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Public Accounts - Minutes of EvidenceHC 659
Taken before the Committee of Public Accounts
on Monday 22 October 2012
Margaret Hodge (Chair)
Mr Richard Bacon
Mr Stewart Jackson
Amyas Morse, Comptroller and Auditor General, National Audit Office, Gabrielle Cohen, Assistant Auditor General, NAO, Steven Corbishley, Director, NAO, and Marius Gallaher, Alternate Treasury Officer of Accounts, HM Treasury, were in attendance.
REPORT BY THE COMPTROLLER AND AUDITOR GENERAL
HM Treasury Resource Accounts 2011-12 (HC 46)
Examination of Witnesses
Witnesses: Sir Nicholas Macpherson KCB, Permanent Secretary, HM Treasury, Tom Scholar, Second Permanent Secretary, HM Treasury, and Julian Kelly, Director, Public Spending and Finance Director, HM Treasury, gave evidence.
Q1 Chair: Welcome. It is the first time that we have seen Julian Kelly here, so welcome to you.
Now, Sir Nicholas, these accounts are completely impenetrable. You may sigh, but it is impossible. In the end I might have got there, but I tried really hard to work out how much support we have given as a Government, how much of the risk is outstanding and how much everything is costing us. You are in charge of the clear line of sight project. I do not understand why you have to produce stuff like this, which is just so difficult for us to get to.
Sir Nicholas Macpherson: I sympathise with you. I too hanker after something simpler. It is always tempting on these occasions to blame the accountants-
Q2 Chair: I did that, but they told me they could not understand it either.
Sir Nicholas Macpherson: I will not fall into that trap, because they would exact their revenge in due course. The serious point is that a lot of the financial interventions took very different forms-some took the form of classic direct public money, such as buying shares; others took the form of guarantees; and others translated in accountancy terms into complex derivatives-and the result is that you are not comparing like with like. At the risk of appearing sycophantic, I think the National Audit Office did a very good job in their chapter on the financial interventions to try to reduce to reasonably simple terms the exposures the Government have.
The only bit of good news that I can give you is that those exposures are declining steadily. Only the other week, Royal Bank of Scotland announced that it is leaving the Asset Protection Agency; in the past year, the special liquidity scheme has come to an end; and a further bit of good news is that the credit guarantee scheme will soon be drawing to a close. By next year, at least the number of interventions covered in these accounts will be smaller, but there will be a very long legacy. We discussed this in the context of Northern Rock-the so-called "bad bank". We are likely to be owning mortgages for many years to come. Looking again at the accounts, with the various Icelandic banks, there is a long list and there will be a long tail. I can only apologise if the accounts are impenetrable.
Q3 Chair: I will make one more point, because we had to have a Report on your report, which is a bit daft, but it made it a bit simpler. One thing that really caught my eye is on page 28 of your report, where you discuss changes to Government financial exposure to the financial sector. I thought, "Ah, good. It’s going down," until I realised that, if you look at RBS and Lloyds, what you are really reflecting is that the share price has gone down, so we have lost a whole lot of money. We are only exposed less because you are writing off a loss. I am trying to understand that. I am not an accountant and my economics goes way back and I was not a very good student, but when I looked at financial exposure, I take that as being a completely different concept from the one that I got on the page when I looked at the table.
Sir Nicholas Macpherson: When doing a bit of revision for this appearance, I also paused on that table. One thing we may want to do is to take the presentation away and try at least to provide you with something more intuitively sensible next time around.
Q4 Mr Bacon: It is not just us; there are a lot of taxpayers out there who are funding all this, some of whom might like to read this. Not all will, but some will and they should be able to. May I suggest that you phone the Plain English Campaign, who are very good on this sort of thing? I recently sent them a quote from a local primary care trust in which a cut was described as "negative financial uplift". Like the Chair, I had a little trouble for a second or two working out what was meant, but it was clear in the end that it was a 1.4% reduction.
The Plain English Campaign are very good at this. If you sat them down and gave them a day or two with your report, and asked them to fire lots of questions at you along the lines of, "What on earth does this mean?" you would probably end up with a much clearer report. Why don’t you do that?
Sir Nicholas Macpherson: That is a very constructive suggestion, on which I would like to reflect.
Mr Bacon: They would probably do it pro bono, or for a much smaller fee than some of the consultants that you use.
Q5 Nick Smith: I think the publication Whole of Government Accounts is getting easier to read, and I wondered whether there is to be a new part of that publication that could include this information, which would make it easier for the general reader.
Sir Nicholas Macpherson: We had a good session on the Whole of Government Accounts in front of this Committee nine months or so ago. This will be covered in the Whole of Government Accounts, and we will try to do a job consistent with better English.
Q6 Chair: Before we get on to the meat of the business, I just want to ask a couple of questions. At the peak of dealing with the financial crisis, as I remember it, you had a big financial stability team-I think Tom Scholar was in it. Somebody brought me out a figure that you had over 100 people there-108, I think. How many of those are still working for the Treasury?
Tom Scholar: I do not have the figure at my fingertips. My guess is that it would be something of the order of 70 or 80.
Q7 Chair: As many as that?
Tom Scholar: I would have thought so, with our broader family of UKFI.
Q8 Chair: Are those the same people? I don’t mean the jobs. I am talking about the people with the skills that you had to deal with the financial crisis at its peak in about June 2009. There is a little graph in one of our papers.
Tom Scholar: It would be fewer than the number in June 2009. I was thinking of the people who worked throughout the peak period.
Q9 Chair: Not the posts, the people.
Tom Scholar: Taking people who worked there between, say, the summer of 2007 and the beginning of 2010, which was the two and a half years of the crisis, I don’t have the precise figure-
Q10 Chair: Could you come back to us?
Tom Scholar: I think I’d better come back to you rather than guess at it.
Q11 Chair: The reason I ask the question is the obvious one that you did build up skills during that period, and your own report on how you managed it talked about whether you had got enough people at the right levels. Your non-executive directors are also drawing attention to whether you have the right resource at the right levels. I really want to know how many you hung on to. If not, you said you would set yourself a target.
Sir Nicholas Macpherson: We have done.
Q12 Mr Bacon: What is your target?
Sir Nicholas Macpherson: That turnover across the Treasury as a whole, excluding planned secondments, would fall to 15%-
Q13 Chair: By when?
Sir Nicholas Macpherson: As soon as possible. It may just be fortuitous that in recent weeks we are coming pretty close to 15%. I think we have done quite a good job of retaining people. I will be interested in the figures we provide, but it is striking, especially at middle levels, how successful we have been in retaining our staff and how people who are potentially very valuable are sufficiently motivated to stay within the Treasury to make use of that experience.
Q14 Mr Bacon: Is there a bit of the phenomenon that one saw in the early ’90s after the Berlin wall came down? All kinds of money was being thrown in all directions-PHARE and TACIS and lots of other programmes. It became de rigeur to get the European Bank for Reconstruction and Development, where your colleague Sir Suma has recently gone to be the boss, on your CV. You knew, as a consultant, project engineer, banker or lawyer, that you would not get paid as much at the EBRD, but that later, when you back out in the private sector, your CV was fast burnished because you had been at the EBRD for a couple of years. Is that a phenomenon that you are seeing in the Treasury: people come in, polish their CV, get to know lots of people, and then go out again?
Sir Nicholas Macpherson: You get a bit of that, but in a sense, you want some of that. It is a bit like KPMG or PWC: at any point there are lots of people coming through who will qualify, but most will not make it to partner, so you want people to leave voluntarily. The critical thing is to hang on to enough of the really good people. I was working as a consultant when I joined the Treasury in 1985. Originally, I assumed that I would work in the Treasury for a couple of years and then return to the private sector. I didn’t.
You want to retain enough people. We are not doing badly, but we are at risk. I don’t want to sound like someone who is complaining, because I know how difficult it is, but a Department like the Treasury, which is very market facing, suffers when it comes to national pay scales. You referred to Sir Suma. Ministry of Justice staff turnover is something nearer 5% and possibly less than 5%. If I wanted a market solution, I would pay people more in the Treasury. On the other hand, the Treasury is the nation’s finance Ministry and it would give a bad signal if it appeared to be paying its staff more than other Departments. In the past the Treasury was perhaps too hair-shirted, and since pay was delegated, Treasury pay has fallen behind other Departments. That is because we tend to stick very closely to our own rules. Certainly, with the benefit of hindsight, some Departments have not stuck so closely to the Treasury rules on pay and we have suffered as a consequence.
Q15 Mr Bacon: You have a target to reduce your staff headcount by about 33% haven’t you? You are still facing an enormous crisis. This has not gone away yet. It is not as if the discussion about capacity is new. We had an exchange in March 2009; we were talking about the number of people in the financial stability area-this is on page F8 of our report on Treasury and UK Financial Investments-and you said: "I think something like 60 people were working on financial stability in 2007. We have now gone up to something like 120 and my plan is to get above 160 people working there by the end of this year, so we are expanding our interest in this area." That was only three years ago. Lots of those people came in, and now it seems a lot of them have left, yet we are still on the edge of a precipice. Much seems to be going in the right sort of direction: RBS have pulled out of the asset protection scheme and there are lots of good things you can point at, but the possibility of an enormous volcano going off is ever present with the euro. You are still not at the right level of skills and you are pressing down on staff numbers when you are confronting a crisis of the kind we have not seen since Methuselah. Given the size of your Department relative to the Ministry of Justice, let alone DFID or any of these others, is it really not missing the point?
The Major Projects Authority, which we have looked at, has 38 staff. If you exclude the people in the academy, it is 34. It has to look at £376 billion of expenditure, yet it costs less to run than the consulate in Basra, which we closed just the other day. It costs £6.3 million, whereas the consulate in Basra cost £6.5 million. If you tripled its size it would be utterly inconsequential, but it would have meant that the Major Projects Authority would have had the wherewithal to look at the economic model and the underlying assumptions for the west coast main line, which I know it did not. It was asked to look at the bid administration. That mistake is going to cost us at least £100 million. Are you making the same mistake in the Treasury in trying to cut too much the amount of tar you are applying and risking sinking the whole ship?
Sir Nicholas Macpherson: I think we have got the balance reasonably right. We have acquired a lot of skills in the last few years, and we have managed to retain a lot of the key people in those areas. I think they are very good value for money to the taxpayer and, as I have explained before, we are far less reliant on advice from investment banks than we were in the past, because we have the in-house expertise. Tom may want to comment further on that, because he has far closer knowledge of the individuals concerned.
You are making a broader point that nearly always comes up when I appear before this Committee about what sort of Treasury the nation wants. I was reading a book on Treasury history in the holidays and learned that this Committee was having the same debate with the Treasury in the 1890s about what is the boundary of the Treasury’s role. I am sympathetic to your view that things such as the Major Projects Authority do add a lot of value, but equally my experience of working at the centre of Government is that there are diminishing returns from building larger units. Some of the effectiveness of small units at the centre of government derives from the fact that they are small. The Prime Minister’s Delivery Unit, in its day under Michael Barber, as I think the Chair will recall, was very influential and very effective, but at the moment that it expanded and Michael left, it just became another slightly bureaucratic unit. The Treasury cannot second guess everybody and everything. If it did, it would probably be pretty bad at it, but you do need the expertise.
