Examination of Witnesses (Questions 40
MONDAY 22 APRIL 2002
40. But we will not hit the wall until 2006-07?
(Mr Emmerson) The plans they have to 2005-06 are costed
in here are consistent with the fiscal rules and can be paid more
out of the change in growth assumption and the tax increases.
(Mr Barr) I have to say I cannot really get too excited
about what the projections might look like for something that
is five years away given the one year ahead error on my own personal
public finance forecasts from working in the City. Looking at
the gap in NHS spending of 0.7 per cent GDP for those two years,
they could just freeze, for example, other spendings. Total expenditure
is going to rise by something like £25 billion a year just
to come up in line with nominal GDP over the profile of those
two years, so it would not be that difficult to cost it and hold
back other departments for a couple of years if you wanted to.
It is so far down the line I personally cannot get that excited
(Professor Congdon) Just a couple of points. One is
that the structure of the economy at present is very helpful to
tax revenues. We have had several years now when consumer spending
has been rising faster than national output and imports rising
faster than exports. A lot of taxes are paid on consumption, VAT
and excise duties. If you have, as seems to be implied at some
point over the next three, four, five years, exports growing strongly,
as by the way is assumed in the forecasts, consumption coming
back, then that would reduce tax buoyancy. The present healthy
state of public finances is partly tied up with the imbalance
in the economy, weak net exports and strong consumption, and that
may change. The second point, which I am slightly reverting to,
is if one believes that taxes have got to rise to pay for this
extra spending, and I think I agree with the verdict of my colleagues
here that they are going to rise a bit, then the question is "which
taxes?" because, as I was saying earlier, this Government
has made some promises on direct taxes on persons, there are taxes
on companies, there are indirect taxes but then there is the effect
on RPIX and the price indices. So you are back to national insurance
contributions but then you get this question of can national insurance
contributions be used in this way, the question that was raised
earlier. I think that one thing that you might want to think about
is there have been these plans for spending, does it mean more
taxes, but then what taxes?
41. Can I just ask you to do a little exercise
in your head, which you might be able to do. Cancel the proposed
national insurance increases, assume everything else in the Budget
is as stated, what growth would have been possible in National
Health Service spending under those circumstances in terms of
growth? How much smaller than the 7.4 per cent average would it
be without the NI revenues?
(Mr Weale) My quick answer is that if we remain in
the current economic cycle until the end of the budgetary period
then that growth, although not the same level of spending, could
have been financed out of the cumulated surplus so far during
42. Anybody else?
(Mr Weale) And the golden rule would have been met.
43. I am saying assuming everything else.
(Mr Weale) Having cumulated the surplus of £50
billion so far, since the Treasury believes the current cycle
started in 1999, the sorts of revenues that are raised from the
national insurance increasesand I have done this in my
head, I have not checked the numbersI think the cumulated
total of those over the next four years will be less than the
£50 billion surplus that we have accrued already.
44. I think you are saying that it might have
been possible to get the 7.4 per cent real terms growth in NHS
spending without the national insurance increase.
(Mr Weale) He would have needed then a sharp increase
in tax after this £50 billion surplus had run out.
(Mr Weale) I do not think that would have been a sensible
fiscal policy but it would have been largely coherent with the
(Mr Barr) Page 154 costs it out where it tells you
how much you are raising. It is about £8 billion per year,
not cumulative obviously just £8 billion, which is, what,
0.8 per cent of GDP. If you remove that and everything else is
locked up and there is no change he would have lost 0.8 per cent
of GDP which would wipe out his current surplus over the projection
because it is roughly 0.7 per cent of GDP. So he could have, if
you like, kept his NHS very broad spending plans for the foreseeable
future but he would get to a situation where he had no buffer
whatsoever on his golden rule, if everything else was kept as
comparatives, just using those eight to nine billion figures there.
(Mr Emmerson) Another way to look at it is between
the current financial year and 2005-06, the end of the next spending
round: NHS spending is increasing by one per cent of GDP, the
NI changes are about 0.8 per cent of GDP, so they are paying for
four-fifths of the increase as a share of national income. So
if he wanted to be as cautious as he is in this Red Book and not
increase NI he could have increased NHS spending by 0.2 per cent
of GDP instead of one per cent of GDP.
Mr Plaskitt: Right. Okay.
46. Again, some commentators have said this
is a new Labour budget and others are saying it is old Labour.
What is your view? One simple answer, please.
(Mr Weale) Could I say simply that, if the Wanless
proposals are implemented in full, the solid progress arrangement,
and all the extra revenue is collected from the basic rate of
income tax, which it presumably would not be but that is a reasonable
thought experiment, over and above the national increases then
we would be very close to the 35p in the pound that we enjoyed
under the 1970s Labour Government. So, in that sense you might
say taken all the way, it would take us back to old Labour but,
of course, the Budget itself does not take us all the way.
(Professor Congdon) Could I just say in one respect
this is not like old Labour because the Government's finances
are in good order. Perhaps the years of surplus are over but nevertheless
the ratio of net public debt to GDP is only 31 per cent and the
envisaged deficits are really quite small. That is different from
old Labour. I think that the Labour Party, both old and new, does
believe, I am sure it does, in more spending on health and education
and it is paying for them in responsible ways but it does mean
(Mr Barr) I think my definition of the old Labour,
new Labour thing would be you will know in three or four years
when we see how the money has been spent and whether it isreflecting
what Martin was sayingspent well. There is a lot of extra
money being thrown at the NHS and I think the key thing is to
make sure that it is spent well and it does not just disappear
into some sort of black hole and does not deliver improvements.
We are starting to get worrying reports about massive pay increases.
Working in the private sector I would be the first to argue that
public sector pay has fallen to below where it should be but if
that does not deliver results, if it is just thrown at a white
canvass, then that is going to be the defining test of whether
it is old Labour or new Labour to my mind.
(Mr Emmerson) The Budget means that the period of
NHS spending from April 1999 through to March 2006 will be the
record period of investment over that period since the NHS was
introduced. It means also that on average the bottom 40 per cent
of the income distribution will gain and on average the top 60
per cent will lose.
47. There is a hint of wise Labour but verify.
We have to bide our time and wait and see. Is that what you are
(Mr Weale) I think so, yes.
Chairman: Thank you very much for your
time, that is very valuable for us. We have a few meetings left
this week, not least with the Chancellor on Wednesday. Thank you.