UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 575-i

house of commons

oral evidence

taken before the

Treasury Committee

Spending Round 2013

Tuesday 9 July 2013

Carl Emmerson and Gemma Tetlow

John Cridland CBE, Nicola Smith and Professor Douglas McWilliams

RT HON Danny Alexander MP and Sharon White

Evidence heard in Public Questions 1 - 193

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 9 July 2013

Members present:

Mr Andrew Tyrie (Chair)

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andy Love

Mr Pat McFadden

John Mann

Mr George Mudie

Jesse Norman

Teresa Pearce

Mr David Ruffley

John Thurso

________________

Examination of Witnesses

Witnesses: Carl Emmerson, Deputy Director, Institute for Fiscal Studies, and Gemma Tetlow, Programme Director, Pensions, Savings and Public Finances, Institute for Fiscal Studies, gave evidence.

Q1 Chair: Thank you very much, both of you, for coming in this morning and kicking off our examination of public expenditure control in the wake of the announcement of the review. Can I begin by asking you, Mr Emmerson, how long is this austerity going to last?

Carl Emmerson: The Chancellor’s plan, based on the OBR’s forecasts, is that he will get the deficit down to the level we are comfortable with in 2017-18, so that plan is that austerity will continue until March 2018. That is a central estimate, so there is a 50% chance that it will be over before then and a 50% chance it will take longer than that, based on the OBR’s projections.

Q2 Chair: Does the IFS think that is the end of the matter?

Carl Emmerson: Beyond that, there are a number of challenges to the public finances. We know that we have an ageing population, which is putting pressures on the budgets of the NHS and social care and pensions. We know that we have pressures on North Sea oil revenues. As production in the North Sea declines, those revenues will gradually fade away. We know that revenues from fuel duties and vehicle excise duty will decline as people increasingly drive cleaner and cleaner vehicles. There are a whole load of challenges that face the public finances, quite possibly of a similar scale to what we have been dealing with over the last few years, but we have a much longer time horizon over which we can adjust. We will have to make decisions over taxation and spending to deal with the ageing population and to deal with the revenues that are likely to fade away.

Q3 Chair: Having been through a phase of great optimism about the sustainability of revenue, revenue has now collapsed and we are in a phase of saying, "We won’t be able to fund very much because the tax won’t come in".

Carl Emmerson: The current crisis for the economy has turned out smaller than we expected, revenues have disappeared with that collapse in the economy, and that is the problem we are dealing with at the moment. Even if the financial crisis and recession had not happened, we would still have had the longer-term challenges of an ageing population and what happens to fuel duty revenues, vehicle excise duty revenues and so on.

Q4 Chair: Also the overhang of a structural deficit that you have analysed on many occasions.

Carl Emmerson: And the deficit that we will get back to appropriate levels around 2017-18. Of course, the stock of public sector debt will still be much higher than it was pre-crisis, so Governments in the future will need to think about what level of debt they are comfortable with and how quickly they want to get debt back to that level. Clearly, one thing we have learned in recent years is that one advantage of having low debt is that you can increase it a lot if you need to when a crisis comes along, so we will need-

Q5 Chair: The IFS did publish an estimate of what they thought the underlying deficit was prior to the crash, but I can’t remember what the figure was. Can you remind me?

Carl Emmerson: Before the crash happened, we thought that there was a problem in the public finances of the magnitude of about 1% of GDP, about £15 billion. That was a forecast based on, "If the Treasury is right about the path of the economy, what do we think will happen to tax revenues?" We were projecting that there was a problem, but clearly nowhere near as large as the problem that we are now dealing with.

Q6 Chair: Sorry, that was my fault for not being precise in the question. Retrospectively you re-examined the judgment that you were making in 2007-08, and I am asking you what that retrospective judgment was.

Carl Emmerson: With the benefit of hindsight, we know that the crisis and associated recession have done damage to the public finances.

Q7 Chair: No, I am asking you what the size of the structural deficit was prior to the crash, with the benefit of the information you know now, not what size it is after the crisis.

Carl Emmerson: The problem is, if you look just at data up to 2007-08, it is less clear that there was a huge problem in the public finances. Clearly, as soon as you look at data beyond that you see there was a huge problem worth about 9% of national income, and therefore if we had a time machine and we could go back to the early 2000s, we would want to have higher taxes or lower spending sooner in order to ease the problem that we subsequently had. But if you don’t look at data beyond 2007-08, it is much harder to make the judgment, although the public finances were in a very, very bad state.

Q8 Chair: You did publish a figure for this, and I can’t remember what it is.

Gemma Tetlow: Since the crisis, the Office for Budget Responsibility has published a new estimate of where it thinks the trend level of GDP was before the crisis. On that basis, we estimated that the structural borrowing in the UK was 1% of GDP higher than the Treasury figures prior to the crisis suggested.

Q9 Chair: Giving a figure of-

Gemma Tetlow: I am afraid I can’t remember off the top of my head.

Q10 Chair: Could you let the Committee know afterwards?

Gemma Tetlow: Yes.

Chair: Neither your memory nor my memory is good enough. I have slightly more excuse, but both of us can be excused.

Q11 Mr Mudie: Paul Johnson projected that the share of the difference between taxation and cuts would be 85:15. At what point does he suggest you reach that point, 85:15? Are we at it now?

Gemma Tetlow: The plans that are currently set out suggest that by the end of the current planned fiscal tightening, which, as Carl mentioned, is 2017-18, the composition of the measures at that point will be 85% coming from spending cuts and 15% from tax increases. The 80:20 is where we will be at from the measures that are implemented up to 2014-15.

Q12 Mr Mudie: If we got to that, is there some £6 billion increase projected to get those figures right?

Gemma Tetlow: If you wanted to do the same size of fiscal tightening by 2017-18, but do it 80:20 instead of 85:15, that would mean doing £6 billion more on tax increases and £6 billion less on spending cuts.

Q13 Mr Mudie: It seems from the figures that, apart from the first flush of enthusiasm for cuts when the Government came in, the deficit has remained roughly the same, and there seems little likelihood, unless growth contributes, that they will move away from that. That means that they are pushing everything until after the election. Do you think that the ring fence can survive under those situations after the election?

Carl Emmerson: Whether you want to protect areas like health and schools from spending cuts-they are clearly big parts of what Government does-will depend in large part on how much you think austerity should come from cuts to public services versus welfare cuts or tax cuts.

Q14 Mr Mudie: Carl, I understand the sensitivity of these areas, but if you are going to deal with the deficit, I think in some of your figures your organisation projected-I think it was you, Chairman-that we would go up to, what is it, 15% cuts in the areas that are non-sensitive, that are not ring-fenced? There are fierce cuts, and there comes a point where you can’t cut any more, so if all this is being pushed after the election, is it feasible that you can deal with the budget deficit without going into the ring-fenced areas?

Carl Emmerson: If you want to do the deficit reduction largely on the spending side, as the Government plans going forward, I think it is feasible that you could protect schools and hospitals and cut back spending elsewhere. I think it is more a question of whether you would want to do that. If you were to do all of the continued squeeze on spending, do you really want all of the pain to go on public services that are not health and schools, or do you want to share the pain in some other way? Do you want to lift the ring fence and go for spending on schools or hospitals, or do you want to do more welfare cuts, to be cutting public spending in a different way, or do you want to instead go for greater reliance on tax rises? They are clearly political choices, but I think it might seem unlikely that you would want to put all the pain on not just public spending but spending on public services except for schools and hospitals, which are such a large part of what the public sector does.

Q15 Stewart Hosie: In terms of the impact of the CSR, if I have understood this correctly from the Government’s own distributional analysis, the bottom quintile has gone from losing £830 a year in 2015 at the time of the Budget to £930 a year since the CSR. Is that correct?

Carl Emmerson: The Budget document sets out how the consolidation up to 2014-15 is shared by income quintiles, and the Spending Review document does it up to 2015-16. We are moving forwards one more year, and in that year we have one more year of welfare cuts, the welfare uprating Bill and cuts to public services. I do not think it would be surprising if a lot of that were to be felt by those towards the lower end of the income distribution.

However, I do not think you can compare the numbers in the Spending Review completely with the ones in the Budget, because the Treasury has changed the methodology. I think it would be much more helpful if the Treasury had said, "Here are the figures up to 2014-15 based on our latest best methodology, and here are the figures up to 2015-16", and you could, therefore, directly compare them. They did not do that, and I think it is good that they are trying to do this analysis, but it is something that they could do a much better job of documenting what is going on.

Q16 Stewart Hosie: That might be something we will want to raise with the Chief Secretary later, but in general terms, from what the Government has provided and the assessment you have done, the poorest quintile, in the following year, is likely to be another £100 worse off as a consequence of the CSR cuts.

Carl Emmerson: At IFS we have only modelled the impact of tax changes and welfare changes. We have not looked at changes to public services, so that is not something we have tried to do. The Treasury has tried to look at public services, but it is important to remember that they have only included 60% of spending on public services in their analysis, and they have almost certainly only included a minority of the actual cuts, because they have included all the spending on health and schools, but that is not being cut. It is a very hard thing to do, but the numbers they have are not the impact of the whole Spending Round, because there is so much they have not been able to model. Again, that is something they have not really set out in their document. They do not make clear what percentage of the cuts they have included in their analysis.

Q17 Stewart Hosie: That is important, because it is the loss of benefits in kind that the lowest quintile households get that forms a large part of the impact. What would your overall assessment be, taking into consideration not just the cash cuts, benefit cuts and tax credit changes but the cuts in terms of benefit in kind? Would it be an accurate assessment to say that as a consequence of the CSR, the lowest quintile is now bearing the largest share of the burden?

Carl Emmerson: I would want to look at the consolidation as a whole. It seems to be an important bit of context. This Government has chosen to do tax rises upfront. They are naturally something that affects those further up the income distribution, and then over time the welfare cuts kick in a bit more. I think it is a bit unfair just to look at the change in 2015-16, given that the up-front stuff they did was much more likely to be paid for by the rich. I would say, according to the Treasury’s analysis, the richest fifth has been hardest hit, but the next hardest hit is the poorest fifth.

Q18 Stewart Hosie: I think in general terms that is right, but is that the case as a consequence of the CSR decisions only?

Carl Emmerson: I think it would be rather odd to look at the CSR on its own in isolation from the whole consolidation package. It would seem that the Chancellor, whoever is in government, would want to take into account the impact of all of the decisions they are taking to get the deficit down.

Q19 Mr McFadden: The Government has failed to secure any meaningful growth in the last few years through this strategy, and the Spending Review was in two parts. We had the cuts announced on the Wednesday by the Chancellor, and then the statement on infrastructure by the Chief Secretary. I would like to ask you about that. The Government has made a great deal of lots of spending on roads, bridges, rail and so on, but the table on page 11 of the report issued alongside the spending plan shows departmental capital budgets flat in cash terms between 2014 and 2015 at £50.4 billion, which is a real-terms cut. What is actually happening with infrastructure spending?

Gemma Tetlow: The figures that were published alongside the CSR for capital spending all the way up to 2017-18 were essentially exactly the same set of figures as had been published in the Budget for capital spending.

Q20 Mr McFadden: So there is nothing new in this statement.

Gemma Tetlow: In terms of the total level of public sector gross investment, the figures for 2014-15 to 2017-18 were exactly the same in the Spending Review. We did obviously get more detail from the Chief Secretary about some of the priorities within capital spending. I think, qualitatively, the plan for public sector gross investment is essentially for it to be roughly flat across the years up to 2017.

Q21 Mr McFadden: Define "flat".

Gemma Tetlow: It is set to grow very slightly in cash terms. That will be a small cut in real terms.

Q22 Mr McFadden: In real terms, after all this, we have a cut in capital spending.

Gemma Tetlow: I would describe it probably as broadly flat, but it is declining slightly in real terms.

Q23 Mr McFadden: Would you like to add anything to this, Mr Emmerson?

Carl Emmerson: It is not being cut as hard as day-to-day spending, which is in contrast to the last Spending Review where investment spending was cut much more sharply than day-to-day spending. So you could say there is a change in the priority of this Government, because previously it chose to cut capital spending much harder than day-to-day spending. Those capital cuts were following the plan that Mr Darling set out in his March 2010 budget, whereas in this Spending Round they have chosen to cut capital spending in real terms, as Gemma said, by less than the cuts to day-to-day spending.

Q24 Mr McFadden: You raised Mr Darling’s last budget. The Government has claimed as justification for its position that it is spending more on capital than under the plans inherited from Mr Darling, but that is not true, is it? The OBR has published figures saying that they are a cut in relation to those as well.

Carl Emmerson: I would say that in broad terms they delivered the cuts that were set out in that March 2010 budget. They have topped up the spending plans a little in 2013-14 and 2014-15, but the big picture there is that we are spending a lot less on investment than we were in 2010-11 and, as Gemma says, in broad terms it is roughly flat going forwards.

Q25 Andrea Leadsom: Ms Tetlow, do you think that £50 billion spent on High Speed 2 represents good value for infrastructure spending?

Gemma Tetlow: I am afraid High Speed 2 is not my particular area of expertise, so I can’t comment on that.

Q26 Andrea Leadsom: Let me ask you in a different way then. Do you think that the actual projects that infrastructure capital is spent on matter, or is it simply important to spend money on infrastructure?

Gemma Tetlow: Certainly in the longer term we want to make sure that we are spending investment spending in the places where it is going to have most long-term value. Obviously, the short-term boost to the economy may matter simply in what you can get started most quickly, but in terms of the long-term value to the economy then, yes, it certainly matters what you spend the money on.

Q27 Andrea Leadsom: Mr Emmerson, do you have any views on whether, if you had £50 billion to spend on infrastructure, HS2 is where it should be spent?

Carl Emmerson: I am afraid IFS has not done any work on where we would best spend £50 billion of capital spending, and indeed, as Gemma said, we have not done any work looking at the cost-benefit analysis of High Speed 2.

Q28 Andrea Leadsom: All right. Would you ever intend to spend time looking at the relative merits of one piece of infrastructure spending over another, or do you not see that as your brief at all?

Carl Emmerson: I don’t think it is our relative strength.

Andrea Leadsom: Okay. Thank you.

Q29 Chair: You have looked at capital spending in aggregate, though.

Carl Emmerson: Yes, we have.

Q30 Chair: Presumably, when you get up into the tens of billions, it might be a good idea to have a look at the return expected from them.

Carl Emmerson: Yes. Of course, it is easier for economists to think about the financial return and harder for us to think about the social return, which we would also care about, and that may be much more difficult to measure.

Q31 Chair: But isn’t that what the IFS exists to do?

Carl Emmerson: The other thing that is difficult here is, of course, that often when we are looking at the merits of some tax change or some benefit change, we can look at similar things in the past and work out how people responded to those changes in the past, whereas with High Speed 2 it is very hard to think of a comparator to say, "We did a project like this in a similar way and it worked, and these were the pros and these were the cons". We don’t have that kind of experiment to look at.

Chair: We have not discussed this as a whole Committee, but I do know roughly where people stand on this. I think that there would be at least a number of colleagues around this table who would find it extremely helpful if the IFS were to consider doing such work for the very largest projects. It is, after all, very much your field of expertise and the expertise of a number of your micro-economists, as well as the macro-economists.

Q32 Mark Garnier: Mr Emmerson, in the past you have done some work on schools funding, which it is a focus of mine, and on the calculation that harmonised different local authorities’ allocation methods, and the FT quoted you as coming up with the fact that six schools out of 10 will lose funding whereas just one school in 10 will gain funding. Do you think there may be a similar problem with the Government proposals to try to reduce the difference in the schools funding formula post-2015?