The point that I would make on financial services is that this Government, and indeed the last Government, have taken the decision, for example, when it comes to resolving collapsing banks that the Bank of England should carry out that responsibility. There is therefore no point in us having a shadow function in the Treasury duplicating the role of the Bank of England, but we do need sufficient capacity to be an intelligent interlocutor of the Bank of England. For that you need expertise-there is no doubt about that-but you probably do not need that much. Tom will know more.
Tom Scholar: Let me give the example of the credit guarantee scheme, which will shortly be completely closed down. When we created that scheme in 2008, we did so from scratch. It was a scheme that involved enormous complexities of technical design, pricing, operational delivery, risk management and all the rest. We had to do that very quickly, pulling in as many people as we could to put on to it. Since then, we have had four years’ experience in operating it. It is closing, but it is completely possible, as you hinted at in your question, that circumstances may arise where we would need to reintroduce a scheme of that sort. Indeed, at the back end of last year, there was a big debate in Europe about whether there should be either a Europe-wide scheme or a co-ordinated set of schemes set up by member states. At that time, I was asked, "Could we do this?" and I was able to answer extremely confidently to the Chancellor that, "Yes. If you want to announce this, we can do that and we can do it this afternoon. I can guarantee you that we can have it operational immediately." The reason why I was able to say that with such confidence is that we now have the technology; we did all the policy development work four years ago; we have looked at different models; and we have looked at pricing structures and so on and so forth. We have the documentation and delivery mechanisms ready.
Q16 Mr Bacon: Is the answer still yes today?
Tom Scholar: The answer is still yes today. On resolution, as Nick said, that was a Treasury responsibility four years ago, but it is now a Bank of England responsibility. They have big machinery that is available for use on resolution. If you are talking about capital contributions to banks or in insurance schemes, such as the APS, there would clearly be difficult judgments to be made at the time in any of these things, but I am completely confident that, with the knowledge we have built and the experience we have, we can do those things. The real question for the Treasury as a Department, in 10, 15 or 20 years’ time, will be how we can be sure that, in that time frame, we retain those skills and capabilities. I know that that has been a preoccupation of the Committee.
Q17 Chair: I want to ask two more general questions, and than we have to get to the meat of the actual exposures in the financial sector. Last week, I happened to do a thing on Starbucks with John Whiting, which you might have noticed. He said on telly that there are only six people working on tax simplification. Quite honestly, that is laughable.
Sir Nicholas Macpherson: I think he was referring to the six people who work in the Office of Tax Simplification.
Q18 Chair: Which is your bit.
Sir Nicholas Macpherson: Which was set up by this Government, within the Treasury, at arm’s length.
Q19 Chair: Okay, but whether or not it is arm’s length, it comes into this Report: it appears, which is why I was moved to ask the question. When we see that there are so many problems and that it is a capability issue, it seems madness that you have only six people in the Treasury addressing a major issue of public concern.
Sir Nicholas Macpherson: Six are working in that arm’s length body, which is in a room in the Treasury. Actually, there are a lot of other people working on tax within the Treasury-
Chair: Tax simplification.
Sir Nicholas Macpherson: -and I would hope that simplification would be one of the objectives that informs their work.
Q20 Mr Bacon: An interesting metric would be to measure the number of people trying to make things simpler compared with the number of people trying to make things more complicated.
Sir Nicholas Macpherson: I think that would be good. Historically-and it really doesn’t matter whether it is a Labour Government, a Conservative Government or a coalition Government-my experience of tax is that Chancellors come to a Budget, which is a great theatrical occasion, and they have to announce things, but the problem is that there is never very much money to hand out, so people always come up with amazingly targeted, clever schemes, which tend to make the tax system more complicated. I hanker after a world where we have a very small number of allowances and reliefs and we have low tax rates, but I never seem to have had much influence.
Q21 Chair: But Sir Nicholas, this is a serious point. There is a growing consensus now that tax simplification will help you deal with avoidance and evasion-I don’t think anybody dissents from that. While we accept there are constraints on staffing, it just seems ridiculous that there are as few as six people working in an arm’s length body on this particular issue. It just seems daft.
Sir Nicholas Macpherson: I will reflect on that.
Q22 Nick Smith: I have a similar sort of question. I was just trying to find out how many people worked on the national loan guarantee scheme, which was initially to lend up to £20 billion to small businesses. How many worked on that?
Tom Scholar: There was a large team involved in developing it, drawn from quite a number of the different areas of the Treasury, given that there were so many different issues to consider in the design of it. Again, I can’t give you a precise figure for how many were involved, but I remember seeing very long e-mail copy lists and there were quite large meetings. I would guess that something of the order of 30 people would have been involved in the design of it-that is at the working level-possibly more.
Q23 Nick Smith: So an initiative to try to get £20 billion in the economy had 30 people working on it?
Tom Scholar: The role of the Treasury in the scheme is not to process individual applications, it is to create a broad design and make sure that the incentives are well aligned for banks to use the scheme to pass on the benefits to borrowers.
Q24 Nick Smith: How many are working on it now? The same 30?
Tom Scholar: The scheme has to a large extent now been superseded by the Bank of England’s own FLS, which the bank is running but with which we also have a large engagement. My guess is that a similar number of people are working on it at our end.
Q25 Nick Smith: In the note about other staffing, could you tell us something about that please?
Tom Scholar: Certainly.
Q26 Chair: I am going to cover one final governance issue, and then we will go to the meat of it. Again, while trying to find my way through this report, I discovered that your departmental board met only once last year. Isn’t that making a mockery of the Government’s commitment to radically transform the way it manages government, and the involvement of the Secretary of State in chairing that, and the involvement of non-executive directors?
Sir Nicholas Macpherson: The departmental board chaired by the Chancellor of the Exchequer did meet only once, but there have been far more meetings of the sub-committee of the board, which is chaired by Baroness Hogg and includes the non-executive directors working with the executive team. That meets very regularly.
This departmental board business is very difficult. If you are in a Department where you have a Secretary of State who often has to go abroad or go to urgent meetings at No. 10-from your own experience as a Minister, you will know that the diary is always moving around-it is quite a challenge to get all the relevant people there at the same time.
Q27 Ian Swales: But why has it met only once-what is the reason?
Sir Nicholas Macpherson: The reason is that, and the report records that one time it had to be cancelled because of, I think, something that was happening in Parliament-a statement or a vote-
Q28 Chair: But you rearrange it. Obviously, you have to protect your Ministers in this regard, I accept that, but the reason I am saying this is that it was heralded as a new way of doing business-indeed, we are to have Lord Browne back to give evidence-and I see that your board has only ever met once. Perhaps it is irrelevant to the way you do your business. I accept that diaries change, but you prioritise which meetings you put in.
Sir Nicholas Macpherson: I would argue that the model of a board chaired by the Secretary of State is perhaps more relevant in operational Departments such as the Department for Transport or the Department for Work and Pensions than it is to the Treasury.
Q29 Ian Swales: Did your board pass these accounts, and if so, what was the process?
Sir Nicholas Macpherson: Formally, I think-Julian can correct me-that I, as the accounting officer, have to sign off the accounts. That is one of the problems about trying to transplant a private sector model into the public sector.
Q30 Mr Bacon: I think that’s a no.
Q31 Chair: Let’s get the end of this, because I think that is quite interesting.
Julian Kelly: The non-executive directors did have and comment on the accounts. They were also cleared through our audit committee and our Departmental Minister, the Economic Secretary.
Q32 Chair: But it is interesting that you do not find the model useful in doing the Treasury’s business.
Sir Nicholas Macpherson: I find the involvement of serious non-executives hugely useful. The Treasury has always been lucky with its non-executives, and the lead non-executive, Baroness Hogg, is a very experienced person who has been on a number of different boards and brings real expertise and commitment to the job. I also find it useful when the ministerial board meets, because it is always useful to get a ministerial view on how the Department is performing and to have a genuine dialogue about where resources are being placed, and so on.
Chair: When it met once.
Q33 Austin Mitchell: I have a couple of questions specific to the Icelandic issue-Landsbanki. We lent them money to pay our depositors back. It was then subjected to a referendum, which the Icelanders rejected-they said the terms were too tough-and then new negotiations began. The question is: what happens to the deposits put in by charities and local authorities, such as North East Lincolnshire council, which, under the chairmanship of the Liberal Democrats, invested £7 million in Landsbanki? What is going to happen to that?
Tom Scholar: They have claims in the administration, which are gradually being paid out. Obviously, that takes place-
Q34 Austin Mitchell: By the Icelanders, or from our loan?
Tom Scholar: There are three different things here. There is the UK sovereign loan to Iceland, which we are pursuing through the EFTA surveillance authority; there is the Landsbanki administration, which is taking place under Icelandic law; and the Kaupthing and Heritable administrations, which are taking place under UK law; and in each case, the administrator is gradually working through the issues, and payments are gradually being made to the depositors and others who have claims in those administrations.
Austin Mitchell: Each time I go to see the reserve bank in Iceland, they say, "Yeah, you will get your money back, it’s just that the Treasury is proving difficult in the negotiations." The questions are: will we get our money back-North East Lincolnshire, with its £7 million, and all the other local authorities-and how will we get it? Will we get it in the form of a loan given by us to them, so we are paid back out of our own money-how?
Tom Scholar: The sovereign loan is, as I said, in front of the court. The British Government thinks it has a very strong case in that claim in front of the EFTA court. The others are with the administrators. The report that the administrator gives in each case suggests a very high level of recoveries, but of course it is not possible for us to predict what that would be. There is a due process there that has to be followed through. As assets are being realised, claims are being made to those with claims.
Austin Mitchell: So the Icelanders can say to me, "You’ll get your money," but you can’t.
Tom Scholar: Well, I don’t think it would be wise of me to make a prediction, and I cannot make any confident judgment about precisely how much will be paid back and when, but, as I say, we think we have a strong case on the sovereign loan and on the administrations. The administrator’s forecast in each case is for a very high level of recoveries.
Q35 Ian Swales: For the sake of completeness, I should just say that Labour-controlled Redcar and Cleveland was one of the very few public sector organisations to borrow money from Iceland, even after the Treasury told them they shouldn’t. I will just make that point, since a political point was made earlier.
Q36 Mr Bacon: To borrow money from Iceland or to deposit money?
Q37 Ian Swales: Sorry, to lend money to Iceland.
I just want to talk quickly about quantitative easing. Figure 12 shows how the scheme actually works-I think I understand it-with the Bank of England lending money at 0.5% interest to an arm of itself, which then bought gilts from financial institutions. Presumably they receive the coupon on the gilts in the Bank of England asset protection fund, do they?
Sir Nicholas Macpherson: They do.
Q38 Ian Swales: So it is a normal holding of gilts, as any other institution would hold them?
Sir Nicholas Macpherson: Yes.
Q39 Ian Swales: So why, in that case, do we have to give them some kind of guarantee around that holding? Why are they not just freeholders like anybody else?
Sir Nicholas Macpherson: At this stage the scheme is well in the black, and seen from here, with the benefit of hindsight, it is unlikely the Bank will make a loss. The thing you do have to take into account, however, is that at some point interest rates will start rising-obviously it hasn’t happened yet, but when it does the market price of those gilts will fall, and at that point you could sustain quite big losses. My guess is that it will all wash out in the end and capital losses will offset the capital gains. In any case, the Bank could hold those gilts to redemption, in which case they will get repaid at par.
Q40 Ian Swales: What has happened to the accumulated dividends, then? They are just being held in that fund, are they, so the value of the fund is going up?
