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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 818-iii
HOUSE OF COMMONS
TAKEN BEFORE THE
Thursday 13 December 2012
Rt Hon George Osborne and James Bowler
Evidence heard in Public Questions 269 - 359
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Taken before the Treasury Committee
on Thursday 13 December 2012
Mr Andrew Tyrie (Chair)
Mr Andy Love
Mr Pat McFadden
Mr George Mudie
Mr Brooks Newmark
Mr David Ruffley
Examination of Witnesses
Witnesses: Rt Hon George Osborne, MP, Chancellor of the Exchequer, HM Treasury, and James Bowler, Director for Strategy, Planning and Budget, HM Treasury, gave evidence
Q269 Chair: Chancellor, you are looking remarkably good on no sleep and an overnight negotiation in Europe, so we know what gets you going. I want to begin by asking you first of all to tell us how much resolution of the eurozone crisis matters to the British economy. What proportion of the downturn that has happened in the economy over the last two years could be attributed to it?
Mr Osborne: First of all, I am very grateful to you and members of this Committee for agreeing to move the hearing to this afternoon, and that is much appreciated. I should also introduce James Bowler, who is the Director of Budget in the Treasury and can also answer your questions.
The answer to your question is that the eurozone crisis has had a huge impact on the British economy and indeed many other Western economies. It is not the only thing that is affecting the British economy, of course, and we still are living with the aftershocks of the financial crisis and we were hit by the oil price increase as well across the world. In terms of attributing a number to it, first of all the OBR’s analysis of the deterioration in the growth forecasts since the budget is that the weakness in the eurozone is the principal cause, indeed more than accounts for the downgrade of the forecast. There is an interesting observation: if trade to the eurozone had grown as fast as trade to the non-eurozone over the last year, then that would have added 1% to our GDP. But I would stress that the impact of the eurozone crisis is not just on trade, it is also on confidence and it is also on financial intermediation. But there is an illustration of the impact. It is something of course that Britain and other countries have to work with.
Q270 Chair: You have been out there all night part observing and part protecting Britain’s position in some difficult negotiations. Perhaps you can tell us first of all how you protected Britain’s position and then tell us whether you think that they have solved this.
Mr Osborne: I would say it is a significant moment for the European Union, first because the eurozone took a step towards a banking union by creating a single supervisory mechanism. They did not create common deposit protection, they did not create a common resolution fund, which are the other components of a fully-fledged banking union, but that is not to underestimate the very significant step they took last night in creating common supervision. I think it was also significant last night because the UK-and indeed other countries that are not joining the banking union-secured significant protections. I would highlight two, although there are others I could describe. The first is we have now this recognition that the interests of the outs must be protected as well as the interests of the ins, and we are going to have a double simple-majority voting system when it comes both to writing some of the technical financial regulation in the European Banking Authority, but also to things like dispute resolution. So we have this new double majority: a majority of ins is required, as well as a majority of outs, and that is significant.
We also have now written into European law-assuming this all becomes European law-a very clear non-discrimination article, which I know this Committee has been concerned about in the past. It is only one sentence, if you would allow me to read it out, "No action, proposal or policy of the European Central Bank shall directly or indirectly discriminate against any member state or group of member states as a venue for the provision of banking or financial services in any currency". That is a very significant non-discrimination clause because we are currently in legal dispute with the European Central Bank about some of their location policy.
So I would say what we saw last night is perhaps a model of what is going to happen in the future, which is that a core of eurozone members and other fellow travellers among the outs are going to integrate further. Britain is not going to be a part of that. We are not going to transfer more rights and powers to Brussels. Our interests are going to be protected and the interests of all 27 members through the single market are also going to be protected, and I think it will come to be seen as quite a significant moment when you look at broader development of European policy as well.
Q271 Chair: I just want to take you back to an earlier part of that reply-which is extremely interesting and we are grateful for it-and what you have said about the core components of the banking union. This banking union, if it is to be called that at all, seems to be missing the key features of any banking union. One is that there is a common resolution to the source of funding, and to sort out resolution, that is at least theoretically bottomless, and secondly, that there is common deposit protection. Without that, how can a banking union be called a banking union?
Mr Osborne: I think we should not take away from the achievement last night of creating a common supervision. That is a difficult thing to have put together, and the eurozone have put it together. But I agree with you that it is not a fully-fledged banking union. The reason why this debate grew up was because of the weakness in some eurozone banking systems and a concern that your deposits were not safe in particular banks because could the sovereign stand behind those deposits, or a country could not bail out a bank because it did not have the money to do so. The view was that you had to create common deposit protection and common resolution. Those two elements were not agreed last night and of course they are the subject of much controversy within the eurozone. My sense, my personal view, is they will move in that direction over the coming years, that an important precondition of moving in that direction was having common supervision, because that provides some reassurance to the taxpayers of Germany and the Netherlands and Finland and the like that their money is at least spent in a way that is properly supervised. But they did not take that step last night and I think that is going to be the debate for the next two years.
Q272 Chair: From the markets’ perspective, this is a binary issue, isn’t it? Either the markets believe there is that protection and there is that guarantee coming from the central authority of the banking union or they do not. It is one or the other. Why should the markets believe for one moment that a run on Spanish banks, were one to take place, would get bailed out by the ECB as a consequence of what happened last night?
Mr Osborne: I think the markets can take some confidence that earlier this year the eurozone indicated their willingness to consider using the European Stability Mechanism bailout fund to stand behind the Spanish sovereign and through the Spanish sovereign, the Spanish banks, but of course there is a fierce debate in the eurozone about direct recapitalisation of banks. I think an important hurdle has been passed, however, because countries like Germany said, "We won’t even entertain this question while there is not some form of common supervision." We now have that common supervision coming into place. But if you are telling me, Mr Tyrie, that more needs to be done to reassure people that the single currency is a stable currency zone and that banking problems can be dealt with, I agree with you. Of course we can point out where things have gone wrong and we do, but when something has gone right, I think British politicians should also acknowledge that, and I think we should acknowledge that last night they got something right.
Q273 Chair: But it is the absence of clarity about these issues, and it is the absence of credibility lying behind any putative guarantee that is blighting the eurozone, isn’t it? You began your remarks by saying that there is this blight; the loss of credibility and a lack of confidence in the eurozone is a massive impediment to the UK economy. Although you are being polite about it, by the sound of it, because you have just come back from the conference, you seem to be telling me we do not really have a banking union and although some of the tools required to start working one up look as if they might now be possible, we are a long way from it. A moment ago, you just said, "Some years hence we might get towards it."
Mr Osborne: I think it will be some years before you have fully-fledged deposit protection, which by the way some member states would today question is required. My personal view is it will be some years before we have common deposit protection and common resolution. There are directives in the area that are going to be legislated for next year and they are making progress. If you are telling me it is too slow and has been over the last couple of years, I think most eurozone members would agree with that, and I would certainly agree with it, but they are making some progress and I think we should acknowledge that. Personally I would say a lot of this is a symptom of the problems in the eurozone, not a cause. The cause is a fundamental disparity between the competitiveness of different economies in the eurozone and that is playing itself out in a single currency, where they cannot externally devalue.
Q274 Chair: Let us move on and touch on another subject that is very much alive at the moment, which is in the wake of your appointment, which we will hold a hearing on. As you know, we will be holding a pre-appointment hearing with Dr Carney on 7 February, and in the wake of your decision, your announcement in the House of Commons, a number of remarks have surfaced-some from him-that he is dissatisfied with the inflation target and is considering money GDP targeting. Have you discussed this with Dr Carney?
Mr Osborne: First of all, I think Mark Carney is going to make an excellent Governor of the Bank, and I very much welcome the opportunity he is going to have to talk to you about his views about the British economy and British monetary policy in February. I am not going to speak for him today. It is right that he comes and talks to you about that.
The second thing I would say is that it is not that these remarks that you refer to have "come to light". He gave a speech. I welcome the fact that we have in Mark Carney someone who is leading international debate and opinion and I think that is a good thing for a future Governor to be doing.
The third thing is we have an inflation targeting regime that has served this country well and has provided stability. There is a debate about the future of monetary policy, not in the UK exclusively, but in many, many countries. You saw yesterday the Federal Reserve take action on indicating the future path for monetary policy and linking it to the unemployment rate, so there is a lot of innovative stuff happening around the world. In the UK, we have the Funding for Lending scheme, which in itself has been very innovative, and other countries have looked at it closely. So there is a debate going on. I am glad that the future Central Bank Governor of the United Kingdom is part of that debate. Of course any decisions about the framework are decisions for the Government, a Government-accountable department.
Q275 Chair: Are you dissatisfied with the inflation target?
Mr Osborne: I would say it has served us well. That is the point I make, and I think therefore if you were to move away from it, you would want to be satisfied, and Parliament would want to be satisfied, that you were getting some very significant rewards in return for moving away from that.
Q276 Chair: You didn’t answer my question, by the way, about whether you had discussed this Dr Carney.