Carl Emmerson: I think it is a natural consequence of the Government’s decision. It is something that needs to be thought about, but whether it is a problem is less clear. School spending at the moment is allocated in a way that is not optimal or desirable. School money is allocated to local authorities based not just on their current circumstances but a lot of history, and I think it would be a good move to move to a system where two schools with similar circumstances and similar sets of pupils receive the same amount of money. The current system is very unequal and moving to that system will be painful. It will involve some schools getting big increases in their budgets and some getting big cuts, and we will want to manage that carefully, but I think ultimately, in the medium term, we can end up in a better place.

Q33 Mark Garnier: To give an example, I have a secondary school in my constituency with about 1,100 pupils. Were you to pick up this particular school, Baxter College, and move it to Tower Hamlets, they would get £3 million more to run the school on a per annum basis than they do now. Are you suggesting that what should happen is that, effectively, Tower Hamlets loses £1.5 million and Baxter College gains it in Kidderminster, or would you see a regression to mean closer to the higher level as a way to approach this problem?

Carl Emmerson: I think that it is quite hard to describe the pattern of what kinds of schools would lose and win under this, because the current system of allocating funding looks so strange. I can’t sit here and say, "These types of schools would definitely gain and these types of schools would definitely lose". Clearly, we do not want big changes in budgets overnight. We want to manage that process. It could be managed over a number of years. It would be easier to do in a world where school spending was gradually rising, so you could have bigger increases in some schools and smaller increases in others. Ultimately, where we want to get to, I think, is that schools with similar intakes should get similar levels of funding.

Q34 Mark Garnier: We clearly have a bit of a nonsense where, according to the f40 group, the bottom end is £4,328 per pupil and the top end is £8,051 per pupil. I have cited an example between Worcestershire, where we are 148th out of 156 shire counties in the ranking, and Tower Hamlets, which is first. I use those extremes to illustrate a point.

My question is slightly more subtle, if you like. That is an obvious inequity, but clearly in Tower Hamlets they have key problems. However, do you think it is worse that we have a situation of Worcestershire bang next door to Birmingham where you have, literally on the other side of the road, an £800 increase per pupil funding? Do you think that is more of a social problem than these big differences across wide parts of the country-the cliff edge between districts?

Carl Emmerson: The big differences will depend on a judgment about what kinds of characteristics should involve a school getting more money. There is not going to be a right or wrong answer to what things need more money in a school. People will disagree about that. I think that we know that because local authorities have been allocated money based on a lot of history, and because local authorities themselves come up with their own formulas, it does mean that across borders you are going to get differences, and that does seem rather odd, and we would probably be able to allocate public spending in a better way.

Q35 Mark Garnier: With this difference between £4,328 at the bottom end and £8,051 at the top end-as I said, I can see a justification for a difference, depending on certain issues like London weighting-in your opinion what is a fair difference between the best-funded and the worst-funded per pupil across the country? That is nearly a 100% difference. What do you think would be a fair percentage difference?

Carl Emmerson: I am afraid I do not have a view on whether that gap is too big or too small.

Q36 Mark Garnier: You agree it is too big, though?

Carl Emmerson: I don’t have a view on whether it is too big or too small.

Q37 Chair: If it was 200%, how about that? Do you have a view?

Carl Emmerson: What I have a view on here is that two schools with the same intake should get the same funding, and the current system does not deliver that and therefore the system we are moving to is an improvement. What we then need is a discussion about what kind of characteristics we should take into account, and people may disagree on what things should count and should not count in the school funding formula.

Q38 Mark Garnier: If we unpick a key part of that reply, you have just said you think that there should be no difference at all.

Carl Emmerson: Among schools that have the same intake in terms of their pupils, but different pupils may-

Q39 Mark Garnier: The same numeric intake or same-

Carl Emmerson: No. It might be the same number of children but also the same types of backgrounds that those children come from. Then there is the question about how much you think you should spend on children from different backgrounds, which is what I think people might disagree with.

Q40 Mark Garnier: Are you likely to do any work on this?

Carl Emmerson: We are doing lots of work on this, and we have already done some analysis of what a funding formula might look like and pointed out that one in six schools could see their budget change by 10% or more, up or down, and we are planning to do more work as we respond to the Government’s consultation on the formula when that comes out in due course.

Q41 Mark Garnier: But overall you welcome this measure?

Carl Emmerson: Yes.

Mark Garnier: Thank you.

Q42 Jesse Norman: Mr Emmerson, you have said that the current system of school funding is highly unequal. Can you talk about exactly why that has arisen, what the elements are that have made it so unequal?

Carl Emmerson: What has happened is that we give money to local authorities based on the types of pupils they have, but then we introduce lag, so we don’t want the funding to change too much over time. We have been doing this for a long while, and then it has led to a situation now where it is very hard to explain why one local authority is getting X pounds and another one is getting Y pounds. Moving to a system where the spending that a local authority gets more carefully reflects their current circumstances would be an improvement.

Q43 Jesse Norman: Should the broad principle be-of course, there are lots of subsidiary principles-that the richer the area, the less funding they have?

Carl Emmerson: Per pupil, you would think that would be sensible, yes.

Jesse Norman: In the very broadest terms.

Carl Emmerson: Yes.

Q44 Jesse Norman: So, it would be highly anomalous to have a situation in that arrangement where you had low levels of local income and low levels of funding for schools?

Carl Emmerson: Yes.

Q45 Jesse Norman: Picking somewhere just at random, a place that had below-average income and yet was third-bottom rated for schools funding would be highly anomalous, according to those criteria?

Carl Emmerson: It would. Of course, income might not be the only measure. You might think about not just average incomes but whether these children have parents whose first language is not English. They may have high-income parents, but you might think those children still have a lot of educational needs, so it would not be as simple as just income.

Q46 Jesse Norman: No, I understand that. You will have detected that I am referring to Herefordshire, my own county, which was the third worst-funded area in the country until last year-only just off the bottom-and yet has lower than average income. Can I ask you about the principle of allocation? You have been talking in terms of what I think is generally correlated to deprivation. Is deprivation the right measure? I will give you a way of answering the question-might the effect of deprivation be to focus you on the bottom 10%, the very least well off, and miss the two deciles above that?

Carl Emmerson: You would want to think about a range of measures, I guess. You would think about things that were correlated with deprivation and poverty. You would also want to think about differences right across the distribution. I do not think we would want a world where you have the same amount of funding per pupil for most pupils and then just an increase for the very poorest. It would be more continuous than that.

Q47 Jesse Norman: No. In other words, more weight ideally would be given to the deciles above the very bottom one.

Do you think that the pupil premium has the effect of concentrating attention only on those who receive free school meals and, therefore, ignoring the deciles of the relatively poor or less well off who, nevertheless, either are not taking free school meals or are just ineligible for them?

Carl Emmerson: Clearly, the pupil premium is going to help those schools that have a lot of free school meal children. Some schools that are just slightly below average income might still have a lot of those children, so it is fine. There may be other schools where they are just below average income but they have relatively few children in that situation, in which case you might want to allocate money in a different way. But I think these are judgments about what kinds of characteristics really should count, and what I am saying is good about the Government’s proposals is that they want a consistent approach.

Q48 Jesse Norman: Just to be clear, would a system that was smoother in treating the people who are just above the free school meals level in those two deciles we talked about, and that bore a more equitable relationship between income and funding, be a lot fairer than the one we have at the moment?

Carl Emmerson: The current system is not one where we only give extra money for people who are on free school meals. There are other criteria that get you extra cash as well, so the hypothetical system you described would not seem optimal, but I do not think that is where we are.

Q49 Jesse Norman: No, but we are quite close to it, though. We have those other elements that are slightly shadier, but the broad picture is that the pupil premium goes to the least well off and the two or three deciles above that do not receive anything like the same level of support.

Carl Emmerson: The pupil premium does, but the other elements of school support might help those other areas as well.

Q50 John Thurso: Can I turn to you, please, Gemma Tetlow? What assessment have you made of the impact on growth of this Spending Round?

Gemma Tetlow: We have not made an assessment of the impact on growth. As you probably know, the IFS does not produce macro forecasts and, therefore, we have not looked at this in detail.

Q51 John Thurso: The OBR is not undertaking any work in that field until the autumn. Have you anything you can guide me with as to the impact of what has been done on growth generally, whether it is likely to be enhancing or detracting?

Gemma Tetlow: In terms of the Spending Review announcements, all that they have done is to tell us how the given envelope of money will be allocated, rather than changing the total level of Government spending. To that extent, I suspect their impact on growth is quite negligible. In particular, the split between capital and current spending is exactly as we thought it was going to be in the March Budget, for example.

Chair: Thank you very much for coming to give evidence this morning. We have managed to be brief, which is not always our style. There are one or two things that we are hoping to receive from you afterwards. We will move straight on to the next session. Thank you very much.

Examination of Witnesses

Witnesses: John Cridland CBE, Director General, CBI, Nicola Smith, Head of Economic and Social Affairs Department, Trades Union Congress, and Professor Douglas McWilliams, Chief Executive and founder, Centre for Economics and Business Research, and Gresham Professor of Commerce, gave evidence.

Q52 Chair: Good morning. Thank you very much for coming to give evidence on the Spending Review. Can I begin with you, Nicola Smith, and ask you whether you think that controlling public spending-that is, reducing spending’s share as a proportion of GDP-is an essential part of the rebalancing of the economy in order to create the space for the private sector to take up the slack and grow?

Nicola Smith: No, I don’t agree that in general the UK had a problem before the crisis with a disproportionate share of public spending relative to GDP overall.

Q53 Chair: Do you think 50% is okay? That is your view?

Nicola Smith: I think the level of public spending the UK in 2008 was around 48%-I can double-check on that statistic-and that was within the range of what was normal within the developed economies with whom we compete. Absolutely, addressing the deficit and the problems our public finances face as a result of the financial crisis, and the consequent drop in taxation revenues and increased social security spend is important, but as you will know from the TUC’s recent statements and from our written evidence, we disagree with the approach that the Chancellor is taking to that fiscal consolidation and feel that it is indeed slowing growth and reducing our ability to deal with our public finances.

Q54 Chair: Do you agree with that reply, John Cridland?

John Cridland: No. I think the business community is supportive of the Government’s strategy. Since the election we have talked to small and large corporates in the UK and the view is that the overriding responsibility of Government is to get the public finances in good order, and that is a necessary corrective for the health of the private sector in the country.

In relation to the Spending Review, we felt the Government should continue with plan A but, given the disappointments with economic growth and the consequences for tax receipts, it was necessary to have continued spending reductions in 2015-16, but also the Government must set out a longer-term view of its investment intentions, because that was the best way-

Q55 Chair: We might come on to that in a moment. Before we get on to how the money is spent, I am talking about this overall envelope, the balance in the tripod between spending, tax and borrowing. I just want clarity about whether you agree, broadly speaking, that 48% is okay or whether you think it should be some other figure. I am not asking you for a precise target, but roughly where do you think it should be in order to maximise medium and longer-run economic growth?

John Cridland: For medium and longer-run economic growth, we think a figure closer to 40% is healthier for the British economy than the 48% figure. We think evidence suggests that if you get into the mid-40s you begin to choke off the private sector, and that the necessary correction over time is for public sector as a percentage of GDP to come down from the 48% figure.

Chair: Perhaps you could send that evidence in and let us have a look at it.

John Cridland: Indeed.

Q56 Chair: I will allow Nicola Smith a quick rejoinder, but I want to bring in the professor before moving questions on.

Nicola Smith: Thank you, Chair. Just to note that a fall in public spending of that scale would leave the UK with a drop in public spending pretty much the largest of all developed economies, excluding Ireland and Greece, and would leave us very low relative to other countries with the proportion of public spending we would have in our entire economy. The TUC would argue very strongly that we saw strong growth in the years up to the financial crisis. There was not any evidence of public sector spending squeezing out private sector investment over that period. The importance of addressing the public finances and the problems we have with our deficit now need to be seen as distinct from the share of public spending that we need to secure strong growth going forward.

Q57 Chair: Professor McWilliams, what is your view on all this? You are a former chief economic adviser to the CBI, aren’t you?

Professor McWilliams: Yes, that was the job I did in my misspent youth. I take a slightly different view from either John or Nicola. I think it is important that we compare ourselves not just with other countries in Europe and in the western world more generally, but also with the rapidly emerging economies that are increasingly setting the terms of the game competitively. Hong Kong and Singapore have higher life expectancy, better educational attainment and better infrastructure than us, and neither spends as much as 20% of GDP on public expenditure. To make our taxes competitive and to get the deficit down, we will in the long term have to get public spending way below 40% of GDP.

Q58 Chair: Way below 40%?

Professor McWilliams: Way below 40%, and we may have to go as far as 30%.

Q59 Mr Mudie: In May you did a press release that was quite chilling. It was quite chilling inasmuch as you projected all the problems after the next election and you were saying that after the next election, if there was any easing on dealing with the deficit, there could be a financial crisis because the markets would move in a bad way. You are projecting a £76 billion deficit for 2017-18, and this year the Chancellor was projecting a £60 billion deficit. He promised us it in his 2010 budget. It is twice that now, and he has been projecting it last year and this year-there is a three-year run. Why have the markets been so benign with a Chancellor who seems to have abandoned any hope of doing anything with the deficit?

Professor McWilliams: The markets have been benign. There are two different markets that are relevant in this. First of all there is the gilts market. The gilts market is fairly relaxed because of the scale of quantitative easing, which means that in practice the Government can finance its current deficit without a problem of trying to sell gilts in a market that is fairly adverse. The forex market has not been especially benign. The foreign exchange market has already brought the pound down, which is one of the factors contributing to inflation being above target, but it has not yet fallen in what you might call a catastrophic fashion.

I think the circumstances could change, though, for two different reasons. The first is that if it becomes more clear that effectively the deficit is not going to move very much for a couple of years, the past progress will be discounted in a way it has not been so far. The second thing is that as QE slows down in the US, I think the markets will cast a beadier eye on those countries where they are still needing to fund a deficit and use accommodative monetary policy to deal with their fiscal deficits.

Q60 Mr Mudie: Is there any sign, or would you care to predict, that in the next two years before the election the foreign exchange markets will be prepared to continue putting up with a failure to deal with the deficit?

Professor McWilliams: As you know, forex markets are a law unto themselves and-

Mr Mudie: I thought you were a very good forecaster.

Professor McWilliams: We have had a good track record, but even we cannot-

Mr Mudie: I was going to nominate you for the OBR.

Professor McWilliams: I certainly think we could improve their forecasting track record, but I still don’t think that any forecaster who is realistic about his or her abilities will claim to have much certainty about how markets will behave. But there is a risk of a financial crisis before the election.

I think it will depend, first of all, on what happens internationally and then, secondly, on what happens in the UK. I think the markets would be prepared to accept that, for political reasons, the process of reduction will slow, as it very often does in countries in the run-up to an election, provided that they are reasonably convinced that the process will accelerate again after the election. But if they are afraid that the process will not accelerate again after the election, I think that they will view the UK with less equanimity.

Q61 Mr Mudie: It is a pretty tolerant market, then, if they take political practice into consideration, because out of a five-year term he has probably had a good 18 months in terms of dealing with the deficit, and we are now saying quite happily that the markets will accept three years of a five-year term as acceptable behaviour on the deficit because of political reasons. It is a very tolerant view, isn’t it?

Professor McWilliams: It is a tolerant view, but I have pointed out that we have seen quite a fall in the pound already. It just has not moved to catastrophic levels. Catastrophic levels would be levels that created inflation that was intolerable, and that would prevent monetary accommodation. We have seen a fall in the pound, so in a sense the markets have not fully accepted it, but they have just about been prepared to leave us in the situation that is manageable, so far.

Q62 Mr Mudie: You mention in that press release "the increasing signs that the country is well beyond the limits of its economic taxable capacity". Can you explain that in a little more detail?