Sir Nicholas Macpherson: When we set it up, we did not anticipate that quantitative easing would last as long as it has; nor did we anticipate that such a large fund would be built up.
Q41 Ian Swales: Would you have done it differently if you had known then what you know now?
Sir Nicholas Macpherson: The United States and Japan have gone down this route. In both, there are regular payments back to the finance ministry every year.
Q42 Ian Swales: Being made up of what?
Sir Nicholas Macpherson: The coupon is paid back to the authorities.
Q43 Chair: Why did we not that?
Sir Nicholas Macpherson: When it was first set up we were concerned about losses as you came out of QE, so it seemed sensible to keep the gains within the fund to help pay for the losses. With the passage of time, it has become clear that we are not going to make losses. Those coupon payments are money that is building up in this fund, and it is fair to say that this is something we should look at.
Q44 Ian Swales: How much of the £28 billion that you are recognising in your accounts is made up of those accumulated coupons and how much is capital gains?
Sir Nicholas Macpherson: I do not have the number in front of me, but I can come back with a figure.
Julian Kelly: At the point these accounts were done, the aggregated amount from the beginning of the scheme was about £38 billion, of which £28 billion was last year, and it is about 50:50 coupon versus gilt market yields.
Q45 Ian Swales: So there is about £14 billion sitting there that is accumulated coupon paid by the Government to this fund?
Sir Nicholas Macpherson: Yes.
Q46 Ian Swales: That is an interesting policy angle. My main question is what the result of this programme has been, because obviously we are interested in driving the economy forward. Perhaps I do not understand it very well, but do you know what has happened to that money? I know it sounds like a strange question. It has obviously gone into the banks’ accounts that have sold the gilts, but do you have any idea of what has actually happened to that money?
Sir Nicholas Macpherson: We have a reasonable idea of whether the policy has worked or not, and the Bank of England themselves have carried out extensive analysis. What it has helped to do is to drive down yields across the asset distribution. The Bank, very understandably, have focused on buying gilts, but in pushing gilt yields lower they have had the effect of pushing corporate bond yields lower and, ultimately, pushing up equity prices as well, so it has fed into a lower interest regime across the economy. Bank calculations suggest that this has had a positive effect on GDP. I could send you the relevant bit of analysis that sets that out.
Q47 Chair: And inflation? It will have a positive effect on GDP, but it will have a negative effect, one assumes, on inflation.
Sir Nicholas Macpherson: I think the Bank would argue that inflation is set to come down, so QE is necessary to keep inflation close to target.
Q48 Chair: Necessary? That sounds a bit odd.
Q49 Mr Bacon: We are deflating so rapidly that unless we print lots of money, the whole thing will go into a rapid downward spiral. That is what it sounded like to me.
Sir Nicholas Macpherson: That is a reasonable summary.
Q50 Ian Swales: It is also had a depressing effect for savers, of course, which affects a lot of our constituents.
Can I be more specific? I understand the macro-economic points that you are making, but have you done any specific analysis of what a bank has done with that cash when you have given it to them? I start with a prejudice that if they were selling safe assets, which Government gilts would be in their balance sheet, they would not then go off and do risky loans to small businesses. They would look for some more safe assets because of the shape of their balance sheet and the need to have it in the right order. Have you done any analysis of what an individual bank or collection of banks has actually done with this money?
Sir Nicholas Macpherson: As I have said, there has been extensive analysis. I would not expect them to go into risky loans; I would expect a rippling across the asset distribution. The fact is that the monetary transmission mechanism at present is very impaired. This is an environment where monetary policy can have only a limited effect. I am confident that QE has had a positive effect, but in one sense this is an experiment, and we won’t know the ultimate answer for many years.
Q51 Ian Swales: Let’s say a particular bank sold £50 billion worth of gilts over this period, you could at least ask them what has happened to their cash flow and balance sheets.
Sir Nicholas Macpherson: You can do. On day one, it just shows up in their bank account at the Bank of England, but the question then is, what is the behavioural response? I don’t know if Tom wants to add anything.
Q52 Ian Swales: It’s important for us because what we want is to see the economy grow, so the behavioural response is crucial to whether the policy is working or not.
Tom Scholar: It is extremely hard at the level of an individual bank to separate out this effect from the effect of all the other things that are going on across their balance sheets and Treasury functions over any particular quarter or year, which is why the Bank of England has done their analysis principally at the aggregate macro level. I think they are able to demonstrate, and we would agree with them, that this has had a broadly positive effect on activity.
Q53 Ian Swales: Sir Nicholas said a couple of minutes ago that the transmission system in this country was impaired. If we want to stimulate the economy in the way that policy makers might want to, is QE actually the right answer? Are you telling the policy makers that more and more of this is a good idea, or are you suggesting that this should be looked at again and something different should be tried?
Sir Nicholas Macpherson: QE is a way of dealing with the impairment. It clearly has had an effect: gilt yields are very low. They are low for a whole lot of other reasons, but I think QE has kept long rates in this country lower than they otherwise would have been, and that feeds through into a whole lot of things, from mortgages through to business lending. We are dealing with an economy in which a lot of the traditional mechanisms to do with credit, monetary policy and even the public finances are not operating as well as they did in the good times, and that has resulted in low growth persisting for longer than any of us would have liked. Britain is not unique in that; it is the case pretty much across the industrialised world.
Q54 Ian Swales: We are fortunate to have some of the top international banks based in the UK. How do you know, when you do this policy, that the money is used to benefit the UK economy?
Sir Nicholas Macpherson: Tom is going to answer that question.
Tom Scholar: As I said earlier, it is incredibly difficult, at the level of an individual bank, to see what has happened, but the Bank of England is acting very much in concert with other major central banks, who are also doing huge operations in their own centres, which are also big international centres. If it was just the Bank of England doing it in isolation, there would be a major risk of leakage of the sort you are describing, but with all the principal central banks doing it as part of a concerted effort, globally, to drive growth and-
Q55 Ian Swales: Have you actually asked the banks? This amount of money we are talking about-I know you could say it is lost in the roundings, but we are talking about quite large sums of money here. If I was on the board of one of these banks and I suddenly had to sell £25 billion worth of gilts and decide what to do with the money, I do not think I would just sort of lose it in the day-to-day operations of the bank. Or would I? I mean, is it really that insignificant to an individual bank?
Tom Scholar: I am quite sure that the Bank of England, which has both regular discussions with bank treasurers to look at liquidity and funding positions of the individual banks and also has the impact-
Q56 Chair: But do you know?
Q57 Ian Swales: We talk about Bank of England independence. Doesn’t the Treasury need to know the answer to that, and don’t we need to know?
Sir Nicholas Macpherson: Clearly some of your colleagues have been listening to you, Mr Swales, because the Treasury Committee has just started an inquiry into the effect of quantitative easing, and these issues are going to be examined in front of them. Yes, the Treasury does retain independent capacity in a sense-not independent, but able to challenge and question the Bank of England. We have a team of people who look at monetary issues and this is pretty much at the forefront of their agenda.
Q58 Chair: So far, in respect of the Comptroller and Auditor General, what has come out of this little exchange is that you are hoping it’s worked, but you don’t really know and you don’t know how much has seeped out of the UK. That is what I take from this exchange. So if you want to challenge that-
Sir Nicholas Macpherson: I would be a bit more positive than that. There is uncertainty around it and we are very clear that it has had a positive effect on the economy as far as economic activity is concerned.
Q59 Chair: But you don’t really know.
Sir Nicholas Macpherson: We don’t really know because even when the economy is working perfectly, the precise relationship between a change in interest rates and the economy is very uncertain. There will be some people who might come along here and tell you that it will have an £X billion effect in terms of economic activity. I would be quite sceptical about that. There is a lot of uncertainty around economic policy. It happens that we have embarked on, by historical standards, a pretty innovative form of monetary intervention. We are clear it has had a positive effect but if you ask me, "Are you absolutely clear what effect a further tranche of QE would have in terms of its precise impact on the economy?", I would say there would be a degree of uncertainty around it.
Amyas Morse: I am just wondering whether, apart from its effect on the wider economy, you could say that it had been quite helpful to the banks themselves, primarily. They have stronger balance sheet than they used to have, haven’t they? Has it been quite useful to them?
Sir Nicholas Macpherson: It has certainly been useful to them. Gilts are pretty high quality assets. It is a classic problem of substitution across the asset class. It has had a positive effect on banks.
Q60 Nick Smith: I want to return to strategy for growth and go into a little bit more detail about the national loan guarantee scheme, which we have had 30 people working on in recent years. It was supposed to subsidise lending of up to £20 billion to small businesses. What was the take-up of the scheme?
Sir Nicholas Macpherson: By my recollection something like £2.9 billion in guaranteed funding has been issued under the scheme. But it got very rapidly superseded. Just as the scheme was up and running the Bank introduced a funding for lending scheme. That meant that banks were going to use the FLS rather than the national loan guarantee scheme.
Q61 Nick Smith: Okay, so given that it only achieved 15% of its original objective and in the round actually seems to be a pretty damp squib-
Sir Nicholas Macpherson: Well, 20,000 loans have been made under the scheme. I can’t remember when it started. Was it around Budget time?
Tom Scholar: The first three months.
Sir Nicholas Macpherson: So for the first three months it did pretty well. But then the Bank introduced a funding for lending scheme that is basically, at its heart, more generous than the national loan guarantee scheme and so funding is now being provided under that.
Q62 Nick Smith: Okay. You say that another vehicle came along just a few months later. So tell us more about the success of the funding for lending scheme. What is its objective and how well is that doing?
Tom Scholar: First of all the funding for lending scheme is more generous and broader than the national loan guarantee scheme. So it is available to support and cut the cost of all bank lending, not just those to small or medium-sized businesses. That scheme, as you know, was announced in July. It is a two-year scheme. So it is still in its early days. We don’t yet have the figures-I think we get those later in the autumn-for the first quarter. They will be Bank of England figures because the Bank of England is running the scheme. I don’t yet have the equivalent figures for the first quarter of the NLGS simply because we are not yet at that point.
Q63 Mr Jackson: I asked a parliamentary question earlier this month about the impact of the funding for lending scheme on my constituency. The reply I had back from the Treasury from the Exchequer Secretary was very unhelpful because it completely ignored my constituency and gave a very general rationale for the scheme. Leading on from that, do you have a methodology for projecting the impact-disaggregating it to local regions or sub-regions? I was a bit worried when the permanent secretary said that it will be some time before we can understand the macro-economic impact of QE. When is the demonstrable success or failure of funding for lending going to be measured?
Nick Smith: Yes, I was interested in the same thing-how much, and by when, and can it be broken down by constituency?
Tom Scholar: I think I am right in saying that there will be quarterly figures, which the Bank will produce, and which will therefore give a quarterly assessment of what is happening. We get the first figures towards the end of this year, to look back at the first quarter. Can it be broken down by constituency? I don’t think that that is going to be possible on a precise basis, because I don’t think we have figures for bank lending by constituency. Also, it is difficult precisely to trace which pound of cheaper funding for banks gets passed on to which pound of cheaper lending to businesses or households. I think that we could get to an approximation of it by looking at the benefit of the lending scheme across the country as a whole, and then assuming that this is passed on proportionately, region by region, constituency by constituency, in proportion to the lending going on.
Ian Swales: You also have the problem of head office addresses versus places of operation. Greater London has a bigger chemical industry than the north-east of England; I don’t know if you knew that, but it has. I am not sure where it is, but it is here somewhere.