Mr Osborne: I had lots of discussions with Dr Carney over the last year, including interviewing him for this job, but I think it is right that those conversations are private and I think it is right that he first explains to your Committee his views on the British economy and the future of British economic policy.
Q277 Chair: What difference would it have made if we had money GDP targeting over the last couple of years?
Mr Osborne: I regard that as a hypothetical question and I do not think Chancellors should speculate about different monetary policy regimes. I would make a broader point, which is whatever regime you have, you have to ask the prior question, "What is it that you would want the Monetary Policy Committee to be doing that they are not currently able to do because of their regime?" before you would consider changing the regime. If you cannot answer that question, then I would not change the regime. So I think there is a prior question. What is it that you want them to do that you think the inflation targeting regime that we currently have prevents them from doing? But it is totally to be expected after everything that has happened to the international economy, and indeed to the British economy, over the last four or five years that there is a debate about the future of monetary policy. What I regard to be my job and to be accountable to Parliament for is to determine that framework. In the meantime, we can make sure that we have fiscal policy that is credible and enables the Bank of England to do what it needs to do. But I have no plans to change the framework. There is a debate going on.
Q278 Chair: I know you do not like hypothetical questions, but if you did seek to change the framework, would you try and obtain cross-party support for it?
Mr Osborne: I think it was a good feature of the inflation targeting regime, that my understanding is that the Labour Party at the time was supportive of that development, originally under Norman Lamont, and personally I think my party made a mistake in voting against the Bank of England independence. I think we were right to criticise the decision to take away banking supervision from the Bank of England. We were wrong to oppose the granting of interest-rate decisions to the Bank of England. I would like to get cross-party consensus for all the things I do. I am realistic that that is not always going to be the case, but obviously for significant changes to the monetary policy framework it would always be better to have cross-party support.
Q279 Chair: You would acknowledge it is a somewhat curious state of affairs that it has taken intervention by the Canadian Central Bank Governor, albeit one is about to come over here, to stimulate this debate.
Mr Osborne: First of all, I do not think it is particularly surprising that people are paying close attention to the speeches and expressed views of the person who is going to be the next Governor of the Bank of England. Second, I would say if you look at some of the academic debate, if you look at some of our leading newspapers, they have been carrying quite a lot of commentary and discussion about monetary policy. I think it is one of those areas, it has to be said, where it would be a good thing for academia to lead the debate and governments to follow, rather than the other way round. I think that is certainly what happened with inflation targeting.
Q280 Mr Newmark: It is curious, given the crisis that we have had in this country and the traditional thinking, which has been inflation targeting, that you yourself were very creative in thinking out of the box in choosing someone like Mark Carney, who himself-as you know-is an A-graded Governor of his bank, and you have reached out to somebody outside of this country to go to someone like Mark Carney. Mark Carney himself says or implies that perhaps after 20 years or so, we have exhausted the concept of inflation targeting and maybe we need to think a little bit out of the box. I am just sort of curious that you say-or you imply in what you say-that the Treasury itself has not been thinking a little bit more laterally, a little bit more creatively in coming up with solutions other than inflation targeting.
Mr Osborne: The first thing I would say is, I think there has been plenty of creative and innovative policy-making in this country in the monetary space in the last few years, that we have interest rates that are at a level few would have ever expected; we have the quantitative easing programme; we have the Funding for Lending scheme. So the Bank of England-and indeed the Treasury, both under myself and under my predecessor-have engaged in a lot of thinking and innovation in this space. I obviously do not give a running commentary on all the discussions that take place in the Treasury, but I am very clear in public and in private to say that if you want to change the regime, you have to make a pretty strong case for doing so. I think it is very good that there is a debate taking place in this country and around the world and I think it is good that we have the next Governor of the Bank taking part in that debate.
Q281 Mr Newmark: It is quite a radical form of thinking, to do GDP targeting versus inflation targeting. First, you must have an opinion on this, and secondly I am assuming, having read Mr Carney’s speech, and your team having read Mr Carney’s speech, this certainly must have excited some thinking and discussion. Do you think it is a good idea or not? You have not really answered that question.
Mr Osborne: As I say, I don’t think it is sensible for the current Finance Minister of a country to kind of openly speculate about the macro framework. I think it is right that there is a debate. If we were to make a change, we would come and tell you about that and seek parliamentary opinion on that. But as I say, there is a debate taking place and I think it is one of those areas where, to repeat myself, academia should be taking the lead and governments, if they want to, should follow.
Q282 Mr Newmark: Okay. You have said that we have tremendously low borrowing costs, in fact the lowest borrowing costs in our history. On the balance between quantitative easing effectively and your plan A, what do you see has been the main driver in keeping our borrowing costs so low?
Mr Osborne: I think the principal driver of why our rates are low compared to some other countries-and it is partly a relative game-is because of the credibility of the UK fiscal policy, so obviously a stated aim of QE is to make money cheaper, but I would say that between QE operations undertaken by the Bank, we have also maintained very low rates, and it is worth remembering that if those rates were to rise relative to other countries, that would have a huge impact on the UK economy and the cost of mortgages and the cost of doing business and be very damaging indeed. It is one of the things that some of the countries that I was sitting around the table with last night are wrestling with at the moment. I would say the credible fiscal policy anchors those low interest rates and enables our monetary authorities to undertake innovative monetary operations like QE, and indeed Funding for Lending and the like.
Q283 Mr Newmark: You talk about credible fiscal policies and that is something that you yourself had pushed as one of the main drivers of keeping our interest rates low, but I think when you look at the US, for example, the US has continued to print money. They have continued to run a huge debt. Their debt ceiling has blown over $14 trillion and is heading to $20 or $22 trillion, and they are running what I would view certainly as unsustainable deficits. Yet their borrowing costs are also incredibly low. I keep getting this argument back from my friends in the States saying, "You guys have to lighten up a little bit and maybe a little bit more borrowing isn’t such a bad thing."
Mr Osborne: There are two things I would say to that. First of all, the US has a reserve currency-we do not have a reserve currency-and that gives them more latitude than any other country in the world. It is not a hypothetical to imagine what happens to a middle-sized or large European economy when they lose confidence in the bond markets, because we have seen it happen on our doorstep. When I first started in this job, people stood up and said, "It is ridiculous to compare Britain to Greece" and then suddenly it was not just Greece, it was Ireland and Portugal, and then Spain had problems and even Italy had problems. So we can see what happens. There is a debate in the US about how to reduce the deficit. There is not a debate in the US about whether to have a big stimulus or a plan B. They have a debate about the mix between tax and spending. That is taking place in the Congress at the moment and we all want them to resolve that this month. But even if you look at US fiscal policy over the last year or more, it has been mildly contractionary and quite a lot of the state governments have also been dealing with their deficits or shrinking their spending to avoid deficit. So in the US as well, I think there is a recognition they need to deal with their deficit and debt problems, and I do not see any significant body of opinion in the United States, certainly none that carries any weight in the US Congress or the White House, that is arguing for some big additional discretionary borrowing or stimulus.
Q284 Mr Newmark: But they are going to go over 50% above target. They are going to hit $20 or $22 trillion, which is a huge debt figure. So just then to go back to your point, the last bit, a focus on keeping borrowing costs down, effectively what you are saying, in the absence of the policy that you are pursuing-for example, flipping to plan B, which is the Shadow Chancellor’s view that we need to borrow a little more to really get the economy going, and I think David Blanchflower believes the same thing-that then would impact the low borrowing costs that we have here that would impact mortgages and corporations that are borrowing. That would be your concern, effectively, of pursuing perhaps a little bit more loosening on the debt side.
Mr Osborne: It would threaten the UK fiscal credibility. I think the public would realise this would simply be deferred tax increases or further spending cuts, so I think it would probably not have any boost on confidence. What I would say I have noted in the last six to 12 months is that I do not hear a significant argument from the Opposition that there should be lots more borrowing or a plan B. They have gone pretty quiet on that. There is an argument about the composition of the consolidation, which no doubt we will come on and have, but you don’t hear much about five-point plans or plan Bs anymore from the Opposition.
Mr Newmark: Okay, thank you.
Q285 John Thurso: Chancellor, can I ask you a little bit about your supply side measures? The OBR have not included these in forward growth figures, which is quite consistent with the majority of forecasters. When do you think we might expect to see some of these measures bearing fruit going forward?
Mr Osborne: They are supply side measures. They are designed to improve the structural competitiveness of the British economy. I am not attempting a fiscal stimulus. I am deliberately saying that that is the wrong thing to do. I want to see more roads and schools and the like built because I think that is right for the medium- to long-term performance of the British economy and that is why we are switching current to capital spending.
In terms of its impact, I think an interesting measure at the moment is how the UK is climbing up the league tables of competitive places in the world to do business, so we have climbed back into the top ten of the World Economic Forum list and I think we are now at number eight. So we are becoming a more and more competitive economy. I think that is a combination of supply side reforms to welfare, education, the tax system, the capital investment in key bits of economic infrastructure and the like.
Q286 John Thurso: Would you say there is a set of principles underlying those reforms?