Professor McWilliams: Yes, I certainly can. First of all, on the top rate of tax, it is now 45p in the pound; it was 55p in the pound. Of course, that excludes the national insurance contributions, which are on top of it. The IFS did a study that showed that the ideal top rate of tax was, I think, 36%. Our own study shows that the Treasury is likely, over time-it does not happen immediately-to lose money through having such a high top rate of tax. We did a similar study on fuel duties a few years ago, which showed that we were probably at a point where we were actually losing money by having such high fuel duties because of the impact on purchases abroad and on discouragement for spending. I have seen similar work on some of the other taxes, on alcohol.

When we looked at the impact of VAT at 15%, I think our study, which was one of relatively few studies, showed that the reduction in VAT that Alistair Darling put in was much less of a cost to the revenue because of the stimulus it gave to spending. There were a series of different studies looking at different taxes, which seemed all to have a similar conclusion that taxes at their current levels are starting to damage economic activity.

Q63 John Mann: Can you tell us a bit about the research that you have been doing on jobs? How many of the new private sector jobs are under 20 hours?

Nicola Smith: I don’t have specific evidence on how many new private sector jobs are under 20 hours. I believe TUC analysis shows that just over 50% of new jobs are full-time employee positions. We know that underemployment in the labour market-that is the number of workers who report to the Labour Force Survey that they would like to work more hours than they are being provided with-is over 3 million and remains at record highs. We know from IFS analysis, I understand, that private sector job creation is not correlated exactly with where jobs are being lost in particular regions of the country. The TUC’s analysis is that the jobs being created are generally of a poorer quality than many of the jobs that were being lost. Indeed, work that we will publish next week will show that 80% of jobs that have been created are in the low-paid sectors, for example.

Q64 John Mann: That was not quite the question, because I was not just asking about jobs being created. I am also talking about existing jobs being altered. I am interested in-either from the TUC or CBI-any research there is on the number of jobs that are now under 20 hours, including the new jobs created.

John Cridland: The CBI has not done research on this, but my understanding of the labour force figures is that they show, as you suggest, Mr Mann, an increase in the numbers-I don’t have the figures in front of me-of jobs of shorter duration, as there has been an increase in the number of zero-hours contracts and fixed-term contract work. We understand that in a difficult economic time that is one of the responses employers are forced to make. I think it peaks and then comes down as the economy picks up, but it looks like those figures will get to a normative position that is higher than they were before the recession.

Q65 John Mann: It is not the employers who are necessarily, in terms of their profit lines or shareholder response to problems, the ones that are making the most changes, is it? It is in fact a lot of large employers. Is it not just zero-hour contracts but in fact minimalist contracts now? We are seeing, for example, a company like Tesco putting existing employees on to guaranteed hours of as low as three, four or five hours a week.

Nicola Smith: I certainly know from evidence provided to us from USDAW that it is now the norm in the retail sector for workers to have shorter-hours contracts and to be often required to work larger shifts on top of those minimal hours that they are guaranteed, but with no guarantee of those shifts being provided. I would echo John’s point. Our analysis is that we currently see a labour market characterised by deficient demand, and that that has all sorts of consequences both for the types of jobs that are being created, which are more likely to be shorter hours and to be lower paid, with less job security for employees, and for the number of hours that employees who remain in work are able to be offered by their employers. Until such a point as we see a strong recovery start to take place, it is hard to see how that situation can change significantly.

Q66 John Mann: With a strong recovery-

Chair: This is the last question.

John Mann: The question of jobs is an important issue, Mr Chairman. You, Mr Cridland, of course, if there is a strong recovery, are very keen to see the maximum flexibility-

John Cridland: Yes.

John Mann: -and to have cheap labour from across Europe and an expanded Europe coming in and keeping those fixed hours and wage rates down. Where is the spend going to come from that is going to sustain recovery from this huge amount of under-employment, which for the first time has become a huge and permanent feature of the UK labour market?

John Cridland: The labour market has reacted since 2008 in some unusual and quite complex ways, and I think many of us are still getting a better understanding of what has been happening. I accept the point you make, but I think overall, a flexible labour market has worked to the advantage of the British economy over this period because unusually, compared with previous periods of economic difficulty, employers have tended to seek to retain skilled labour rather than let it go. I know that for British workers that has led to a reduction in earnings growth. Many have lost their jobs but many have had more chance of sustaining in work, and I think in that way the British labour market since 2008 has acted in a more European fashion and a less American fashion.

Clearly, it is important for British business that we have a flexible labour market where employees feel they are getting a fair return for their labour, at a time when I believe the overall economy is just beginning to pick up. Many CBI members are concerned about skill shortages, and skill shortages require us to be able to make sure that more of our fellow citizens are able to access the jobs available, get skills enhancement and get the income growth that will come with that.

Q67 Andrea Leadsom: Good morning. Professor McWilliams, the Treasury has suggested that High Speed 2 will help rebalance the economy regionally. Do you think that that is right?

Professor McWilliams: The main work on this has been done by a man called Daniel Graham, who is I think acknowledged to be the major expert in the world on the subject, and his conclusion is that it will have some effect but is a very expensive way of achieving that effect. If you connect two ends, you cannot always tell which of the two ends is the one that is going to benefit most, and I think his calculations are that about 20% of the benefit is regional and about 80% of the benefit goes to London and the south-east.

Q68 Andrea Leadsom: Do you think HS2 is a good way to promote regional growth or do you think that there are better priorities?

Professor McWilliams: It is a very expensive way of promoting regional growth, and it is a project where the study we did two years ago showed that demand was way overstated and if you put realistic demand numbers in, first of all, the costs way outweighed the benefits and, secondly, there would be a very large funding gap. I see that the latest Spending Review has started to support our conclusions on the funding gap.

Q69 Andrea Leadsom: John Tomaney, the Professor of Urban and Regional Planning at UCL, said to the Transport Select Committee that he thought regional policy was more important than transport for regional rebalancing. He was suggesting that what matters more is investment in skills, knowledge and technology in preference to a piece of transport infrastructure. Would you agree with that assessment?

Professor McWilliams: I have not done a specific study to back it up, but it sounds like the right type of approach.

Q70 Andrea Leadsom: I am not really asking you on this specific project, but in general terms, for regional economic development, would you agree with his thesis that skills, knowledge and technology are more important than a piece of transport infrastructure, relatively speaking?

Professor McWilliams: Very much so, and one tends not to think of the London economy as a region, but recently it has had some similar characteristics to a depressed region. London suffered a massive loss of financial sector jobs and that has been absorbed very easily by the growth of the technology sector, the so-called flat white economy, as we have called it and as other people have started to pick up, because it has so many industries coming together that you cannot define it by SIC codes but more by the type of coffee they drink. It has created, on our numbers, 60,000 jobs, and it could well be many more than that, in London in a couple of years.

If you apply that to the regions, it is clear that skills and technology look a lot better as candidates than a high-speed rail project, although urban transport in these regional economies is also important.

Q71 Andrea Leadsom: That sort of transport being buses and local train links and so on, as opposed to intercity.

Professor McWilliams: That is absolutely right.

Q72 Andrea Leadsom: Yes. Thank you. Mr Cridland, you have asked at what point HS2 ceases to be value for money. Do you have an answer to that question yourself?

John Cridland: I don’t, because I think it is a question that has only very recently come into sharp contrast. I think the increased costs of HS2 are a matter of concern. The view of business is that infrastructure investment is critical to regional economic growth, alongside the other investments that you mentioned, and there is a considerable appetite for infrastructure investment. We have always balanced out, in our own representations to Government, smaller local projects-repair and maintenance-with appropriate big projects, but they have to be value for money and they have to wash their face. I find it hard to envisage in 30 years’ time that the UK, as a major economy and industrial nation, will not have excellent rail infrastructure. I am quite convinced that there is a strong case for more rail capacity, both for intercity transport and for commuter and rail freight transport on the west coast main line. For High Speed 2 to go ahead, it has to wash its face. I am quite convinced that the value for money test needs properly applying.

Q73 Andrea Leadsom: If you had £50 billion to spend on infrastructure, would HS2 be your priority, or what would your priorities be for the economic development of this country?

John Cridland: To date, the CBI has supported the investment in HS2 on the previous costings. We had to face the choices as to whether that money could be spent on other infrastructure or other public priorities, and we felt it was an appropriate scheme following on from other major infrastructure developments-most particularly, thinking of London and the south-east, Crossrail. I am acutely conscious that it took 20 years to get Crossrail decided upon. It would have been very easy at difficult moments for public spending in those times to have lost our nerve on Crossrail, and I think we are already beginning to see that Crossrail is essential to London. The extra capacity is vital, but what has, in a sense, raised the questions we are now asking in the last two weeks is the extra cost, and we need to model what the implications of that extra cost will be on other infrastructure projects. I am afraid I can’t answer that question, because it is a new issue for the CBI to face.

Q74 Andrea Leadsom: Essentially, you are saying that the merits of the project need to be reviewed in light of the increased contingency that has been applied to it.

John Cridland: I am.

Andrea Leadsom: Thank you.

Q75 Chair: I am surprised that you said it has only very recently come into focus. HS2 value for money has been a controversy running for years.

John Cridland: Yes, but what has most recently come into focus is that on the same day as the Government had to announce £11.5 billion of spending reductions in one financial year, the Department for Transport had to increase the upper end of High Speed 2’s budget by £10 billion.

Q76 Chair: Are the beneficiaries of the contracts from HS2 members of the CBI, and are they very active in expressing their view?

John Cridland: I am sure there will be some beneficiaries. As on-

Chair: Are you a shop steward on this this morning?

John Cridland: I hope not, Mr Chairman. As on any infrastructure project there will be beneficiaries, but let me be clear. On any CBI infrastructure policy proposals, I speak for corporate users-the small businesses who want more connectivity with the south of England, the supermarkets, the engineering companies that want to get their product to market-and we speak for the users of infrastructure, not for the providers.

Q77 John Thurso: Can I ask each of you about the question of growth? I will perhaps start, if I may, with Nicola Smith. Can you say what impact, if any-positive, negative, neutral-the Spending Round has had on our prospects for growth? The same question for everybody, please.

Nicola Smith: We can’t see that the Spending Round has had any particular impacts for our short-term growth prospects insofar as the money that was announced for infrastructure was, as you heard from the IFS in your previous session, not new money, and indeed is not due to come online until 2015-16. Insofar as the Spending Review saw the Chancellor stick to his current fiscal framework, which we believe is damaging the UK’s growth prospects, there has not been a significant change in what the consequences of that will be.

Our view is that the consequences so far have been that borrowing is up over £200 billion more than the Chancellor forecast it would be at the time he took office, tax revenues are down some £245 billion, and there is scope for an immediate stimulus. Recent research we published with the National Institute of Economic and Social Research showed, for example, that a £30 billion stimulus now, equivalent to about 2% of GDP, could boost output, reduce unemployment in the short run and lead to a lower debt to GDP ratio over the medium term. The output gap remains, scope for stronger growth remains, and unfortunately the Spending Review did not take the opportunity to change course and deliver better outcomes.

John Thurso: Thank you. Mr Cridland, same question.

John Cridland: I think the Spending Review avoided policy mistakes that could have damaged growth. I think, with an £11.5 billion spending target for savings and with the constraints caused by protected Departments and ring-fencing, it is not inconceivable that some growth-enhancing measures and programmes, particularly in the BIS budget around science and skills, could have been hit, or that more unfortunate decisions could have been taken on public sector capital. The very fact that the Chancellor was able to walk that tightrope and avoid cutting growth-enhancing programmes was I think the right judgment call on policy.

Of course, the Spending Review was also a longer-term forecast on what the economy might look like. I think some of the decisions there about the pipeline of major infrastructure projects, and about the rebalancing within spending towards measures that would have a tangible effect on growth-I think of the emphasis on repair and maintenance expenditure, both by local government and by the Highways Agency; I think of the increased funding for the Technology Strategy Board within the BIS budget; I think of the forward plan beyond 2015 of support for affordable housing investment-were all signals to the private sector that will have impact now, because they give a degree of policy certainty that was previously lacking.

Professor McWilliams: We think that the spending numbers that are contained in this will be quite hard to manage with the financial markets, so we are not convinced that the cuts are sufficient to prevent another quite tough Spending Round after the next election. On the other hand, we do believe that infrastructural spending, both from the point of view of the user benefits and from the direct stimulus through demand, does have a beneficial effect on the economy.

We are looking for improved ways of bringing private sector money in to develop infrastructure, because we think that is the solution to a conundrum where essentially public spending is likely to have to be cut rather more aggressively than it is planned to be for the next three years. At the same time, our work for the civil engineering contractors suggested that the country has an infrastructure deficit of about £100 billion-worth of spending.

Q78 John Thurso: Is there a failure in Government of all shades and within the Treasury to grasp the concept of the difference between investment-if we move cash from one side of the balance sheet to an asset that is productive on the other side of the balance sheet-and current spending, where you simply spend to achieve something currently? Do you believe that they have not really got their heads around the concept of turning cash into an asset that produces value?

Professor McWilliams: Obviously, as far as monetary policy is concerned, whether the money is spent on capital or current, it has the same monetary effect. So I do understand the Treasury’s concern with the overall envelope of spending from that point of view, but we have invested in infrastructure much less than most other comparable countries. Even countries with very low levels of public spending as a share of GDP seem to manage to invest more in infrastructure than we do, and we seem to be not very clever at findings ways out of what is a real problem, which is how you get infrastructure spending at a time of public sector austerity.

Q79 John Thurso: I have one other related subject, and perhaps I can start with you, Professor McWilliams. We have had a major shift in how we spend money publicly, which began quite a long time ago. A document we had from the Institute for Government makes it very clear that, as they have put it, "We have increased the share of our national income spent on pensioner benefits, the NHS and overseas aid through reduced spend on areas such as education, law and order, and defence". This brings into focus the question of the ring fence. How long is it sensible to have a ring fence in certain areas if one is looking to bring down, as you argued earlier, the totality of Government spending? Is it not an absolute given that the ring fences have to go?

Professor McWilliams: I believe so, but I believe that the ring fences should never have been put in place in the first place so, in a sense, my view has not changed. I think the circumstances have made the choices very much tougher than they might have appeared if you believed the OBR forecasts back in 2010.

John Thurso: Can I ask the same question of both of you? Mr Cridland.

John Cridland: Thank you. I think, as we move into the next Parliament, it will be increasingly difficult for the Chancellor of the day to protect the sort of capital investment and growth-enhancing current expenditure programmes that the CBI needs to see protected in the interests of the economy while the ring fences and protected spending continue as they are. The challenge that the Chancellor faced in June of this year, with quite punitive levels of reduction in some spending Departments because of the consequences of those ring fences, will become more exacerbated the longer the cuts need to continue. At the end of the day, those are political decisions for elected politicians, but I think it is likely that the ring fences will need to be revisited.

Nicola Smith: A few points from me. Firstly, the TUC would not accept that the ring fence has been properly implemented insofar as the NHS budget, for example, is experiencing cuts. There are a number of ways that can be evidenced. The initial increases in NHS spending did not take account of inflation. There is an additional national insurance charge that NHS employers will be facing of about £1 billion, as a result of the end of contracting-out-

Q80 John Thurso: But if we stick with the headline numbers just for a moment, if you look at the Departments I named, broadly, in real terms, they are static or going up, and the other Departments I named are going down. Could I ask you to concentrate on that principle?

