Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 300 - 319)



  300. Did you read, Chancellor, yesterday that after four years of Labour Government 200 13-year-olds were sent home from Holywells High School in Ipswich at 11.15 in the morning because they were six teachers short. Did you read that?
  (Mr Brown) I did read the newspapers this morning, and I read them most days. I am not in a position obviously to answer for what is happening in an individual school in an individual education authority. I think the figures I have read out, about the additional amount of educational expenditure that is available, are ones that show we are putting more money into schools and education generally. I think the determination of the Secretary of State for Education to deal with what have been recruitment problems that build up over a long period of time, partly through the numbers of people not doing teacher training in previous years, and the efforts he is making and the additional package he has announced to encourage people and to recruit people is something I think he would welcome.

  301. If it takes one year to train a graduate teacher, and you have been in power for four years, this is your failure, is it not?
  (Mr Brown) It takes a number of years to build up the expectation that teaching is a career that more people want to go into. It takes changes in both salary arrangements, and in the recruitment of people to colleges, as well as changes in the schools themselves. I think most people would agree the changes that the Secretary of State for Education has brought in, starting with primary schools and now moving to secondary schools, they are showing results; but, as we have said on previous occasions, a lot has been done but there is still a lot to do.

  302. This billion pounds is not going into raising teachers' salaries, is it?
  (Mr Brown) The billion pounds is over three years, and it is an addition to the rise in teachers' salaries that was announced by the Public Sector Pay Review Body. There is additional money in his recruitment package for people returning to education immediately—money to help them do the refresher courses, and back to teaching bonuses that are available for people if they come back to teaching in the next period of time. Yes, there is additional money to recruit people back into teaching in his package that was announced on Monday of last week. I think, if I am right, that the total recruitment package was worth £200 million over three years.

  303. If you are so short of teachers are their salaries right?
  (Mr Brown) The Public Sector Pay Review Body made recommendations which we have accepted. We did not phase in the awards; we accepted the awards. Equally, over a period of time the Secretary of State for Education has been trying to recruit more people with the promise of higher salaries for head teachers and also higher starting salaries. He is trying to address these issues. I can only repeat, that the amount of money going into education now compared with what it was under the previous government is very substantial indeed. Education expenditure will rise from £46 billion this year, to £49.8 billion next year, to £58.1 billion by 2003-04. I had thought the complaint of the Conservative Party was that we were spending too much on these public services, not too little.

  304. Can you recall when children were last sent home from school at 11.15 in the morning?
  (Mr Brown) These are matters that are relevant to how local education authorities are dealing with problems that they have.

  305. It is their fault?
  (Mr Brown) These are matters that local education authorities are dealing with in relation to recruitment of staff in their areas; and they are being helped by the measures that the Secretary of State for Education is announcing.

Mr Cousins

  306. Box B3, Chancellor, on page 177, deals with the US economy. In the text of Box B3, which is extremely illuminating, it says ". . . investors may be unwilling to finance the current account deficit [of the United States, obviously], leading to a sharp correction in the dollar". Do you think the same thing could happen to the pound?
  (Mr Brown) As you know, I never got into the position of speculating about the future movements of sterling. In the medium-term we believe the exchange rate will reflect the fundamentals of the economy.

  307. I asked that question really because there is an element of speculation about the course of the dollar. It seemed to be logical to—
  (Mr O'Donnell) Could I just add that for the US we are talking here about a current account deficit of around 4.5 per cent. of GDP. In our forecast the current account deficit for the UK only gets up to a peak of 2.5 per cent. It is quite a lot lower.

  308. Chancellor, you have referred in your reply to the long-term economic fundamentals as determining the value of currencies, and of course that must be right. Last year you were of the view that the weakness of the euro relative to sterling could not be justified by any reference to long-term economic fundamentals. Is that still your view?
  (Mr Brown) The exchange rate for sterling did adjust in relation to the euro over the course of the last year. Yes, it is still my view that over the medium-term that the exchange rate will reflect the fundamentals.

  309. Last year you said, and I am quoting from your James Meade Memorial Lecture approximately a year ago, the exchange rate cannot be justified by any view of long-term economic fundamentals. That was the euro/sterling exchange rate.
  (Mr Brown) Yes, but that, if I may say so, was when the exchange rate was the equivalent of 3.40 at the old Deutsche Mark/pound level. It is now something in the order of 3.10; so it has come down quite a bit since the time we talked last year so an adjustment has taken place.

  310. Your view of that adjustment would be?
  (Mr Brown) Just so you are clear, I am not speculating about when an adjustment is completed, no.