Mr Osborne: I think the principles are that we are doing everything we can to make the UK the most competitive place in the world to come and do business, to invest and to grow a domestic business, and we benchmark ourselves against other major Western economies. For example, with the corporation tax rate, I am very clear that what we want to do is have the lowest corporation tax rate in the G7; make this a place where if you are an investor in Texas or Shanghai you say, "Have you noticed what the UK is doing on its corporate tax rate?" and if you are a domestic business, you are getting a competitive advantage as well against those you are competing with in other countries. So what I am trying to do is assist the private sector and make sure that the people seeking employment in the future have the right skills and the right education to make the best of their lives and make the biggest contribution to the British economy.
Q287 John Thurso: Do you think we could have moved faster on those?
Mr Osborne: I think everyone doing my job would always like roads to be built more quickly and buildings to go up more quickly, but we are willing the means, so we are changing the planning rules so that, yes, of course people can still have their objections heard, but they are heard more quickly. The Prime Minister set our plans at the CBI to dramatically increase the speed at which a road can be built in this country, so that again objections can be heard, but there is no reason why the whole thing has to take years. So I am for accelerating the pace of some of these changes.
Q288 John Thurso: Rest assured that if the Government in Scotland decides to deal with the A9, it would be welcomed with no objections anywhere.
Can I turn to the automatic stabilisers? Can I ask, first of all, do you accept that the automatic stabilisers do dampen the economy during booms and provide the necessary stimulus in a downturn?
Mr Osborne: Yes.
Q289 John Thurso: Jonathan Portes said to us that cutting welfare benefits negates, as a matter of policy, the operation of the automatic stabilisers; it is a reduction in flexibility, not an increase. Do you accept that?
Mr Osborne: No, I do not accept his analysis, because the scorecard is neutral across the period of the spending review and period of welfare benefits being underrated. So we are not-to use the crude language-taking money out of the economy. There is a deliberate policy over the next few years to circulate money from current spending into capital spending and so we are not diminishing in that sense the automatic stabilisers.
Q290 John Thurso: So it would be your expectation that the automatic stabilisers will continue to function much as they have in the past?
Mr Osborne: Obviously one of the central judgments of this Autumn Statement was not to chase the debt target, in other words, to accept that we had missed the debt target, and had we chased the debt target, that would have required significant cuts or tax rises over the next couple of years. I think that would have cut across the automatic stabilisers, because the OBR was telling us, "This is a cyclical deterioration in the forecast" and I didn’t want to chase that cyclical deterioration. So I guess one of the absolute central judgments of this Autumn Statement has been to let the automatic stabilisers operate.
John Thurso: Thank you.
Q291 Andrea Leadsom: Chancellor, I would like to talk to you a bit about bank forbearance. In evidence to the Treasury Select Committee, the Governor of the Bank of England was describing how good forbearance is where a bank feels, "Look, this company does have a long-run future. Let’s not put it in a difficult position now," but bad forbearance, on the other hand, is where the banks do not insist on repayment, not because they care about the customer, but because they are worried about the implications for their own balance sheet". Is that what is happening now? There has been all this talk of zombie companies. Do you believe that bad forbearance is in fact becoming a feature of our economy?
Mr Osborne: I think there is no doubt that the recovery from a financial crisis, the likes of which we have not seen in this country in any of our lifetimes, is having all sorts of impacts out there in the economy. One of them, which is one of the things the OBR examines, is what happens on credit intermediation and whether it is preventing strong firms expanding because they get cannot get a loan, and also because of the very low interest rates allowing so-called zombie companies to continue. The only question I would raise is it is quite difficult sometimes to tell the difference between a zombie and a good company that is just having a difficult period because the economy is weaker than anyone hoped. I am absolutely clear that trying to clear up the credit intermediation channels and get the bank system functioning normally is probably the most important or certainly one of the most important tasks I face. But I do think this whole area is one that is worthy of greater consideration. I think we should all, including the Treasury, be doing more work on how the recovery from the financial crisis has taken longer than people had hoped and what is the impact on company and household balance sheets.
Q292 Andrea Leadsom: So do you believe personally in the concept of destruction, where you let companies go to the wall because then you get better capital allocation as a result of that, so you might suffer short-term pain, but you get long-run better capital allocation?
Mr Osborne: I have always thought it was a rather unattractive phrase. One of the things that we should welcome over the last couple of years, difficult as this period has been, has been the relatively strong performance of the job market and the fact that yesterday we had another fall in unemployment, another increase in employment. So those who advocate the sort of short, sharp shock that would lead to a load of companies closing and a lot of people being put out of work are not people that I would myself agree with. I don’t think that is what the British economy needs at the moment.
Q293 Andrea Leadsom: I think most people would agree with you that it is not attractive to think of putting people out of work for the sake of the long run, which is unproven. But bearing mind the situation we find ourselves in, where undoubtedly productivity is unusually low, notwithstanding the relative good performance of the employment market, do you think there is a case for the Government to do more to create a bad bank/good bank scenario? When we were taking evidence I think it was the banks themselves that were saying it would be very advantageous to clear up some of the bad debts on bank balance sheets and allow the good bank to proceed. That old thing of privatising the losses or nationalising the losses and allowing the taxpayer to bear the bad debts so that the banks can proceed to lend freely. Is there a case for doing more of that, do you think?
Mr Osborne: We have some bad banks on our balance sheet, and indeed, one of things in the Autumn Statement was that Bradford & Bingley and Northern Rock Asset Management came on to the balance sheet. Although there is a superficial-and I don’t mean that in a pejorative way-attractiveness to the bad bank/good bank idea, that is not the route that was pursued in 2008-09 when RBS was part-nationalised, and it was not the route pursued when HBOS was taken over by Lloyds. So I think the question four or five years later is do you go back into these banks, which have done a lot to shrink their bad assets and are continuing to do so, disrupt everything and try and rip out of RBS the bad assets, try and value them-which would take a long time, and the experience that the previous Government had of valuing assets with the Asset Protection Facility was not a particularly happy one-in order to achieve some gain in the future that you might have created this bad bank and taken these bad assets off RBS’ balance sheet, or indeed, the old HBOS assets. I think it is very, very disruptive and I am not sure the gains outweigh the disruption.
Q294 Andrea Leadsom: Only six financial institutions have yet taken advantage of Funding for Lending, and there is, because of the lower risk weighting associated with mortgage lending, a tendency for those to have been towards the mortgage sector. Are you happy with that balance and with that relatively slow start? Do you have some concerns about that?
Mr Osborne: I am happy to write to the Committee if I have this wrong, but my understanding is many, many more institutions than six-several dozen-have participated in the Funding for Lending scheme, and so it has had a very strong take-up. One of the encouraging things again from the OBR analysis is that it is having an impact on the real economy. It is adding to GDP, it is bringing down the bank funding costs and we have published in the Green Book, if you look at the unsecured bond spreads, the impact that the FLS announcement has had, so that was a joint scheme between the Treasury and the Bank of England, and I think it has been working well.
Q295 Mr McFadden: I apologise for missing the beginning of the session, Chancellor, I was at my son’s Nativity play. He was a shepherd.
Can you tell us, what is the cumulative total of extra borrowing in your plans now compared to the plans you announced in the budget after the election?
Mr Osborne: First of all, I never made it to shepherd. I played the triangle in my school nativity play.
I don’t have that number before me, but I can write to you with it.
Q296 Mr McFadden: Would the figure of £212 billion sound right?
Mr Osborne: I don’t have the number in front of me, so I will happily write to you with the number.
Q297 Mr McFadden: If someone had said to you in the summer of 2010, "In two years, your plans will include over £200 billion more of borrowing than you are now saying," how would you have described a plan like that?
Mr Osborne: I always knew in 2010 that we were facing a very difficult situation domestically. What of course subsequently happened was the impact of the international situation. But if I had known in 2010 that we were going to put in place a plan that commanded the confidence of bond investors and that in a period over the next 24 months we were going to see countries like Spain and Italy really struggle but the UK maintaining those low interest rates, I would have thought, "We are doing the right thing."
Q298 Mr McFadden: Do you not think it throws into some relief the discussion of borrowing, given that the plans have moved to that extent? £200 billion is a lot of money.
Mr Osborne: I would note that the Institute for Fiscal Studies have analysed the alternative proposal, which was Alistair Darling’s plan, and said that would add a further £200 billion to any borrowing that we had undertaken. So I think you have to take into account the fact that between 2010 and now, every country has seen its growth forecast downgraded; every country has seen borrowing forecasts downgraded, because every country has been affected by the same international environment. I think it is also fair to say that in the United Kingdom, we face this additional challenge of the recovery from a very, very deep and destructive banking crisis.
Q299 Mr McFadden: There may be many reasons, but my central point is you do not dispute that you are borrowing in the order of £200 billion more in these plans than you said would be the case after the election?
Mr Osborne: I said I would write to you.
Q300 Mr Mudie: Mr Bowler, why can he not answer? He is the Director of Budgets. He must know that figure. If he does not, I think you should look for another Director of Budgets.
James Bowler: I don’t have the cumulative figure to hand.