Nicola Smith: I suppose the question is whether the current fiscal framework is the right fiscal framework, and whether that is one that a future Government might operate in. If a future Government was to, say, take a longer-term approach to addressing the deficit and was to target debt to GDP rather than structural deficit over a five-year rolling period, that might lead to a less extreme fiscal settlement for our public services. Similarly, if a future Government decided it wanted a different balance between tax and expenditure cuts, we could have a less austere period for public spending. I think the current balance, the IFS said, is now 85:15. Under the Darling plan it was 70:30. I understand that in the 1990s under Norman Lamont it was 50:50. There are a range of options available to people as to the relative balance of tax and spending cuts. Even within the current envelope, the TUC has observed that the Chancellor has, for example, decided to cut corporation tax by a very significant amount, which I think amounts to around £8 billion over the course of the Parliament. That is money that a different Government might choose to deploy elsewhere.

I think we can’t see austerity into the future as an inevitability. There are choices that Governments can make about how they allocate spending and about the fiscal frameworks they operate in.

Q81 Jesse Norman: John Cridland, the CBI has clearly recognised the importance of education to the long-term prosperity of the country. Do you have any views on the current school funding settlement and its fairness or unfairness?

John Cridland: If you look at our investment in education per capita, we are not underfunding the education system as a whole in contrast to some of our major international benchmark competitor countries. I think that is because previous Governments significantly increased the investment in education. However, there are some significant imbalances in education funding, particularly as we see a marked shift in the structure of schools. I do think that many of the challenges of the British education system, it seems to business, derive from primary school. There is a question to be asked about the balance of per capita funding between primary education and secondary education. In secondary schools we are dealing with problems of underperformance that have started earlier in the education system, with relatively poor return on the investments in secondary school.

I also think there are issues about the further education system. I think the further education system received some protections in the most recent Spending Review, but at a time of significant unemployment we need to be focused on the stock of skills as well as the flow of skills.

Q82 Jesse Norman: Just focusing on the issue of schools funding, because that is the area in which the funding formula is going to be tweaked, the imbalances that you have described suggest that you would not disagree with the IFS in describing the situation as highly unequal at present.

John Cridland: I would agree with that.

Q83 Jesse Norman: Would you also agree with their judgment that, broadly speaking, income should correlate negatively with funding? That is, the higher the income of an area, the lower level of state funding it should receive? Very, very broadly.

John Cridland: Broadly, yes.

Q84 Jesse Norman: So it would be an anomaly to have a part of the world that had low funding and low income.

John Cridland: Yes.

Q85 Jesse Norman: Good, thank you. Would you also share the view that it is not just a matter of performance, because often you get high-performing schools in low-funded areas? It is also a matter of equity to the children themselves, who may be having a less rich school experience although they are performing quite well in academic terms.

John Cridland: I do agree with that, but I would balance that by saying all the research I have seen suggests that the key factor in the performance of a school is the leadership and capability of the teaching force. Therefore, one can see, as you have suggested, schools that have many disadvantages that are very highly performing. I would put the investment, where I accept the points you are putting to me, alongside the capability of leadership, Government and the teaching force.

Q86 Jesse Norman: Do you think the escalating costs of public transport are making a further shift in the balance against schools where there is a lot of transport required-just the difficulty of getting a child to school?

John Cridland: Yes. Forgive me, I have no specific research on that, but it is certainly my view that it is advantageous for education, as well as for communities, if people are as close as possible to their school, such that long commuting distances for schoolchildren are a disadvantageous outcome.

Q87 Jesse Norman: If you have high transport costs, private or public, that would on balance tend to advantage city schools where people live close to the school, versus rural schools.

John Cridland: Yes.

Q88 Jesse Norman: Do you have any comments on that, Professor McWilliams?

Professor McWilliams: The research we have done suggests that it is not just costs but time that is relevant. A young person spends quite a long time at school anyway, and if you add as much as 90 minutes either way you are significantly increasing the proportion of the day that they are spending away from home, and that does make it a lot more difficult.

Q89 Jesse Norman: That would bear on both the quality of the school education they receive and the equity underlying it?

Professor McWilliams: It would probably have an impact on performance as well, because if the children are tired when they come to school they are less likely to perform well.

Q90 Jesse Norman: A high-performing school that nevertheless has an awful lot of those costs associated with it would really be doing extremely well.

Professor McWilliams: If a school performs well in those circumstances, it is a very impressive result.

Jesse Norman: That is very kind. Thank you very much indeed.

Q91 Chair: We are running to time, in fact just slightly ahead of time, and I am going to end by asking each of you to say, in 60 seconds, if there is something that you have come to this hearing wanting to say and have not yet had an opportunity to say. It may be a nil return. I will start on my right and move to the left. Nicola Smith.

Nicola Smith: I think I have made my broad points about the Chancellor’s economic policy, but one point I would like very much to highlight is the TUC’s concern about the Chancellor’s move to a seven-day waiting period for unemployed claimants and the negative consequences that this may have for household finances. The TUC understands that the actual policy will be that universal credit will be paid four weeks in arrears as per the current plans, but that instead of receiving a universal credit payment equivalent to four weeks, the claimants will receive a universal credit payment only equivalent to three weeks. That will include housing benefit and other elements to support the costs of children as well, and will leave people at a very vulnerable time, when they are facing unemployment, with extremely straitened public finances. We can see no rationale for introducing this measure, and I think it would be useful to explore further with the Government what the perceived rationale for the measure is and what the actual implications will be for families.

Chair: We may well be doing that very shortly this morning. John Cridland.

John Cridland: Thank you, Mr Chairman. In addition to the appropriate judgments that we felt the Chancellor made on the day of the public spending announcements, British business took some encouragement from the announcement of the parallel package on the following day on infrastructure investment. We had felt that infrastructure investment was in danger of being stalled in its delivery and we were looking for more encouragement around energy investment, which you asked me some questions on when I last appeared before you, particularly the use of UK guarantees, the prospects for shale gas and appropriate strike prices for renewables. We were also looking for the pipeline of major transport infrastructure projects-some of my industrial Olympics-to be given more clarity and determination. The package announced by the Chief Secretary the day after the Spending Review was a source of some encouragement to business, both in energy and in transport, and I think complemented the announcements in the Spending Review on forward capital.

Chair: Professor McWilliams.

Professor McWilliams: We want planned public spending on cautious assumptions about growth that take account of the cataclysmic change in the shape of the world economy as the east becomes much more competitive. We also face a challenge to our terms of trade through raised costs of energy, raw materials and other important factors of production. Secondly, we should put the brightest minds in the Treasury on to the project of ensuring that the infrastructure that we need gets built, and finding a way of bringing in private finance to fund that.

Q92 Chair: I am not able to tell on the basis of that whether you are supporting the energy policy or opposing it, or arguing that the infrastructure policy is basically right or wrong.

Professor McWilliams: I think the ambition is right, but what we have seen so far has been a failure in delivery, and we need to get the delivery. I am not convinced from what has been said so far that there is proof that we will have delivery, and I think that finding a way to ensure delivery is the key to this.

Chair: Thank you, all three of you, for coming in this morning. We will resume at 11.25am, five minutes earlier than planned, to begin our cross-examination of the Chief Secretary. Thank you very much indeed for coming in.

Examination of Witnesses

Witnesses: Rt Hon Danny Alexander MP, Chief Secretary, HM Treasury, and Sharon White, Director General for Public Spending, HM Treasury, gave evidence.

Q93 Chair: We are just a few minutes earlier than planned and, as I have alerted various people to, we may run slightly longer than intended, since a lot of colleagues want to come in.

You have succeeded, Chief Secretary, in keeping to the envelope that you set yourself. How did you do that?

Danny Alexander: Thank you, Mr Chairman. I should just introduce Sharon White, who is the Director General of Public Spending at the Treasury.

I think there is a combination of factors, as in all these things. There is a very strong political commitment around the Cabinet table to dealing with the deficit, and that is a collectively agreed position, before the Spending Round and subsequently. All of my Cabinet colleagues had a shared interest in ensuring that we delivered the savings that we did set out to deliver in the Budget.

Q94 Chair: To translate that, is that basically because it is a make-or-break issue for the Coalition?

Danny Alexander: Sorting out the economic problems of this country was the set of issues that caused the Coalition to be formed-dealing with the budget deficit, making those decisions and continuing to make them.

Q95 Chair: Isn’t it mainly the deficit that is at the heart of the Coalition agreement?

Danny Alexander: I would say dealing with the deficit is, because in itself it is necessary to restore the financial credibility of this country, and because it is necessary to restore economic growth in this country that we regain some control over our public finances. So commitment to that would be the first point. That is obviously backed up by a market discipline, by a strong sense that by being willing to take tough decisions we have kept interest rates low in this country, and that is obviously good for the economy.

I would make another point, which is about efficiency. In this Spending Round, I think I was the first Chief Secretary in history to have at my disposal a pool of commercial expertise located in the Efficiency and Reform Group in the Cabinet Office, which was able, through this process, to really get under the skin in each Department about contract renegotiation, IT management and a lot of the building blocks of efficiency that I think the public really expects us to look at. That expertise helped to analyse in detail what was going on in Departments and to release the £5 billion of the £11.5 billion through efficiency savings that we said we would do in the Budget.

Of course, added to that is a sense that this was a Spending Round for one year, for 2015-16. From the point of view of Departments and Permanent Secretaries, this is part of a long-term process. There is obviously a need for further fiscal consolidation in the two years beyond that. I think that again helps to be a motivation for Departments to play their part in this process, as well as the answer for the Treasury in dealing with these things.

Q96 Chair: Going back to market discipline, there is always some market discipline on spending decisions, but are you saying that it is much stronger now than it was before and therefore, by implication, that whoever is trying to take these decisions is going to end up hamstrung, in a sense, if they want to spend more money?

Danny Alexander: I do probably think that. Given the scale of our deficit, the problems in our public finances and the need to continue to deal with that and to eventually get our debt falling as a share of our economy, market participants of all sorts watch those things very carefully, and the sense that you have a Coalition Government that is continuing to deal with those difficult choices in a fair, balanced and measured way is something that helps to maintain confidence in the UK economy.

Q97 Chair: You were talking about techniques of the Efficiency and Reform Group, which all sounds nice and techie but the truth is, isn’t it, that you were pretty ruthless? You picked off a few colleagues, got some settlements, and then showed the instruments of torture to the rest of them.

Danny Alexander: I am not sure about instruments of torture. I think that is over-dramatising it.

Q98 Chair: Have you ever been involved in a star chamber?

Danny Alexander: No, I haven’t.

Chair: Weren’t you threatening one?

Danny Alexander: Let me answer the question in my own way, if you don’t mind. The first thing that I sought to do both in conducting this Spending Review and in 2010 was to try to be as straightforward as possible with Cabinet colleagues about the amount of savings that we were looking for from their Departments, so that you do not end up with this process of game-playing where the Treasury demands twice as much as is wanted and the Department offers up 10% and then you have to haggle. It is about trying to spend the time and effort, and I had a lot of meetings with all Cabinet colleagues about this, discussing not what amount of savings they were looking for, although of course there is room for manoeuvre at the margins, but how they are going about making those savings. I think that is what the public expect us to do-to find the savings in the right way and not just to get to the numbers.

You are right to say that as in 2010, we had a Public Expenditure Committee that was looking at the Spending Round, and that was populated with Ministers from the Departments that settled first, and of course it is the case that if any Cabinet colleague had decided not to settle with the Treasury they would have been brought before that Committee to explain their position and to be scrutinised by their colleagues. I don’t think any Department got anywhere near to that position, because everyone wanted to-

Q99 Chair: They were all such nice chaps, were they not, and they came quietly? Is that a fairer description?

Danny Alexander: I would not want to mischaracterise it. Of course there were robust discussions, there were very thorough exchanges about what was the right way to find savings, and one or two people sought to try to attract some media attention to that process. I would say that did not put me up or down, but-

Q100 Chair: Just to be clear, what you did was you got collective buy-in to an envelope, and then you operated divide and rule, didn’t you?

Danny Alexander: No, I would not put it like that. I would say we got collective agreement to an envelope. We gave each Department planning assumptions about the amount of savings that they were expected to find. You will see that the final figures by Department came pretty close in each case to the planning assumptions that we issued, so that is a very straightforward way to conduct the process. Departments had a period of time in which to submit an initial return to the Treasury, about a month after the Budget. My officials and I then spent a lot of time with Departments, working through what they had offered, looking at ways that they could go further where their initial offer did not match up to expectations. Through PEC, and also through the quad process, which met five times on the Spending Round, we had processes to ensure there was a degree of collective agreement across the Government about the approach we were taking in each Department.

Q101 Chair: There is one other question that I would like to ask at the start. It is one thing to agree figures, it is quite another to deliver them. So far the Government seems to have been able to deliver its numbers. How far has that been because inflation has been acting as a cracking good cutter on cash numbers, since inflation has been above trend, and how much has it been down to the use of other tools? For example, are you using zero-based budgeting?

Danny Alexander: I would say it is down to the process that we entered into in 2010 when we started out. In 2010 we set budgets that were setting cash terms for each Department for the four years of the current Spending Round process. I have taken steps to tighten spending control in a number of ways. I published a document a year or so ago called Improving Spending Control, which is about improving forecasting and giving the Treasury more access at an earlier stage to the information about what is going on in Departments. It is to do with managing the reserve very tightly, not using it as a slush fund but making sure that it is only available where it is absolutely needed, and therefore having a rigorous but straightforward process of spending control.

That is why we have not ended up with Departments breaching their budgets, and I would say it is a testament to the commitment of Secretaries of State, and also to their civil servants, that in many cases Departments are ahead of the savings that we expected them to be at at this stage. At the start of this year we had already made 65% of the savings that we had set out in the 2010 Spending Round, when the original forecast had been about 50%. So in many cases Departments themselves have sought to get ahead of the game on this, to make sure that they deliver to the plans we set out.

Q102 Chair: Because their Ministers do not want you around to see them with this committee that you have created?

Danny Alexander: I am sure all of my colleagues would be delighted to see me at any time.

Q103 Chair: Okay. It was said, wasn’t it, by Joel Barnett that the Chief Secretary was rather like the Jackal in The Day of the Jackal? He could never work again once he had done this job, because he had made so many enemies.

Danny Alexander: Thank you for the career forecast, Mr Chairman.

Chair: You might just wonder what has really been going on behind the scenes, but you look quite jolly on it at the moment, Danny.

Danny Alexander: Well, I am the third longest-serving Chief Secretary now-there was a period when they seemed to last about nine months. I think Lord Barnett was the second longest-serving, and we have longevity in the role in common at least.

Mr Ruffley: John Major became Prime Minister. A bit of history.

Danny Alexander: I think if you are going to be strictly accurate about the career progression of my predecessors you might also point out that Jonathan Aitken was once Chief Secretary, so there is a range of options afterwards.

Q104 Mr Mudie: You agreed with the Chairman when the suggestion was put that dealing with the deficit was the main objective. You have failed, wouldn’t you say?

Danny Alexander: No, I wouldn’t say that. I would say a number of things about that. I would say, first, that since we came in the deficit is down by a third. I would say that if you look at the underlying measures, broadly speaking we have been tightening the structural deficit that we are targeting in our fiscal mandate-it is an underlying measure of the deficit, taking away the cyclical factors as short-term economic effects have an impact on the public finances-at roughly 1% every year. That has continued through this Parliament and is forecast to continue. I think that is the right way to approach it. It is a measured and sensible pace at which to take it, and we are continuing on the spending side to be, as was observed earlier, on track to deliver the spending numbers that we set out.

Q105 Mr Mudie: The numbers you set out are slightly different, Chief Secretary, aren’t they? We have had a witness here, Professor McWilliams, whose projection for the deficit in the year 2017-18 is £76.6 billion. You were going to have it cleared by a year earlier than you assumed; in fact your deficit is something like £118 billion this year. In your first plans given to the Chamber at the first Budget it was not going to be £118 billion, it was going to be £60 billion. Do you call that a success?

