Select Committee on European Union Minutes of Evidence


Examination of Witnesses (Questions 260-280)

MONDAY 2 JUNE 2003

MR JOE GRICE, MR RICHARD PRICE, MR TREVOR EVANS AND MR PAUL LANSER

  260. That is extremely helpful. Bearing that in mind, Lord Shutt is going to ask you something shortly in relation to the activities of other departments, but let us stick with the Treasury for now. Applying those principles, is there an evaluation unit in the Treasury under you which is looking at the tax measures, which have been handing out hundreds of millions of pounds allegedly to support the output of improved entrepreneurial enterprise activity and growth; specifically in relation to these hundreds of millions of pounds of tax concessions, not the others. Take a major one and tell us what evaluation you are doing or have done and whether or not there is any evidence that enterprise growth has actually been stimulated as a result.
  (Mr Price) There are two teams responsible for this in the Treasury. The first is the tax policy team which looks at taxes as a whole and is responsible for providing advice to the Chancellor on all decisions relating to tax and consulting Revenue and Customs colleagues. My team is responsible for looking across the piece, specifically focusing on DTI but also looking more broadly across government at all programmes.

  261. No; no, stick to the Treasury.
  (Mr Price) Fine, but just to explain the way we work.

  262. Who is watching the gatekeeper?
  (Mr Price) Within the Treasury the responsibility would be with the tax policy team but clearly we work very closely with them when it comes to matters affecting small businesses. It is important to say that all decisions on policy matters in this area and other areas are taken in the light always of the best available evidence, so we publish large parts of it, making clear where the evidence suggests that the market failures exist. We always use the best available evidence to make sure, whether it is a tax or a spending measure, that measure is well focused on tackling the market failure in a way which secures value for money and which includes delivering against the government's objectives for closing the productivity gap and boosting enterprise.

  263. Take corporation tax. There is a lower rate of corporation tax for small businesses. Take that as an example. How do you in the Enterprise Team measure the output, the effect of that on the growth of enterprise and small businesses?
  (Mr Price) We do not specifically evaluate the impact of tax rate changes on specific policy objectives such as enterprise.

  264. Why? That is precisely why that concession was given. Mr Grice has just told me about this great work—I shall not go through the book. You are now saying you do not actually apply this to the low rate of corporation tax.
  (Mr Lanser) It may help if I explain a little how the Revenue works with the Treasury. We are a Treasury department and we have Treasury ministers as our ministers. We are also in certain aspects, a separate department. If you look at what Mr Grice said about how the Treasury is responsible for trying to promulgate best practice through things like the GREEN BOOK across departments, if you think of us like DTI, as a department which has specific policies like corporation tax, like CGT, these are our policies which we administer, I am responsible ultimately for evaluating these measures we have just been talking about.

  265. Talk about the specific example I gave, tax relief, lower rate corporation tax.
  (Mr Lanser) The zero per cent rate of corporation tax?

  266. Yes.
  (Mr Lanser) What I tried to explain earlier was that we are not evaluating the impact on output or investment of the nought per cent. What we will do is monitor the costs and the numbers affected by that measure. It is a revenue issue. It is about how much revenue is involved. Where we have a specific policy objective, as we do with capital gains tax, of increasing entrepreneurial activity or research and development tax credits, of increasing the amount of R&D and ultimately raising productivity. Then we will commission work to measure specifically the impact on those outputs as you termed it. With the measures which Trevor outlined, EMI, CGT, R&D tax credits, EIS, VCT, we will look at the impact on jobs, investment activity, output, ultimately productivity. On general tax measures, we do not because the effects are small and they are not the specific objective of the measure we are talking about. If I might, I want to give just a brief example of how we work together with the Treasury and DTI on the work we did on EIS and VCT because that is a good example of how we intend to work on things such as EMI and R&D tax credits? The Revenue was responsible for the evaluation, we commissioned PACEC, we were responsible for the day to day management, but there was a steering group which involved the Treasury and Richard's team; also the DTI and, separately, the Small Business Service were all represented on that steering group. In that way we try to ensure that all the different interests are reflected and that we are addressing all the concerns within government.
  (Mr Price) It is worth saying that these evaluations, the evidence, are taken very seriously in assessing the likely policy consequences of policy decisions. The EIS evaluation is available now and we are consulting on a number of improvements to the scheme along with VCT which were identified in the process of that evaluation. You cannot always have all the evidence you would like to have before you have introduced a policy, but that does not mean that you are not able to make effective use of the evidence that is available. Indeed a while ago when EIS was launched, it was designed with the evidence from the previous business expansion scheme which it replaced very much in mind and specifically tightening up a number of the problems we experienced with the scheme where essentially, rather than being focused on the finance gap experienced by small businesses, there was a large degree of leakage from that scheme into the property market. That was a decision which was taken deliberately in order to make sure that lessons were learned from previous schemes and incorporated into new schemes more effectively targeted on the market failure and consequently on improving the environment for enterprise.

