Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 320 - 339)



  320. The outbreak of foot and mouth disease has come along as an unpredicted factor. What effect is that likely to have on GDP growth and on inflation if it persists for some months?
  (Mr Brown) While obviously this is very serious both for farmers themselves who are affected and for the rural economy, and it has got implications for the British economy, that is why we have immediately made available the agri-monetary compensation of £150 million or so; made arrangements for the advance payment of that where possible to the farming community; made changes in the advance payments we can make in the big restructuring scheme as well so that livestock generally is dealt with by better measures; and of course we are making available statutory compensation which already runs to something in the order of £115 million. Because of the strength of the public finances, obviously we are in a position to meet these additional requirements. As far as the effect on the British economy as a whole is concerned, I think we have to bear this in context: that agriculture is 1 per cent. of the economy, and employment is less than 2 per cent. of the economy. It is very serious indeed for the farming community and the rural communities, and it has implications for the economy, but I think we have to get it in proper context as far as management of the economy is concerned.

  321. Would you say the same about the knock-on effects, for instance, on the tourist industry?
  (Mr Brown) There are substantial issues that have been dealt with by the Working Party that is being chaired by the Minister for the Environment, where we are looking at the effects on the rural economy, on tourism and on other aspects of the rural economy; and these are obviously very serious matters that are being dealt with. I believe there is to be a report from this Committee very soon. Clearly, as you would expect, the Treasury are in contact and working in consultation with this group.

  322. These payments in compensation, will they be given from reserves or from the Ministry of Agriculture?
  (Mr Brown) The additional money for agri-monetary compensation came from the Reserve. Obviously we have got to look at other matters as they develop.

Sir Michael Spicer

  323. Chancellor, just in passing, now your boss has indicated that he would like to go off and make some money are you going to make an open play for his job?
  (Mr Brown) I do not quite follow? I am beginning now to get the hang of it, but I think that was rather similar to a question you put to me the last time I was here. I can only give the same answer, that I am happy doing the job I am doing.

  324. Did you anticipate last year with your pre-Budget Report the downturn in the American economy?
  (Mr Brown) About November there was a great deal of talk obviously about the orders that businesses in America were putting in for the first few months of 2001. I would put it to you this way: the way we are managing macro-economic policy is that, on the fiscal side we are cautious. With the Bank of England responsible for monetary policy and meeting the inflation target, we have also that additional built-in element of caution. We are putting ourselves in a position where we cannot anticipate all the ups and downs either of the British economic cycle or the world economic cycle, but we are putting ourselves in a position where we are better placed to deal with these difficulties when they arise.

  325. Was that a yes or a no?
  (Mr Brown) Yes, we knew that the American economy had a risk of slowing; but obviously it is taken into account in the Budget forecast as a result of what we have seen for the first few weeks of the new year in the United States of America.

  326. While on the American economy, if Mr Greenspan does decide to bring interest rates down by, say, 0.5 per cent. later on today, would it be true to say there is not similar scope here, because of what you said earlier on in answer to Mr Cousins; that because of high spending, consumer spending and low savings, the scope of reducing interest rates, even if the Americans reduce theirs, is not so great?
  (Mr Brown) If I may say so, Sir Michael, that is the opposite of what I said. I said we have locked in the fiscal tightening that had been achieved over recent years. We have a fiscal position as tight or tighter in future years as in the previous Budget; and we have put the public finances in a position where we can withstand difficulties as they arise. As far as the Bank of England is concerned, I believe that they will find themselves satisfied with our fiscal stance.

  327. I was not on this particular occasion talking about fiscal stance. You did say that consumer spending was high and rising. You said that in response to a question which Mr Beard asked you. Commensurately you would accept that savings are falling at the moment—certainly your published documents say that. Presumably there is less scope here than there would be in America for reducing interest rates?
  (Mr Brown) I am sorry, I do not accept that either. You must remember that interest rates were cut in Britain in February. You are speaking as if there has been no cut in interest rates. There was a cut in February. I will ask Mr Balls to read out the figures for consumer spending which paint a different picture from what you are suggesting.
  (Mr Balls) Consumer spending in Table B3 slows from 3.75 per cent. last year to 3 /3.5 per cent. this year, and then 2.5-3 next year. The savings ratio rises from last year to this year, this year to next year, and next year to the year after. Our economic forecast has always been based upon a slowing of consumer spending to trend and so have the Bank's decisions over the last year. We are forecasting that happening over the next year as we were doing last year.

  328. Then I really do not understand your answer to Mr Beard. When he asked about the American economy downturn and the effect on your forecast, you said something to the effect that that was going to be made up by consumer spending?
  (Mr Brown) Yes, I am sorry, the growth of consumer spending was slowing in the course of the next year, from what it had been in the previous year, but not slowing as fast.