Chair: Is that right?
Ian Swales: Yes, because of the head office effect. They are reported as operating out of sales offices in Middlesex or the City, or whatever.
Q64 Nick Smith: I am a bit concerned that we are not really tracking the effects of these different policy initiatives. I sort of understand the difficulty of doing it with QE, but this is a specific policy initiative. I would be interested to know how much it is hoped will be lent, by what date, and whether it can be tracked, because the fuzzy answers we are getting from you guys this afternoon are really not good enough, so tell us a bit more. For this scheme, how much do you hope to have lent and by when?
Tom Scholar: When the Bank announced the scheme, it did not put a figure on it, quite deliberately, because it wants to make the scheme potentially open to an increase in scale over time.
Q65 Nick Smith: Have you got any internal indicators that you would like to see?
Tom Scholar: Well, as I said, there is going to be quarterly monitoring-
Q66 Chair: Monitoring against what?
Meg Hillier: What does success look like?
Tom Scholar: The scheme is designed to incentivise extra lending, because the benefit that each bank gets in terms of lower funding costs goes up the more they increase their lending against a baseline. The baseline, which is the first thing that the Bank has been working on to construct, is the same as the baseline of lending immediately before the scheme was announced, so there cannot be any kind of perverse announcement effect there.
Q67 Mr Jackson: Will it be sectoral? For instance, one of the drags on growth over the last three years has been oil and gas, and also construction. Will you take a decision in the Treasury that, actually, we need to see more lending in oil and gas or construction, in order to drive up cumulative growth in the economy? I think Mr Smith is asking you what success would look like at the end of funding for lending.
Tom Scholar: The purpose of the scheme is to reduce the cost of borrowing generally, across the economy. We have not built into it particular targets for particular sectors, not least because the Government does not have a particularly strong record on targeting particular sectors in that way. Of course, elsewhere in Government policy, we do; for example, we have ways of doing that though the tax system. But in terms of allocating credits and assessing credit risk, that is typically not a function that we have undertaken.
Q68 Meg Hillier: I assume that funding for lending does not support banks in overdrafts, if I have understood it right? It does not support them in providing an overdraft facility to a company-that kind of short-term lending.
Tom Scholar: Since it reduces the bank’s overall cost of borrowing, it makes it possible for the bank to pass on that benefit.
Q69 Meg Hillier: It could do, okay. There are many small businesses in my constituency-bear in mind that Silicon roundabout is part of it-and there are often small start-ups. A big one would employ 40 people and that is unusual. They often say to me that it is not that they want a loan or that a percentage increase or decrease on a loan would make a big difference; it is the withdrawal of overdraft facilities and the caution that banks show in allowing them one. I can think of one business that has the freehold on its premises, has 40 staff and has been local for 20 years, but the bank withdrew its overdraft facility overnight. For a creative business with cash-flow issues, that is a bigger problem. They do not want to borrow a lot of money from the bank. They want that overdraft facility. Are you tracking whether this will help those sorts of businesses, of which there are many?
Tom Scholar: It is quite typical of many small businesses that a small facility such as that with the bank, rather than some big loan, is the way in which they fund themselves. The one thing that I will say about the design and operation of the scheme is that the Bank has its network of regional agents-I am sure that you are aware of them from your constituencies-and one of the things that they do is keep closely in touch with businesses in the regions and try to get a sense of credit conditions. Part of what they do is to report to the Monetary Policy Committee, but that information is also available in the Bank to try to get a clearer sense of credit conditions across the country.
Chair: The answer is no to that, I think.
Q70 Nick Smith: We know that we are going through extraordinary times, and, with some of these policy ideas, you are literally feeling your way through it, and we do get all of that. On the funding for lending scheme, is there reasonable co-ordination between the Treasury and the Bank of England and the Department for Business, Innovation and Skills on it? With some of these schemes, you just have to follow the money and work out what is going to see the effect of it. Are you doing that?
Sir Nicholas Macpherson: The Bank of England actually wanted the Treasury to be fully involved, and one of my colleagues, Dave Ramsden, sits on the board, in effect, of the vehicle that is providing it, so we are working closely with the Bank of England and with BIS.
Q71 Chair: Are you tracking it?
Sir Nicholas Macpherson: Yes, we will track it. This is a general incentive designed to make it cheaper for banks to fund themselves and therefore cheaper for them to lend, whether through overdrafts or more general loans. Banks are incentivised through the scheme to lend more, because if their lending does not increase, they will get a smaller subsidy from the Bank of England. It is quite a clever design. As with all clever designs, the challenge is whether it will actually make a difference. It is always difficult to tell what the counter-factual is, but we will be looking at it very closely through the coming year, and the Bank of England will publish data.
You are right that, in many ways, these interventions are experiments. They are a response to extraordinary credit conditions. The Government have made a number of interventions. There is the national loan guarantee scheme and other such interventions to try to actually dis-intermediate from the banking system. There is something called the business finance partnership where, again, we are working very closely with BIS. The challenge is to get the money out of the door and, at a time when demand for credit is also falling, to try to get to a better place. We are very happy to share the data with you on a regular basis.
Q72 Chair: May I just ask you one final question on funding for lending? It is also there to help stimulate the housing market and mortgages. Am I right?
Tom Scholar: Yes.
Q73 Chair: My understanding from what I have seen in the press recently is that the only way in which-I accept it is early days-it has supported an increase in mortgage lending is for second-time buyers, who want a 60% loan against the asset, and not for first-time buyers. That seems to be the evidence coming through from a number of the builders and lenders. The intention would surely have been to stimulate first-time buying, would it not? Therefore, if it is not achieving that, how are you going to tackle that one?
Tom Scholar: We need to keep this under review, as we do. I think it is true that, so far, the primary visible effect has been through lower rates, rather than changes to deposits, which I think is the central point of what you are saying. The Government have also looked at other policy measures to try to address the problem of very large deposits. I do not think that that is the primary intention of the funding for lending scheme, but it is obviously one of the things that are kept under review.
Q74 Chair: To be honest, the answer sounds really woolly. It is not working in the way that you intended-I accept that it is early days-in that it is providing cheaper loans to people buying their second homes, but you are keeping an eye on it. And?
Tom Scholar: First, it is working in the way intended. It is very early days, so we do not have full information-
Q75 Chair: Was it intended to help people on their second home?
Tom Scholar: It is not necessarily people on their second homes. It is people with-
Q76 Chair: With a lot of money, but those are not the ones you really want to help, are they?
Tom Scholar: It is people with larger deposits.
Q77 Chair: Are those the ones whom you really intended to help? They are the better-off.
Tom Scholar: The intention was to reduce the cost of borrowing for mortgage borrowers generally. I think that if we wanted to target specifically the size of deposit, a generalised funding scheme will probably not be the primary way of doing that. There would be other things, too, and there have been other incentive schemes that the Government have looked at.
Q78 Chair: So this is not working to help first-time buyers, it never was intended to do so, and you are looking at something else.
Sir Nicholas Macpherson: It is intended to ease credit conditions. In so far as it succeeds, that should help all house buyers.
Q79 Chair: But it does not. At the moment, they are giving the lower rates to those who want only 60% of the value of the house, which is not a first-time buyer.
Sir Nicholas Macpherson: Inevitably, schemes such as this work at the margin. We will monitor what is going on in credit markets. You are right to be concerned about first-time buyers, but this will have a general positive effect across lending as a whole.
Q80 Mr Bacon: What amazes me is that you seem to be doing so many different things on a quite big scale and yet they seem to be having an effect at the margin. In relation to this funding for lending, I have a constituent who is a very successful businessmen-a multi-millionaire. He has been trading for 40 years with a good trading record. His bank recently became so annoying by asking him to jump through various hoops. Every time he did, it said, "We didn’t mean this hoop, we meant that hoop," so he jumped through that one as well. He said to some of his customers-because of the business he is in he was able to do this-"The banks are really playing up. I’d like to put together a trading facility. Will you come in with me?" He told them that he could give them the deeds on the building as a security. They said, "Well, it’s a much better rate than we are getting from the bank, so, yes, we will be in." He put together exactly what he wanted-a lot of businesses cannot do this -in what was essentially a piece of classic disintermediation that could not have occurred if the banking system were operating even remotely properly.
At the moment, following the consolidation after the crisis, we have six institutions that have 92% of personal accounts, 88% of mortgages and 86% of business accounts. You have six institutions with that degree of concentration, and banks that are very happy to take all this money through QE, but, as Mr Swales was saying earlier, it is not at all clear where it is coming through. I was horrified by your description earlier when you basically said that you did not anticipate that it would be going on for this long, and that it is an experiment that we will not know the results of for many years. You cannot say for sure how much benefit is actually coming through to the UK, although in answer to the Chair, when she put all those points, you tried to sound a bit more positive. You said that you were clear that it has had a positive effect-I am always a little worried when I hear people in officialdom saying, "We are very clear that," because it is often the case that it is not very clear-and I think you were referring to the Bank of England’s estimate that there has been a positive impact on GDP of 1% or 1.5%. Meanwhile, we have an economy that is going nowhere and, essentially, the problem is a failure of aggregate demand. All the things that you are talking about are having an effect, if at all, at the margin. How much are we on with QE now? Is it £375 billion? It is perhaps going to go up to £425 billion in November. Can you remind us what period that is over?
Sir Nicholas Macpherson: That would be over four years or so.
Q81 Mr Bacon: Four years. So, £375 billion on one year’s GDP is about 20% to 22%, so it is 5% or 6% of GDP each year for four years. I would have hoped that something of that scale would have something rather more than a marginal effect. The best you can say-I think that you more or less agreed with me when I said this-is that it has stopped us so far from going into a much more vicious spiral. It makes it sound like we are on a drip where we have to have yet more and more of this drug in order not to go into a vicious spiral.
Sir Nicholas Macpherson: That is quite a serious point.
Q82 Mr Bacon: I am very worried about it.
Sir Nicholas Macpherson: I think that we are all worried about it. We have had the most monumental banking crisis in any of our lifetimes. This is a banking crisis on a different scale. All the international experience of banking crises is that it is a long, hard road to recovery. We could all pretend that there is some magic wand that we can wave and it would all be different.
I think your point about the counter-factual is very relevant. If the Bank had not taken decisive action when it did, things would be a hell of a lot worse. It is going to take time for the banks to get their balance sheets into the right state. I totally welcome your constituent who, effectively, is providing credit services of his own. Some of the money through the business finance partnership has gone to the Department for Business specifically to encourage that sort of-
Q83 Q83 Mr Bacon: It was his customers.
Sir Nicholas Macpherson: This is something that we want to encourage. We have put in money, working with fund managers outside the banking system, to see if we can get credit flowing that way. As you say, the banks are not lending in the way-
Q84 Mr Bacon: But my point is that it is the banks that got us into this problem-very highly paid, unqualified people selling things that they did not understand and crashing the whole world. That is what has happened. Your solution relies largely on the banks getting us out of this hole.
Sir Nicholas Macpherson: The alternative solution would be for us to become-
Q85 Mr Bacon: I tell you what: if you had put £375 billion into QE for South Norfolk, I would have done something with it. We would have had the Long Stratton bypass by now and a lot else besides. You could have actually had something real and tangible for all this money, instead of which it has seeped away into the banking system. It may have prevented a vicious decline, but we still have an overall failure of aggregate demand. That is the problem; we are static. To say that we would not have been static and that we would have been going down a vicious spiral without this is some comfort, but it is very limited comfort.