  Chairman: I suspect we shall come back to that before the session ends.

Lord Shutt of Greetland

  267. What is it that makes the entrepreneur buzz? I have written down five things: access to borrowed money; grants; not paying as much tax; gifts in kind, whether it is education or whatever; advice. Those are five; there may be others. There must be some sort of assessment of which of those five and in which order makes the entrepreneur buzz. Who does that?
  (Mr Price) I am not sure we would see it in terms of these things being alternatives. In practice what we are trying to do is look at a series of market failures which occur across the piece, making sure that there are appropriate value-for-money focused interventions to try to tackle those. In some cases those will be quite large-scale generic interventions, maybe not even focused specifically on the small business sector where the market failure is something that is more pervasive than in the economy. Skills are a good example of that where there is a lot of both theoretical and empirical evidence which shows that firms in general, not just small ones, tend to under-invest in their skills base because workers are able to move away once they have been trained and businesses cannot guarantee they will be able to capture the benefits of their investment in skills. In that case, we have a series of interventions, the employer training pilots for example, which are not specifically focused on small businesses. The market failure is much more pervasive, so it is made available for the larger firms to act as well, but recognising that it may actually have a disproportionate benefit for some smaller firms. That is one example. In the case of finance for small businesses, the market failure there is one which is more specifically related to small businesses. A number of the schemes we have mentioned already, EIS, VCT and things like small business investment companies on which we are consulting at the moment, are explicitly designed to focus on the scheme sector rather than more generally. In a different category again there will be some interventions which are even more focused than that and do not necessarily involve large amounts of spending. For example, there is a fair degree of evidence that there are problems with information on the availability and quality of business advice for SMEs and also a fair degree of evidence that fewer SMEs actually take up that advice than would be really beneficial. We have a number of smaller, more focused interventions, to try to improve the availability of that information and smaller, again more focused, schemes which focus on improving the availability of business advice and support specifically in disadvantaged communities. These are a number of examples. The important point is that no single one of those is sufficient in its own right to make the environment right, you need to take the holistic approach.

The Committee suspended from 6.23pm to 6.33pm for a division in the House.

Lord Fearn

  268. What on earth do you do in a crisis? You had the tourism crisis. I was in the other place when I was waiting for something from the Treasury on foot and mouth and after 11 September it did not come for quite a long time. Looking at your evaluation, which does not seem to exist really and truly, we wait until the end of the scheme and as the scheme goes on, if something goes wrong, then you immediately react to it. So what do you do in a crisis?
  (Mr Price) I really do not accept that government only waits for the end of schemes to generate evidence before anything can be done to modify them.

  269. But you told us before that you have no unit.
  (Mr Price) What we have tried to describe is the process, based around the public service agreements, of setting very clear objectives with departments, in our case sharing the productivity target with DTI, so we have joint responsibility for that and a series of very close working relationships with departments based around making sure that there is sufficient evidence to support policies which will deliver the outputs and the outcomes which those targets require, essentially to understand jointly, reach a common understanding of what policy, what portfolio or group of policies is going to be sufficient to deliver the outcomes we have targeted. Of course, we do not always have perfect information on policies at the inception of the policy, but we do very carefully pull together the evidence which is available, both operating from a framework of economic principles which we try to set out in the Treasury productivity papers, for example, and in Enterprise Britain and also drawing on evidence from the schemes which we have already evaluated here or experience which has been had in other countries, including drawing on independent academic research wherever it is available.