  329. I will come back to that. Did you anticipate in your forecast last year the very sharp downturn in the British Stock Market?
  (Mr Brown) I will ask Mr O'Donnell to say something about that. We make a number of calculations in these forecasts. I do not know which forecast you are referring to. Are you referring to the November forecast?

  330. I am referring to the November one, yes.
  (Mr O'Donnell) Because we do not believe that it is possible to forecast short term movements in the Stock Market, otherwise we would be very rich, we use the NAO audited assumption which is that the equity market will move up in line with money GDP over the medium term. That is the forecasting convention we have been using for a number of years and that is audited by the NAO.

  331. In view of two responses that I have now had, one on the American economy, which you partially anticipated but did not entirely and you think is made up by consumer spending, in the light of what has been said about the Stock Market and anticipated in the forecasts I really cannot find how it is possible for you to argue that your pre-Budget forecasts should be precisely the same—is it not extraordinary?—as your Budget forecast.
  (Mr Brown) It is a range. It is between two and a quarter and two and three-quarter per cent. I am not suggesting that there is absolute precision to the last 0.1 per cent, but it is two and a quarter to two and three-quarter per cent. I think you will find, Sir Michael, that that is very much in line with what other people believe is likely to happen to the British economy over the course of the year. I do not think you will find that we are out of line with some of the independent forecasters that you might examine.

  332. But do you not, Chancellor, find it extraordinary that even the range has not been altered in view of these quite considerable changes in affairs which have occurred since your November forecast?
  (Mr Brown) No, I do not, for the reasons that I have described to you. Of course, so that nobody is in any doubt, we are vigilant. We look at what is happening in the rest of the world. It is clear that the growth rate of the major industrialised countries, which was four per cent last year, is two per cent this year, so there has been quite a major change in that position. Equally, the major economy with which we trade, the rest of Europe, is experiencing growth this year of above three per cent, and so if 50 per cent of our exports and imports are with the European market we are still in a position to grow as a result of trade.

  333. But you have said to us today that you have been rather precise in why you think that the forecasts have been changed. You said that the downturn in the American economy is made up by the decline in consumer expenditure. That is a pretty precise answer. It indicates that you really feel that you are holding very precisely to these parameters for growth.
  (Mr Brown) I would say that we had to take into account that the growth rate of the world economy, but particularly because of what was happening in America, would be less this year than had previously been expected, but we also took into account first of all that the European economy continues to grow, and secondly that we detected that the slowing in consumer demand in the United Kingdom economy, for whom the growth rate is going to be less this year than last year, will not be as fast as we previously thought. I am not suggesting—and nobody is when they are dealing with forecasts—a degree of precision that gets you to the last 0.1 per cent, but the 2.25 to 2.75 I believe is a fair reflection not only of what I have said about the forces at work in the United Kingdom economy but also it reflects what other people are saying as well. Perhaps the Committee may wish to look at the independent forecasts that are available.
  (Mr Balls) If you look on table B.2 you will see that the average independent forecast for this year is 2.6 per cent, so it is not precisely in the middle of our range of 2.25 to 2.75 but it is not far off. If you look at independent forecasters since last year I would say that in the main independent forecasters last year were expecting consumption in the United Kingdom to slow and the world economy to slow this year. What has happened for all forecasters, including us, is that the consumption is slowing in the United Kingdom but at a slightly slower pace, and the world economy is slowing but at a slightly faster pace and those two things together mean that we along with other independent forecasters have similar forecasts this year to what we were expecting last year.

  334. One thing you have already acknowledged that you could not have anticipated is the effect of foot and mouth. Do you have any forecast change that you can give us today as to the likely effect in terms of falling demand, for instance, in the tourist industry as well as for agriculture, which some people are anticipating to be anything up to £10 billion?
  (Mr Brown) We do refer to this in the Red Book and I will draw your attention to page 165. We did note the impact of foot and mouth. I did give you the aggregate figures without in any way diminishing the importance of individual farms and the importance of agriculture as a whole to the rural and national economy. At one per cent of the whole economy that is the way that you can measure the effects of agriculture on the whole economy. As far as tourism is concerned, it is a major industry but of course the figures also show that a very substantial amount of the tourist industry is city based as well as rural based, so it is not the whole of the tourist industry that is affected. I think the message is going out from the various tourist boards that tourism should continue and should not be affected in the way that some people suggest by people cancelling their bookings.