Sir Nicholas Macpherson: I understand what you say. If you look at the interventions of successive Governments, government has made a difference. Ultimately, the banks need to get their balance sheets into the right state to support borrowing. Until that happens, credit growth is likely to be less strong than we would like. The Bank of England and the Government are taking measures. I genuinely think these are having positive effects, but I suppose I am counselling caution about whether there is a magic solution. It is easy for pundits to say, "If only you can do this or that, it would make all the difference."
Q86 Mr Bacon: If we had 60 banks with the current assets and liabilities of the six banks divided between those 60 institutions rather than six, do you not think that things would be moving a bit faster?
Sir Nicholas Macpherson: We are strongly in favour of more competition in the banking sector.
Q87 Mr Bacon: When I was at a seminar the other day at the Centre for Policy Studies, someone explained that they had looked into trying to set up a new bank. It is enormously difficult. You are surrounded by bureaucracy and it is thrown back at you straight away. How many new banking licences have been issued in the last 100 years?
Sir Nicholas Macpherson: I couldn’t tell you.
Q88 Mr Bacon: How many in the last five years?
Sir Nicholas Macpherson: I should be able to find out reasonably cheaply how many in the last five years. I and the Government share your objective-the previous Government shared your objective-of more competition in the banking sector. I can remember great new challenger banks such as Northern Rock. There were some other challenger banks such as Alliance and Leicester.
Q89 Mr Bacon: They weren’t new; they were long-established institutions.
Sir Nicholas Macpherson: Bradford and Bingley-where are they now?
Q90 Mr Bacon: I declare an interest here, because I used to act for a successful anti-demutualisation campaign for the Britannia building society. Northern Rock was not a new institution. Northern Rock, Alliance and Leicester, Bradford and Bingley, and Halifax were all long-established institutions. You could almost say they were philanthropic institutions that had done an extremely good job for 150 years in helping to put roofs over people’s heads. Because of nothing more than greed and a lot of rhetoric about access to capital, which they did not need-they had access to all the capital they needed-they were turned into plc banks, and most of them had crashed within 12 years, costing my constituents and those of fellow Members an enormous amount of money. It had nothing to do with new or challenging, other than that they were allowed to run riot selling 125% mortgages on six times income, with nobody who was supposed to be in charge of looking at them doing anything about it.
Sir Nicholas Macpherson: One bit of welcome news is the Co-op entering into an agreement with Lloyds-
Mr Bacon: And I welcome that very much.
Sir Nicholas Macpherson: Only the other week the deal between RBS and Santander broke down, however. We want more competition, and we will encourage competition. We discussed the other day Virgin buying up Northern Rock, and I regard that as a very positive development indeed, but it is a struggle. It is a struggle to get new interest in banks. I totally agree with you that we should be working very closely with the Bank of England and the FSA. The Governor personally wants to see a lot more competition in the banking system and we are very supportive of that.
Chair: There are a lot of other things in this Report, folks.
Q91 Fiona Mactaggart: I find this all quite confusing, really, and I think that most people do. Looking from the point of view of simple ignorance, which is how I would describe myself, it seems that we have taken the risk into the citizen and given the rewards-such as they are, and they are of course less than they used to be-away to the private banks. I am anxious that one of the ways in which that is happening is because there is not a clear picture-I have not seen one from what you have said, and there isn’t one in the Report-of what the metrics are from this process that would judge success. What is a good result? I am not sure that I know. From listening to your response to Mr Bacon, it sounded as though stopping the spiral of decline was enough. Is it?
Sir Nicholas Macpherson: No, it is clearly not enough. I am just saying that a spiral of decline would have been very undesirable, but we managed to stop that. What we want is a return to sustainable growth in the economy, supported by sustainable lending by the banks.
Just picking up on your point about the socialisation of losses and the private returns of profit to the bankers, the Government have been introducing a succession-as, indeed, the previous Government did latterly-of financial services Bills. We pretty much have one every year. The Vickers commission is a response precisely to your point to try to ensure that whatever happened in 2008 does not happen again, in terms of the ring-fencing of retail banks from investment bank activity and so on. There is quite a big policy response to ensure that the bankers do not go off with all the loot next time, leaving us to pick up the bill. Tom might want to add a broader point on metrics.
Tom Scholar: We are requiring banks to hold much more capital and much more liquidity than they ever had to. As a result, the returns on banking are going right down.
Q92 Nick Smith: When you say returns, you mean profits.
Tom Scholar: Yes, so the return on equity and indeed compensation is gradually coming down as well. Some of the capital increases have made some types of business that were previously very popular almost completely uneconomical, and they are just stopping. Those are some of the activities that Mr Bacon was talking about earlier. The whole thrust of policy is to have a safer banking sector and a clearer delineation between the core domestic banking sector focusing on supply and credit to the domestic economy, and the global centre, which is an important part of our economy and produces tax and jobs right across the country, but clearly needs to be separated from the core domestic business. That, expressed as simply as I can, is the objective of the policy.
Q93 Fiona Mactaggart: I understand that, but what we have heard from the lending schemes, Mr Bacon’s story and so on is that actually that is not happening. We are not seeing banks lending to good substantial businesses, so they are beginning to have to invent their own banking system outside the banking system. It seems to me that whatever your metric is, we are failing. We are not succeeding in using our domestic banking system to grow our companies.
Tom Scholar: We are coming out of a huge banking crisis in which at various points it looked like bank lending would simply stop altogether. The figures were quite horrific at the back end of 2008 and into 2009. There are, of course, many examples. You get them all the time and quite often you write to us with them, so we are very well aware from our Ministers’ correspondence of many, many cases of the kind of difficulty you are talking about. At the same time, with this great raft of measures that we are putting in, we are trying to build the conditions for a normalisation of the sector. It is not complete yet. Part of the reason why it is so difficult to establish the kind of clear metric that I think we would all love to see is that, given everything that is happening in the world economy, it is very difficult to say what the world would look like in the absence of all these measures. To go back to what Mr Smith was saying, he characterised it very fairly. We are dealing with a set of circumstances we have not seen before. Both this Government and the previous Government have tried a range of policies without necessarily being precisely certain what would happen as a result. They are all going in the general direction of trying to support activity and to support a renormalisation of the financial system.
Q94 Chair: May I ask you two specifics on Fiona’s point about public loss and private benefit? One is RBS and Lloyds where, according to figure 4 in the NAO’s Report, we are writing off £34 billion-that is public loss. Some of the explanation of that is that if we are going to split up the banks, you assume that loss is gone for ever, so your implementation of new proposals for the banking sector leads to a financial loss to the taxpayer. If that is the case, can I just ask you the general question? As you consider when you are going to sell off our shares in RBS and Lloyds, what is your priority: the state of the UK Government finances, or the best value for money in this particular deal? That is a specific on public loss and private benefit. What is the priority?
Tom Scholar: I think there will be a great coincidence between the two there.
Q95 Chair: I don’t think so. If it is value for money, you will hang on to them; if it is UK finances, you will get rid of them faster.
Tom Scholar: What this table tells you is how much the Government would lose on their shareholdings-
Q96 Chair: But you’ve written off £34 billion.
Sir Nicholas Macpherson: The way reporting works is that it gives a snapshot at the end of the financial year. You said that we had made a loss of £34 billion. I looked at the share price before I came out, and you will be glad to hear that we have made a few billion since then. We are down a mere £28.9 billion.
Q97 Chair: Loss?
Sir Nicholas Macpherson: Yes. On the in price.
Fiona Mactaggart: That would have paid the whole tax credit bills-
Sir Nicholas Macpherson: This is real money and it is worth having. I think what you are getting at is that there are wider objectives beyond just making a return for the taxpayer. There are issues around the structure of the banking system. The Vickers commission, the recommendations of which the Government are implementing, estimated that those proposals-the break-up of banks-would result in a loss in our shareholdings of £6 billion to £9 billion. There are trade-offs here.
Q98 Chair: And there are trade-offs about deficit reduction.
Sir Nicholas Macpherson: We are trying to optimise between, effectively, our economics Ministry functions, which are all about getting credit flowing and supporting the economy. We also have, however, our Finance Ministry interest in ensuring that the taxpayer does not sustain an unnecessary loss. We are trying to optimise the choices there. I remain an optimist. I would be very disappointed if we ended up realising a loss of £34 billion. There is upside potential in these shareholdings. I am also an optimist that there is upside potential not only on the share price, but also on the capacity of RBS and Lloyds to lend into the future. As you say, we need more competition in the sector and there will always be a choice between backing one very large bank versus selling parts of it off, as was happening with the so-called rainbow deal.
Q99 Ian Swales: What do you think about the Barclays takeover of ING?
Sir Nicholas Macpherson: Mr Scholar will answer, but I do not think we normally comment too closely on that.
Tom Scholar: The Government does not take a view on that kind of acquisition. The FSA does as a supervisor.
Q100 Q100 Ian Swales: So on this further consolidation of the banking sector, which is about to happen, the Treasury has no view. Does the Bank of England have a view?
Tom Scholar: There is a competition regime, which is both national and European.
Q101 Ian Swales: Would it be true to say that no one bank is big enough to trigger those competition considerations? They will always argue that there are six of them, so it is a competitive market.
Tom Scholar: No, one can imagine a number of transactions that would not be approved by the competition authorities.
Q102 Q102 Mr Bacon: I compliment you, Sir Nicholas, on the very deft way in which you said that Mr Scholar will now give an extremely opaque answer to that question. I have not often seen a side-step done quite that elegantly.
Tom Scholar: I do not feel that my answer was opaque.
Q103 Mr Bacon: No, the question was about Barclays and ING. Mr Swales asked what your view of Barclays and ING was. You said that Mr Scholar will answer that question and then you told him what his view was.
Sir Nicholas Macpherson: Mr Scholar is more knowledgeable in these matters, having dealt with little else for four or five years.
Q104 Mr Bacon: I am sure that that is true. You said that the choice was between keeping these large institutions or breaking them up. If you broke them up, you could keep lots and lots of golden shares in a series of much smaller institutions, could you not? You would then be able to share subsequently in the upside.
Sir Nicholas Macpherson: You could do.
Q105 Mr Bacon: Is that not the thinking?
Sir Nicholas Macpherson: You should not underestimate the planning blight and the general effect of breaking up banks. It takes an extraordinary length of time to break up the IT systems and things. When we intervened with Lloyds and RBS, the European Commission, using its state aid responsibilities, imposed some stringent conditions on RBS and Lloyds, but it has taken a hell of a long time to implement those schemes. The so-called rainbow deal broke down.
Q106 Mr Bacon: Are you saying that if the Government, after a deal had been concluded, retained a golden share-or were this to be the case in future transactions-in the future institution and the Government could share in some upside through that golden share, that that in itself would create a future planning blight? That is what I am talking about.
Sir Nicholas Macpherson: No, what I am saying is that the breaking up of RBS would mean that management would be concentrating on little else for several years. That may be a price worth paying, but we should not underestimate some of the transitional costs. Part of our more general discussion has been about how we are going to get credit going. All I am saying is that there is a trade-off. There are a number of options that you could take with RBS, but you have to be very clear on the short-term and medium-term implications for lending and wider economic activity.