  270. Which scheme was a major failure then? I am an ex-banker and your small loans scheme was a failure from the point of view of the banking system. Was that one a failure or have there been others?
  (Mr Price) The Small Firm Guarantee Loan Scheme has been under a process of review within DTI for some time and it is pretty clear that it does perform a useful role at the very small end where firms do not have a credit track record. It does have a significant effect at that level. We are currently consulting, reflecting the review of the scheme, on a number of improvements to it in the small business finance consultation document. We are trying again to draw on the experience not just from formal research evidence but also the experience of the banks and others in operating small firm loan guarantee schemes and evidence on the difference it has actually made to the ability of small firms to get finance.
  (Mr Grice) May I add one point which is relevant both to Lord Shutt's questions and to the questions you have been raising there? In a sense Richard is being over modest in denying or failing to recognise that we have a unit because actually the work of Richard's own team is precisely this on an ongoing day to day basis. These are difficult issues. What spurs entrepreneurship, what spurs growth? It is the economic equivalent of the secret of life. We have made tremendous progress over the last few years in building a framework to try to get to grips with this and increasingly to find what the evidence is telling us, what the market failures are, what the barriers to growth are, what the things which positively stimulate it are and that is the activity on a day by day basis, an ongoing basis, Richard's team in the Treasury and various other parts of the government machine and the Revenue and elsewhere are doing all the time. We are increasingly looking at the benefit side of the equation or the effectiveness side of the equation as well as the cost.
  (Mr Evans) Two comments from the Revenue perspective. One is that we have vastly increased our analysis and research function in the Revenue over the last few years and part of that function is to monitor on an ongoing basis the schemes, the reliefs which have been set in place. What we might be in danger of drawing is a distinction here between a formal evaluation and ongoing monitoring. Ongoing monitoring does feed back into the process of whether the relief is working and whether it is delivering the desired objectives, but the formal evaluation might have to wait some time before it can be done in a totally coherent way.

  271. When would the minister act then if something were going wrong?
  (Mr Evans) If something were going wrong, then we or Treasury would advise the minister to act at that point, when we first became aware of it.

Lord Shutt of Greetland

  272. Earlier you referred to the Green book and on many of the points I now want to raise you will immediately tell us to look at the GREEN BOOK. I am just wondering in such circumstances whether we ought to see it. I do not think the inquiry team has the green book.
  (Mr Grice) We can certainly make copies available.

  273. That would be very helpful.
  (Mr Grice) I looked at the picture on the front over the weekend as it happens and there is the London Eye and you can just see the House of Lords in the background.

  274. We shall take that into account as we consider the rest of it. We were concerned and I want to ask you about government departments such as DTI, DFES and DEFRA and so forth and where the Treasury is. Yes, you say there is an agreed framework within government, but what role does the Treasury play in that to make certain that policies represent best value for money in promoting the translation of entrepreneurship into successful business growth and development?
  (Mr Grice) The general answer is contained in what I said before. As part of the spending review process, but it is part of a two-year cycle, the Treasury ensures, discusses with departments and, to the extent they are relevant, with the Prime Minister's delivery unit, how the existing PSA is looking, how performance against target is going and what design or re-design of the policies in the PSA that go with it should be. In the context of entrepreneurship, the expertise in the Treasury would largely be in Richard's team, also in the tax policy team to a degree, also in the spending teams which are concerned with DFES or DEFRA. I should perhaps also say that we do have a unit, the better public services unit, which is responsible for co-ordinating across the piece to ensure that process goes on smoothly and effectively. One thing I should say which I did not say before is that a number of these targets need to be and are jointly owned by several departments, because sometimes the policies which need to be effective will actually involve elements of responsibility of a number of spending departments or tax departments and the PSAs are sometimes jointly owned in that kind of way.
  (Mr Price) A case in point is in fact the productivity target which is jointly owned by the Treasury and the DTI as the two lead economic ministries which can influence the business environment. Shall we just say something about our relationship with DTI and the process for making sure that we secure value for money from their programmes? Value for money is absolutely central to all aspects of policy development and Joe has described some of the core processes in place to make sure that it is delivered. The DTI PSA focuses specifically on enterprise and the productivity growth target is shared with us. Within the PSA framework it is also developing its own approach to tracking and measuring value for money as part of its public service agreement and equivalent processes are under way in other departments. In each case that approach would be reflected in a technical note describing precisely how the department will judge value for money, which will need to be agreed with my team or my counterpart spending teams in the Treasury. Joe touched on the spending review process. My team in the Treasury scrutinises the bids for resources and the evidence to support them which the DTI submits at each spending review. The team plays an important challenge role in making sure, not just effectively that the requests for resources are well costed, well founded, but that there is a clear linkage between those requests and the outputs and outcomes that those programmes will deliver to meet PSA objectives. It is fair to say, as we have gone through successive spending reviews that the emphasis on the nature and quality of that evidence has become increasingly important. DTI know that and for that reason, among others, we are working very closely together on making sure that we both have a common understanding of what the evidence base is telling us, including indeed where it is weak and needs to be improved. We have several joint arrangements with DTI. DTI has recently launched an investment committee which is an independently chaired committee, has a number of independent members and that committee is remitted with ensuring that new proposals for business support and indeed existing business support programmes within DTI are rigorously assessed. DTI has been in the process over the last year of working systematically through each of its existing business support schemes and looking for scope for the rationalisation. A final example of joint working here, specifically focused on small business and enterprise, is that the Treasury co-chairs with the Small Business Service, the cross-Whitehall group responsible for looking at policy towards small businesses. That exists to make sure that we have effective co-ordination across all different departments, including DEFRA, DFES, Revenue and Customs and a number of others, making sure that we are avoiding duplication, that each of those departments is equally focused on the agenda for making sure that regulatory costs are no more than they need to be to make sure that we have an efficient, effective system of regulation and in general taking an holistic approach to regulatory and support programmes. In a whole series of respects, we have either Treasury machinery or joint machinery with the department to make sure that we are putting pressure on departments to maintain and improve value for money and indeed to improve our understanding of the evidence on which programmes are based.

