Examination of witnesses (Questions 200
- 219)
THURSDAY 15 MARCH 2001
MR GUS
O'DONNELL, MR
NICHOLAS MACPHERSON,
MR ADAM
SHARPLES, MR
ALEX GIBBS
and MR CLIVE
MAXWELL
Mr Fallon
200. Mr Maxwell, you are reducing petrol duty
and you are freezing other fuel duties. You have frozen vehicle
excise duties. Overall, that is going to increase car use, is
it not, not decrease it?
(Mr Maxwell) I think it needs to be seen in the round.
There is a series of different policies taking place here. We
have the introduction of the new company car tax. In this year's
Budget, the Chancellor announced not only reductions in duty on
the cleanest available current petrol and diesel but also set
out a route map for cleaner fuels for the future, starting first
of all with the road fuel gases, and LPG, CNG and then biofuels.
In the round, it is the package of these measures plus the changes
to vehicle excise duty for new cars coming into place this March
and the incentives for smaller existing cars that needs to be
considered.
201. Seeing it all in the round, which is your
phrase, will car use increase or decrease this year as a result
of these measures?
(Mr Maxwell) The DETR has estimated in its ten year
plan for transport that car use will increase by something like
17 per cent by 2010.
202. I am asking about this year's measures.
Will they increase or decrease car use?
(Mr Maxwell) As a result of the reductions in duty,
we would expect an extremely small impact on the use of cars.
203. Which way?
(Mr Maxwell) There are two things going on. There
is the differential which is encouraging people to use cleaner
fuels. That has air quality benefits and, in the medium term,
it has potential CO2 benefits. There is also an impact on car
use at the lower duty rate and that is likely to increase very
slightly. We are talking of the order of less than half a per
cent in the context of a 17 per cent increase by 2010.
204. This year's duty measures will increase
car use slightly?
(Mr Maxwell) A reduction in duty has a number of effects,
one of which is in air quality. The other is, if the duty on fuel
falls, the demand could rise slightly and therefore car use would
increase very slightly, but we are talking about extremely small
amounts.
205. That is not going to make the roads safer
for your new generation of cyclists, is it? You are encouraging
car use on the one hand and trying to get people to use cycles
on the other.
(Mr Maxwell) You have to see things in the round.
206. If you are a cyclist, there are going to
be more cars to contend with.
(Mr Maxwell) Congestion has grown over many years
in the United Kingdom. The DETR has forecast that car journeys
will increase over the period to 2010.
207. In the Pre-Budget Report, you said you
were going to do a proper assessment of the environmental implications
of removing the duty premium on lead replacement petrol. Now you
have done that so you are reducing it but you have not published
the assessment. Is that a secret?
(Mr Maxwell) I do not think it is a secret. The DETR
carried out an assessment of the environmental impacts.
208. Do you expect that to be published? Is
there any reason why it should not be published?
(Mr Maxwell) I cannot see a reason why it should not
be published, no.
Mr Beard
209. Could we turn to productivity? Do you believe
that the various measures that have been announced to boost productivity
are actually working?
(Mr O'Donnell) We take an overall look at what is
happening to productivity. There are tables in here which look
at what has been happening in the current recovery. At the moment,
it is quite interesting that the recovery has been very employment
rich. We have had a big expansion in employment and this has brought
new people into the workforce who were previously marginal. We
would expect those new entrants to the workforce to have below
average productivity because they were relatively low skilled.
What has been happening so far is that you have had big increases
in employment but not much in productivity. We had expected this
to turn round somewhat. It had not until 2000. If you look at
GDP growth for 2000, essentially it is about half and half. About
half the growth is due to increased productivity and about half
to increased employment. As we go forward from there, we would
expect the proportion due to employment growth to be relatively
small and the proportion due to productivity growth to be somewhat
higher. That reflects the view that there is quite good econometric
evidence that when people come into the workforce they certainly
start with relatively lower skills but between two and three years
on their productivity goes up towards the average. There will
be that effect coming through. Also, we have had a very big rise
in business investment. The individual workers are working with
more capital, so we would expect that to have a productivity effect
coming through. We expect overall business productivity to be
affected positively by the macro-economic stability that has been
delivered—low inflation, low interest rates and the like—and
then there is the whole raft of individual measures that we are
implementing. The one I would point to in this Budget, which I
think is a key measure is the consultation that we have announced
on research and development tax credits. There is quite a lot
of good economic evidence that the social returns from research
and development are quite a lot higher than the private returns.
Mr Troup in his evidence to you pointed that out. Therefore, there
is a good case for trying to stimulate research and development.
There is already a credit for small and medium sized enterprises.
We released a consultation document with this Budget to explore
an incremental R&D credit—i.e., additional on what was
done last year—to explore a tax credit for R&D for medium
and larger firms. There are issues about how you define incremental
and how you define R&D. Those are issues that have been put
out for consultation. There is quite a lengthy discussion of those
in the consultation document. There are a number of other individual
measures that we hope will have small but positive effects on
productivity like venture capital funds, enterprise management
initiatives, community investments, those sorts of areas. Overall,
these measures will take time to come through. This is the sort
of thing that is a very long term programme. We are not expecting
suddenly to be able to observe increases in productivity month
by month. This will be a pattern that emerges over years.
210. Why has the growth of productivity in the
last three or four years been so poor?
(Mr O'Donnell) It essentially reflects the employment
rich character of our recovery. Basically, we are bringing a lot
of new people into the workforce, expanding employment quite substantially.
These are people who have been at the margins and whose actual
productivity is below the average, so they are bringing down average
productivity. It is not unexpected.