Q107 Mr Jackson: Referring to page 17 and "Delivering the Treasury’s priorities", are you in a position to repudiate the report-this is on fiscal policy-in The Daily Telegraph this morning which is supported by the Institute of Chartered Accountants in England and Wales, that the infrastructure that is needed to give rise to the changes in upper-rate child benefit is woefully behind schedule and that you will not be in a position to enact that Government policy?
That is a quite a chunky question. Linked to that, will you also be able to enact the commitment on page 30 of the coalition agreement to introduce transferable tax allowances for married couples by the end of this Parliament? They are specific fiscal policy questions, but I think they are quite important in the context of the commitment that the Treasury has on its generic priorities.
Sir Nicholas Macpherson: To the best of my knowledge, the child benefit change remains on track.
Q108 Mr Jackson: For 7 January?
Sir Nicholas Macpherson: Yes. Given the sensitivity about speculating about future tax changes, I do not feel in a position to comment on transferable tax allowances.
Q109 Mr Jackson: As the permanent secretary, you will no doubt be mindful that were you not in a position to put the appropriate infrastructure in place by, say, April 2013, then it is highly unlikely-hypothetically of course-that you would be in a position to enact that policy, which is in the coalition agreement and which, incidentally, has publicly won the support of the Chancellor, the Prime Minister and various other Treasury Ministers.
Sir Nicholas Macpherson: That is a policy question that I feel that Ministers should answer rather than myself.
Q110 Mr Bacon: Hang on. With respect, it is not. "Can you implement the Government’s policy?" is not a policy question. It is a question of effectiveness and efficiency.
Sir Nicholas Macpherson: It is a perfectly reasonable question to ask, because the critical thing with any policy change is "When can you implement it?" It is fair to say that the further into the future you announce a policy, it becomes inevitable that its implementation will be even further into the future if it involves IT change. That is the experience that we have all had with tax changes, and indeed benefit changes, over the years.
Mr Jackson: I declare an interest, in that I voted against the first policy. I think it is barmy. I think the second one is a very good one.
Q111 Meg Hillier: I also declare an interest as a woman with three children who is in receipt of child benefit. I think Mr Jackson is right. There are real issues here. As The Daily Telegraph reported today, lots of people going into self-assessment do not have a clue that this is coming down the road, and we know that HMRC has lost a number of staff. What would your advice be to people if they do get this letter in the next few weeks telling them that the change is coming if all goes well? You are relying on another Government Department to have the infrastructure to deliver the necessary support for people who will be quite confused by this whole new process.
Sir Nicholas Macpherson: Yes, and the Treasury is having very regular meetings with HMRC on such issues. Only last week, I was at a meeting with Lin Homer, the chief executive of HMRC, and she is very focused on implementation and, above all, the presentational strategy, by which I do not mean presentation in a propaganda sense, but rather how you engage with individual taxpayers who will be affected by the policy.
Q112 Meg Hillier: If it turns out that HMRC is inundated and if letters are out by 7 January and if people have not done it before the next tax year comes in April, are you confident that there will be enough resources? You said that Lin Homer was on top of it. If not, will the Treasury be putting money into HMRC to make sure that there are enough people there to deal with queries from a group of people who have not been used to dealing with HMRC in that way?
Sir Nicholas Macpherson: I am confident that HMRC has made the right preparations, but obviously if that optimism is misplaced-
Q113 Meg Hillier: So if there is a flood of telephone calls that you are not expecting-
Sir Nicholas Macpherson: HMRC is used to implementing controversial policies-
Meg Hillier: You can sense the confidence around the table.
Sir Nicholas Macpherson: I am always optimistic about these things. I think you should take this up with Lin Homer the next time you see her.
Chair: We are seeing her in a couple of weeks. We have got such a long agenda.
Q114 Nick Smith: I want to return to RBS and Lloyds and the £66 billion of our money they currently have. I want to ask how the Treasury operates as a major shareholder to get best value for the taxpayer. Specifically, how much say do you have in the level of bonuses paid to their senior executives?
Sir Nicholas Macpherson: I am going to ask Tom to answer this, because this is something he dealt with year in, year out.
Tom Scholar: As I am sure you know, the framework, which was set up by the previous Government and has been retained by this Government, is to have UKFI, an arm’s length body, responsible for exercising the Government’s shareholding on their behalf. The reason for that arrangement is precisely in order to maximise the value of the shares and the return to the taxpayer over time.
I think the arrangement has been successful in doing that, in that the investor community-we have feedback on this-regard UKFI as a credible and value-driven shareholder. As a more than 80% shareholder in RBS, and a 40% shareholder in Lloyds-in each case the dominant shareholder-they have, clearly, a lot of discussion with the management, the boards and the remuneration committees on the subject of remuneration each year. Their objective is to ensure the best possible commercial practice, including RBS and Lloyds demonstrating in the best possible way their adherence to all relevant guidelines, standards and so on. They also take on the responsibility of making sure that those boards understand the public sector context in which they are operating.
I am very well aware that despite all that, this leads to levels of remuneration and, for example, total bonus pots-which in the case of RBS is large because they have a large investment banking operation-that many people struggle to understand or find acceptable. There is a constant dilemma for management and UKFI, and ultimately for the Government, because on the one hand you do not want to be paying any more than you need to, but on the other hand RBS is still one of the biggest banks in the world with an immensely complicated balance sheet, and it is in the taxpayer’s interest to have people managing it who are able to deal with that risk. As we have discussed previously at this Committee, those people, by and large, do not come cheap.
Q115 Nick Smith: Mr Scholar, can we cut to the chase? My constituents think that some of these people are filling their boots. How do you challenge them?
Tom Scholar: The taxpayer’s interest is to make sure we get back as much as possible of the money that we have invested, and we therefore need good people managing that risk on our behalf. That is the balance that we are trying to strike.
Q116 Nick Smith: So you think the bankers’ bonuses of recent years have been fine?
Tom Scholar: No, I think across the industry as a whole they are far too high. The chairman of RBS himself is on record as saying that he thinks that remuneration is far too high across the industry and he would like to see it lower. I think it is coming down slowly, but you cannot solve the problems of the industry as a whole through just one of the banks.
Q117 Nick Smith: I have a related question. We have, as I understand, as a Government voted against some of the remuneration reports of the banks in recent years. How many times have we done that at an annual general meeting, and what will be our policy next year?
Tom Scholar: I can recall certainly one occasion, which was the first remuneration report after the collapse of RBS. I think I am right in saying that the then Government voted against it because of the provisions in regard to Fred Goodwin’s pension-I think I am right in saying that. As for what will happen next year, I cannot say. It depends what is proposed, and it will be a decision at that point.
Q118 Nick Smith: But wouldn’t it be a good idea to vote against these reports and send the right signal to bankers to stop them filling their boots in this way?
Tom Scholar: Government policy is definitely to reform remuneration. Lots and lots of things have been done to do that and the Treasury supports that, but we do need to bear in mind the very large sums of money that we have tied up in this bank, which we need to get back.
Q119 Mr Bacon: On that subject and the failure of the recent Santander deal, I just have a couple more questions on RBS. Sir Nicholas, you mentioned IT systems and the complexity of getting the bank into a position where you can sell it off. There is another issue, which is the dividend access share and the fact that its existence in some ways makes the shares in the existing bank very difficult to sell, because who is going to buy equity when they know that no dividend is capable of coming from it? In the Santander sale that failed, would that problem have gone away for that proportion of the business, because it would have been handed away or sold away to a new owner and the dividend access share, in so far as it applied, would have been struck out for that bit? Is that how it would have worked and, if so, was there a price attached to that? In the accounts, the total value of the dividend access share is £1.8 billion, so presumably it has a smaller value in relation to a proportion of the business? Is that right?
Sir Nicholas Macpherson: I don’t think so. Santander agreed a fair price, or at least what they thought at that time was a fair price. I don’t think they were buying so much of RBS that the implicit value of the dividend access scheme came into play. What do you think, Tom?
Tom Scholar: Had the transaction gone through, my understanding is that those parts of the business would have been integrated into Santander-
Q120 Mr Bacon: It would have been clear and unimpeded, and then Santander could have carried on paying dividends of whatever it liked with no problem, without any specific compensatory payment for that element. Is that right?
Tom Scholar: Yes.
Q121 Mr Bacon: So is the £1.8 billion at which it is valued a fair benchmark for what RBS would pay to get rid of the dividend access share?
Tom Scholar: What they would pay would clearly be for negotiation between RBS and the Government at the point at which they did it, and it is in the nature of these things that the estimate of its value constantly changes, depending on your view of the future profitability of the bank.
Q122 Mr Bacon: The Santander deal having failed, there are now one or two other people circling, including Virgin and one or two others, and you are up against this Commission deadline. The last thing that we as taxpayers will want to see is anybody coming in and getting something rather nice on the cheap because they knew that you had one arm tied behind your back because you had to sign on the dotted line by such and such a date. Presumably, the Commission, notwithstanding the stringency of its state aid rules, understands that, and were you to discuss with it the possibility of making an extension precisely so that a bidder cannot play games until the 11th hour, the Commission would be sympathetic to that, would it not?
Tom Scholar: RBS and the Treasury, as the Department responsible for the state aid agreement, obviously have to discuss in great detail the whole question about what to do now that the Santander transaction has fallen through, including with the European Commission. I do not think it would be in the taxpayers’ interest for me to speculate as to what might happen, or what the view of the European Commission might be, but-
Q123 Mr Bacon: You are alive to the issues I have just referred to?
Tom Scholar: We understand exactly what you are saying, yes.
Q124 Chair: Okay. Let me take you on to other bits of this massive report. We had a hearing last week on offshore transmissions-really exciting. We got quite excited about it at the end, but the interesting thing about it was that here DECC is attempting to create new licences, a new market and new competition in offshore transmissions, and yet it seemed to us that DECC is completely unaware of the pitfalls of PFI that you have already experienced and that we collectively have experienced. They had no proper understanding of the proper transfer of risks, no policy on the sharing of profits and no policy on refinancing. The question that came out of that was: why on earth does Treasury not take that history-that experience-of PFI and ensure that it is translated when we embark on a whole load of very expensive licences that are going to cost ordinary people a lot of money through their energy bills?
Sir Nicholas Macpherson: I would hope that the Treasury will be engaging more in future. One of the reasons-
Q125 Chair: But the trouble is that these things have already been signed, you know? It is all very well talking about "in future". It was honestly shocking to see. Take a very simple thing about PFI, the refinancing. They finance this stuff at the worst possible time; if they are going to refinance, they are going to make money out of that. There has been one sale of a licence already and yet there is no sharing of profits, or sharing of the benefits of refinancing. So it is all very well to talk about the future; what is really disturbing is why it is not happening now.
Sir Nicholas Macpherson: I will come back to that case in a few seconds. I can remember you saying two or three years ago, "When you come to start selling banks, will you ensure that you learn from the NAO’s"-or it may have been the PAC’s-"special recommendations on how to sell an asset successfully?" When we sold Northern Rock, we did go through and we made sure that we were doing it consistently with best practice. Actually your report, although it had some criticisms of what had happened in the past, was very polite about the sale of Northern Rock. So I don’t think we should despair. I think that the Government have got the capacity to do things properly, although I know from time to time our confidence is shaken.