Mr Mudie: But you should know it.
James Bowler: But the Budget 2010 figures will show borrowing throughout the period. The Autumn Statement 2012 will show them. I have the fact that we were forecasting debt at 70% this year in the Budget 2010, and we are now forecasting at 75% of GDP in the Autumn Statement. That is primarily because of a difference in the OBR’s growth forecast.
Q301 Mr McFadden: Let me give you another one, Chancellor, and see if you can do better on this. Turning to your welfare measures in the Autumn Statement, and this 1% cap on the uprating of working age benefits, the Resolution Foundation believe that around 60% of the real-terms cut associated with this will fall on working households. Would you accept that figure?
Mr Osborne: First of all, I accept that working households in receipt of benefits-and indeed, I have said this in the House early this week-will be affected by the decision to uprate tax credits at 1%, and indeed, we took a decision last year to freeze the working tax credit, and the Labour Government for many years froze the family element of the tax credits. If you look at 2015-16 and you look at the £3.7 billion of welfare savings, £1.4 billion comes from the tax credits upraising and around 70% of tax credit recipients are in work. But of course you cannot look at that measure in isolation because it sits alongside a big increase in the personal allowance, which means that on average, working families are £125 better off. So when you make these decisions, you take them in the round. I was aware of course that the personal allowance would help working families, by definition.
Q302 Mr McFadden: I am interested in your justification for this. You said in your statement, "Fairness is about being fair to the person who leaves home every morning to go out to work and sees their neighbour still asleep and the blinds or curtains drawn," or whatever it is and so on. You also said, "Over the last five years, those on out-of-work benefits have seen their incomes rise twice as fast as those in work." Given that we now know that a large proportion of the cuts you have announced will fall on working households, is it not the case that these households are suffering from a double whammy of the stagnating wages-which the whole economy is suffering from-and the real-terms tax credit cuts. When you say they are better off, the same foundation, the Resolution Foundation, believes that those in the bottom decile who are earning, I think, £12,000 a year or so, will be losing £3 a week. So they don’t accept that your personal allowances outweigh the welfare cuts.
Mr Osborne: The first thing I would say is that all working people, and indeed, out-of-work people, are suffering from the aftershocks of a very deep recession and banking crisis and the fact that we were running a double-digit deficit. We have had to take very difficult decisions on VAT and lots of other measures, including benefits, that are not decisions you would want to take in better times.
Mr McFadden: I am trying to probe the effect of these.
Mr Osborne: So you have to make choices about what you do. We have had to increases taxes, so I increased VAT, completely opposed by the Opposition. I have also taken the decision to take child benefit away from the top 10% of families; opposed by the Opposition. That is not something they wanted to see happen. Now I have taken the decision to underrate out-of-work benefits and tax credits, again to try and get the budget deficit down and reduce the structural deficit and make sure that we have a state that the country can afford and that is fair to the person who is working and paying their taxes for that. But you take these measures in the round, and to help that working person, I have also increased the personal allowance that means that they, I say, are on average are £125 better off.
Q303 Mr McFadden: Are you then disputing the Resolution Foundation’s accusation that taking into account both the personal allowances and the other measures in the Autumn Statement such as the welfare measures, the effect is for the bottom decile they lose £152 a year for the second-bottom decile, £146 a year, and for the third £136 a year? In other words, for lower income groups, even after the effect of the personal allowance, and many of them in work, the effect of your proposals is to bear down heavily on those incomes.
Mr Osborne: I do not have the Resolution Foundation numbers in front of me, but I would ask the question of them, have they included the total increase in the personal allowance next April, which is obviously going up very significantly, the largest increase in our history; have they taken into account the impact of the Universal Credit, which is going to provide more generous support for the lowest-income working families? I suspect they have done neither of those things, so they have made a selective calculation, but I would point out that overall, if you take the Autumn Statement measures, working households are, on average, £125 better off and average households in every decile are better off next year. These are difficult decisions. I am not claiming that in better times you would want to underrate welfare benefits, but when faced with a still very large budget deficit, when, as I say, you are doing it alongside things like VAT rises I think it is a perfectly fair way to try and save money and to make sure we have a state that we can afford. For those who do not support this they have to explain why it is fair to taxpayers that out-of-work benefits for example have gone up by 20% and earnings have gone up by 10%, but more to the point they have to explain what else they would do. If you do not do this then you would have to confront deep cuts in education and in the National Health Service. If someone wants to get up and argue that is the right thing to do, that is the better balance, fine, then I can engage in that argument, but it is quite difficult to engage in an argument with people who literally oppose every single measure to deal with the deficit, who even oppose taking Child Benefit away from the top 10% of families.
I am happy to have the debate with someone who is prepared to engage in the tough choices that anyone doing my job would have to take at a time like this.
Q304 Mr McFadden: I am trying to explore the effect of your decisions. The time when you can debate what other decisions might be will certainly come.
Mr Osborne: It is here now. I agree with you about that.
Mr McFadden: We had the Institute for Fiscal Studies give us evidence yesterday and we asked them for the cumulative effect of the measures announced in all your Budgets and Autumn Statements since the election on a one-earner family with two children. They said it was over £3,000 a year reduction in that family’s income. Do you accept that figure?
Mr Osborne: I certainly accept that the consolidation has borne on every quintile of society. I certainly accept that the whole population has had to contribute to dealing with the deficit. I did not see their evidence to you, but the IFS presentation last week was very striking. Chart after chart after chart showed that the richest were paying the most, not just in cash terms but as a proportion of their income. I thought the IFS nailed the argument that somehow the better off have got away with it, because the better off were paying more-more as a percentage of their income, more in cash as well. Those charts from the IFS I thought were pretty compelling.
Chair: I think we will leave it there.
Q305 Mark Garnier: Can I go back to Government debt? In response to Mr McFadden’s question to you, I think we broadly speaking have accepted that we had run up debt in the region of around £200 billion, which is more than we were expecting, but can you just let us know how much we have increased Government debt since 2010, since you became Chancellor?
Mr Osborne: The cumulative increase?
Mark Garnier: Yes, absolutely.
Mr Osborne: It has gone from 69.8% to 74.7%.
Mark Garnier: But in cash terms, do you know?
Mr Osborne: I will give you the exact cash number.
Q306 Mark Garnier: The point I am trying to make is how much would it be if you had not done anything at all?
Mr Osborne: If we were continuing to run on an 11% budget deficit it would obviously be significantly higher, and I am happy to give you those numbers as well. It has also been the case that we have saved £32 billion, which is about the size of the Defence budget, on lower interest payments than were forecast in 2010. So that is also a significant saving for the British state and one of the things that we have to wrestle with is that one of our largest items of Government spending now is debt interest.
Q307 Mark Garnier: Which is pretty horrific. Can I ask a similar question about unemployment as well, because I believe unemployment in the public sector has gone up by somewhere in the region of 270,000 job losses but in the private sector employment has gone up by 1.2 million? Again, if you had done nothing in 2010 since gaining power, have you any idea what the employment figures would have been relative to each other?
Mr Osborne: I am not sure I can answer the counter-factual. I think job creation in the private sector has been aided by confidence that there is a stable fiscal policy and a stable macro policy underpinning the British economy and that has been very supportive.
Frankly, I think anyone who had been in Government during this period would have seen the numbers of people working in the public sector fall, because the wage bill was unaffordably high, but in general wage restraint both in the public sector and the private sector has helped keep the job losses in the public sector lower than they otherwise would have been. In the private sector it has enabled companies to be able to go out and hire more than we were forecasting. We have talked a lot about forecasts being worse than we have previously produced. The unemployment forecasts are of course significantly better in many respects and this year we have considerably exceeded the OBR forecasts for the fall in unemployment and the rise in employment, and of course yesterday we had very welcome news of a big fall in unemployment, a big rise in employment and a record fall in youth unemployment.
Q308 Mark Garnier: To what extent do you think it is your policies? And the other question, to what extent were you surprised by the fact that we have record employment and that we are as a country employing four people in the private sector to every one person who works in the public sector?
Mr Osborne: I am not surprised by the fact that if you can make your economy more competitive then businesses will become more competitive and be able to employ more people. There is no doubt that the OBR who do the forecasts have been surprised by the employment and unemployment forecasts and they provide an explanation of why that might be the case and there is this so-called puzzle of the unemployment numbers and the GDP numbers. I would just say that out there of course firms have had a difficult time but many firms remain in good shape. They are hiring people and keeping people on, and I think that is very welcome. It comes back to the discussion we were having earlier and I think firms are well-poised to take advantage of any global recovery.
Q309 Mark Garnier: In your statement you said that the OBR projects that the share of national income spent by the state will fall from almost 48% of GDP in 2009-10 to 39.5% by 2017-18. Is that coincidental or is that your long-term intention, to try and get public expenditure below 40% of GDP?
