Examination of Witnesses (Questions 260-280)|
MONDAY 2 JUNE 2003
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 workI
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
(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.
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
(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.
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.
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 turnoverslightly
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
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
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.