The question then is: what can the Treasury do about it? I know that PFI has been a continuing issue for this Committee, and relatively recently Sharon White and Geoffrey Spence appeared before you to discuss it. The Treasury is taking a more active role: we set up something called Infrastructure UK, which is trying to pull together some expertise that we can then deploy to support Departments in doing things properly. I haven’t studied the transcript of your session with DECC, but clearly energy and climate change must be a very big priority for us in the coming period because energy is absolutely critical, and Geoffrey Spence, who is the chief executive, is making it a high priority. Part of the challenge is about how you pull together expertise within Government and deploy it, and we clearly need to do better.
Q126 Ian Swales: What appears to be the core problem, which the Chair is referring to, is that it seems as though Departments do not understand what the value of a risk-free flow of Government money actually is. When we talk about risk and reward, it seems as though the private sector will only play if they get the rewards and effectively do not get the risk. And of course, there is the capital value. I was just thinking after our hearing that if I sold the cash stream on my solar panels today, I would double the money that I paid for the solar panels; and people are doing that, in a macro sense, on PFI deals, on offshore licences and so on, all the time. So the Government are losing a huge amount of value by doing these deals without any potential for clawback, percentage of onward sale profits, and so on. That is what we heard last week and it seems to be a regular feature now-that in the desire to attract private capital, we are doing it on a basis that results in super-profits for the people who get involved. I declare an interest; I am a beneficiary of that with my solar panels.
Q127 Chair: You’d be mad not to have bought into those licences-absolutely mad. That basic knowledge, which should have come out of the PFI experience, just was not transmitted.
Q128 Mr Bacon: This speaks to a much broader issue, which Sir Bob Kerslake talked about recently following the west coast main line debacle: the skills of the civil service and whether they are there in depth.
Sir Nicholas Macpherson: It is a continuing issue with this Committee-it is that commercial expertise. All the Treasury can do is try to create clusters of expertise, which can then get deployed more widely. UKFI-
Q129 Mr Bacon: With respect, I don’t think that is all you can do. Going back to what I was saying-
Sir Nicholas Macpherson: On the people front-
Q130 Mr Bacon: No. I understand exactly what you are saying, but creating clusters and hoping that it will somehow cascade down-
Sir Nicholas Macpherson: This isn’t about hope. It is about controls and also about Treasury approvals. It is about ensuring that expertise is deployed at the right time. There were some quite positive references earlier on to the Major Projects Authority and the Major Projects Review Group. I think this is a good example of projects being reviewed sufficiently early on so that experts, often commercial experts in the Treasury and elsewhere, can challenge at the right time.
Q131 Mr Bacon: I couldn’t agree with you more. I also completely agree with you about central units getting top heavy and ceasing to be useful-it is a matter "right-sizing" it. I have heard so many people say, and you said it yourself earlier, that the Treasury cannot be everywhere second-guessing things, but I have looked at so many projects on this Committee over the years where I have thought, "Where was the Treasury?" It is not a case of second-guessing; it is a case of having a much more open and honest, detailed, symbiotic relationship between the people who are sponsoring the project and paying for it on the one hand-our taxpayers, via you, the Treasury-and the Department that is implementing it on the other, and making sure that at every stage, every possible sensible question is asked, including, "What we can learn from previous experience of the 63 PFIs that we have done in the last few years that might be applicable in this onshore transmissioning?"
Those bits of wiring-all the information is there-have not been joined up properly at the moment. It is because your central capacity, the Major Projects Authority, is overstretched and overtrading. Although it does not want to get a huge amount bigger, it needs to be somewhat bigger for the enormous task that it has to do. What is more, if you want to cascade it throughout the whole of Whitehall, make sure the progression through the senior civil service depends utterly on people having gone through that process, having gone to the academy and then having performed and shown a track record of success afterwards. Only then do they have the chance to progress further up the ladder in Whitehall. That is how you get sustained success.
Sir Nicholas Macpherson: To a large extent you are preaching to the converted. One thing I feel very strongly about-it is a perpetual challenge in the Treasury-is persuading and incentivising people to do jobs for longer. One of the reasons why you persistently hold me to account is that pretty much everything that goes on in the Treasury has gone on under my watch. I have been doing my job now for seven and a quarter years or so. Tom has recently moved jobs, but he did his job for four or five years. We need that continuity because that is the only basis on which you can hold people to account and build up the expertise.
Q132 Mr Bacon: There is a simple maxim. Sir Terry Leahy said this last week at Policy Exchange and it is actually one of the chapters of his book. Reward the behaviour you seek to encourage. It is not rocket science, it really isn’t.
Q133 Chair: Coming back to what I was talking about, why didn’t you stop this? You could have stopped it. You had the control to prevent those licences from going ahead, but somehow the system did not allow you to do that. That is what really astounds me. Having been a Minister, I know about Treasury controls. You could have stopped it-you could have seen the parallel between those licences and the PFI deals-and yet it did not happen. That is what interests me.
Sir Nicholas Macpherson: I would be happy to come back to you on what the lessons for the Treasury are on this. I look forward to reading your report. I am lucky enough to be appearing before you again in a few weeks’ time to discuss the implementation of your reports. Indeed, I am coming back next week to talk about public spending planning and control.
Q134 Chair: In the same vein, the world, including consistently Nick Robinson at the BBC-say that you want to scrap universal benefit because of the costs and complexities. Is there any truth in that?
Q135 Mr Bacon: You are taking a long time to answer.
Sir Nicholas Macpherson: I am considering my response. Universal credit is Government policy. The Government are committed to it. The challenge is to implement it in a way that works. I had personal experience of tax credits at the turn of the last century. You do want to get these things right.
Q136 Chair: That is a very helpful answer.
Can I ask some brief questions? Corporation tax is down from 26% to 24%.What is the impact of that on tax take?
Sir Nicholas Macpherson: I can give you a note. One of the reasons why corporation tax rates are coming down everywhere-you made some trenchant points on a coffee company the other day-is that multinationals have huge scope to move activities around the world and capital generally flows very easily. Extracting tax on profits is difficult. There are real advantages in having a lower corporate tax regime. When I first started working at the Treasury, I think the corporation tax rate was 52%. Nigel Lawson, Gordon Brown and George Osborne have all lowered the rate of corporation tax.
Q137 Chair: I understand that. I am interested in what works. You have reduced it from 26% to 24%. It will then go down to 22%-this is in your report and accounts for that year.
Sir Nicholas Macpherson: It costs money to cut the rate of corporation tax. That is a static cost.
Q138 Chair: It costs.
Sir Nicholas Macpherson: Yes, it costs. There is no doubt about it. By contrast, my recollection is that the OBR estimated that a cut in the top rate of tax from 50% to 45% probably did not cost money. In the short run, cutting corporation tax rates does cost money. However, I would argue that there are dynamic benefits in the medium term from having a low corporation tax regime, simply because it really does encourage companies to invest in Britain.
Q139 Meg Hillier: There is a big issue of course between Northern Ireland and the Republic of Ireland and a lot of discussion about harmonisation there. Has the Treasury had any further thoughts about whether to grant greater powers to the Northern Ireland Assembly?
Sir Nicholas Macpherson: I think the Government is due to come back on that issue in the reasonably near future. However, I was sitting next to the Chief Secretary to the Treasury at the House of Lords Economic Affairs Committee last week where he made it very clear that although he could see further devolution of tax-raising powers in Scotland, he personally would not support devolution of the corporation tax rate to Scotland.
Q140 Meg Hillier: He personally, or is that Government policy?
Sir Nicholas Macpherson: He was speaking for himself, I think, but I do not think the Government have any plans to introduce a separate corporation tax rate for Scotland.
Q141 Chair: Can I ask another quick question? I am trying to go through these quickly. We have the pension investment platform-the new PFI initiative. Can you explain to us how it will be different from the PFI we have learned to deal with? What lessons have you learned that you have transposed to it? Perhaps also you can let us know when we are going to see the results of the pilot that you did on the existing PFI in my constituency.
Sir Nicholas Macpherson: If I answered that question, I would not be happy. I am happy to send you a letter on it. I am sorry, I cannot answer it. Perhaps Julian can.
Julian Kelly: No.
Q142 Chair: Okay. It would be helpful to have that. There are final little bits and bobs. I do not think that I am going off topic, but the OBR also appears in here, and it was supposed to be taking us out of fiddling forecasts-I think Danny Alexander said that-and financial mirages and terms like that. That is all good and well, but what is the use of it if it consistently gets its forecasts wrong?
Sir Nicholas Macpherson: It is fair to say that all forecasters get their forecasts wrong. Occasionally you get lucky-
Q143 Chair: These are dramatically wrong.
Sir Nicholas Macpherson: Occasionally you get lucky with forecasting, usually when the economy is growing at a very steady rate. The Treasury forecast growth very well between 2000 and 2007, but the problem is turning points and unknown journeys, such as the one we are on at the moment. The OBR is forecasting as well or as badly as any other forecaster. Where it does make a difference in my experience is just at the margin. When the Treasury did the forecast rather than the OBR, there was a slight tendency towards optimism. I think that the OBR’s forecasts-
Chair: That is what I feel there still is.
Q144 Mr Bacon: When we visited the Congressional Budget Office in the United States-I have done so two or three times in the past five years-what became clear was that its single biggest benefit was that it kept the Office of Management and Budget inside the White House more honest. If we had a parliamentary budget office that was genuinely independent, because it was answerable to Parliament, do you think that whatever is left of the pink in the OBR’s spectacles might be rubbed away?
Sir Nicholas Macpherson: I don’t think that the OBR forecast was biased. If you look at any other forecasting body over the past few years, the OBR has been very much in the mainstream. Maybe they should not have been, but there is real benefit in having an independent forecasting body. We are five or so weeks away from the autumn statement. In the old days, we would be arguing about the forecast or I would be accompanying the Chancellor to see the Prime Minister, who would say, "Surely the economy will grow a lot faster than that?" An awful lot of time was wasted on that. Forecasts only tell you so much. What matters is what you do. Of course the forecast informs what you do-
Chair: It is scary when it comes to the west coast main line and you are looking at a forecast 15 years ahead.
Sir Nicholas Macpherson: Indeed.
Q145 Mr Jackson: That was my question. Specifically what lessons are you assisting the Department for Transport in learning in the wake of the west coast main line debacle, and how will you help it in its planning for High Speed 2?
Sir Nicholas Macpherson: There are a number of reviews going on in the light of the west coast main line issue. I have been asked to lead a review on establishing best practice in terms of quality assuring economic and financial models. I am working with the chief scientist, the chief economist, the chief statistician and so on and I will produce a report in due course. I hope that the National Audit Office will help inform it, but if it waits until the report is produced, I am happy to bring the report before this Committee to see if I can improve it further.
Amyas Morse: We are already having another review of the matter, so the more opportunity, the better.
Sir Nicholas Macpherson: It is in the Treasury’s interest to work closely with the National Audit Office and although you seem to invite me to appear quite regularly, I continue to believe that the Treasury’s and the Public Accounts Committee’s interests are well aligned. Your accountability makes a real difference. Again, I do not want to appear sycophantic, but the one thing that keeps my mandarin colleagues on their toes is having to account for themselves in front of you.