Mr Osborne: I have never myself thought it was wise to have a GDP target for a percentage of national income spent by the state. There are plenty of people in politics who think there should be, so I do not mean any disrespect to them. I just think that it is better to think about the state you want and the state you are prepared to pay for, but you cannot help noticing that 39.5% or thereabouts has been the long-run average for the British state in recent decades. It was only when we started to diverge from that in the middle part of the last decade that some of the serious problems in our public finances emerged. As the IMF recently analysed, we went into the financial crisis with the largest structural deficit in the world, and that is a significant burden to carry into a crisis, let alone out of one.
Q310 Mark Garnier: Would it be your intention, going beyond 2017-18, should you continue to be the Chancellor of the Exchequer all those years out, to continue with having the state costing less than 40% of GDP? Again I appreciate your earlier point.
Mr Osborne: That is not the way around I would look at it. It is clearly the case that when we were spending close to 50% of national income, which is what we were doing when I came to office, that is totally unsustainable, and 40% or just shy of 40% is the long-run average. Broadly speaking, Governments have got themselves into trouble when they spend considerably less than that and they have got themselves into trouble when they spend considerably more than that. I would basically take the view that you should work out what you want and then see if you can afford that, and build it from the bottom up, rather than the top down, in that sense.
Q311 Mark Garnier: One final question, if I may, Chairman, on a small technicality of your statement. You chose not to cut spending further in order to meet your supplementary target. Does this suggest meeting the supplementary target was not as important as you originally claimed?
Mr Osborne: Of course I very much wanted to hit the target but then faced with a choice of taking £17 billion of cuts in a single year in order to hit the target and give myself the satisfaction of saying, "I have hit the target" compared to the impact that would have on the economy and the unnecessary pursuit of a static target because of a cyclical situation, faced with that choice I chose not to hit the target, aware that people would focus on that. Broadly speaking the reaction has been a very positive one and the debt target was put in place in 2010 alongside the fiscal mandate. The mandate is being met. The mandate is the cyclical target. The debt target was put in place to assure people that we were determined to deal with our deficit, which was something that I had to prove early on in the Government. We were a hung Parliament for the first time in our modern history. We had to prove that a Coalition Government could take difficult decisions. I think it helped, but then faced with this choice--hit the target and potentially damage the economy in doing so, or miss the target and help the economy-I decided to help the economy.
Q312 Mr Mudie: Can I just give you some debt figures from your Budget book, as you and your Budget Director don’t seem to have them to hand? Public sector net debt 2010-11 £905 billion, following year £1.39 trillion, the following year £1.159 trillion and 2013-14 £1.272 trillion. Did you get that, Mr Bowler?
James Bowler: Thank you very much.
Mr Mudie: Then if I just give you some figures from Martin Wolf, an impeccable source-Mr McFadden is quite right. The latest forecast increased to £539 billion away from the original estimate of £322 billion, which Martin Wolf makes £217 billion extra borrowing, as he and other commentators say, with no sign of movement to our objectives after two years. I am sure you knew those figures. Can I just ask you-
Mr Osborne: Can I just say that I don’t accept there has been no sign of-
Mr Mudie: Are you asking the questions now?
Mr Osborne: I don’t accept there has been so sign of movement. The deficit has come down by 25%, we have cut the structural deficit more than any G7 country, and we have very low borrowing rates. So I would argue that that is significant progress.
Q313 Mr Mudie: The point is that after two and a half years we still have another five years to get to the target we should get to three years from now, not five years. Austerity has been extended at a cost of £270 billion.
Just on debt and just technically, and gently, you have accepted this afternoon you have missed a target, so the second part of the fiscal mandate is lost. You said it this afternoon.
Mr Osborne: The target-
Mr Mudie: Don’t backtrack.
Mr Osborne: No, I am not backtracking. We have missed the target, and I was very open about that in the speech and today.
Q314 Mr Mudie: Okay. This is all about the credibility of your targets and yourself as Chancellor. The basis for a fiscal mandate is, this is how you are going to be judged. The mistake you made, it seems, with debt, is you did not make it a roll forward, a five-year roll forward, and so you have to admit now that you are going to miss the target in the year 2015-16. So you are missing that, but you also are going to miss the deficit target, but because of a roll forward you are able to say, "Well, I still have my-" but how do you, genuinely, think that gives you credibility? You came to the country in 2010, you said the deficit had to be dealt with quickly, you would deal with it in five years-and I even have from the Daily Telegraph, front page, 6 December, your figures-and where are you now?
Mr Osborne: What does the headline say?
Mr Mudie: You don’t want to pay any attention to that, George. Let me ask the questions. You said it has to be done in five years. It has not been done in five years, because in five years you are well behind, and that is going on. That is the same as the debt. The deficit is the same as the debt. Why do we accept the debt target we missed and the fiscal mandate is lost on that part and we are missing it on the other, but we amazingly say, "Oh well, five years from now"? If you borrowed money from a bank, £10,000 payable over five years, and two years in you said to the bank, "I’m not going to pay you off in three years’ time, because we agreed five years, so it is five years from now," how long do you think you would stay in the bank manager’s office?
Mr Osborne: A bank in that situation would take a look at the business that said, "It’s going to take us longer," and say, "This is a sound business with good prospects and a good future, and we will go on lending it money." That is not a hypothetical situation for the UK economy, because every single week we are out there borrowing money to fund our public services and if for a moment the international community, the bank in your metaphor, decided, "You know what? The UK is not a going concern," we would pretty quickly find out about it. So there are plenty of banks that are accepting that companies are taking longer to pay off their debts. As I said in my statement it is taking longer, but when you look at the progress that we are making, the reduction in the deficit, the increase in jobs in our economy, the fact we are becoming more competitive, the fact that we are rebalancing our economy so that we are starting to export as we should have done many years ago to the big new markets in China, India, Indonesia and Brazil, the fact we are doing all those things-is it difficult? Yes, it is, but is it also absolutely necessary? Yes, it is, as well.
Q315 Mr Mudie: Those sound good soundbites, but out there the pain is growing, and that is the point. We were discussing automatic stabilisers. Your response to Mr Thurso and Mr McFadden on automatic stabilisers was, "Well, it was this business of the 1% on benefits. We are taking that 1% and we are transferring it over to capital spending." Well, the whole point, the cry for capital spending as a stimulus, is additional spending. Instead, you are doing the right thing maybe in too small a matter by putting £5 billion into construction and infrastructure, but you are taking it from people who need to spend it, want to spend it, and now cannot spend it. The two things balance themselves out.
Mr Osborne: I would say many western economies face a similar challenge and many western economies are advised to try and switch spending from current spending to capital spending, to try and invest in the economic infrastructure of the country. That is what we have sought to do and we are investing more as a percentage of our national income in this Parliament than we did over the average of the whole Labour period before us. We are doing that in a way that remains fiscally credible because we are not, as I say, undertaking a discretionary stimulus.
The other advantage of capital spending is that it is temporary, it is a one-off, it can be turned off, and current spending is more difficult, as we have all seen.
Q316 Mr Mudie: I have another matter to raise with you. Martin Wolf for example would ask you to consider temporary fiscal expansion on a major scale which was clearly accepted by the market to deal with problems, get people into work, get the economy stimulated, and that is what Mr McFadden was speaking about. You have spent and are spending £270 billion of additional borrowing not to put people into work, just because you are trying austerity rather than growth. That is our argument.
Mr Osborne: I don’t accept that.
Mr Mudie: I thought you wanted an economic argument away from the five points?
Mr Osborne: I am happy to have the economic argument. I would say that by not chasing the debt target we have allowed the automatic stabilisers to operate and that is a sensible economic decision, in my view. That supports the economy in that sense, during a cyclical downturn. One of the things that we are doing is getting the structural deficit down. We are getting the underlying deficit that does not go away when the economy recovers.
Q317 Mr Mudie: All right. Can I just raise a more positive matter with you? You have announced in the budget the Business Bank starting from the spring. One immediate thing I would raise because we are in the Autumn Statement format is that I am disappointed it is only £50 billion in the first year in the Budget, because if it is going to help small businesses who are crying out for money £50 billion will go nowhere. That is the first thing that you might mull over.
The second thing is more important. I am interested if the Cabinet have had any real discussion about this, because the Business Secretary announced it a couple of days ago, and it appears to be that it is a bank where you borrow through the internet and you are put on to peer-to-peer lenders. In all the discussions we have had on the banking industry and retail banking we have all wanted face-to-face banking back for small and medium-sized businesses so that the bank manager knows his customers through bad and good. He knows them because he has met them, he knows the area, and so on. That is something the banks have moved away from.
If we are going to introduce a bank just for that, is there not an argument for, have you not discussed, and will you consider discussing, taking some of the RBS’s divestment-not a great number, 300 or so, so a very small number-and starting regional business banks, with a few local ones where the region is too big, so that we can start having small businesses being able to go in and speak to a banker with access to resources? I don’t even mind suggesting that, at the end of the day, as soon as it is sensible financially, you float them off. I don’t want to see us as politicians running a bank. Is there any sense in that, and is there any suggestion that it might be considered?
Chair: If you can do a somewhat shorter reply than the question, we would all be grateful.
Mr Mudie: Just say yes.