Danny Alexander: You are right that the deficit this year is higher than it was when we first forecast. I think we have been very clear. The OBR-which is responsible for these forecasts now, so it has been taken out of my hands and the Chancellor’s hands and made independent-has been very clear too that the impact of the eurozone crisis has had a major effect on the UK economy. A period of high inflation, particularly in 2010-11, had a significant effect too, and of course there is the legacy of the financial crisis. We had figures two weeks ago showing that the depth of the financial crisis was even greater than originally forecast-I think it was 7.2% of GDP. The legacy of that through the financial system is greater on our economy, and inevitably that has had an effect on our economy and on our public finances.

The point I am making to you is that if you look at the structural deficit and look at the primary balance, cyclically adjusted, you will see that has been more than halved from its peak in 2009-10, and we are continuing to make progress at that steady pace. I think that is the right way to approach things. I do not think we should be chasing those numbers. I think we should be sticking, as we are, to the spending plans that we set out when we started.

Q106 Mr Mudie: In terms of the deficit, you are standing still for three years of this Parliament. I don’t see how that is tying in with your original plans, or even tying in with dealing with the deficit. To be standing still on the deficit at that amount seems to me to be failure.

Danny Alexander: I would say that the deficit is coming down as a share of GDP. Of course it is more slowly than we originally forecast, and that is one of the reasons why we have just conducted a Spending Review for 2015-16 because, rather than chasing those numbers, which I do not think you would have argued we should have done, instead we chose to extend the period of deficit reductions and to do so in a way that has enabled us to make the right short-term decisions but also to maintain confidence in the UK’s ability to manage its public finances. I think that is the right balance.

Q107 Mr Mudie: Chief Secretary, those are words but what I am putting forward, and you are accepting, are the actual figures. Let’s take debt. You inherited debt at 76.3% of GDP. No, you were going to peak at 76.3% of GDP in 2015. That was from an inherited position of 57%. The Labour Government had handed over at 57%. You were going to peak at 76%, and you saw that as a success. The estimated debt for 2017-18, on the figures we have heard this morning, is 92.3% in 2017-18. That is not a success either, is it, on the figures?

Danny Alexander: Of course the consequence of larger than expected deficits is that your debt rises. We set our fiscal mandate-

Q108 Mr Mudie: That is the importance of the deficit going down, and the fact that you have it steady at £118 billion a year, that is £118 billion going on the debt each year, and so that is why you arrive at 92.3%. You are chasing Japan.

Danny Alexander: If I can just answer the question, we are bringing the deficit down year by year. We are taking difficult decisions on public expenditure.

Q109 Mr Mudie: You are not taking the deficit down year by year. You have held it steady for three years.

Danny Alexander: I would be delighted to answer the question, if I could get a word in edgeways.

Q110 Mr Mudie: I have just given you the facts, you accepted them, and now you turn them around and say you are bringing the deficit down. You are not bringing the deficit down. That is the sad fact.

Danny Alexander: Firstly, the deficit when we came into office, inherited from the previous Government, was over £150 billion. As a share of GDP it has fallen by one-third, since we came in. It will continue to fall as a share of GDP. If you take the underlying measure of the structural deficit, which is I think the right measure to target-it is what we chose to target in our fiscal mandate-we are consolidating at roughly 1% a year. I think that is a sensible pace to consolidate at.

Of course we have had representations, such as the ones you are making, that we should cut the deficit more quickly, that we should make more cuts now. We have rejected those representations in favour of sticking with the pace of consolidation that we set out when we started. We have had representations that say we should borrow a lot more now. We have rejected those too, on the basis that we think that that would significantly undermine the confidence that our plan has established in the UK economy. Instead, through our spending control processes and through this Spending Round, we have sought to make sure that we are using public expenditure in the best way we can to support economic growth. I think that is the right balance for the country as we make a transition from a huge deficit, mismanaged public finances and a large structural deficit under the previous Government even before the financial crisis hit, to ensure that our public finances become more sustainable.

Q111 Mr Mudie: Professor McWilliams went through these figures in his report and he projects the real worry of a financial crisis after the election, because all the debts, all the hard decisions, have been put off until after the election. He points out that a financial crisis could be extremely serious for the country, as you can imagine. Against that background, don’t you think that we have wasted three years when we should have been dealing with this deficit?

Secondly, you are coming here really on the back of the infrastructure announcement. It is much exaggerated, but it projects a lot of schemes starting after the election. With these figures, how can we take these promises of expenditure after the election seriously, because of the financial problems that we do not have the courage to deal with this Parliament but somehow we will do in the next Parliament?

Danny Alexander: I don’t accept that analysis. I would say that we have made, in a serious-minded way, some very tough decisions, to reduce departmental budgets, to freeze and then restrict pay growth in the public sector, and some difficult decisions on welfare expenditure too. We have increased taxes, particularly on the wealthiest in society, and taken more action to tackle tax avoidance, all of which were necessary to improve our public finances. I don’t want to repeat what I said before, but I think that the approach we have taken is the right one.

Of course there are further decisions to be taken after the election. There are two more years on the current plans of fiscal consolidation. That means, effectively, that we have done five years’ worth and there are two more years to be done. I hope in time that all political parties will recognise that those decisions have to be made, while of course having a debate in the election about what is the precise nature of the choices you would make to meet those things. I do not think we are there yet. If your warning is that our economy will be damaged if one party comes into office without a clear plan to deal with the problems in our public finances, then I would accept that.

Chair: I would ask colleagues to be brief in their questions, if they can, and also the Chief Secretary to be as brief as he possibly can manage with his replies, otherwise we might find ourselves missing out on lunch.

Q112 Stewart Hosie: Chief Secretary, the overall impact of public spending, tax credit and benefit changes, including benefits in kind, in 2014-15 as a percentage of the 2010-11 figure was £830 for the bottom quintile families, 3.4% of income. After the Spending Review the figures for 2015-16 were £930, 3.9% of income. Why did you configure fiscal consolidation in the Spending Review in a way that was going to make the poorest quintile even poorer?

Danny Alexander: First, I would say that we have published very transparently the distributional analysis that you are quoting. We are the first Government and first Treasury ever to have done so, which, exactly as you say, has looked at the impact of all of the consolidation decisions, not just spending but taxation and welfare decisions as well, as a share of income and benefits in kind. There have been some methodological changes made to improve the analysis, in consultation with organisations like the IFS, for example, which mean that the two sets of figures, as I think the IFS may have said when they were here earlier, are not directly comparable.

The other point that I would make is that, while clear and transparent, this analysis does not capture the improvements to the quality of public services, so the services that people receive as a result of some of the reforms we have put through. For example, a freeze in teachers’ wages would feature in this analysis as a loss of benefit for people who consume education as opposed to something that affects the workforce. This is a new area in terms of distributional analysis of public spending. There are further improvements that could be made, and our team in the Treasury is talking to the IFS and other organisations about how we can strengthen the analysis, but overall I would say that our consolidation has affected the top quintile the most. You are right to say that it has a significant impact on the bottom quintile. Public expenditure is consumed much more heavily in the bottom quintile, but the wealthiest fifth of the population continue to pay the most, as they have in every year of our fiscal consolidation, and I think that is right.

Q113 Stewart Hosie: I have a suspicion with that argument. The problem is that your own distributional analysis, thinking about the Spending Review only, shows that the impact on the top quintile goes from 4.1% of income to 4% of income; quintiles 4, 3 and 2 also go down. It is only the bottom quintile where the impact as a share of income goes up, and that is a fact. Do you accept that?

Danny Alexander: I think the proper way to look at this is as the impact of the fiscal consolidation as a whole. Of course, this Parliament is not over and so we have further Budgets to make tax policy decisions and so on. If you look at the top quintile, for example, that quintile is a net contributor rather than a net recipient, in terms of public expenditure and taxation, and therefore it is tax policy decisions rather than spending decisions that have the major effect.

I did ask my officials to do some analysis-you might be interested in this-of which areas of public spending are skewed towards the top quintile of the population. The answer is very few. Arts and culture expenditure, roads, railways and universities are the only areas of public spending that in a distributional sense are skewed towards the top quintile of the population. Therefore, I sought to focus in the Spending Round on making a large proportion of our savings through efficiencies in the back office, joining up services and so on-things that do not affect the frontline outcome, although of course some of which still show up in this analysis, subject to further improvement. Reforms such as the troubled families scheme and the integration of health and social care, which get better outcomes for a limited amount of public money, are particularly focused, as social care expenditure is, very directly on the bottom quintile of the population.

Q114 Stewart Hosie: I am sure everyone will welcome more efficiency and better quality of service in these targeted areas, but that does not change the fact that in austere times the impact of the Spending Review has hit the bottom quintile hardest. You said earlier that what you had tried to get was transparency but, as Carl Emmerson from the IFS told us, because of the methodological changes we can’t do a like-for-like comparison on the 2014-15 figures. We move straight from 2014-15 on the old methodology to 2015-16 on the new. Has the Treasury itself done a 2014-15 analysis based on the new methodology?

Danny Alexander: We have applied the new methodology to the 2015-16 analysis that we have published.

Q115 Stewart Hosie: Yes, but have you done it for 2014-15?

Danny Alexander: We have not done it on a backward-looking basis. We have applied the improvements to the methodology, which we have spent a lot of time discussing with the IFS-they may have mentioned that-to these new figures. So, for example, the previous methodology was based on an assumption about the take-up of benefits, which assumed that benefits were taken up by 100% of the population. This is looking at a more accurate analysis of benefit take-up. Likewise, for some of the more detailed analysis of particular elements of public expenditure and where they fall, the analysis has been updated by Departments.

Q116 Stewart Hosie: In that case, will you be prepared to publish an analysis of 2014-15 on the new methodology? If it is things like benefit take-up being reduced, then it means the rise in the impact on income in the lowest quintile would be even more significant than a rise from 3.4% to 3.9%. Would you be prepared to publish a 2014-15 analysis on the new methodology?

Danny Alexander: I will certainly take it away and look at it, but I am not inclined to put a lot of Treasury officials’ limited time into a backward-looking analysis when the Treasury, like all Departments, is shrinking in numbers. I think we are down to 1,000 civil servants by the end of the next financial year. But I will certainly take the idea and look at it and come back to you about it.

Q117 Stewart Hosie: Without it we would not be able to accurately measure on a single methodology what the impact on any quintile was of the decisions taken up to the Budget and then the decisions taken at the Spending Review. Without that information we are looking at a set of figures that go from March to the Spending Review into 2015-16, and that is really not particularly helpful.

Danny Alexander: I think that the information we published is better in quality and detail than any Government has published before. I would say that it is inevitable, when you have a new form of analysis that no Government, including the Scottish Government, has done before, that you are going to want to improve the methodology. I would hope that this Committee would welcome those methodological improvements rather than seek to rake over the past.

Stewart Hosie: In that case, let us just have some consistency so that we can do a proper analysis, and our job is to scrutinise not to rake over the past.

Q118 Chair: I would be very grateful if the Chief Secretary could reflect on the request that has been made.

Danny Alexander: I will certainly reflect on it and come back to the Committee.

Chair: Having said that, it is worth pointing out that it was this Committee that pressed for many years for a distributional analysis, and the Treasury said no for a decade or more-15 years or so. You have now started producing some very interesting distributional analysis, and this Committee is very grateful for the fact that you have responded to the request we made in 2010.

Danny Alexander: You were right to request it. To me, personally, it is vitally important that we continue to make sure that the burden of our consolidation falls most heavily on those most able to bear it. That is why we published the analysis. It is not perfect but it is improving analysis, and we will continue to make improvements to ensure that it is as robust and open as possible.

Chair: It is time to bring in a fellow Liberal Democrat Scot, John Thurso.

Q119 John Thurso: Firstly, can I ask you what assessment you have made of the quality of financial management in the Government, across the Government and in individual Departments?

Danny Alexander: A very good question, and I would say that the quality of financial management has improved during my time in office. When I came in there were some Departments where financial management was deemed to be incredibly weak. The National Audit Office had passed recommendations on various Departments. I think in those areas particularly we are seeing a strengthening.

One of the things that we also announced as part of the Spending Round was a review of financial management within Government, because it is an area that I think does need to be strengthened further. There have been a number of very useful independent reports on that subject in the last few months. One of the areas that I have been pushing on is to improve the quality of management information within Government. One of the issues in a Spending Round, and for people trying to understand the public finances, is being able to compare apples with apples, so that they can look at different Departments and be able to understand the figures on a comparable basis. That is an area where we have made some progress, but we need to do more.

Q120 John Thurso: The Institute for Government, in their submission to us, said that the Government needs to invest in a more strategic approach to financial management and that they welcomed the review that you had announced. When do you expect that review to report, and what will you be looking for from it?

Danny Alexander: I expect the review to report by the end of this calendar year. We have asked Richard Douglas, who is the head of the Government Finance Profession, to carry out this work, with Lord Sainsbury as an external adviser. He is someone who has taken a close interest in these matters. I am not going to try to prejudge the report, because I want it to look in a searching way, to take on all the external advice that we have had, including from the Institute for Government, and look at ways in which both the ability of the centre to get the information it needs to understand what is going on and also the financial management capabilities of Departments could be improved. Perhaps there could be more of a system of owned autonomy, so that when a Department proves that it is able to really manage its finances very tightly, as I think some have, we can relinquish some of our tight controls, but in other areas we can focus greater Treasury scrutiny on Departments that are not performing. That is the sort of regime that I think would be useful, but I am not going to prejudge it.

Q121 John Thurso: But you would broadly agree with their view that the strategic financial leadership roles at the centre of Whitehall are relatively underdeveloped?

Danny Alexander: Not wholly. Given that I am the holder of one of those offices, I suppose I would have to say that. I think it is true that as the Treasury gets smaller, in common with all Departments, we need to make sure that within that smaller Treasury we have the professional skills alongside the political and strategic skills that are necessary to carry out that role properly.

Q122 John Thurso: Let me come on to my second question. What assessment did you make of the impact of the Spending Review on prospects for growth?

Danny Alexander: We spent a lot of time. You will remember that when we launched the Spending Round we had four themes of activity: efficiency, reform, growth and fairness. We have discussed the fairness issue in relation to the distributional analysis, and we might come back to it in other contexts. We talked a lot to external organisations, such as the CBI and other business organisations, about which areas of spending they would seek to prioritise. The long-term focus on infrastructure was a key ask of that particular industry. We had topped up our capital budgets in the Budget and are also now setting out long-term plans for capital expenditure, so I think we are getting the balance right there. Also, there are things like apprenticeships, school spending, which is vitally important for the long-term quality of our workforce, and innovation expenditure. One of the things that we did in the Spending Round around Lord Heseltine’s excellent report-setting up the Single Local Growth Fund- was a direct response to an argument about an improvement to the way in which public spending is used to support local economic growth, which I think we responded to very sensibly.

It was a central part of our process and our discussions, particularly-this is the point that the Chairman made earlier that I did not respond to-in relation to capital expenditure, where as well as putting in place longer-term plans we did a zero-based review to look at all of the bids across Government and allocate that funding on a Government-wide basis, with a particular focus on the expenditure that would make the most difference in economic terms.

Q123 John Thurso: The OBR has not taken into account any of these policy changes and will only do so in the autumn. You would presumably be disappointed if the OBR did not adjust its growth forecast up and specifically state which of these policies had been part of increasing growth?

Danny Alexander: Having decided to establish the OBR as an independent forecasting organisation, I think for me to try to start forecasting the forecasters would not be an-

John Thurso: I am asking for your potential reaction.

