TUESDAY 20 MARCH 2001 _________ Members present: Mr Giles Radice, in the Chair Mr Nigel Beard Mr Jim Cousins Mr Edward Davey Mr Michael Fallon Judy Mallaber Mr James Plaskitt Mr David Ruffley Sir Michael Spicer _________ THE RT HON GORDON BROWN, a Member of the House, (Chancellor of the Exchequer), MR ED BALLS, Chief Economic Adviser, MR GUS O'DONNELL, Managing Director, Macroeconomic Policy and Prospects and International Finance, MR NICHOLAS MACPHERSON, Director, Welfare Reform, HM Treasury, examined. Chairman 242. Welcome, Chancellor. Would you like to introduce your team - I think we know who they are - just for the record. (Mr Brown) Thank you very much, Chairman. On my right Ed Balls, the Chief Economic Adviser to the Treasury; on my left Gus O'Donnell, Managing Director of the Macroeconomic and International Division; and Nick Macpherson, who deals with the issues related to taxation and benefits. 243. Is there anything you would like to say to us? (Mr Brown) I thought, Chairman, I would like to draw attention to the new figures that have been published this morning, which may inform the Committee's proceedings. First of all, the figures demonstrating the strength of the public finances; and, secondly, the inflation figures, which show that RPIX inflation in February was 1.9 per cent., and HICP inflation was 0.8 per cent. which is the lowest in the European Union. The public finance figures demonstrate that we are well within our two fiscal rules. The current surplus in the year to February is now 24 billions; that compares with 19 billions last year and less than 12 billions the year before. We remain on course to balance the current budget over the economic cycle, even on the most cautious of cases. Our second fiscal rule, which is the sustainable investment rule, is that we keep debt at a prudent and sustainable level below 40 per cent. of national income. Today's figures show that the ratio of net debt to GDP, which was at 44 per cent. in 1997, had fallen to 36.1 per cent. this time last year; it is now at this time, this year, 31.1 per cent. so we are on course to meet the sustainable investment rule. In the year to date net borrowing yielded a surplus of 4.6 billions higher than in the same period last year, contributing to the large repayment of debt that we are making. The figures also show that because we have cut debt and cut unemployment, we are not only spending 10 billions a year more on education and on debt interest, we are spending 30 billions more on the National Health Service than debt and unemployment together. We have listened to the views in recent weeks of the European Commission and the International Monetary Fund on our fiscal plans; in particular their views on our proposals to double net investment over the next three years. Building on our position of strong public finances, it is right that we proceed with our plans. The European Commission and the IMF acknowledge the need for more investment in our public services. The Maastricht Treaty explicitly recognises the scale of public investment should be taken into account in any assessment of a country's fiscal plans. Our investment plans are not only affordable, but the last figures show that we have the lowest ratio of cross debt to national income of any country in the European Union, apart from Luxembourg. In three years' time we will be spending an extra 12.5 billions a year on net investment across the public sector; 3.5 billions of that on transport; 1.4 billion a year more on NHS capital; 1.6 billion a year more on education and employment investment. Indeed, we need to press ahead with our plans in a timely way without jeopardising value for money; and that is why, to speed up investment, we require each department to draw up their own individual department strategies; and that is why, through their annual reports, departments will have to explain the progress they are making in delivering their investment strategies; how they link to the policy outcome in targets for improved services outlined in the Public Service Agreements; how existing assets are managed and disposed of when they are not needed; how systems and procedures are being improved to deliver better value for money. I believe that this extra investment is crucial for the future of our country; and it is only by reversing this historic trend of under-investment, that we saw in previous decades in the nation's infrastructure, that we will succeed in building a stronger economy and delivering opportunity for all. Thank you, Chairman. 244. The figures you have announced on public finance today, how do they compare with the ones you announced in the Budget? (Mr Brown) They are very much in line with what we have announced in the Budget. We expect there to be an underspend on capital investment, and we are taking steps to improve the ways that departments manage the public investment programmes that are their responsibility. As far as the overall effect on our fiscal rules is concerned, we are well within our first fiscal rule. The current balance is strong and, equally, as I said in the Budget and I repeated today, debt is falling as a proportion of GDP towards 30 per cent., and it is likely to remain at that level in future years. Therefore, the net repayment of debt that we envisaged in the Budget is going ahead. Mr Michael Fallon 245. Chancellor, Mr Dilnot of the Institute for Fiscal Studies came before this Committee a week ago and drew attention to Table C23 in the Red Book, which showed the tax burden, net taxes and social security contributions (which I think is your favourite definition even including your tax credits) at 35.2 per cent. in the last Conservative year; and you yourself estimate in Table C9 that this year just finishing it will be 37.7. Mr Dilnot pointed out that that was an increase of 2.5 per cent., or roughly 25 billion in four years. Is he right? (Mr Brown) Mr Dilnot is entitled to his views. 