Chairman

  275. How do you decide on the balance of policies? There is EIS, there is the cost of co-ordination, tax relief, the cost of various things. DTI has various spending programmes. The Department for Education and Skills has spending programmes. Presumably the Treasury plays some kind of co-ordinating oversight role to try to have a view about the balance of priorities here. Am I right on that? How is the balance of policies and their impacts decided? Inevitably it is a rather critical judgment, but in so far as you can rationally look at spending programmes, tax concessions could add up in total to billions of pounds. How does government go about deciding the balance of policies, which have been the most effective and which should have more? How is that decided?
  (Mr Price) It makes a lot of sense to look at the range of policies as a piece, as a portfolio, to make sure we are creating the positive supportive environment in which businesses can thrive. The cross-cutting review which you have seen was one of the first attempts really systematically to understand what that distribution of resources is and its findings on the balance are set out in that report. Just looking at the balance of spending can only get you so far. I can explain why. Government's approach is to try to tackle a whole series of market failures which can adversely impact on productivity growth and that means interventions need to be focused in the way which most effectively tackles that market failure. That does not always mean that interventions need to be specifically targeted at small businesses. Earlier I gave the example of skills where a lot of spending to tackle the market failure in the labour market associated with under-investment in skills, actually takes place outside the small business sector. We need to look pretty broadly and in particular make sure that our policy measures are specifically targeted on the market failure, whether it is covering just one part of the small business sector, the small business sector as a whole, as in the case of finance, or, as in the case of skills, a much more general market failure. Given that, it would not be safe to assume that the balance of funds reflects a set of conflicting priorities, not does it reflect an assessment that any one market failure is any more important than any other. It is a question of making sure that the measures are well focused, that they are proportionate to the problem, that we get value for money from them. One other thing on this is that it is worth emphasising that spending is not the only way to tackle market failures. Indeed over the last few years the government have put a lot of effort into strengthening the competition regime which consumes comparatively small official resources, but potentially we believe has a major effect on small businesses' ability to access markets and therefore is actually very important in stimulating small business and new business activity. The other example is in simplifying or in some cases abolishing inefficient regulation where actually we can save money, but still have a positive impact on the small business environment. Overall it is certainly important to see this as a portfolio of measures, but the balance of spending across that portfolio is only part of the picture.

Lord Fearn

  276. Does the Treasury have any evidence that increasing entrepreneurship will increase productivity and output growth? Does it have any evidence?
  (Mr Price) There are several pieces of evidence looking at the relationship between small business start-ups rather than participation in different countries and growth rates. Within the UK, there is a fair amount of evidence recognising that the small business sector is a substantial part of the economy in its own right and it accounts for more than half of private sector employment and half of private sector turnover—slightly less. Some small businesses can have impacts on productivity and on the dynamics of the economy which are disproportionate to their size. For example, many small businesses can enter a market with a new idea, a new innovative approach to delivering services or innovation in products. In entering the market they contribute to competition and in turn put pressure on incumbents in those markets themselves to innovate and to improve their own performance. There is a fair degree of evidence, both looking across countries and looking at the UK, to suggest that there is indeed a link between entrepreneurial activity, start-ups in particular, and productivity growth.

  277. Having seen the Green Paper, what is your view of the cost of it?
  (Mr Price) The Green Paper at this stage does not actually make specific policy proposals. At this stage we are not in a position to cost any of those. The next stage in the Green Paper process is that the Commission will produce an action plan, which will contain a number of those proposals. We are expecting drafts of that to be available towards the end of this year and those will be for consideration at the spring council in 2004. It is only once we have the action plan that we shall be in a position and the departments will be in a position to cost the specific proposals and to assess their appropriateness.