Danny Alexander: You are asking for a measure of my mood, as opposed to a forecast. The OBR has tended not to factor these kinds of things into their economic forecast, because of the methodology that they apply. I think the test that I apply more is to listen to the reaction of industry organisations. The CBI has welcomed the decisions that we made; other business organisations likewise. The Home Builders Federation and the National Housing Federation, which represents housing associations, have very much welcomed the decisions that we made on housing policy, because in all cases we have made long-term commitments that enable those industries to plan ahead with confidence. That is an important part of securing growth in our economy.

Q124 John Thurso: The EEF, which represents the engineering and manufacturing sector, said in their submission that, "In future it must be more clearly anchored to a more coherent economic strategy. So far this Government’s plan for growth in response to Lord Heseltine’s No Stone Unturned report has failed to provide the underpinning to this strategy." That is presumably something you would not accept.

Danny Alexander: I would not accept that. I have spent time discussing these things with the EEF and they have produced some extremely good ideas that we have taken forward, for example on improved capital allowances for first-year investment for businesses, which we took forward last year. I would look to the reaction of the organisation of Local Enterprise Partnerships, which very warmly welcomed what we have done on the Single Local Growth Fund. When you take together the Single Local Growth Fund and the other resources that LEPs are able to influence, including European funding, you have, over the period, about £20 billion that LEPs will be able to shape and influence, and that influence will extend beyond those pots of money to other things that the Government are doing through the growth deals process we are entering into. I hope that people will see in time that this has been quite a radical shift, not just in where public expenditure takes place but in where influence is exercised from and how industry can exercise influence over the policy choices of Government to support growth.

Q125 Mr McFadden: I was going to say good morning but it is now good afternoon.

Danny Alexander: Good afternoon.

Mr McFadden: I would like to ask you in a little more detail about this question of capital and infrastructure. You made a statement to the House the day after the Spending Review, outlining all these infrastructure projects. Can you confirm, on page 11 of the Green Book that was issued at the time-the Chairman has a copy there-just what the bottom line tells us here about capital spending? This confirms that between 2014-15 and 2015-16 capital spending remains flat in cash terms at £50.4 billion which, according to your table here, is a 1.7% real-terms cut in the overall figure.

Danny Alexander: It does indeed tell us that public sector gross investment is £50.4 billion in 2014-15 and £50.4 billion in 2015-16. It also says that total capital DEL is going up, but public sector gross investment is the measure that we have used. If you look at the Investing in Britain’s Future document that I published the day after the Chancellor’s statement, that sets out longer-term plans for public sector gross investment to rise in real terms thereafter. Those figures are both significantly higher than we had originally set out in our Spending Round and also significantly higher than the plans that we inherited from the previous Government.

Q126 Mr McFadden: Let’s just go through this piece by piece. First of all, on the position as set out in the table, I want to be completely clear that you are confirming the public expenditure position. We were talking about 2015-16 in the Spending Round. That is what it was all about. I will come in a second to future years, but in terms of 2015-16, compared to what is already announced in 2014-15, we are flat in cash and we are declining in real terms.

Danny Alexander: We are spending £50.4 billion in both years. It is fair to say that on the previous plans before the Budget, that was going to be a fall. We increased the budget in 2015-16 by £3 billion, and £3 billion a year thereafter, and have planned to have capital spending thereafter flat in real terms.

If I may make one further point, a key part of this is how you go about allocating that spending, and how you make sure that it is actually spent as opposed to having large underspends. On the first point, we went through this zero-based review precisely to assess bits from all around Government on the basis of impact on the economy. I think through doing that and through having this in the context of longer-term plans, we are getting a better growth impact than has been the case from capital spending in the past.

Q127 Mr McFadden: Do you see the point of asking? Quite a lot has been made by the Government of its capital expenditure programme, and can we just establish the fact that it is flat between the two years that we are talking about?

Danny Alexander: You have asked me that three times, and three times I have confirmed that the table in the Green Book is accurate. I am happy to confirm it for a fourth time, if you like.

Mr McFadden: We have talked about a number of other things as well.

Danny Alexander: But I would also say that in the context of that we have set out, I think, the largest programme of road investment since the 1970s. We continue to fund the largest programme of rail investment since Victorian times. We have made huge commitments on communications infrastructure and broadband and a significant programme of house building, all of which are good for the economy.

Q128 Mr McFadden: Let me ask you about some of the specifics. Your list of projects included things like HS2, the A14, the Mersey Gateway bridge and various rail electrification projects. Of the list of projects that were in your statement the day after the Spending Review, how many of those had never been in a previous statement? All these others had?

Danny Alexander: In terms of setting out the funding over the period, which is what I was doing in the statement, with the exception of HS2, which the Secretary of State had made a funding statement on before, all of the funding allocations for 2015-16 and beyond were new. They had not been set out before. The Investing in Britain’s Future document sets out, in annexes at the back, existing programmes that continue to go forward and new programmes that are going to be funded. I think that has been entirely transparent. But I would say that, taking roads as an example, the A14 is a project that, you are right, we have talked about on a number of occasions but we have not been in a position before this to set aside the funding to pay for. There has been work going on to produce feasibility studies and so on. This is the first time that the Government has made a commitment to funding the A14 programme in full. You mentioned that, and that is just one example. I am sure we could go through others. On HS2 what we did in the Spending Round-and you may want to come back to this-was to set out a budgeting framework to make sure that now we have more clarity on the costs, the programme is delivered to the budget set out.

Q129 Mr McFadden: We will talk about HS2, and I think others will ask about that. Can I ask you about one other piece of the Government’s case on this capital expenditure point? The Government has claimed a number of times that it is spending more on capital-I think you mentioned this yourself in your first answer to me-than under the plans inherited from Alistair Darling. Can you confirm what the public expenditure spent on capital public sector gross investment was in the first three years of the Government, compared with the plans inherited from Alistair Darling?

Danny Alexander: I don’t have those numbers in front of me, but I do know that if you take the decisions that were made in the 2010 Spending Review, the autumn statement in 2011 and the autumn statement in 2012, over the four years 2011-12 to 2014-15 we are spending or planning to spend £9.5 billion more than the plans that we inherited from the previous Government.

Q130 Mr McFadden: Isn’t it the case that the OBR has said that what you have spent in 2010-11, 2011-12 and 2012-13 is cumulatively £5 billion less than Alistair Darling was planning to spend?

Danny Alexander: I have not seen those figures. I am happy to look at them if you want to supply them to me. What I have set out, in terms of a comparison of the plans that we inherited with the plans that we have set out, is that-

Mr McFadden: I am talking about what you have actually spent compared with the plans you inherited.

Danny Alexander: Can I just make this point? If you compare the plans that we inherited to the plans that we set out, we are spending £9.5 billion more than our predecessors. There is also the issue of underspends. We have reduced underspends on average by a third, compared with capital underspends by our predecessors, through tighter financial management, over-programming in certain areas and more of a focus on delivering projects to time. So it may well be that there are differences between the underspend assumptions of the previous Government and ours, where we are seeking to get people to deliver the funding that we have set out. I am quite sure that we are planning to spend and spending more, and underspending less, than our predecessors. What’s more, if you take public sector gross investment over this decade, as compared to the 13 years of the previous Government, we are investing more as a share of GDP in our economy over this decade than our predecessors managed during their 13 years in office.

Q131 Chair: You said in a reply a moment ago-a very interesting reply actually-that zero-based budgeting had not been given a great deal of public attention.

Danny Alexander: Oh, dear.

Chair: We like interesting replies in this Committee-

Danny Alexander: I do too.

Chair: -even if not all our witnesses want to give interesting replies. But you mentioned zero-based budgeting being applied to capital right across Whitehall in order to ensure value for money from capital projects-how on earth did HS2 survive that?

Danny Alexander: For a number of reasons. Maybe I should explain the process very briefly first, because it is a subject that you are interested in, and then I can say something about HS2 more generally. First, we asked all Departments to bid on the basis of their proposals for capital expenditure. We received a lot of bids of, it has to be said, varying qualities, but the expectation was that there would be a robust economic analysis set out alongside the bids. That was subject to scrutiny from a cross-Whitehall panel of economists and then brought to the Chancellor and myself to look at and apply our own judgments to. That resulted in a scheme that very heavily prioritised transport investment, science investment, broadband investment and so on, and other areas where we sought to deliver reform. In housing, for example, we are delivering many more houses per pound than previously, because we have changed the model of delivery of affordable housing, an area where we are getting better value for money, I would say, for the taxpayer. High Speed 2 is a project that the Government has committed to, as our predecessors did.

Q132 Chair: May I just reinterpret that? That means it is exempted from this value for money process. You are committed, so it has got a bye. Is that right?

Danny Alexander: It might have been available to us to say we are going to stop this, but we have made a very strong commitment to it on the basis not just of the short-term economic analysis but of our view about the longer-term economic transformational potential that this project has in the context of what is still a very divided economy, especially across England. There are substantial wider economic benefits that will come from a project of this scale, scope and ambition, connecting together eight of our 10 largest cities. We know from countries around the world that improved connectivity of this sort makes a big difference to balance of your economy over a number of decades. We also know that capacity constraints on some lines are really starting to bite now, so this investment not only creates a very important infrastructure improvement in its own right but also releases capacity for existing services.

Q133 Andrea Leadsom: Good afternoon. To be clear, value for money for the taxpayer does not come into the HS2 project?

Danny Alexander: No, I am not saying that at all. Of course it comes in. In fact, that is the whole basis of the announcements that I made about this in the Spending Round, which is about ensuring that this project is delivered to budget. We are taking some of the lessons from the Olympics, for example, where we set out a funding package for the term of the project and built in robust incentives for those delivering the project to deliver it, not just to time but under budget as well. In a sense I would say the step we made on HS2 in the Spending Round was about financial control and delivery, on the basis that our collective judgment is that this is something that is good for the economy and therefore good value for the taxpayer.

Q134 Andrea Leadsom: Do you then refute the NAO’s report expressing concerns particularly about the assumption that time spent travelling at the moment is unproductive whereas under HS2 time spent travelling on a train will always be productive at an average salary of £70,000 per annum? Do you feel that that is a reasonable assumption? Is that something that will be reassessed at the next financial assessment of HS2?

Danny Alexander: I do refute the analysis that suggests that this is the sole basis on which HS2 is understood. I would say that the appraisal and analysis that has been done on HS2 is completely consistent with what is done by DFT for all rail projects and with international best practices. You can look at the price that people, particularly business people, are prepared to pay to travel as another proxy for this, and that would also show that there is a strong value attached to higher-speed journeys.

I would also say that the specific analysis of transport projects does not, in general, take into account the much wider economic benefits of these sorts of projects. Can I just make one further point? If we simply followed the economic model in the way you are suggesting, this country might not have built the M1 in the 1960s, for example, or completed the M25 in the 1980s. These are transformational projects that go beyond just the travel time benefits of a particular rail service.

Q135 Andrea Leadsom: I think the point you would have to accept is that the broader economic benefits are not known until they are known, and with a motorway it has lots of things called junctions whereas with High Speed 2 it has a beginning and an end and one or two stop-offs. You are challenging the NAO’s report and, according to NAO guidelines, each report is signed off by key Departments, including the Department for Transport. The Department for Transport’s Permanent Secretary would have cleared this report before it was published. Where does that leave the position that time spent travelling is unproductive, because that is a significant part of the benefit to taxpayers of the project, is it not? The Department for Transport would have signed off the report, but now you refute its findings.

Danny Alexander: What I was saying is that I think that too much burden in the public debate has been based on this particular facet of the analysis.

Q136 Andrea Leadsom: The financial case is very largely based on the time spent on a train having a value.

Danny Alexander: This is one of a number of things that are taken into account. The methodology used is the same methodology used for appraising all rail projects. We are investing in rail projects all around the country. This is not costing us investment in the Northern Hub or in the railway stations around this country. There is another proxy you can use for that question, which is what price are people prepared to pay for tickets, and the analysis done there-

Q137 Andrea Leadsom: What I am asking you is, did the Department for Transport sign off on the NAO report that you are now refuting? Is that the case?

Danny Alexander: I do not know the specific answer to that question. I would not characterise what I am saying as refuting the NAO report. What I would say is that I think that too much burden is being placed on this particular point in terms of trying to criticise the HS2 project when, as I said earlier, I think there is a very strong economic case for HS2 as a project that can transform the economic geography of the United Kingdom in the way that the advent of the railways in Victorian times did.

Q138 Andrea Leadsom: The Adam Smith Institute has noted that UK high speed rail costs per kilometre are up to four times that on the continent because we have so many towns and villages. Does that have a bearing on the value for taxpayers’ money of high speed rail in the UK?

Danny Alexander: It certainly has a bearing on the approach that we are taking to try to control the costs. You are right that, as the Secretary of State for Transport has told the House of Commons, there have been cost increases based on things like tunnelling work, changes at Euston station and so on, and those things all have to be factored into the cost. The approach we are taking now is to say that having done all that work, we are setting a budget for the project, £42.6 billion. It is a lot of money. It is the largest budget I think there has ever been for an individual project in this country. We are setting up the incentives within the project for the people delivering the project to ensure that they deliver under budget, taking the best lessons from the successful delivery of the Olympic Park and asking Lord Deighton, who has joined the Government and was involved in delivering that project, to take a role in ensuring the delivery of this project. I think that is the right balance.

If your wider point is whether it is more costly to deliver infrastructure in this country, the answer is yes. We published an infrastructure cost review two or three years ago. We have been engaged in a piece of work with the construction sector to try to look at the cost benchmarks for infrastructure projects in the UK compared with other parts of Europe, for example, and we are taking a whole series of steps to try to bring those costs down. That is one of many ways in which we can get better value for the taxpayers’ money.

Q139 Andrea Leadsom: How far do costs have to rise before the cost benefit analysis for HS2 just collapses? We already had, in the original £30 billion for the total project, including £17 billion for phase 1, what we were told was a 30% optimism bias, which in most people’s terms would mean contingency, yet only last week we have announced another 40% contingency on top of what was already a 30% contingency bias, so clearly the costs are escalating. The Government lost a judicial review on fair compensation. Do you expect the costs of compensation now to escalate and at what point will the cost benefit analysis just make it unviable?

Danny Alexander: I am not looking for the costs to increase. I am looking for this project to be delivered within, and ideally under, the budget that we have set. That is why although the P95 estimate for phase 1 is £21.4 billion, which is within the £42.6 overall estimate, we have given HS2 Limited a target price for delivering phase 1 of £17.16 billion. It is meeting that price that the people who are running HS2 will be incentivised to deliver. So, far from planning for further cost growth, the approach to budgeting we are setting out here is precisely about trying to apply the best lessons of how to manage these big projects to deliver it within the budget that has been set aside.

Q140 Andrea Leadsom: John Tomaney, Professor of Urban and Regional Planning at UCL, said that, "The evidence for high speed rail to transform the economic geography of the UK is fairly weak. Where you have a dominant capital and you connect that dominant capital to peripheral cities and regions by high speed rail, the bulk of the gains accrue to the capital." What evidence is there that disputes that?

Danny Alexander: I think probably it would be best for that question to be addressed to the Department for Transport. I can only say that I represent a small city, a very long way from London, and the connectivity of Inverness to London is crucial. I am sure it is important to London’s economy, but it is absolutely critical to the economy of the Highlands and Islands of Scotland, as I dare say John would agree. I suspect that that sort of lesson applies right the way across the country and benefits both ends of the line, not just one.

Q141 John Mann: You were very bullish last time you were in front of this Committee about the broadband, including rural broadband, targets to be met by 2015. Will those targets be met by 2015, as the Chancellor indicated in his statement, or will it be 2017, as British Telecom has made public?

Danny Alexander: We are working as hard as we can to deliver the rural broadband commitments that we have made to the time that we have suggested.

Q142 John Mann: Is it 2015 or 2017, is my question?