  335. But a number of estimates indicate that the effect on growth will be one per cent less, in other words that your figures of two and a quarter to two and three-quarters will come down to perhaps one and a half?
  (Mr Brown) I do not accept the very big numbers that were mentioned in one Sunday newspaper and I do not think that they have been proven to be accurate figures for the impact on the economy. Of course, if this problem continues over a long period of time it has got major effects on agriculture and therefore on the rest of the economy, but we have committed ourselves not only to the statutory scheme but to additional money for the agricultural industries and of course if there has to be the reduction in the sheep herd as a result of eliminating and eradicating the disease, then we pay for compensation and for removal and disposal and we are aware of the figures that we have to meet in that area.

  336. When you say you do not accept the figures that have been provided by some newspapers, what are your reasons for not accepting them, particularly on tourism which is a very large sector of the British economy?
  (Mr Brown) Because we take the view that the more we can do to continue with the existing pattern of the tourist trade and the less disruption that takes place, the better for the economy. I think you will find as a result of the working party that the Minister for the Environment is chairing that they will be taking measures to encourage people to continue with their plans for tourism and not disrupt them, and I think that all of us in this Committee would want to encourage that.

  337. Chancellor, is not the truth that the Government plan to cut and run to the electorate before the full truth of the impeding economic downturn becomes apparent?
  (Mr Brown) I had thought that this Committee was one where objectivity and the search after truth dominated. I do not think I should be drawn into discussions about elections. As far as the economy is concerned, the economy is pursuing a stable course. The fundamentals are sound. None of the questioning today has suggested that the fundamentals are anything other than sound in terms of low inflation, strong public finances, and the sustainable growth in the economy is something I have pointed to throughout this proceeding.

  338. The only comment I would make on that is that on a number of occasions I have asked why it was that changes have not been made to your forecasts on the basis of considerable changes which have been introduced into your autumn forecasts. I certainly do not think I have been given answers as to why you have not made any changes and therefore I must assume that they are over-optimistic and they are hiding something for the future.
  (Mr Brown) I think you are doing a disservice to the Treasury forecasters who have looked very carefully at these issues and who, incidentally, were proven right about the way they saw the economy moving in 1998 and 1999. I think that yes, there is a slowing of growth from last year, but it is roughly at trend, two and a quarter to two and three-quarter per cent, this year and it is in a context where there is low inflation, as everybody accepts, as well as strong public finances and, while being vigilant, it is a picture that I thought the Committee might welcome.
  (Mr O'Donnell) Can I just add that at the Budget hearing last year we were forecasting for the year 2000 three per cent growth plus or minus a quarter per cent, and the ONS figures tell us that the year 2000 growth was three per cent.
  (Mr Brown) So he was not only right for 1998 and 1999; he was right for 2000 as well. That is the point he is making.

  Sir Michael Spicer: Let us hope he is right for 2001 as well.

Mr Fallon

  339. Chancellor, turning now to taxation measures for the Budget, almost all the representations we have had complain about the growing complication of the tax system. You have 22 rates of company car tax, you have different rules for mini ISAs and maxi ISAs. For families you have got children's tax credit, child benefit, baby bonuses to come, all the clawbacks, reliefs and tapers. Are you going to go down in history as Complexity Brown? Why are you not interested in simplifying the tax system?
  (Mr Brown) First of all, as far as these tax representations are concerned I would have thought that from the vehicle sector, which you mentioned, people should be pleased that we have reduced the hundred different rates for lorry licences to seven and they are environmentally driven. As far as the car licence sector is concerned, we are giving the benefit to people because of environmental concerns, and I would have thought that this Committee, and indeed the public, would want to welcome that. As far as the tax credit system is concerned, which you are drawing attention to about the children's tax credit, I believe that this is a fundamental reform that has been long overdue in the country to integrate tax and benefits where we are going over time, as we are already doing in many instances, to eliminate a situation where people are paying tax on the one hand while receiving social security benefits on the other hand. Instead of two separate transactions done by two different authorities we are now in a position to look forward in some of these areas to there being only one transaction. I think it is important to recognise that it is not complexity that is going to be the result of this. It is going to be a far more co-ordinated, cohesive and integrated approach. Perhaps I may draw your attention to the fact that the first Government that recommended the tax credit system was the Conservative Government with a White Paper of 1972, and all the arguments that they have used there for the tax credit system being simpler, being integrated, ending an unsatisfactory relationship between social security and the tax system, eliminating the old form of means testing and moving to a situation where people had one calculation which they made of their tax and benefits, apply to what we are now doing. I have also looked at the previous Conservative Government on tax and benefits, and Norman Fowler, who was Minister for Social Security, says this is exactly what he had wanted to do in 1986 but was prevented by the Chancellor of the day from integrating tax and benefits in his review of the social security system. We are doing what has been achieved in some areas such as America in integrating tax and benefits through the earned income tax credit as well. Far from it being more complex, the result of this integration of tax and benefits will be that instead of people having to have two transactions to get what they are entitled to, in most cases this will become over time only one.

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