211. What are your forecasts of productivity
growth for the future, given the measures that have been taken
and the factors you have already outlined?
(Mr O'Donnell) It is difficult to know precisely how
much these measures will stimulate productivity. Essentially,
what we are doing is adopting a very cautious approach. As we
go forward, we are assuming that labour productivity grows at
around two per cent per annum. Our neutral view of trend growth
is made up of two per cent labour productivity growth and half
a per cent increase in the number of workers. The half per cent
is given to us by the demographics. One can be fairly certain
about that although there are labour supply effects. We talked
about some of the ones at the margin that might have an impact
on that. We are rather hoping that that half a per cent will turn
out to be cautious as well, so we might induce rather more people
into the workforce and we might improve upon the long run average
productivity figure of two per cent. There are good reasons to
believe that two per cent should rise because of the very high
levels of business investment we have seen. Increasing levels
of public sector investment through time should improve the infrastructure
which will help the private sector increase its productivity through
better transport and the like. The combination of those, we would
hope, will start to push up productivity. When those things happen,
we may be in a position to say that the trend growth rate has
gone up. At the moment, we have a neutral assumption of trend
growth rate of 2.5 per cent, but we will need to look at the evidence
and see the numbers as they come in. This is not something that
we are in a position to have the evidence for yet, but there are
some signs that things are moving in the right direction.
212. The Chancellor recently announced the joint
working parties involving the CBI and the TUC on productivity.
How are they progressing?
(Mr O'Donnell) They are progressing well. The Chancellor
has had a number of workshops and breakfasts on productivity where
we have been working with businessmen and unions to get them to
think about what kind of measures would help increase overall
productivity. We produced a paper with this budget on productivity
which had some case studies in there. It is interesting to see
that the debate is being engaged by the employers as well. I pick
out for mention the Engineering Employers' Federation who produced
a booklet recently called Lessons from Uncle Sam, where
they compared US and UK productivity and looked at reasons for
the productivity gap and considered ways of trying to learn from
best practice in other markets. This is going to be one of those
areas where the answer is probably that there are lots and lots
of smaller answers rather than any one big answer.
213. Mr Paul Myners's report was accepted by
the Chancellor recently. Are you doing any assessment of what
the impact of implementing those recommendations on productivity
might be?
(Mr O'Donnell) Yes, we will be. The Chancellor has
accepted the Myners recommendations but for some of them—for
example, one of the key ones like abolition of the minimum funding
requirement—they will require legislation. That has not
happened yet. What you have observed is the markets moving ahead
and taking the assumption that these things will change. One of
the problems we faced in the pension industry was that, because
of prudence on public finances and the fact that people only see
that we are running surpluses now but expect us to carry on with
tight fiscal positions long term into the future, we have very
low, long interest rates in the United Kingdom. They are below
the US and Germany and that has consequences for the pension industry.
The announcement of the Myners proposals did in fact cause some
effect at the long end of the gilts curve. It meant that people
saw that pension funds would be able to diversify somewhat more
out of just buying gilts. That meant the demand for gilts would
go down a bit and push the prices down and yields up somewhat.
Myners is not just about buying gilts; it is about diversifying
pension funds holdings overall and making pension funds perform
better. That will mean that they may hold a slightly wider set
of assets and move towards a slightly riskier but slightly higher
return overall portfolio. That will include things like venture
capital funds possibly.
214. When would you expect legislation to implement
the Myners report to come in?
(Mr O'Donnell) That will be a matter for the usual
channels to consider when there is parliamentary time. I know
this is a priority matter.
215. The minimum funding requirement took some
time to devise. Is it likely that any replacement for it would
be equally difficult to devise?
(Mr O'Donnell) I do not think so in the sense that
the minimum funding requirement required a certain amount of legislation,
but then there were questions about the implementation and how
should one implement it. Those issues went to actuaries who were
giving advice on it. As I understand the implication of the Myners
proposals, it is that quite a lot of the way forward will be to
establish standards, voluntary codes and use transparency to allow
pension fund managers who are faced with pension funds that are
in very different circumstances to be able to explain their circumstances
and their particular investment strategy in the light of their
liability, so that they can match their asset and liability management.
A lot of this will come about through more transparency and a
greater role for trustees, for example. How much of it has to
be done via the legislative route and how much can be done through
that route I am not sure but it may well be that the legislation
does not have to be too complex.
Mr Fallon
216. Coming back to the research and development
tax credit, when you planned to move it from the small firms to
the larger firms, what lessons did you learn from its operation
in small firms?
(Mr O'Donnell) Remember that large firms R&D tax
credit is simply out there for consultation at the moment. We
are in the process of learning. For the small companies R&D
tax credit, again, we will be able to get more information. It
takes a while from the tax credit being introduced to being able
to have good, solid information as to what the behavioural impact
of that has been. As yet, we have not been able to learn much
from it but I hope through time we will be able to by observing
precisely what has happened to R&D spending by small companies.
Obviously, we have to compare that against a relevant counter
factual. That will require us being able to establish what R&D
spending by SMEs would have been in the absence of the tax credit.
That is where evaluation work is always quite difficult.
217. Presumably, you have to make some estimate
of the dead weight cost if R&D would have gone ahead anyway?
(Mr O'Donnell) Exactly.
218. You have not done that work yet on the
smaller companies?
(Mr O'Donnell) That work will be carried out but it
is a question of having simply enough data post the tax credit.
It is not very sensible to have done it until you have a reasonable
amount of data to analyse the impact. The credit has not been
in force for very long.
219. There has not been an evaluation?
(Mr O'Donnell) We have not completed an evaluation
yet, no.
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