Danny Alexander: As you know, this has been organised on a contractual basis county by county across England and in Scotland, in the Highlands and Islands and other parts of Scotland. Some of those contracts go into the 2015-16 financial year. We are working as hard as we can to ensure that they are delivered to the time scale, but there have been issues in terms of state aid clearance. There have been issues in terms of-

Q143 John Mann: We know there are issues. What you are saying, then, is that the Chancellor, when he said in his statement that the target would be met by 2015, was inaccurate, and that that target has slipped, as BT has confirmed in writing, to 2017.

Danny Alexander: No, I am not saying that. I am saying that the Government is working hard-

John Mann: You just said 2015-16.

Danny Alexander: The 2015-16 financial year includes a very large part of 2015, so what I am saying is that we are working as hard as we can-

John Mann: No, be clear, just so there is some clarity here.

Danny Alexander: I am trying to be clear if I could get a word in.

John Mann: Your target is May 2015. That is not a long way into the 2015-16 financial year.

Danny Alexander: We are working as hard as we can to deliver this massive investment in rural broadband to the time scale we have set out. In some areas there are delivery issues that, by local consent between the county council and the provider, mean that it will slip into the 2015-16 financial year. What we have also done in this Spending Round is set aside additional funding so that we can go from the 90% obligation that we originally set out and reach 95% of the population, and through engagement with the industry, particularly the mobile industry, to have superfast connections of one sort of another reaching at least 99% of the population of this country by 2018. I think that is a good ambition that everyone should support.

Q144 John Mann: Thank you. So the target has slipped. What percentage of major infrastructure spend over the next three years will be outside London and the south-east, approximately?

Danny Alexander: I don’t have a percentage figure to hand. I don’t have a figure that I would guess at.

Chair: Perhaps you can come back to us with that, if it is not too burdensome to produce, because I think that would be an interesting number for us.

John Mann: What I am saying is-

Danny Alexander: I draw your attention to the Investing in Britain’s Future document that we published. There is a very useful map that sets out major projects taking place in every region of the country, which will help to answer the question.

Q145 John Mann: No, it would be helpful to have the figures. It would also be helpful, unless you know now, to know what percentage of the major infrastructure starts in the next three years will be outside of London and the south-east. I don’t mean number of projects, I mean the actual projected expenditure. How much of the expenditure on the ongoing major infrastructure projects that are started in the next three years will be outside London and the south-east?

Danny Alexander: I don’t have a percentage figure to hand. What I would say is that, as the map and the document show, there are major road, rail, communications and energy projects taking place in every region of the country. There are major projects in London, like Crossrail. There are major projects in the north like the Northern Hub railway investment and many others. There is also an awful lot of infrastructure that is being delivered in the private sector, energy investments in particular, that is important. So it is not just Government spending.

Q146 John Mann: Of course it isn’t. The third set of statistics that would it would be useful if you gave us, if you don’t have them to hand, is what percentage of major infrastructure completions will be outside London and the south-east in the next three years. That also would be useful.

I do not know whether, Chief Secretary, you have ever been unemployed, signed on.

Danny Alexander: I was briefly in 1992 or 1993.

John Mann: So you know what it is like. Good. I am wondering, as a Liberal in the Government, what are you going to say when you are meeting people who are unemployed and are not going to be getting any money at all for the first seven days?

Danny Alexander: I think what I would say is that we currently have a three-day waiting period in a system where benefits are paid fortnightly, and we are moving to a seven-day waiting period under universal credit where benefits will be paid monthly. All the money that we are saving through that measure is being reinvested in measures that we know, on the basis of DWP assessment and research, make a significant difference to the prospects of Jobcentre Plus being able to help people back into work quickly. The best outcome for anyone who is unemployed is to get the support and help that they need to get back into work as quickly as possible. I think that the things that we are investing the money in really will make a difference in that respect, and that surely must be the right thing for all of us if we want to get people off benefit quickly and into work.

Q147 John Mann: I am just thinking of the woman I was talking to on Saturday who has now been reduced, by her employer Tesco, to a three-hour-a-week contract with call-off on top if there is more work. If she is made unemployed she will not be entitled to anything for seven days. So I just ask, again, thinking as a Liberal, how would you justify that decision with your Liberal tradition and philosophy if you were face to face with that young woman if she was to be made unemployed and was unable to get any money for seven days?

Danny Alexander: I would say, as a Liberal, I think the most important thing for people who are unfortunate enough to become unemployed, which is a serious thing for any individual in any family, is to get the support and help they need and that we know works up front, and to get people off benefit and back into work as quickly as possible. That is what we are investing in.

I would further add that with the creation of universal credit, which I think is one of the most important reforms in the benefit system undertaken since Beveridge, a person’s benefit will be paid in work and out of work-it will vary according to the number of hours that they are working-and that will create a benefit system that is much more supportive of people seeking to get back into work. At the moment we face a situation-certainly the benefit system we inherited had this situation in many sets of circumstances-where people are better off being on benefit than in work. We are changing that and providing the support necessary to get a job. I think that is the right balance.

Q148 Mr Love: Can I return to the infrastructure plan?

Danny Alexander: Yes, of course.

Mr Love: Earlier on, in a response to Mr McFadden, you stressed funding commitments as being the important part of the plan, yet the Engineering Employers’ Federation, echoed by a considerable number of others, has described the plan as falling short of a clear and fully funded plan. How do you respond to that criticism?

Danny Alexander: I don’t accept that criticism. I think that the programme that we set out was clear and gave the certainty that a lot of industry organisations, including the EEF, had been looking for around that sort of investment. Where the funding has been set out, the reforms will in due course be legislated for to back up that funding-for example the corporatisation of the Highways Agency-to give people confidence that those things will be delivered. I would be very surprised if any party in the House of Commons would want to say it wanted to reverse any of those plans.

Q149 Mr Love: The EEF went on to say, "Future commitments to fund have only been made subject to value for money and deliverability criteria. These can be used as grounds to retrench in the next Parliament." How do you respond to that criticism?

Danny Alexander: I think this Committee would not welcome me coming here and saying value for money criteria are being set aside. Of course projects have to be delivered in a way that is value for money, but you will see in the roads package, for example, that we are committing to funding all of the projects in the current Highways Agency pipeline, in other words projects that have already passed the test that you have set out.

We are setting aside considerable resources, £10 billion-plus, to local road maintenance to deal with-it may sound trivial but it is very important in every constituency in this country-the massive backlog of potholes and road maintenance issues that have to be dealt with, which have been subject to a major campaign by important national newspapers, among others, and quite rightly so. We are for the first time not just undertaking feasibility studies but setting aside the funding for routes in this country that have been major bottlenecks for a very long period of time. The A303 is an example. I am sure Members around this table would have lots of other examples that they would cite. I think it is right to be ambitious about investment in our transport network, and I think people should have confidence that those plans will be delivered.

Q150 Mr Love: Let me go on to the transport network. You mentioned the A14 earlier on, but the A14 and the A19 upgrades have only received conditional future commitment whereas other road schemes, such as the A303 upgrade, only have a commitment to carry out a feasibility study. Surely all of these things can be called into question in the next Parliament?

Danny Alexander: I would hope that there could be a consensus established around this plan, because I think it is the right plan for the country. I would say that in the context of things like the A303 and those other routes, of course you have to conduct a feasibility study, not to work out whether you do something but to work out what precisely you do and what is the best plan for upgrading each of those routes, and you have to do so quickly. I hope that those reviews will all be carried out very quickly so that there can be a degree of certainty about precisely what is going to happen. Also, we have set out in the plans substantial increases in funding for the Highways Agency, precisely so that it knows not just that it is doing the feasibility study but that it has the funds to deliver the results of that study during this period.

Q151 Mr Love: There is a lot of criticism that we are very good on strategies and press notices and statements to the House of Commons but we are bad at getting the diggers on site. How do you respond to that criticism? None of these projects that you have outlined in your infrastructure plan will come to fruition in this Parliament, as has already been indicated, because capital investment will stay flat during the rest of this Parliament. All of the ones in the next Parliament are subject to caveats that could mean they are cancelled. How do you convince people that this is a reality that will happen?

Danny Alexander: I would say, first, as the previous Chancellor said in the House of Commons in response to the Chancellor’s statement, that delivery problems are an issue that has dogged successive Governments. I would say that we have a good record of delivery. Over 30 major road projects have been completed since the 2010 Spending Review; 24 major road projects have been announced since 2010; eight are under construction; eight will start this year and the rest next year. We have invested in 190,000 new school places since 2010, 84,000 houses completed, 59,000 homes protected from flood defences, all as a result of capital investment by this Government. So I think we have a good record of delivery, but we are also seeking to make a number of reforms to make that better.

We can look at the things that hold up infrastructure projects-the planning system, which we are speeding up and reforming to give more of a tilt in favour of sustainable development; and the application of environmental rules that, without slipping on environmental standards, could be done much more quickly and effectively by the relevant agencies, the habitats directive for example. There is a whole range of changes that we are making to speed up the delivery of infrastructure projects, which I hope the Committee would welcome, because it is precisely to ensure that we can go more quickly from drawing up a plan to making the thing happen that we have set out these proposals.

Q152 Mr Love: If I may say so, the long list of achievements of this Government that you read out a few moments ago is part of the problem. It is part of the smoke and mirrors that you tell people all the marvellous things you have done on the basis of massive cuts in public expenditure, but let me go on-

Danny Alexander: I am not afraid to defend the record of getting better value for public money and delivering and focusing that money on priorities that are important to the country.

Q153 Mr Love: We could get into a tit-for-tat. That is not what this Committee is about.

Danny Alexander: Okay, I apologise.

Mr Love: How many projects have actually started and how many have not started; I think that is for the main Chamber.

I wanted to ask you one final question. Earlier on you prayed in aid the support of the CBI, yet the CBI in their commentary on the infrastructure plan said, "It’s clear the Coalition sees it was wrong to cut capital spending so deeply in 2010". Are they right?

Danny Alexander: I would say that we inherited plans for deep cuts to capital spending from our predecessors. We have sought, wherever we can since then, to make further savings on current spending and added that money back into capital spending. We had to take radical action when we started out, but I think at each and every stage, wherever possible, we have sought to switch money into capital spending because we recognise that it is important for the economy.

Q154 Mr Love: This whole stop-start phenomenon, where you massively cut and then you have to reintroduce capital expenditure-we could take education as one example of that-is surely the least efficient way to carry out the infrastructure that is absolutely necessary for this country.

Danny Alexander: That is why I would expect and hope that this Committee would warmly welcome the massively ambitious long-term plan for capital investment that I have set out, precisely because it gives us a chance to move beyond that. The only other point I would make is that it is also important to make sure that the programmes we have are good value for money. For example, I think it is also the case that our priority schools buildings programme is more efficient and better value for money than the building schools for the future programme that we took over from.

Mr Love: We would welcome it if it was a reality, but it is the reality that we are trying to get to.

Q155 Teresa Pearce: In response to a question from John Mann, you on the seven-day wait for claiming that people currently have to wait three days. That is not true, is it?

Danny Alexander: There is a three-day waiting period for Jobseeker’s Allowance, yes.

Q156 Teresa Pearce: There is a three-day waiting period for it to be paid, not to claim it.

Danny Alexander: No, there is a three-day waiting period, which means that your initial payment effectively starts three days later.

Q157 Teresa Pearce: Is that correct? That is not what they told me at the Jobcentre Plus visit that I did last week. They told me that the day you claim, your money is paid from then. Are you sure?

Danny Alexander: I am sure.

Q158 Teresa Pearce: You are sure? Okay. The seven-day wait, does that include housing benefit as well?

Danny Alexander: It will apply to new claims for universal credit. So if you are-

Q159 Teresa Pearce: So not for Jobseeker’s Allowance?

Danny Alexander: Let me just explain. If you are already in the universal credit system, which, as I explained earlier, covers a whole range of different benefits paid as one, and you become unemployed within a universal credit claim, your claim will not stop in those circumstances. It only applies to new claims for universal credit, so people who are outside the universal credit system altogether, and it will apply to all components of the benefit.

Q160 Teresa Pearce: So will it apply to anybody claiming Jobseeker’s Allowance or will it not come in until universal credit comes in?

Danny Alexander: It will apply in the universal credit system that will be well under way in 2015-16 when this starts.

Q161 Teresa Pearce: So this applies when universal credit comes it. It won’t apply prior to that?

Danny Alexander: I think in fairness on that point I would like to get back to the Committee, if I may.

Q162 Teresa Pearce: So when universal credit comes in, it is a week before you can claim. It is-

Danny Alexander: What it effectively means is-

Teresa Pearce: Can you just let me finish? It is paid a month in arrears. I went to visit the pilot up in the north-west last week, with the rest of the Work and Pensions Committee, and we were told that currently it is paid a month in arrears and it takes another seven days after that month for it to hit someone’s account, so that is five weeks, at least, in arrears. What you are saying is that it will be five weeks in arrears but there will be a week missing because it will be a week before you can claim it at all.

Danny Alexander: It would mean that your first payment, rather than being reduced by three days, is reduced by a week. That is right.

Q163 Teresa Pearce: Including your housing benefit?

Danny Alexander: For new claims of universal credit. If you are already in the universal credit system, so supposing you are working on a low income and you are in receipt of universal credit-

Q164 Teresa Pearce: So people who are currently on tax credits will be in that system. Somebody who loses their job would go into universal credit-

Danny Alexander: People who are currently not in the universal credit system who lose their job-

Teresa Pearce: Who are currently employed.

Danny Alexander: -who are currently employed will then be subject, if they lose their job, to a seven-day waiting period.

Q165 Teresa Pearce: So they will not be able to pay their rent? They will have to say to their landlord, "I’m sorry, I’ve only got three weeks’ rent instead of four"?

Danny Alexander: As I was explaining earlier, the whole point of the reform is precisely to ensure that people get off benefit and back into work more quickly, which is in the end the best thing for that person to be able to pay their rent, meet their bills, and all the other things that we talked about.

Q166 Teresa Pearce: What the Chancellor said is that it is better for people to be looking for work in that way than claiming a benefit, but I would say to you if you went to your landlord and said, "Sorry, I can’t pay you rent this week because I am looking for work", he would have something to say about that.

This measure is meant to save £350 million a year, and the Chancellor said that this has been introduced because, "Where is the fairness in condemning people to a lifelong benefit because the system will not help people get back into work?" Yet, in the last two years, £736 million has been spent on the Work programme. You are already spending £736 million on the Work programme, yet the Chancellor says this is a system that won’t help people back into work. Are you saying that the Work programme is a failure?

Danny Alexander: People come on to the Work programme having been on a Jobseeker’s Allowance for a substantial period of time. What this is about is strengthening the initial Jobcentre Plus regime, which already works well for a lot of people, but we know from the evidence that DWP have looked at that introducing up-front work search, using the Universal Jobmatch software that they have developed more effectively, looking at the issues about linking up between the ESA system and helping people to manage their conditions all make a difference in the initial phase of someone’s claim in getting them off benefit so that they do not ever have to go on the Work programme.

Q167 Teresa Pearce: I understand that and I understand the value of work, but what you are saying is that people need to be helped back into work rather than be given benefit.

Danny Alexander: Yes, that is what I am saying.

Q168 Teresa Pearce: Yet the Chancellor said that people need to turn up with a CV, register for the online job search and start looking for work, and only then will they receive benefit. You are saying that you are going to help all these people but they have to help themselves before they even get there. You will have people who may have been in jobs for 30 years and not done a CV for 30 years, but you expect them to turn up and until they have done a CV to a standard, they will not get any benefit. Is that correct?