Lord Shutt of Greetland

  278. I am well aware of course that the EU has some spending programmes aimed at enterprise and entrepreneurship. Is the government satisfied that there is no overlap between EU and UK schemes of support? What is the rationale for EU spending programmes in this area?
  (Mr Price) Mr Zourek explained that the entrepreneurship policy is primarily a Member State competence. The role of the Commission is focused largely on sharing best practice and ensuring that Member States get the most from taking a co-ordinated approach where that is appropriate. The Green Paper is actually a good example of that because it draws out a number of examples of good practice from around Member States. The government are going to respond formally to the Green Paper towards the end of June but we think the broad thrust of it is helpful. There are several areas where D-G Enterprise takes action which is complementary to our own and we support their general approach, specifically the work they are doing, the efforts they are making to ensure that the regulatory burden on small businesses is fully taken into account when new proposals for legislation are developed at European level, just as we would in the UK when national legislation is developed. The EU's structural funding can be used in objective one and objective two areas and that is coordinated at the regional level, again looking specifically at the complementarity, with other forms of government support and the government offices of the regions lead on that in partnership with regional and sub-regional groups including the RDAs. Judgments on allocation of those funds from the EU are taken in a way which reflects regional priorities within guidelines set by the Commission, but specifically reflecting the policy environment in the UK, again making sure that those activities are complementary. The current arrangements for the structural funds in 2006 and debate on what comes after that is just beginning. One of our key objectives will be to make sure that the use of the structural funds again complements UK programmes, making sure that EU resources are focused where they can add most value, especially in making sure that there is funding in the poorest Member States and promoting exchanges of best practice which we have already seen. Government works very closely with the relevant EU authorities and we have very good dialogue which also helps to make sure that our programmes are mutually complementary. There has been quite good close work on a number of innovative new programmes. A good example of that is the UK's use of the multi annual programme for enterprise and entrepreneurship, where the UK have the largest share of European Investment Fund investments in risk capital under that programme. Through collaborative work with the EIF, UK was successful in securing more than £53 million from the funds to invest in regional venture capital funds, which we think is the largest investment in a EU Member State. Again it is specifically focused on a very specific need in the UK. That said, some programmes are less relevant to the UK, though we support them because they tackle market failures which were widely experienced in other parts of the Union. In the UK, for example, we are lucky to have a strong, sensible financial sector, but that is not the case in all European countries. Some EU programmes therefore focus on that issue, reflecting a different position in many other Member States, even though those measures are of relatively little relevance to the UK. So a number of areas and means through which we seek to ensure that our programmes are complementary and that has really made sure that we have substantially avoided overlap between our programmes and the EU.

  279. Do you take the view that there are other EU Member States who can learn from some UK experiences?
  (Mr Price) I think so. In a number of respects the UK is ahead of other parts of the EU in its thinking on enterprise policy. That actually reflects the fact that we believe, and it is reflected in our targets, that we have a way to go to catch up both with the level of entrepreneurial activity in the US and indeed in some other parts of the EU. I can give you a few examples where I think we are ahead and where there may be lessons to be learned from UK experience. One thing we have made rather a lot of in our recent policy thinking is the extended use of venture capital approaches. That can be described as genuinely innovative, including things like the UK high technology fund, the regional venture capital funds, the community development venture fund which is, as far as I am aware, the first time a venture fund has been used in the EU specifically to target disadvantaged areas; I am pretty sure it is the first time in Europe that that has been done. We introduced the community investment tax relief which supports investment through non-mainstream financial institutions and again with a more than proportionate influence on funding in disadvantaged areas. Recognising that there is a lot to share, next week the Small Business Service is organising a large conference on addressing the equity gap, the English experience, to which people are coming from the Commission, from a number of Member States as well as from the US. We are trying, as far as we can, to share experience. Enterprise Britain has had a good response from other Member States and we have had a number of enquiries.

  280. So there is a direct Treasury response to the EU Green Paper.
  (Mr Price) It is a government-wide response.

  Chairman: I suspect we could go on, but we have gone on far past our normal time. That is entirely because of the interest in your responses and we are extremely grateful to you. We understand entirely that these are difficult matters. I said in casual conversation in the break there that it is often easy to say one can measure what the costs of things are, but it is awfully difficult on occasion to measure the outputs, particularly when long-term policies are involved. Your answers this afternoon have been helpful and constructive and we are most grateful to you. Thank you very much for coming along; we are most grateful.





 
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