Mr Osborne: I will say yes in this respect, which is that I think you are right that one of the things that went wrong was the loss of face-to-face banking, for small businesses and indeed also for individuals. To be fair to the banks, they are trying to recreate that.
When it comes to the Business Bank, we are not proposing to create a rival on the High Street to the other banks. Frankly, I do not think we would be allowed to anyway under state aid law and so on. What we are trying to do is reach those companies who the banking system is not supporting at the moment, to underpin lending to small and medium-sized businesses and to help, for example, restart the securitisation market. So we are putting £1 billion of public money into that. We are also bringing together the existing schemes, which can be a bit of an alphabet soup for businesses, and we are trying to help the non-bank channels of lending. Indeed, it sits alongside something called the Business Finance Partnership which we have also undertaken in this area. So it is a credit intervention, it is designed to help those small and medium sized businesses. It won’t have a branch on every High Street in the way that you describe.
Mr Mudie: I did not ask for that.
Mr Osborne: I think it will help and support lending to small and medium-sized businesses. The trickiest area of economic policymaking in the aftermath of the financial crisis has been trying to return the banking system to health and get credit channels cleared and get lending going again. That has undoubtedly been the most difficult thing that both myself and my predecessor have confronted. I think we are making progress. I have talked about the Funding for Lending scheme but we still have further to go.
Q318 Chair: As you know, the Banking Commission is looking at these issues at the moment and half of its membership is around the table, the Commons half, at the moment. What is very quickly apparent is that of course even if the Business Bank is successful on its own terms and it is really an investment bank anyway, as you have obliquely pointed out, it is only going to make a very small contribution compared to what is required to sort this out. You would agree with that, would you not?
Mr Osborne: It sits alongside. I don’t think it can be taken in isolation. The Funding for Lending scheme is an £80 billion scheme, but I think if we did not have the Business Bank or some intervention like it there are medium-sized businesses that would fall through the net. Looking for the big bang solution, I don’t think it exists. It is a series of interventions, to clean up the banks that we have the shareholdings in and to return as quickly as possible some of those banks to the private sector, as we have done with the good part of Northern Rock, and to have these interventions through the non-bank channels for small and medium-sized businesses.
Q319 Chair: Just to be clear, under the definition which you have just said does not exist, the big bang solution, you would class, for example, the big bang of breaking up the existing part of your wholly-owned state banks as a big bang solution, would you not? I just wanted to be clear as to whether they are in any way on the agenda?
Mr Osborne: I don’t think even if you broke up RBS I would describe that as the only solution.
Q320 Chair: Is that a big bang solution?
Mr Osborne: I think the problem with breaking up RBS that you have to confront, first of all RBS has shrunk, dramatically, its weak assets. Secondly, it is now shrinking its investment bank and making sure it is a less risky proposition. So the question you then have is, okay, do you want to break it up still further into several component parts? That would be a very complex operation. As you have seen with the sale of RBS branches, which Santander are not buying, it is not as if there is an enormous market out there for people who want to buy bank branches at the moment. So I would just say there are lots of problems with it. Although it sounds like a good idea, in the sense of, "Let’s just break up the banks" when it comes to the practicalities of delivering it I think it makes you think twice.
Q321 Chair: So it is not on your agenda?
Mr Osborne: At the moment what we want and what the RBS management are seeking to do is to turn themselves from a universal bank with a very large investment bank into something much closer to a UK corporate bank that is supporting homeowners and businesses in the United Kingdom, and they are on track to doing that.
Chair: I could not spot whether that was yes or no.
Mr Osborne: I am glad.
Chair: Do you want to have another go?
Mr Osborne: I think if we had thought that breaking up RBS was a practical proposition then we would have done it. We have not done it.
Q322 Mr Love: Chancellor, how significant would it be for the United Kingdom if it was to lose its AAA credit rating?
Mr Osborne: It would not be a good thing, but the majority of the rating agencies have us on negative outlook. You have seen what has happened to countries like the United States and France who have lost their AAA credit rating. We have the AAA rating. I would say it is one test, alongside others, and I guess the ultimate test is what you can borrow money at.
Q323 Mr Love: There is some contrast between what you have just said about the AAA rating and what you were saying all the way through since the 2010 General Election, when this was, if I may put it, something of a virility symbol. This was a reflection of the confidence that the markets had in your economic strategy. What has changed?
Mr Osborne: As I say the UK still has its AAA rating. Other countries have had theirs downgraded. I think the question in the General Election and the question two and a half years ago was is an incoming Government going to put in place a credible fiscal policy, because at the moment the country does not have one. That was the question being asked in early 2010. I think we have that policy. That is demonstrated by the fact that the bond spreads for the UK and Spain were the same on the day that I came into office and they are very different today. So you can see what has happened to other countries and there is a real benefit in the debt interest bill, the fact that we are spending £32 billion less than we thought we were going to on debt interest.
Q324 Mr Love: Is it a credible economic strategy that the economy will shrink this year? Is the market looking at that?
Mr Osborne: I have just been to a meeting of European Finance Ministers. There was not a single Finance Minister there who is not facing a weaker economic situation than they had hoped. Many economies in Europe are contracting and some are contracting a great deal more than the United Kingdom is forecast to contract this year. Of course it is disappointing the economy is forecast to contract by minus 0.1% this year but contrast that with a recession where the economy contracted by 6% in 2008-09. That is what we are recovering from. That is the damage that was done to the British economy. As I say, of course you can point out, as you are, that the GDP numbers are not what we hoped they would be, but you can’t accept one part of the forecast and not at the same time accept the analysis that goes behind it. The OBR, totally independent of me, has said that the deterioration in the UK’s GDP forecast is more than accounted for by the deterioration in the eurozone and the impact on net trade to the eurozone. I am the first person who wishes that were not the case, but that is the independent analysis we get.
Q325 Mr Love: As Mr McFadden and Mr Mudie mentioned earlier, is the deterioration and the borrowing requirement not of a scale of economic failure that it is bound to be taken up by the credit reference agencies and the markets?
Mr Osborne: As I say, the test we have is one we have to meet every week when we go and try to sell our gilts.
Q326 Mr Love: You mentioned earlier on you missed your debt target. Is that something that the markets would be concerned about?
Mr Osborne: The markets obviously were aware of that and paid attention to what I said. Indeed, some were anticipating it in advance. But you didn’t see a reaction in the markets to that because they saw that by spelling out further measures that we were taking, including the difficult measures like welfare uprating, we were maintaining our determination to deal with our debts, that we had extended the consolidation. So in the end the question is one of credibility out there in the international investing community, which is tested, as I say, on a weekly basis in our gilt auctions.
Q327 Mr Love: Do you expect the coming downgrade to make it more expensive for the Government to borrow? There is contradictory evidence from others who have been downgraded.
Mr Osborne: I am not going to speculate about future decisions of credit rating agencies. I am going to tell you about what is currently happening out there in the investor community. I see in the current environment, with a lot of problems elsewhere in the European continent, that the UK has been something of a safe haven. We have had money flowing into the UK from some of these economies rather than flowing out of our economy as some of our neighbours have experienced.
Q328 Mr Love: As you know, we have various groups of experts come in and speak to us and they all had an opinion in relation to the economic consequences of a downgrade. They did not have a political opinion. Can I ask your opinion? Do you think it will affect the credibility of the Government and its economic strategy if there is a downgrade?
Mr Osborne: I am not going to speculate. What I am saying is my job is to maintain the credibility of the UK’s ability to go out there and borrow as cheaply as possible in international debt markets. We are currently borrowing at the lowest rate at which anyone doing my job before me has ever borrowed money. That saves us real cash for the people we all represent in this Parliament because we are not having to pay so much debt interest, both to our domestic creditors and our overseas creditors.
Q329 Mr Love: Can I come on to questions that Mr McFadden asked and try to tie you down just a little bit? This is in relation to the 1% cut over the next three years. In their evidence to us yesterday the IFS said that it was certainly a majority of those affected would be in work. As Mr McFadden said, the Resolution Foundation, who have done a great deal of work in this area, said that it would be at least 60%. Do you accept those figures? You didn’t earlier on. I am trying to clarify.
Mr Osborne: I have accepted today, as I have accepted in the past-in fact, it is not a question of accepting. I am very conscious that, of course, tax credits go to working people as well as to out-of-work people-indeed, one of them is called the Working Tax Credit-but in dealing with this debt we have to make decisions that affect all groups of society. We have done it in a way that supports those in work because we have also taken decisions to increase the personal allowance. You can’t separate the two because they were decisions taken together. In everything we have done we have made sure that those who have had the biggest impact on their incomes have been those who are among the richest in our society. I think that was very clearly demonstrated in the IFS presentation.
Q330 Mr Love: The reason I want to press you on this is that the justifications you gave in your Autumn Statement were that benefits had gone up twice as fast as wages over the last five years; that we were restraining wages in the public sector to 1% therefore it was appropriate, all of which tends to the view that who you were trying to focus this cap on was those not in work, yet the evidence seems to suggest that the majority are in work. Don’t you find that somewhat contradictory?