Danny Alexander: The benefit claim will be paid after the seven days. The point is that there-

Teresa Pearce: But he said here only then-

Danny Alexander: Sorry, it is a long question, if I could have a moment to answer it. The point is that the work search requirements start the moment someone makes their claim. There is a seven-day waiting period before the money starts to flow, but that does not mean they wait seven days until starting to do things such as registering on the Universal Jobmatch system, writing a CV and all of those things. There is already a strong regime of conditionality, as you will know, within the Jobseeker’s Allowance system, which requires people to sign on on a regular basis and, when they sign on, to give evidence of the work search activities that they have undertaken. There is no change to that conditionality regime.

Teresa Pearce: You are just stopping the money.

Danny Alexander: What we are strengthening is the upfront work search requirements, which we know generally, on the basis of evidence, make a difference to people’s ability to get into a job quickly, and I think we should all be trying to make changes to get people into work quickly.

Chair: Thank you very much, Chief Secretary. I have three colleagues wanting to come in and some of us will be starting to think of lunch before long. I just put that in as an idle thought.

Q169 Mark Garnier: Chief Secretary, good afternoon. Can I turn to the ring-fencing of budgets? To put this into a little bit of context, I will read a passage from one of the commentators, Tony Dolphin, "By the time the cuts have been fully implemented in the next Parliament, the Coalition’s current approach means spending in areas other than health, schools and aid will have been cut in real terms by over one-third, and in some cases by as much as a half". Paul Johnson of the IFS said in his presentation that this ring-fencing is leading to continued change in the shape of the state. First of all, do you recognise that change in the shape of the state? Secondly, if you do, or indeed if you don’t, have Ministers explicitly discussed changing the shape of the state as part of this ring-fencing approach?

Danny Alexander: In one sense, I do recognise that picture, yes, because as a matter of policy we have decided that some Departments will see more significant reductions than others and that, measured in monetary terms, does change the balance. I would say that in each case the ring-fences are justified in their own terms. If you look at the health system, for example, it is an area that is obviously enormously important to our country, and I suspect to every person in this room, but it is also something where there are significant cost pressures that grow year on year. So there is a very significant efficiency challenge within the NHS even within a budget that is rising in real terms.

In the school system, we have seen very big pressures in terms of rising pupil numbers. That is why we are investing in additional school places in areas of demographic pressure. On international aid, I would say that we have a strong obligation to support those people who, even given the difficulties that we are going through, are a great deal less fortunate than we are. So I would justify them in those terms but, of course, I guess each political party will have to decide its views on these subjects in its offering to the country at the next election.

Q170 Mark Garnier: A lot of people would come back on a number of those points. For example, with the health budget, evidence suggests that unless you are seeing an increase in the health budget by 4% a year, it feels like you are effectively seeing cuts. I suppose that is a sort of slightly moot point, but none the less, it still comes back to a fundamental point that there is a challenge, which is of course to reduce the budget deficit. It is absolutely correct that as a country we try to get our public finances back into order, but ring-fencing really is putting a terrific amount of pressure on other Departments.

In some cases we are seeing some of those other Departments pushing their costs elsewhere, and certainly if you look at the local government budget, out of which comes social services, we are now seeing a restriction on social services. For example, we are seeing people not accepting patients and we are seeing the bed blocker problem, and therefore social services are now pushing part of their costs back on to the health budget. That is the sort of anecdotal type of evidence that is coming through, but have you seen any hard evidence that some Departments are now struggling so much that they are trying to push some of their costs into those ring-fenced Departments?

Danny Alexander: Can I answer the question the other way around? I think one of the biggest problems we have with the successful delivery of public services is the lack of joining up of services at a local level. One of the things that I was seeking to do through the Spending Round, one of my biggest personal priorities, was to use the spending levers that we have in the Treasury to try to give a big shift towards joining up delivery at a local level. We know from, for example, community budgeting pilots undertaken in local government that there are really significant savings as well as improvements to services that come when, in the case of a troubled family for example, you are not having half a dozen agencies all giving a little intervention that makes no difference. They are pooling their resources, having one intervention that can transform that family’s life. That is much better for the family, it is much better for the public purse, and we need to give better financial incentives to get people to work together.

That is why I think one of the biggest, most radical and, I hope, longest-lasting reforms from this Spending Round is the pooling of money on social care. We are really getting the NHS and local government to work together to improve social care delivery, to stop vulnerable elderly people falling down the cracks between health and social care, and therefore saving money in the NHS, saving money for the local councils but, most importantly, giving a better service to some of the most vulnerable people in our country.

Q171 Mark Garnier: I broadly agree with that, but one of the interesting things that you raise is efficiencies. When you see a budget that is having the ratchet put on it quite heavily, like local government, what you are seeing is a number of efficiencies coming through, for example shared services between different councils. That is a really excellent way in which a lot of councils are responding to this. However, if you do not ring-fence a budget, you are not putting the same amount of pressure on that Department to try to drive efficiencies. So are we not finding ourselves getting to the problem where those budgets that are not ring-fenced, that are not being nailed down, are now driving genuine taxpayer efficiencies whereas ring-fenced budgets are not?

Danny Alexander: No, I do not think that is the case, but it is a risk that we should guard against. I think in every case we are driving efficiency much more than has happened in the past. I would pay tribute to the work of Francis Maude and the Efficiency and Reform Group in the Cabinet Office, because we now have a real pool of commercial expertise within central Government that was of real assistance to me in this Spending Round. I could go and looking at the IT contracts in the Department for Work and Pensions, or some of the procurement approaches in the Ministry of Defence, and evidence how we could make some of the savings that those Departments needed to make. But those people have also come back to me and said, "In many cases, we think there are many more efficiency savings to be had". That is why I have launched in my statement a further process of efficiency reviews, Department by Department, reporting over the next two years, precisely to identify using commercial techniques where there are more efficiency savings to be made across Government, so that those savings can be used to support our economic priorities.

Q172 Mark Garnier: Can I turn to pensioners?

Chair: Very quickly.

Danny Alexander: I am happy to carry on, Mr Chairman, but I appreciate that others may have lunch obligations.

Mark Garnier: I am on a diet, so I am trying to avoid it.

Chair: One last quick question and then I will bring in two more colleagues.

Mark Garnier: Pensioners have also been ring-fenced in terms of budget. We have heard on numerous occasions, from people like Mervyn King and other commentators who have come and spoken to us in this Committee, that we are seeing a fairly significant transfer of wealth from the younger generation to the pensioner generation for a number of different reasons, not least that we are seeing pensioner benefits being ring-fenced. That is causing quite a big economic skew. Why in particular are you ring-fencing pensioners’ benefits in the budget?

Danny Alexander: We set out a policy for the reform of pensions when we started out-the triple lock to protect the value of someone’s pension, which had been eroded over a number of years. We are now seeing people being paid better state pensions than they were before and than they would have expected under the uprating plans that we inherited.

Q173 Mark Garnier: Why? It is very nice, but-

Danny Alexander: I think because it is right to say that we should provide a proper degree of support to our elderly people who have contributed to our society throughout their lives.

Q174 Jesse Norman: Chairman, I am reluctant to stand between you and your obligations to lunch but maybe I can keep my questions relatively brief. Chief Secretary, we discussed the issue of schools funding earlier with experts, and their comments were that the current system is "very unequal". That was the IFS’s description of it. Could you just comment on who is affected by that inequality and whether you agree with it?

Danny Alexander: It is certainly the case that per pupil funding varies very dramatically between different parts of this country-between the greatest extremes there is a difference of up to £3,000 per pupil per year. Taking a deprived pupil in a Northamptonshire secondary school, the per pupil funding in that case will be about £1,700 more than an deprived pupil in a Derbyshire secondary school. So we have made a number of changes already to try to address that, particularly the introduction of the Pupil Premium, which is additional resources going to the education of disadvantaged children. One of the things we have announced in the Spending Round is that we are going to introduce over time a fair national funding formula for schools. The Department for Education will be setting out in more detail, and consulting on, how to do this. So I do not have much more to add in terms of how it might work, but the basic idea behind it is to say that over time we should move to a fairer basis for the base funding of schools.

Q175 Jesse Norman: But you would accept the IFS’s description that it is very unequal at the moment?

Danny Alexander: I think there are historic and unfair differences in funding between schools in different local authorities.

Q176 Jesse Norman: Thanks. Do you also accept the view that was put forward that although the Pupil Premium is validly targeted on the less well-off, there are at least two deciles above that of people who are not as badly off but nevertheless are eligible for appropriate funding and who may only just be floating above that cut-off point?

Danny Alexander: One of the ways that we have addressed that point is to move from a measure of the Pupil Premium that is just based on receipt of free school meals in that year to look at receipt of free school meals over, I think, a six-year period now. That would reflect the fact that there are people who move above and below that line throughout their lifetime, depending on changing family circumstances, and therefore bring a slightly wider cohort into the ambit of the Pupil Premium.

Q177 Jesse Norman: So people in parts of the country that have relatively low levels of income should not thereby have low levels of funding. Funding and income should more or less be correlative-the richest area should receive the lowest funding and vice versa. That is the expert view.

Danny Alexander: I think it is best to allow the Department for Education to set out the details in due course. I think I have expressed the intention behind our plans.

Q178 Jesse Norman: Do you think school transport should be included in the calculation, given how hard it often is to get kids to school, how much time is consumed by it and the cost of transport at the moment?

Danny Alexander: There is school transport funding that is outside the direct schools grant. That will continue to be paid to schools, so it is not counted in the per pupil allocations through the direct schools grant. That extra funding that particularly helps rural areas will continue to be paid. It is not something that we are making big reductions in in this Spending Round.

Q179 Jesse Norman: A final quick question. Obviously, the issue here is not just about the performance of the schools. It is also about equity and the richness of the educational experience.

Danny Alexander: What we need to have is a school system that is ensuring that every child, irrespective of the circumstances of their birth or the area that they live in, gets the quality of education that we would expect for all of our children. That is what we are seeking to achieve through this reform.

Q180 Jesse Norman: But you are agreeing with the point I am making, which is that it is not just about fairness. It is about fairness and the richness of the educational experience. It is not just about what their academic performance is.

Danny Alexander: It is about both of those things.

Jesse Norman: Yes, that is what I thought. Thank you very much.

Q181 Mr Ruffley: Chief Secretary, why can you not introduce the welfare cap in 2014 rather than 2015? It is a good idea. Why not 2014?

Danny Alexander: With a reform of that scale, we need to take time to get the precise operation of it right. The idea is a forward-looking proposal.

Q182 Mr Ruffley: So it is an operational reason?

Danny Alexander: We would be too close now to the 2014-15 financial year for this to start. If we introduced it in the autumn statement, let’s say, for 2014-15, we would be too close to make it work properly for that year.

Q183 Mr Ruffley: Could you just provide some detail that is not immediately obvious from the Treasury documents? The Chancellor talks in his document about some cyclical benefits being excluded from the welfare cap. Can you list what those are?

Danny Alexander: Yes. We would seek to exclude from that Jobseeker’s Allowance and other benefits that are passported from Jobseeker’s Allowance, because that is part of the automatic stabilisers in the economy. I can’t give a list of what all the passported benefits are but, for example, for people who move on to Jobseeker’s Allowance and have housing benefit passported as part of that, that housing benefit would also be outside the limit that we are setting.

Q184 Mr Ruffley: So the excluded is JSA and passported benefits associated with JSA.

Danny Alexander: Yes.

Q185 Mr Ruffley: The Chancellor also says in his document, "Over the coming months the Government will consider whether it is appropriate to include other elements of AME in the cap". Can you indicate to us what is under consideration?

Danny Alexander: Not at this point. There is a-

Mr Ruffley: What does that sentence mean?

Danny Alexander: There is a very long list of other AME components.

Q186 Mr Ruffley: We are just honest seekers after the truth. "We will consider whether it is appropriate to include other elements of AME in the cap." I am asking you what elements of AME might be under consideration.

Danny Alexander: As I say, there is a long list of measures that are within AME.

Mr Ruffley: And I am asking you which ones might be under consideration for inclusion in the cap.

Danny Alexander: I am saying that we are looking at a number of measures on that list, and when we have reached a conclusion we will announce what we are going to do. Going back to when we came into office, about half of all public expenditure did not have any control framework associated with it, so there are other elements of AME where we have already introduced control frameworks. In public service pensions, for example, our reforms already have a back-stop cap arrangement in the legislation, so that does not need to be here. We have sought to control the cost growth of the basic state pension through bringing forward increases in the retirement age. I am sure that is a process that will continue in future. There are areas like debt interest which it would not be appropriate to include in a framework like this. Environmental levies already have a control framework associated with them, but there are other smaller elements of AME that we just need to look at and work out if they are appropriate to be included within this framework.

Q187 Mr Ruffley: But you will tell us in due course?

Danny Alexander: Yes.

Q188 Mr Ruffley: The "comply or explain" sanction is thought by many commentators to be a fairly weak deterrent to Departments or Ministers who breach the cap. What other sanctions will the Treasury apply?

Danny Alexander: I do not think it is weak-I disagree with that analysis.

Q189 Mr Ruffley: Is that the only sanction?

Danny Alexander: The way that the cap will work is that, having set the cap, the OBR will give a forecast. If there is a breach in the future, perhaps with a small buffer above that to allow for statistical fluctuations, then the Chancellor of the Exchequer will have to report to the House of Commons either the action that he or she is taking to bring expenditure back within the cap or an explanation of why action is not being taken. In that sense, it is similar to a fiscal rule, which I think does impose a great deal of discipline on the Treasury and on the Chancellor and the Chief Secretary and the decisions that we make. So I think it is something that will have a real bite. I think it will also help to improve the forecasting of AME expenditure, which is a real weakness in Government, and by strengthening our forecast we get a better sense of where that money is going to go.

Q190 Mr Ruffley: Why are you not setting individual caps for individual benefits? Why are you just doing it in aggregate?

Danny Alexander: There are always statistical variations up and down for individual benefits. I think it is much more sensible to look at the sort of £100 billion or so of other social security together as one thing.

Q191 Mr Ruffley: But isn’t it the case that it follows from that that if there is overspend in one benefit it might squeeze, without any intentional effect, other parts of the budget, if you have an aggregate policy rather than benefit by benefit?

Danny Alexander: It might do but, of course, it is a judgment for the Ministers of the day to decide what offsetting action they want to take or, if they decide not to, how they will explain that to Parliament.

Q192 Mr Ruffley: But you have ruled out setting individual caps for individual benefits.

Danny Alexander: No, the approach we are taking is the one we have set out, which is an aggregate limit across a range of benefits that brings those things together and treats them in aggregate for the purpose of this control mechanism.

Q193 Mr Ruffley: Final question, Chairman. State pensions are a quarter of total AME. Do you think that the triple lock is sustainable in the medium term?

Danny Alexander: Yes, I do, but it will clearly be a question for each political party to set out its views on at the election. My view is that it is sustainable and right. I think if you look at that in combination with the single-tier pension reform that we are also taking forward at the moment, that also results in significant savings in expenditure over the very long term. If you take that together with the action that we have taken on state pension age, which I think is the fairest mechanism through which to control expenditure in this area, because it relates to growth and life expectancy, I can well imagine that further decisions in that space will have to be made, and we are putting in place a mechanism there. I think that is the right way to control pensions expenditure, not to have a system that ends up with microscopic increases in the basic state pension, as we saw, for example, with the 75p rise in the previous Parliament.

Chair: Chief Secretary, you have provided an enormous amount of detail to a wide range of questions this morning, now this afternoon. We are very grateful to you for giving evidence, and for longer than had originally been discussed with the Department. Perhaps it is a reflection of your absorption of that detail that you have been very well-briefed by Sharon White, who therefore did not need to say anything on this occasion, but I have no doubt on some future occasion we will be looking forward to hearing from you. Thank you both very much indeed.

Prepared 12th July 2013