Examination of witnesses (Questions 100
- 119)
THURSDAY 15 MARCH 2001
MR GUS
O'DONNELL, MR
NICHOLAS MACPHERSON,
MR ADAM
SHARPLES, MR
ALEX GIBBS
and MR CLIVE
MAXWELL
100. But you have just told me you have the
monthly returns from all the departments so presumably you have
some idea?
(Mr Sharples) We do have to apply a degree of judgment
in making the forecast. Departments' records in forecasting are
not always as good as we would like them to be so we have to apply
a degree of judgment, and we publish the outturn department by
department once we have the final figures in July.
101. So you are not willing to comment on which
departments you think are likely to be the ones not spending the
targets?
(Mr Sharples) I think we have to wait for the outturn
figures available in July. As I say, they are published in the
public expenditure outturn White Paper published each year.
102. What impact do you think this underspending
of £1 billion is likely to have on services?
(Mr Sharples) I should emphasise that, as you will
know, we have changed the rules on the carry-over of underspends
from one year to the next so all the money that departments have
not spent this year—and I would emphasise it is a tiny proportion
of their total budgets—is available for them to spend in
future years, so this will have no impact on the delivery of services—
103. It may have an impact this year?
(Mr Sharples) Well, as I said, there is very strong
growth coming through this year in the spending on public services.
Departmental expenditure limit spending is up by 6 per cent in
real terms as compared to the previous year so very strong growth
is coming through and strong growth is planned to continue through
the years ahead.
104. Are you worried that in some programmes—and
we have commented in this Committee before particularly on the
investment programmes—the government is having problems
spending the money that has been allocated? Is that a worry? Why
do you think that is happening?
(Mr Sharples) As I said earlier, I do not think it
is happening. There is a bit of a myth about underspend. The fact
is that departments are increasing their spending in line with
plans. It is perfectly normal to have a small shortfall compared
to budgetary limits at the end of the year but, as I said earlier,
we have changed the rules in pursuit of value for money to allow
departments to carry over that underspend to following years.
What used to happen was that departments tended to spend at the
end of the year for fear of losing the money. Now we felt that
that was leading to wasteful spending at the end of the year so
we changed the rules and we allowed them to carry it over, so
that leads to a smoother pattern of spending; it avoids the wasteful
end-year surges and it allows the departments to plan their spending
over the medium term. That is precisely what the government is
trying to achieve by setting spending plans over the three years
and by setting targets for outputs and outcomes that go with those
spending plans so departments can plan their delivery of services
in a business-like way.
105. In the Budget the Chancellor made provision
for extra spending on salaries for teachers and nurses, NHS staff
generally. Why has it taken so long for the government to react
to the labour shortages in the health service and our schools?
(Mr Sharples) I do not think the government has been
slow to react. This is one of a number of announcements that have
been made which will provide extra resources for recruitment and
retention of key staff in these services. These are simply some
extra resources that are going in on top of the money that was
already allocated in the spending review last year.
106. I find it hard to square what you have
just said with the experience in my constituency and in many other
members' constituencies where there are large shortages of teachers
and nurses and police and other NHS staff and vacancies in biomedical
staff in the local hospitals. Given these quite significant shortages
of staff, should the government not have reacted much earlier?
(Mr Sharples) I think it is precisely because of its
recognition of the fact there are problems in some areas and in
some specialisms that the government has acted and put in extra
money in this budget, and the measures that were announced last
week will be coming through and will have a real impact reinforcing
the measures that have already been taken and that were funded
through the spending review last year. The fact is there are increases
in the number of teachers coming through and in the number of
nurses and doctors employed, and this extra money will allow those
increases to continue and allow the government's targets for recruitment
to be delivered.
107. Will any of this extra money for staff
be targeted at those areas, such as London and the south east,
that have the greater shortages of staff?
(Mr Sharples) The details of the recruitment measures
were announced by the Departments for Education and Health last
week. There is an element of targeting at shortage subjects and
hard-to-recruit areas in those announcements.