Mr Osborne: What I was seeking to do, and I explained it very clearly, was take a series of difficult decisions that were fairly distributed across the income distribution and that affected the rich most in order to go on dealing with our deficit and reduce the structural costs of the British state. That is what I set out to do. I also set out to support, where I could, people in work by increasing the personal allowance, by freezing fuel duty and freezing the council tax. So I have done a series of things to help working people. You have to take those in the round. But if you are really saying to me that you could deal with a 11.5% budget deficit without touching the welfare bill, which costs £200 billion, or without touching tax credits, the cost of which have doubled in the previous decade to £30 billion, and you can do all this when even decisions to take child benefit away from the richest 10% are opposed by the opposition, then I don’t think you have a credible fiscal plan. By all means come up with some alternative, explain why the defence budget should be cut more or education should be cut or the NHS should be cut or child benefit should be taken away from other groups of people, but you can’t just say, "I oppose this, I oppose that, I oppose this," and have no alternative. The real choice I am facing is one of what do you do to deal with a very large budget deficit, a structural deficit as well, one that doesn’t go away when the economy recovers.
Q331 Mr Love: It is your choices that we are investigating here, because this is a Treasury Select Committee meeting looking at the Autumn Statement not a debate on what the alternative economic policies should be. Undoubtedly that debate has to take place, and I accept that.
Let me ask one final question. In your replies to Mr McFadden you seemed to be giving the impression that quite a lot of families would be better off with a totality of those measures taken or encapsulated in the Autumn Statement. The IFS have done a great deal of work on this and they have looked at the totality of the Autumn Statement, not taking into account the budget before, not taking into account some of the changes that will occur related to the Universal Credit, and they said that for the average family with one child with one person in work they would be losing £534 a year by 2015. Do you dispute that figure? You mentioned earlier you had read the IFS submission. That was core to them giving an idea of what the impact of the Autumn Statement would be. Do you accept that?
Mr Osborne: I think it is a selective thing. It does not include the total increase in the personal allowance next April nor, as I understand it, does it include the impact of Universal Credit. What it does is it takes Universal Credit as the baseline and then takes off the baseline individual decisions we have taken on Universal Credit, for example to uprate some of the disregards by 1% as well, without taking into account the stock of the impact of Universal Credit on lower income working families.
Q332 Mr Love: Let me just press you finally. They explained to this Committee that they did not take into account any aspects of Universal Credit other than those that related to this Autumn Statement.
Mr Osborne: That is why I think it is selective, Mr Love.
Mr Love: Except that they are giving a picture of what the impact of this Autumn Statement will be, just the Autumn Statement and nothing else. Do you accept, looking at just the Autumn Statement, that what the IFS have said about £534 is an accurate view?
Mr Osborne: The average working family is £125 better off because of the measures in the Autumn Statement. I think it is very selective to take the policy decisions that affect Universal Credit without looking at Universal Credit itself, which hasn’t even come into effect.
Q333 Mr Love: We are looking at the Autumn Statement not what happened in the Budget, not what will happen with Universal Credit.
Mr Osborne: If you look at the Autumn Statement, average working families are £125 better off.
Mr Love: They would disagree with that.
Q334 John Mann: Thank you for listening, Chancellor. In your Budget I only raised four issues with you. They were petrol duty, caravan tax, pasty tax and drawdown pensions. I wanted to thank you for responding on all four over the last six months and listening to what I had to say.
Mr Osborne: I am here to serve you, Mr Mann, and maybe the Shadow Chancellor will listen to your advice as well.
Q335 John Mann: I thought we might try to build a bit of consensus here. The Chief Economist of the Bank of England last night said something I agree with. I just wanted to check that you concurred as well. He said that, "The harsh but inescapable reality is that households and families are worse off, much worse off." Would you agree that that is the situation?
Mr Osborne: I think it is an inescapable reality that families are worse off because of the financial crisis, the recession and the efforts that the entire country has to make to deal with the consequences of that.
Q336 John Mann: He was referring to the last two years, reading his speech. Would you agree that with your policies households and families are worse off, much worse off?
Mr Osborne: I publish, in a separate distribution that we as the Government do and no previous Government has done, the cumulative impact of the consolidation on the population. There is no doubt that it involves tough decisions and people have seen VAT go up and they have had to see, for example, benefits underrated, but there is no other way to reduce a structural deficit. If you have significant tax rises that you would propose as alternatives or significant spending cuts you would propose as alternatives then I am all ears. But, as I say, of course dealing with an 11.5% budget deficit, which is what I have inherited, requires all groups of the population to make a contribution.
Q337 John Mann: You are in listening mode so I will make sure you get some more of my proposals. Now is not the time to do that, but I am trying to build this consensus on where we are at. I noted in your first Budget that you very helpfully asked the OBR to project what would happen under your predecessor’s budget, and there are some interesting divergences from what the OBR has come out with this week. The most interesting is on debt where the OBR said that under the previous Government’s plans-and you in fact used the words-without further action to tackle the deficit the following would happen, that the debt to GDP ratio would rise by 2014-15 to 74.4%. But it has now gone up to 79%, has it not, so a 5% increase under your watch?
Mr Osborne: It is certainly the case that the economy has been impacted by the weak eurozone and that has led to a deterioration of growth forecasts. We have also had the oil price shock. The OBR do not model alternative economic policies but the IFS do. The IFS have looked at what would have happened to borrowing if we had stuck with what is known as the Darling plan. They assume that we would still have had a eurozone crisis, they assume we would still have had an oil price shock, that even my very talented predecessor would not have been able to stop those things. If you take into account those things and then factor in the consolidation that was put in place by my predecessor it would have added £200 billion extra on top of the numbers you read out. They did this analysis after the Budget, but I am sure they have done that this time.
Q338 John Mann: Chancellor, we don’t want to break our consensus, because you and I also agree that your setting up of the OBR was in fact a good move. So let us not use third party; let us use the OBR. On the structural deficit, the OBR said that under your predecessor’s plans it would be 2.8% of GDP, going to 2014-2015, but now they are saying under your plans, with the changes you have made, that that has increased to 3.7%. Again, under your plans the structural deficit projections have worsened from what they were going to be.
Mr Osborne: The OBR have not changed their view on the fiscal multiplier, so they have not changed their view on the forecast impact of the consolidation on economic growth. The most significant change was in last year’s audit statement. They have changed their view on the impact of the financial crisis on the structural performance of the British economy. They made a change in their analysis; it was last year, not this year. This year, they think there has been a largely cyclical deterioration, brought about, as they say, and more than accounted for, by the problems in the eurozone.
Q339 John Mann: You did say then that the structural current deficit would be eliminated by 2014-2015, but that has now been pushed off. In fact, we do not have a projected year when that is going to be eliminated yet. Your years run out before that.
Mr Osborne: No. The fiscal mandate is to get to a place where we have a current cyclical budget in balance.
Q340 John Mann: But the OBR is saying that that is not happening. I am just trying to create a consensus. A good quantification, how much has the structural debt increased under your watch?
Mr Osborne: The structural deficit has fallen by 3% which is faster than any other G7 economy. In the spirit of consensus, Mr Mann, you cannot pretend that over the last two years, the European continent, the western world and indeed the rest of the world has not been impacted by some very significant shocks, including the eurozone crisis, which is what I was at a meeting about last night. These things have happened to the British economy. The question is, was the British economy better placed to deal with it because of the credibility of the fiscal plans we put in place, the structural reforms we are delivering. My answer to that would of course be yes.
Q341 John Mann: I know, but the OBR has these projections on the previous plans, so we can compare with your plans.
Mr Osborne: But they don’t take those plans and then model those plans for what would have happened to those plans if you had had the impact on the eurozone, the fall in net trade and the like. You are comparing the world as everyone thought it might be in 2010 to the world as we know it to be in 2012, and the very significant external impacts and, to be fair to the OBR, you also have to take into account the assessment they made last year of the impact of the financial crisis.
Q342 John Mann: I am sure you would have been just as generous if the OBR had been projecting in 2008 and 2009.
Mr Osborne: I have not gone around trumpeting the fact that the unemployment numbers-I have mentioned it once here-I have not made it a central piece of my claims that we have done much better on employment than the OBR forecast. The OBR forecasts were wrong in that respect. I try and take a measured approach to all these things.
Q343 John Mann: But these are the current forecasts. You don’t disagree with current OBR forecasts?
Mr Osborne: I have accepted the OBR forecasts.
Q344 John Mann: So we know what their projections are. Just to be clear, you are saying that there has been, under your definition of structural deficit, no increase in the structural deficit under your years as Chancellor? That is what you are saying.
Mr Osborne: The structural deficit has fallen. The overall deficit has fallen by 25%.
John Mann: So there has been no increase?
Mr Osborne: The structural deficit has fallen by 3%.
John Mann: You are saying that it has fallen?
Mr Osborne: Yes.
Q345 John Mann: I think we are perhaps going to need to look, at a further stage, at your definition of structural deficit and what that means. You are not saying, are you, that the debt to GDP ratio has improved under your watch?
