearly, the Winter Fuel Allowance of 200 or 300 for a household with a person over 80 in it is an ongoing policy at a cost of somewhat over 2 billion a year; in light of the particular issues around the price of fuel this year, a one-off addition has been agreed for this year. As you say, the price of fuel in certain markets is considerably lower now and clearly that will have to be a consideration played into any future decisions on the rate of Winter Fuel Allowance in future years.

Q222 Nick Ainger: But in terms of the operation of the market and the reluctance of energy suppliers to bring their prices down in line with wholesale price falls, as far as you are aware, there is no preparation for any legislation to cover that?

Mr Richardson: As I said, the Government has said it is ready to consult on legislation to tackle unfair pricing differentials but I think our view is that the energy market is competitive. Clearly, when the facts come out from the Ofgem quarterly reports, we will look at that in light of the facts.

Q223 Mr Love: Mr Maxwell, turning to mortgage markets, what are the objectives of the Lending Panel that you mentioned earlier on? Is it solely to get lending back to the levels in 2007?

Mr Maxwell: The Lending Panel is intended to bring together different groups to, firstly, monitor levels of lending and then look at the policy issues and other issues that arise in relation to that. It is a forum to bring people together, and it gives an opportunity to look at the situation and understand exactly what is happening and decide if things need to be done.

Q224 Mr Love: Let me ask you this. Northern Rock and, by implication, Bradford & Bingley, are shrinking their businesses and all the other banks and building societies are saying that that is going to have a major impact on lending to the wider market. How would the Lending Panel deal with that issue?

Mr Maxwell: The decisions about what to do with Northern Rock and Bradford & Bingley, in the case of Northern Rock, the business, following the rules set down at the European Commission around state aid, is reducing the size of its mortgage business in line with its business plan. That business plan will have to be updated over time. In the case of Bradford & Bingley, again, that business is being reduced in size. Those steps are in hand.

Q225 Mr Love: Could that not lead to criticism of the Lending Panel that where their overall objective is to ensure the supply of finance to the mortgage market, they are prepared to make exceptions for nationalised organisations; in other words, putting additional pressure on the rest of the banking and building society industry?

Mr Maxwell: I do not think it works like that. As I say, Northern Rock and Bradford & Bingley are in very particular circumstances. The people running those organisations now are doing so in the context of plans that have been agreed by the Government. The objectives in the case of both of those institutions are around promoting financial stability, around looking after taxpayers' interests as well as protecting consumers. However, it is worth saying that those lenders continue to be regulated by the FSA in their activities. They also have made commitments about how they will treat their mortgage borrowers, so those things remain in place.

Q226 Mr Love: One of the other concerns that is raised by the industry, particularly by building societies but I suppose it applies to some extent to banks, is that by reducing interest rates, which I think we all accept is necessary in the current economic circumstances, you will reduce the amount of money held by organisations like building societies available for re-lending so that there will be downstream an impact on mortgage finance availability. Is that something that the Lending Panel will look at?

Mr Maxwell: As I mentioned earlier, one of the key determinants of the ability of banks and building societies to be able to lend is having the right financing arrangements in place and that is both about having enough capital but also enough funding, and one of the sources of funding is from deposits but when you see base rates being reduced across groups of banks I think building societies and banks continue to be able to raise money through deposits to be able to support their mortgage lending. It is not affected directly by that.

Mr Ramsden: Can I just add, and it links back to earlier points about rebalancing, that at the macro level we are expecting the saving ratio to pick up back to levels of around 3%. That is typical during a downturn phase in the economy.

Q227 Mr Love: Even under the possibility that interest rates may go to zero?

Mr Ramsden: Under the assumptions on which we put this forecast together, which were consistent with market expectations of a couple of weeks ago, we have got the savings ratio picking back up. That will play into the issues you are raising but at the macro level.

Q228 Mr Love: I do understand these are difficult judgments. Can I turn to the scheme announced on 3 December, I think it might have been by you, Mr Ramsden, but you will correct me if I am wrong? First of all, why was it not announced as part of the Pre-Budget Report? Was it that you did not think that the Pre-Budget Report had done enough for home buyers? It was described by our experts last week as a political gesture. Will it have any real impact?

Mr Ramsden: I will hand over to Clive for this.

Mr Maxwell: If you are talking about the scheme to help people who suffer a temporary loss of income and stay at home -----

Q229 Mr Love: That is right.

Mr Maxwell: ----- I think that has the potential to offer a real benefit to those particular groups of people that it is targeted at.

Q230 Mr Love: But how many people do you estimate that it will help because there have been reports in the press that range from several thousand right through to a very large number? What sort of numbers are you expecting to benefit?

Mr Maxwell: I do not know how many numbers are going to benefit from that.

Mr Ramsden: Can I make a general point related to that? If you think about what this scheme, along with a lot of the other policies that the authorities are introducing, whether it is the Bank of England or the Government, it is with the aim of boosting confidence about prospects for the economy once we get through this recession and minimising the extent of the recession. If you think of this scheme, there are nearly 12 million mortgage holders in the UK economy and the peak of repossessions in the last recession was about 75,000, so it is a very small proportion of that total. With a scheme like this there will be a debate about how many people will actually take it up but also it should be seen as a more general confidence-inducing measure so that people who fear they might get into difficulties are aware that there is an additional safety net for them through the scheme that was announced on 3 December. Again, I do not know if it is relevant, but in a macro context that is how I saw the scheme.

Q231 Mr Love: So could I characterise that as saying you are expecting the psychological impact to be much greater than the practical impact?

Mr Ramsden: No. I think that wider impact is something that has not really come up in the debate.