  311. Indeed, but if I could just summarise—last year you were of the view when the exchange rate was at a benchmark figure of 3.40 Deutsche Marks to the pound that that could not be justified by any view of long-term economic fundamentals. It is now approximately 3.10 and you are not confirming your view as expressed last year?
  (Mr Brown) What I am saying is that in the medium-term it will move to reflect the fundamentals of the economy; but I am not getting into a day-to-day speculation about what the right rate should be.

  312. I do understand. In Mr O'Donnell's very helpful and interesting—incidentally, I am using the term "helpful and interesting" in a certain naive sense of it being helpful and interesting, I am not making some broad point in order to destroy Mr O'Donnell's career! I am simply meaning that he came to the Committee and he was helpful and he was interesting.
  (Mr Brown) I hope you will say the same as we leave!

  313. So far so reasonably good! He said that the first response mechanism to a reduction in consumer demand, and that is not an exact quote but the gist of what Mr O'Donnell was saying, would be on monetary policy rather than fiscal policy; because the reaction times are faster on monetary policy. Do you agree that there is scope for the MPC to reduce interest rates, if it decided to do so, given the fiscal stance in the Budget?
  (Mr Brown) That is, of course, a matter for the MPC. There is no point in me making the Bank of England independent and trying to pre-judge or presume what decisions it makes in the next few days. The Bank of England reduced interest rates in February. It has taken, therefore, a proactive stand in relation to the economy. Equally, the fiscal tightening that has been locked in, in the Budget, is I think something that they would approve of.

  314. You do not feel that the Budget in any way inhibits the decision of the MPC, should it wish to do so, to reduce interest rates?
  (Mr Brown) No, I do not believe that that is the case. We have locked in the fiscal tightening of the last Budget and the pre-Budget Report. We are pursuing a policy for sound public finances. I believe that the difference in America, Europe and elsewhere between what is happening now and what happened in the late 80s and early 90s is that, generally speaking, we have economies pursuing low inflation policies with sound fiscal positions. I think the figures I read out at the start of this discussion from today's publication shows that the fiscal position is strong.

Mr Beard

  315. Chancellor, the latest Budget forecast of the GDP growth is the same as in the pre-Budget Report. Why is it the view that the events in America are not having an effect on prospects?
  (Mr Brown) We looked at that very carefully, and there is absolutely no doubt that any reduction in growth in the United States' economy will have an eventual impact on Europe and on Britain, particularly with our larger share of trade with the United States of America. We looked at the position of the economy as a whole, and when Mr O'Donnell and his team drew up their Budget forecast they could see that the reduction in trade would be matched by the improvement in consumer spending and consumer demand in the United Kingdom; and, therefore, there seemed no reason to depart from the forecast that we made of 2 -2.75 per cent. for this year.

  316. What is the basis for assuming an increase in the growth of domestic demand compared with the pre-Budget Review?
  (Mr Brown) I think if you look at the position last year, and if you also look at the strength of the domestic economy, if you look at people's purchasing power, if you look also at the changes we have made in the Budget and in the pre-Budget Report you can point to that. It is a situation of sustainable growth. I believe, when you see side-by-side with the growth figures the inflation figures, that we have got inflation under control.

  317. Is not the disparity or imbalance between the domestic prospects and the international prospects for growth in trade a worrying factor?
  (Mr Brown) I believe myself that while the American economy is obviously growing less fast than last year and that has an impact on Europe as a whole, there is still substantial growth in the European economy. Our exports to Europe, despite the exchange rate difficulties we faced, have been growing; and we are able to benefit from Europe becoming more of an engine of growth in the world economy as well as America has been in previous years. I think the disappointing factor in the world economy is that Japan continues to fail to grow; and that America has had a necessary slowing as a result of a very high level of growth last year. We are still, while being vigilant, cautiously optimistic about the future of growth rates around the world.

  318. Are you not concerned about the higher level of balance of payments deficit?
  (Mr Brown) That is obviously a factor that one takes into account. If you bear in mind what Mr O'Donnell said about the share of GDP taken account of by the deficit, it does not rise to the levels we have got in the United States.

  319. The Budget is envisaging a rise in the real household disposable income in the coming year of between 4.25-4.5 per cent. Is there not a danger of stimulating a boom from that rise?
  (Mr Brown) The difference between the position now and the position in the late 80s is that we have clear fiscal rules that are being met. There were no rules that were being observed at that time. We have inflation under control, and it will meet its target; and we have a mechanism by which the target will be met through Bank of England independence. We have not taken reckless decisions in the Budget. We have pursued a balanced approach, where we have balanced the needs of public investment and taxation but within a context where we are achieving stability. I do not believe that we are in the position that the country was in in the late 80s and early 90s.

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