Judy Mallaber
108. Following on from Mr Davey's question,
if there was a mismatch during the year on the monthly returns
you were getting within a department, either under or over, is
there a mechanism for that to be questioned and, if so, what would
that mechanism be? Does the Treasury watch out for that and go
back to the department and say "Pass that message on to ministers"
or whoever else?
(Mr Sharples) We are in constant dialogue with departments
about these issues. We keep the situation under review and, if
there were significant mismatches, we would certainly be going
back to departments and discussing that.
109. What would count as a "significant"
mismatch?
(Mr Sharples) I think it would depend very much on
the size of the programme and the nature of the spending. Sometimes
it is hard to predict precisely because the precise timing of
certain payments coming through or certain initiatives coming
through is sometimes a little hard to predict but, as I say, we
keep this under review and we are in constant dialogue with departments.
110. How much of that dialogue gets passed on
to Treasury ministers? At what point of seriousness would you
be passing it up the line?
(Mr Sharples) We keep our ministers fully in touch
with the situation.
Chairman: That is good to hear!
Judy Mallaber
111. Of the extra spending announced in the
Budget, what proportion of that would be financing higher wages
and how is that classified in the accounts?
(Mr Sharples) The extra spending that was announced
in the Budget was for certain specific measures in health and
education and dealing with crime and drugs. The money is very
much money for the front line: it is money going direct to schools,
direct to hospitals and directly into recruitment and retention
packages in health and education. In the case of education, therefore,
what it means is that each school will get additional money paid
direct to the head teacher—some of it current, some of it
capital—for use within the school depending on what the
head teacher regards as the priority. Similarly, on health, the
money is going to be paid direct to the acute hospital trusts
and it will be up to the management of the trust to decide how
the money is used in accordance with local priorities.
112. So there is no assessment of what proportion
of the budget increases is likely to be going on wages?
(Mr Sharples) Well, the assessment is that the money
will be going for improvements in the delivery of services in
those key services.
Chairman
113. As you know, there is forecast a change
in public sector spending in the sense that we move from a position
of substantial surplus to a small deficit by the year 2003-04
and then in 2004-05. Is that accounted for mainly by the increases
in education and health which have been announced?
(Mr O'Donnell) The reason you move from the surpluses
to the deficits in the numbers for later years is partly a consequence
of the assumptions that we use. We are assuming, therefore, for
those numbers you are coming up with that GDP only grows in line
with our cautious view of trend of 2.25 per cent. By the time
you get out to numbers like 2004-05 or 2005-06 this has a big
impact because it has built up all the way through. Every single
year we have lower growth forecasts than we think are likely to
emerge so that is why you have these ratios and that is why it
is somewhat annoying when the European Commission attack us for
these numbers because what we are doing is building in caution
there and coming up with these assumptions on those bases. If
we had used, for example, the Commission's forecasts of UK growth,
it would not show anything like the same sorts of stories. That
is the GDP side; I will let Adam comment on the spending numbers.
(Mr Sharples) On the spending numbers, as you know,
the announcements provided for increases each year in departmental
expenditure limits of about three quarters of a billion pounds
adding up to two and a third billion over the three years, but
because of off-setting changes in some of the elements of demand-led
spending, total spending is very slightly below the plans previously
announced.
114. But it is the education and health bits
which have led on the spending side to the deficit, as it were?
Putting it another way, negatively, if the Chancellor had not
announced the increases in the education spending in the comprehensive
spending review last year and then the additional bits in both
the pre Budget report and the Budget itself, we would not now
probably, am I right, be having a deficit in the year 2003-04
and 2004-05?
(Mr Sharples) If you cancelled the increases in education
and health certainly the position on the current surplus would
strengthen.
115. We might well still be in surplus?
(Mr Sharples) It is a hypothetical question. It depends
how much you knocked off education and health.
116. The argument that you are putting forward
I seem to remember is that government's policy is not to run large
surpluses, and there is not much point in that.
(Mr O'Donnell) Yes.
117. That sounded sensible. The converse of
that is deficits can build up, can they not?