Q146 Ian Swales: I did not partake in the bank debate earlier, but I want to reflect on something that I am seeing more and more. Our banks just do not play with large projects-capital-intensive projects-with longer time scales. The Thai banks were shocked that no UK bank would engage in the steelworks project in my constituency. A huge project is to be announced in my constituency tomorrow where the bank will be Korean. I can think of another one where it will be Indian. Basically, our banks don’t want to play. You used the expression, "The transmission system is impaired." To me, in plain English, that is a broken banking system. What we heard was huge concern about not only the overt support for the banking system, which we are aware of, but the covert support, whether it is through quantitative easing, various guarantee schemes or sweeteners, and it ain’t working. That is what the Committee is concerned about. The longer it goes on, and the more the covert the new ideas seem, the more concerned we will be. That was really just my reflection on the matter, and you do not need to comment on it. It was just another dimension. You might say that it is great that foreign banks are getting involved in investing in the UK, but it is as much a function of our broken system as it is anything else. I do not know whether you want to respond to any of that.
Sir Nicholas Macpherson: As Tom said earlier, there is ultimately a trade-off. Over the past few years, the state has intervened to support the banking system and to prevent it from going into Mr Bacon’s appalling downward spiral, but there is a real trade-off.
Mr Bacon: It is not my spiral.
Sir Nicholas Macpherson: I mean the possibility of a spiral. There is a trade-off. We could have tried to administer some massive shock to the system by never providing the support in the first place. There is a real risk in getting into long-run support. People talk about Japan and its lost decade. It is alleged that one of the problems in Japan was that the state tried to support the system for too long. I was mentioning today how we got out of some of the support schemes in the last year. The banking system does ultimately have to stand on its own two feet, but there is a role for the Bank of England to ensure that money is flowing round the system and that liquidity is available. I know that we have been very much focused on the UK today, but you only have to look at mainland Europe where things are a whole lot worse. Britain is a very open economy and we operate in an international environment. You are right to challenge us.
Q147 Ian Swales: I will let it rest now, because we had a long debate earlier. I just wanted to get in a view. The concern is the extent to which the taxpayer, whom we represent, is still, in effect, subsidising the banks through whatever system or guarantees. That is really why there is such a degree of concern. I guess that we will keep on coming back to it, but I do have a question beyond that. In the case of Equitable Life, which has been a big issue for us as constituency MPs, we have agreed to pay policyholders £1.49 billion. We paid out £168 million last year. Was that on track? Was that the amount that we should have paid, and should we not be getting this money out quicker?
Sir Nicholas Macpherson: Since then, we have got a lot more money-£455 million has now been distributed and 350,000 individuals have benefited. We are doing all that we can to get the money out. It is quite difficult to track down some people, which is slightly surprising. You would think that older people would not move around as much as they do. I am sure that the National Audit Office will be looking at the scheme in due course.
Q148 Ian Swales: Are you following the independent commission’s advice on paying out to the oldest policyholders?
Sir Nicholas Macpherson: The with-profit annuitants were a particularly sensitive group-the individual policyholders. We are now turning to the group pension schemes, and it is quite difficult to track the people down. However, I think the highest-priority cases have generally been paid.
Q149 Ian Swales: And it is costing £20 million a year in administration. Is that the right number? It sounds like an awful lot of money.
Sir Nicholas Macpherson: This is quite a complex and difficult process. If I compare the costs with the scheme for miners about 10 to 15 years ago-I cannot remember which disease it was we were compensating for-
Mr Bacon: Pneumoconiosis.
Sir Nicholas Macpherson: The administration costs of that scheme were very high indeed. It was getting up to practically 60%, 70% or 80% of the money that went out the door.
Q150 Ian Swales: Since you mention that scheme, that leads to an important question. I declare an interest as my father-in-law died of pneumoconiosis. I say that he was a beneficiary of the scheme, but the main money came out 20 years after he had died, and his widow did not benefit from it either. It took a long time, and there is a huge scandal in the north-east over a firm of solicitors making a ridiculous amount of money out of the scheme. What is this £20 million in administration costs? Where is it going? Is it going through intermediaries?
Sir Nicholas Macpherson: We did think about this long and hard. There was the classic question of whether you contract with a private organisation or do it yourselves. Because we wanted to get the money out quickly, we have used National Savings and Investments as our intermediary, which is a department of the Chancellor. I am quite certain that there are lessons from this process, but, so far, as the accounting officer, I am reasonably happy with it. There are always ways that you could do it for less and get more money out of the door, but I am reasonably happy with how it is being administered.
Q151 Mr Bacon: I remember that there was a solicitor in Doncaster under that scheme who paid himself a salary of £16.7 million a year.
Sir Nicholas Macpherson: Equitable Life has been a sorry episode, but I really hope that we can avoid that sort of side effect.
Q152 Mr Bacon: I would just like to ask about the age of the staff in the Treasury. I was looking at tables 4.C and 4.D on page 44 of the annual accounts. Of the 1,329 staff in the Treasury, I was quite surprised to see that only 112 are senior civil servants. I see that 8.4% are senior civil servants as of 31 March 2012. Is that because a big chunk of the Treasury is staffed up by the other two rows above that figure-"grades 7/6" and higher executive officers? That makes up 63%, many of whom will get promoted on into the senior civil service in due course, simply because they are fast-track people.
Sir Nicholas Macpherson: Your typical Treasury official will be in that group.
Mr Bacon: That group of 63%.
Sir Nicholas Macpherson: Yes. They are the people who do a lot of the legwork. They are probably aged from 23 to 32. Some will move on. They will work for the Treasury for a few years and then go to the City or academia or another Department. The challenge is to retain the really good, high-potential ones. You tend to promote them into the senior civil service at about 32, 33 or 34. It may or may not come out of the figures that Tom provides you with, but I think we have been pretty good at retaining people in recent years.
Q153 Chair: Why are only two of your senior management team women? Two out of 15. All that stuff about retention and staying in the job-women are much more likely to do that. It is outrageous.
Sir Nicholas Macpherson: I think we have doubled it actually.
Mr Bacon: From one to two.
Q154 Chair: Sharon White is in this report, as is Alison Cottrell. They are your two women, and everybody else there is a man.
Sir Nicholas Macpherson: Since this report, we have doubled it again. We have recently appointed Indra Morris to replace Edward Troup as head of tax and welfare. Although I have not announced it-
Mr Bacon: You are now.
Sir Nicholas Macpherson: I have appointed a finance director to replace Julian, who is also a woman.
Mr Bacon: Julian is not a woman.
Sir Nicholas Macpherson: To replace him.
Q155 Fiona Mactaggart: But if you look at page 16 of the Report, which includes all the bodies that you oversee, every single one of them is headed by a man.
Sir Nicholas Macpherson: You’re correct.
Q156 Mr Bacon: You may like to know that a former member of this Committee, the MP for Bishop Auckland, Helen Goodman, who is also a former Treasury official, wrote a chapter in a book published by the Smith Institute in which she said that she had to endure a conversation inside the Treasury where a group of permanent secretaries sat around and discussed the likelihood in game theory that the current proportion of women permanent secretaries would occur.
Sir Nicholas Macpherson: That is interesting.
Q157 Mr Bacon: I thought so too. Where is Mr Kelly going?
Sir Nicholas Macpherson: This Mr Kelly?
Q158 Mr Bacon: Well, he’s leaving.
Sir Nicholas Macpherson: No, he’s not leaving. He has done such a good job as finance director that we have moved him to be director of public spending, where he works for Sharon White. He will mastermind the next spending review, whenever that might be.
Q159 Chair: I just want to pursue the question of women. Fiona and I need a moment on that. You say it is four out of 15, which is still below a third, and Fiona’s very important point that you have not got a single woman running one of your bodies-
Sir Nicholas Macpherson: Can I give you both grounds for optimism? If you look on page 46, among the senior civil service now, 46% are women.
Q160 Chair: But it is always like that. They then do not get the top jobs.
Sir Nicholas Macpherson: I promise you that is a massive improvement. At each level we are getting more and more. Sharon and Indra’s appointments are significant, because apart from Rachel Lomax, I cannot recall a woman in a key policy job at that level in my time at the Treasury. You have people such as Dame Anne Mueller who came in when the Civil Service Department was abolished, but she retired shortly thereafter, and Mary Keegan was there in a specialist role.
I think that is really changing now in the Treasury, and I think it will continue to change because we have got some really good people in really important appointments. The Chancellor’s principal private secretary is a brilliant woman, and the Prime Minister’s economic affairs private secretary is an equally brilliant woman. I think the Treasury of the future will look very different. It will be long after I have gone, but I would expect the table that Ms Mactaggart drew our attention to look very different in future.
Q161 Meg Hillier: I should just say that one of the senior women at the Treasury was very good and took six young women from Hackney schools to see the Treasury. That was a little personal touch from that individual, which is great, but what systemic measures have you got in place to attract more women in at entry level and support them on the way through? For example, do you have a proper job share pool? Do you find that women are dropping out, and do you do an exit analysis of people leaving? I am sure that you will do that anyway because you want to know where they are going, but do you find out whether there are systemic issues that stop people, particularly people with caring responsibilities, staying on?
Sir Nicholas Macpherson: You have highlighted the sorts of things that are absolutely critical to changing your gender distribution. The Treasury-I was responsible for this, so I am happy to take some credit for it-was the first Department to introduce job shares at very senior levels. We did that several years back.
Q162 Meg Hillier: How senior have you got?
Sir Nicholas Macpherson: We had it at director level. In terms of different working patterns, we have been very supportive of people. It is not inevitable that each job has to be five days or seven days, or whatever. You can actually design jobs around different working patterns. We have done that. We look very closely at why people leave, because in the past there has tended to be a certain level at which bright Treasury women-you mentioned Helen Goodman, but I can think of a number of other people-have left, when they have just got to the senior civil service level. They left because they did not find the Treasury a supportive organisation and did not see themselves as having a future within it.
I think we are beginning to really turn that around, and that is essential, because we cannot compete on price but we can compete on quality. Making the Treasury a good and rewarding-not financially but intellectually-place to work is critically important.
Q163 Mr Bacon: I would be very grateful if you could send us, or arrange to have made and sent to us, a more detailed version of 4.B, setting out in more detail the age profile, because my concern with the 28% turnover-presumably the turnover is a bit lower than that now, is it?
Sir Nicholas Macpherson: Yes, it is lower than that.
Q164 Mr Bacon: What is it down to?
Sir Nicholas Macpherson: As I was saying earlier, it is about 16%. So we are in a better place. We had an important meeting of the executive team this morning and we had a really good new chart. What was that chart called?
Tom Scholar: The experience index.
Sir Nicholas Macpherson: What was encouraging was that about three or four years ago I think only 40% or 45% of the Department had been there for more than three years. That has risen to 60%, so people are getting slightly more experienced.
Q165 Mr Bacon: My concern is that there has been an extremely young Department, with people who might be extremely bright but do not have a lot of experience giving the advice and finding the information for enormously important decisions. What I would really like is if you could give us something, and I think the simplest way to do it would be in a spreadsheet, if possible. You could put the age down the left-hand side, from the youngest to the oldest, and then you read across in these seven categories, so I can look at my little chart and go down to 28-year-olds and look across and see how many 28-year-olds are higher executive officers, how many are grade 7s, how many are senior civil servants and so on.
Sir Nicholas Macpherson: I will definitely give you something. Whether it has as much detail as your spreadsheet will depend on whether we can just do it.
Q166 Mr Bacon: And also, while you’re at it: how many men and how many women, at each level.
Sir Nicholas Macpherson: Certainly. We will try our best.
Chair: Thank you very much indeed. It has been a wide-ranging discussion and, as always, very interesting.
Sir Nicholas Macpherson: Thank you, and see you next Monday.
Chair: Actually, you are going to be a bit late next Monday, because we have evidence from someone else before.