Mr Osborne: No, the debt to GDP ratio has gone up, but that is because the deficit is the amount you add to the debt every year, and if you are borrowing 11%, you are adding a lot to your debt. If you are borrowing 8% of your national income, you are borrowing a bit less, so you are adding to the debt a bit less. The way to get the debt to GDP ratio falling is to get your deficit down.
Q346 John Mann: And to give The Financial Times’ deficit, that is the term that should be used to calculate the ability to pay off the structural deficit.
Let me finish with one other question. You are the first Chancellor since Neville Chamberlain to see food banks set up across the country, so I wondered what your festive message is to those who will be forced to queue up at food banks this Christmas?
Mr Osborne: I would say to the entire country that this is a difficult economic situation, but we are dealing with our problems, we are making progress. The deficit is down. As we saw yesterday, unemployment has fallen, jobs are being created. It is, as I said, a hard road, but it leads to a better future.
Q347 Mr Ruffley: Chancellor, the cyclically adjusted current budget needs to balance by 2017-2018. How much do you have to take out of the DWP budget between now and then to achieve that objective, in cash terms?
Mr Osborne: We have cut welfare bills by £18 billion a year, and then in the Autumn Statement we are doing about £3.5 billion a year on top of that.
Q348 Mr Ruffley: In relation to those numbers, how many have been announced or pre-announced in the Autumn Statement, on DWP?
Mr Osborne: The major set of measures were taken in 2010-2011. For example, moving the uprating of benefits from RPI to CPI, and some of the reforms we have made to some of the benefits. But further steps were taken in this Autumn Statement, including the underrating of benefits below CPI for the benefits we have been talking about today.
Q349 Mr Ruffley: Do you anticipate having to take any more steps, further policy changes, in other words, to the welfare system?
Mr Osborne: As a result of the Autumn Statement, we have a spending envelope for 2015-2016, which is the last year of this Parliament, and we have said that we now look to divvy that up between the departments, and we need a spending round to do that, and we are looking for around £10 billion from the departments. In the years after that, whether consolidation continues in a new Parliament with a new Government, in the sense that, certainly, I am clear I would like a majority Conservative Government, that in that situation we have further decisions to take, and this will be true of anyone seeking to be the Government in the next Parliament. Those decisions will involve a combination of spending cuts in terms of departments, or welfare cut or, if people want to propose them, tax rises. Those are the questions that are going to be facing anyone seeking office at the time of the next general election.
Q350 Mr Ruffley: Can you tell us a bit about the spending review that you are going to be announcing some time next year?
Mr Osborne: We have to take, again, a series of difficult decisions. We are going to maintain the protections we have put in place, for example, with health spending and school spending and our overseas aid.
Q351 Mr Ruffley: Which is about, what, 47% of general Government expenditure?
Mr Osborne: It is absolutely about half of the general Government expenditure.
Mr Ruffley: I just want to go back to-
Mr Osborne: Well, departmental expenditure.
Q352 Mr Ruffley: Yes. Just going back to welfare, it was pretty heavily trailed that two things were certainly being looked at. One was restricting housing benefits to the under 25s, and secondly, even more radically, that for new claimants of Child Benefit there might be a restriction to receiving Child Benefit in relation to just the first two children, and not the third and subsequent children. Those were the kind of radical, tough decisions some of your friends from the economic right of the political spectrum they have been urging you to take. Can we take it that you have dropped those two ideas as a source of savings between now and 2017-2018?
Mr Osborne: There is a real question for all of us about housing benefit provision for the under 25s, and why it is the case that housing benefit will provide you with accommodation, when people not in receipt of housing benefit are probably unable to afford accommodation and have to live with their parents, or many have to. There is also a good debate to be had about why it is the case that many working families, before they have an extra child-it is not the only reason, by the way, they have children-but before they have an extra child, have to weigh up the economic cost of having an extra child, whereas, in our current welfare system, you get more money, or are financially rewarded, in that sense, for having an extra child. I think these are legitimate debates to have, and the Prime Minister has raised them, as have I. But obviously, they are not measures that we have announced in the Autumn Statement.
Q353 Mr Ruffley: But we cannot deduce anything from their nonappearance in the Autumn Statement? We cannot deduce that you have gone off those ideas?
Mr Osborne: I think they are worthy of debate and investigation. All of us, again, in this Parliament and those aspiring to election to the next Parliament, are going to have to answer the question, what are you going to do to make sure we have a state that this country can afford. You can propose tax rises that will probably affect the broader scope of the population. Then there is temptation to think you can just do something on the very rich, but frankly, we have increased taxes on the very rich and they are paying more and currently, the top 1% provide 25% of our income tax revenue. We are all going to have to face questions of where we get the savings from.
Q354 Mr Ruffley: I quite understand, Chancellor, and you have explained that well. I just want to be clear. Those two particularly radical policies, we could expect to see them in the spending review announced next year? You have not ruled them out?
Mr Osborne: They are questions that I raised at the Conservative Party conference and the Prime Minister raised in a speech. They are not things that feature in the Autumn Statement.
Mr Ruffley: No, indeed. That is why I asked about it.
Mr Osborne: The default assumption of the spending review is that the money will come from the departments. It will not come from tax rises or additional welfare savings.
Q355 Mr Ruffley: On that point you have proposed the 80-20 split and that is very clearly your view as between spending caps and tax increases making the contribution to the fiscal consolidation. The Institute for Fiscal Studies estimates that under current plans, in other words, after the Autumn Statement, they reckon that the ratio by 2017-2018 will be 85-15 rather than 80-20. Does that imply you might raise taxes to bring the ratio in line with your initial thought, that it should be 80-20?
Mr Osborne: 80-20 is not an exact science; it is a rule of thumb I used in 2010, and it applies today. You have to assess these things at the time, and if you think a tax rise of £7 billion or anything else is less damaging to the economy than a £7 billion saving in welfare or in public expenditure, then I guess you would go with the tax rise. But I do not think you should let the rule of thumb drive that decision. I think you should make that decision on the merits of the policies before you.
Q356 Mr Ruffley: It is not a hard and fast ratio that you are proposing to be bound by. There is no reason you should. But you are saying there is flexibility around that. Could I ask finally, two points? First of all, going back to some speculation about a mansion tax, or let us be more specific, introducing a further band or bands-extra bands-for properties over £2 million, or some people put it even lower than £2 million, might be a new threshold. Could you say to us why you seem to have rejected that option? Is it because you think it might trigger a wholesale council tax revaluation, or was it cost, or was it the length of time it might take to get any kind of new banding system in place?
Mr Osborne: On council tax bands, as I said to the House of Commons, I have yet to see any plan that this could be done without a revaluation of a significant number of properties. With the mansion tax, that would require a wholly different and new tax regime, because it is a national tax. As far as I understand, those who proposed it have not advocated that the money goes to the local authority. It comes to the central government, so that would require a completely different and new tax regime.
Q357 Mr Ruffley: Do you think a council tax revaluation is overdue, because it could raise a lot of additional revenue, could it not?
Mr Osborne: I would say that a number of Chancellors and Governments before me have attempted general revaluations, and have usually come to regret it.
Q358 Mr Ruffley: My final question is on infrastructure. There has been some criticism that perhaps in the last two years since the announcement of the national infrastructure plan, that maybe the wheels of Whitehall grind exceedingly slowly when it comes to getting big infrastructure projects underway. Do you think that criticism is unfair?
Mr Osborne: It is fair to say that it is frustrating how long it takes to get some roads built. The plan did not say everything would start construction in 2011. Some of it was due to start construction in 2013 or 2014. It was a multi-year plan. But there is no doubt that I have found it frustrating that it takes a very long time to get planning permission and build a road. I have two roads in my own constituency that have been funded, and I am pressing for them to get the construction underway. The planning regime takes too long. I am trying to accelerate the time it takes, so that people can make their legitimate objections but they can do so without it taking years. The Prime Minister announced at the CPI conference plans to speed up the construction of roads so that we can overcome some of these obstacles.
Q359 Mr Ruffley: Do you think there is any improvement you can make in the machinery of government, having a dedicated and very senior infrastructure minister reporting directly to you? Or do you think that is just a sideshow?
Mr Osborne: I am generally quite sceptical of big changes in the machinery of government, because I think they create a lot of heat and not very much light, but we are, within the existing machinery of government, hiring, if that is the right word, or he has agreed to serve as Her Majesty’s Minister, Paul Deighton, who was the man who delivered the Olympic games, the chief executive of LOCOG. He is starting a Treasury Minister at the beginning of the new year, and he is going to have an explicit focus on the delivery of infrastructure projects, which of course the Treasury has a responsibility for. He will be doing that across Whitehall, and he has proven experience of doing it, not just in the private sector, but with LOCOG in quite a complicated interaction between the private sector and the public sector.
Chair: We are very grateful for your evidence this afternoon, Chancellor, not least in view of the fact that you have come straight from Brussels and an all-night, difficult negotiation. Thank you very much for coming to see us. It has been very helpful.
Mr Osborne: Thank you very much.