(Mr O'Donnell) Indeed.
118. There have been warnings by some experts
that, although it is quite a bearable deficit, it could increase
quite considerably over a period, particularly I know you are
making a cautious assumption about 2.25. On the other hand, if
we are hit by a recession because of what happens in the United
States, they could appear too optimistic?
(Mr O'Donnell) That is why the fiscal rules are formulated
in the way they are because we formulate the rules in cyclically
adjusted terms so if there were to be a slowdown in the UK economy
so we grew below trend and, as a result of that, the automatic
stabilisers kicked in with more unemployment benefits and less
revenues, the fiscal rules would allow for that and they would
say that is entirely appropriate. The main point to be sure of
is, when you have these periods when you are going above trend,
you do not let things get out of hand. We are now in a very strong
situation where, if there is a slowdown, we have a situation where
monetary policy can respond quite quickly but fiscal policy can
stand it because our overall fiscal position is so strong and
sustainable. For example, our debt ratio has come down 12 percentage
points, so when we said we would try and keep the debt ratio below
40 per cent we are now looking at forecasts of it hitting 30 per
cent, so there is plenty of room for manoeuvre. Given the strong
policy position we have got, if things go wrong we can respond
with both the monetary and fiscal policy. Looking internationally
we see a big contrast with, say, Japan where they have great problems
but they have done everything they can on monetary policy because
interest rates are zero, yet their fiscal policy position is not
really sustainable because they have been putting in injections
all the time and people do not believe that would work. Every
time there is a fiscal injection, therefore, consumers save more
so it does not add to demand and that is when you get into problems.
At the moment we are in a situation where the world has become
somewhat more uncertain but both fiscal and monetary policy are
in strong positions to be able to respond if necessary.
Chairman: I think I said something of
the same in my speech on the floor of the House of Commons but
I thought I would test the other side of the argument.
Mr Cousins
119. The forecast borrowing requirement in the
Budget last year was a £6 billion surplus. By November that
had got to a £10 billion surplus and in the Budget the estimate
is over a £16 billion surplus. What are you doing to improve
your forecasting, because these are pretty dramatic differences?
(Mr O'Donnell) A number of people have mentioned our
forecasts. What I feel about forecasting is that we are doing
incredibly well. If you look back, one of the big forecasting
judgments we had to make was when a lot of outside forecasters
were predicting a recession as a follow-up to the Asian crisis,
and we went well away from the pack and said there would not be
and came up with pretty good forecasts for that year. This last
year, in Budget 2000, we predicted that growth this year would
be 3 per cent plus or minus a quarter of a per cent and the figures
the ONS have put out for growth in 2000 are 3 per cent. One could
infer from this that this is probably a good time to stop forecasting—you
probably do not get it right three times in a row!—so what
I am saying is that basically our central forecast is coming in
right so our forecasting is fine but we are building in to the
public finances, as you rightly say, explicit caution. We therefore
have central forecasts for the economy but cautious assumptions
on the public finances, and we do this on purpose because we think
that, whereas monetary policy should be based on central forecasts
with a symmetrical target because you can tighten or loosen monetary
policy quite easily with the same costs either way, on fiscal
policy it is much harder to tighten than to loosen so it is better
to err on the side of caution. We build in, therefore, a whole
list of NAO assumptions. For example, because we lost a lot of
VAT revenue in the past and we could not quite predict that we
built in an assumption that the VAT as a share of spending would
decline every single year. The NAO audited assumption said that
ratio will fall by 0.05 percentage points every year. If that
does not happen and we get more revenue in, we will outperform
our forecasts and this year we did that in a variety of ways.
As I said to you, the oil price was higher than our NAO assumption
requires us to put in; we have assumptions about unemployment;
we assume, again, an NAO audited assumption that unemployment
does not fall. If, as happened last year, unemployment falls quite
dramatically now to below a million, then our forecasts will be
wrong so, if the world turns out rather well, as our central projections
say, we would expect to outperform on the public finance numbers,
and this year that happened in a number of areas—including
income tax.
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