Q232 Mr Love: I understand that and undoubtedly that will be a factor. Coming to the Crosby Report and its recommendation about guaranteeing mortgage-backed securities, that, of course, was not only recommended but highlighted by almost everyone in the housing industry but it has not gone down that well outside. Our experts last week, particularly Roger Bootle, cast just a little doubt on whether it was a sensible way forward and, of course, the Governor of the Bank of England has not been overwhelming in his support. Are there not real downsides to going down the guarantee route and, looking at the American experience, how do we get out of guarantees some time in the future?

Mr Ramsden: Clive Maxwell is part of the Treasury lead on this so Clive can give you a more detailed answer than I can.

Mr Maxwell: The Government said it was going to proceed to work up a detailed scheme based on Sir James Crosby's recommendations. He makes a series of recommendations. Some are around guarantees, some are around things like new industry standards, so we will be working up a scheme on that basis. The guarantee elements would require state aid approval, so that is something that we will need to speak to the European Commission about. It is also important to look at the interaction between some of his recommendations and the way in which the credit guarantee scheme is operated and both of them in effect are ways of guaranteeing borrowing. The Chancellor has said that he will look at the interaction between those schemes as well as working up a scheme based on Sir James Crosby's recommendations to be able to be in a position to report on progress by the Budget.

Q233 Mr Love: Can I look finally at the concession on stamp duty? Is it going to have any significant effect? It is a similar question to the one before. What impact do you expect the stamp duty concession to have?

Mr Ramsden: That measure was introduced as part of the September housing package. We have updated the cost of the switch as set out in the PBR document consistent with the kind of approach we take in costings elsewhere, as discussed with Mr Cousins earlier. We still think it will have an impact. It is costing a total of nearly 300 billion over two years. It is clear that the housing market is going through a major adjustment, so we see this measure as in a sense supporting that adjustment, trying to make sure that that adjustment is not more marked than it needs to be, but it still has a significant impact according to our costings.

Q234 Mr Love: And will that impact be mostly at the end just before it is taken away or during the whole of the period?

Mr Ramsden: The way we saw this one operating I do not think the relative price effects on a house are as strong as they are on a consumer durable, for example. We costed it as having pretty much the same amount of impact in 2008/09 as in 2009/10.

Q235 Mr Todd: The Government, as part of the PBR, put in some additional funding for debt advice. The CAB have told us the volume increases they are already experiencing in business. Is the sum allocated to them, welcome though it is and Teresa Perchard did welcome it, going to be sufficient to meet the sort of demand that is predicted in these times?

Mr Williams: There are two areas there. There is the money that has been given to Citizens Advice Bureaux, which is 10 million to March 2010. There is also additional money, 5.85 million to March 2011, which has gone to National Debt Line to increase telephone debt advice. They are quite significant extra amounts. If I look first at the Citizens Advice Bureaux money, that is estimated to enable local face-to-face advice capacity to be expanded.

Q236 Mr Todd: Has there been some research which shows which are the preferred routes for consumers with these problems?

Mr Williams: I think some consumers prefer one route; others prefer another. Not everyone, for example, would go -----

Q237 Mr Todd: I appreciate that. I am just saying, has there been some research? Anecdotally I would agree with what you said but it seems that the Government is spraying in a variety of directions without necessarily working out which is the most effective way to assist people with these problems.

Mr Williams: I think it is more that we are recognising that people access the advice through different routes and you have therefore got to give them different ways of accessing it. For example, and hopefully not to digress, there is also going to be more information provided on line at Directgov.uk about debt advice.

Q238 Mr Todd: That is presumably just going to be signposting though, is it not, which is, "If you live within this postcode here are your CABs", and, "If you want to ring up this number they can provide some help"?

Mr Williams: It is also going to provide some free advice online, which is obviously more basic than you could get by, for example, going to a citizens advice bureau, but maybe some people will choose to access the advice through that route.

Q239 Mr Todd: Experience tells us all that at times like these people do not necessarily think to take advice. They instead look towards those who are offering them apparently easy ways out of their debt problem. To what extent has the Government anticipated that in terms of regulating more tightly the IVA marketplace and particularly the lender marketplace to prevent consumers making their problems still worse?

Mr Williams: The Government has, as you say, already looked at that and will, of course, keep under review whether more needs to be done with regard to that.

Q240 Mr Todd: I am sure you have seen some of the stories. I do not know whether your reading patterns are the same as Mr Ramsden's but you will have seen some of the problems over mis-selling of IVAs and other attempts to persuade people that there are solutions to debt problems without properly facing up to them.

Mr Williams: I suspect my reading patterns are not the same as Mr Ramsden's so I am certainly not going to confess to them being the same. Although you are right that some people will not access advice, equally, by providing advice through a number of different channels, we are doing all we possibly can to give them access to that advice.

Q241 Mr Todd: What I am highlighting finally is that we need to provide the advice but we need some assistance at the other end to stop the supply of wholly inappropriate solutions to some people's problems because that has to be the other part of that package. I am not sure I have heard from you or from anywhere else that we are doing that second part.

Mr Williams: On that, you are absolutely right: there is a danger that people will turn to loan sharks, and since September 2004 the Government has committed 11 million to tackling the problem of loan sharks and the Department for Business is going to continue to fund teams to tackle illegal money lending in every region of the country.

Mr Todd: I think we are all consensual about the sharks. I am more pointing to the barracuda that are also out there who are people operating legally but inappropriately and mis-selling the services they offer, and the IVA suppliers are ones that are criticised strongly in this area. Anyway, I leave it at that, Chairman.

Chairman: Mr Ramsden, thank you very much. I am sorry for the overrun but your answers were very expansive and helpful to us in preparing for the Chancellor's visit tomorrow, so we look forward to your company tomorrow.