246. Is it a view or a fact? (Mr Brown) He is entitled to his own view. In actual fact the figures we inherited, on historical sequence, for the year to come would have taxation at 38 per cent. In fact, taxation in the year to come will be 37.5 per cent. I could refer you to the statements that were made in the Budgets before 1997 that confirm that the tax burden was due to rise to 38 per cent. 247. The tax burden has risen by 25 billion, that is a fact, is it not? (Mr Brown) No, the position is that, when we came into power (I have said this to the Committee before and I do not think it needs to be repeated at great length but let me just re-emphasise) as a result of the 1996 Budget and I could quote what was said by the Chancellor at the time, he said then that the tax burden was expected to rise in 2001-02 to 38 per cent. In actual fact it will be 37.5 per cent. according to the projections in the Budget. The last Conservative Government, which you have referred to, was on a rising trend of taxation as a share of national income to rise to 38 per cent. 248. What is official now at the end of your fourth year is that the tax burden is 25 billion higher, is it not? Whatever the previous plans were, the tax burden is 25 billion higher in fact than it was four years ago? (Mr Brown) What I am explaining to you, and perhaps for the benefit of the Committee I should give more information therefore, is that because of the decisions that had been taken by the previous Conservative Government, but also because of the projections that they were making about the rising share of tax burden to national income, the projection for 2001-02 was 38 per cent. Ours is 37.5 per cent. and I think the Committee must note that. Of course, one of the reasons was the projections that they were making as a result, for example, of removing profit-related pay, the tax exemption that existed for that, and they had other calculations that were resting on the escalators that existed in relation to fuel and in tobacco - and, of course, as far as the fuel escalator is concerned, we have removed that. 249. I am surprised to find you still denying that the official tax burden has risen by 25 billion. Do you recall telling Newsnight on 20 January 1997, "I must repeat, there are no public expenditure commitments that require us to raise taxes"? Do you recall that? (Mr Brown) We froze public expenditure, as you know, for the first two years, and we did not make public expenditure commitments for the first two years and it was generally accepted, even by my Conservative opponent, that the Conservatives would not, he said, have kept to the spending plans, but we did. Mr Ruffley 250. Chancellor, on Table C9 of the Red Book, the tax burden measured by net taxes plus social security contributions is 37.7 per cent in 2000-01, is it not? (Mr Brown) I have got Table C10. 251. Page 194. 2000-01 net taxes and social security contributions, the figure is 37.7 per cent. (Mr Brown) That is roughly what the last Conservative Government predicted for this year. 252. That is your figure? (Mr Brown) 37.5 per cent. is the difference between 37.5 and 38 per cent. 253. Could you then turn to Table C23 in your own Red Book Budget 2001. (Mr Brown) It is really an historical series. 254. That is correct. 1996-97 net taxes and social security contributions is 35.2 per cent. is it not, Chancellor? (Mr Brown) This is Table ---? 255. Markedly slow today! (Mr Brown) I am not markedly slow at all; I am getting to the different tables. This goes right across the page. 256. It is your record; you should know your way around it. (Mr Brown) This is the Table that starts with 1978-79, is that right, and goes up to 38.9 per cent. under the last Conservative Government? 257. I am not asking, Chancellor, about 1996 or 1997, the year you inherited. (Mr Brown) Mr Ruffley, I am just finding the Table. If I may point out to other people who do not have the benefit of this, there are nine columns in this Table, stretching from 1970 to 1999-00. The figures start for the tax as a share of national income at 1979 and the rise, as you may know ----- 258. With respect, Chancellor, 1996-97 is 35.2? (Mr Brown) They rise, as you know, to 38.9 per cent. ----- 259. No, that year is 35.2. (Mr Brown) ----- in 1982-83 and then they are at 35 per cent. in 1996- 97. 260. You are going a bit off piste here, Chancellor. (Mr Brown) You have asked me, Mr Ruffley, to look at an historic ----- 261. What we require is 1996-97, that is all, it is very simple. (Mr Brown) Mr Ruffley, you have asked me to look at a Table that has perhaps 300 or 400 separate figures on it. 262. You are meant to be a clever chap. You can read 1996-97, can you not? Could you read it for the benefit of everyone in this room? It is 35.2 per cent. (Mr Brown) You can read what you like. I will answer questions. 263. What is the answer to my question? (Mr Brown) The answer to your question is that ----- 264. 1996-97. (Mr Brown) The answer to your question is that this is an historical series. I have already explained to you that we inherited a situation where the last Conservative Government was predicting that taxes would rise to 38 per cent. of national income. 265. So you will not confirm that figure your own Red Book? Could you subtract 37.7 per cent. from that 35.2 per cent. and tell us what the difference is? (Mr Brown) I am not going to get into the business of this ----- 266. It is 2.5 per cent. (Mr Brown) ----- if you wish to put figures in this way. 267. It is a higher tax burden. (Mr Brown) I have drawn attention to the fact that there are a variety of reasons why the tax burden changes over time. One of the first is economic growth; the second is fiscal drag; the third is better collection of income taxes; and the fourth is historical decisions that are inherited by governments from previous governments; and the fifth are decisions that are made by these governments. There are a lot of factors which contribute to the changes in the tax burden over time. I think it is material to this Committee to draw attention to the fact that we inherited a situation where the last Conservative Government was expecting the tax burden to rise to 38 per cent. 268. Chancellor, are you denying the tax burden between 1996-97 and 2000-01 has increased by 2.5 per cent? Are you denying that? (Mr Brown) I am happy to draw attention to the figures that are in the Red Book because the figures are accurate. The figures are accurate because they reflect what has happened as a result of a series of different decisions. 269. Chancellor, you are denying the tax burden went up. You will be denying next that you tried to save Geoffrey Robinson from the sack. (Mr Brown) Mr Ruffley, if you want to reduce the tenor of this debate. 270. No, you are denying a basic fact in your own Red Book - you will deny anything. (Mr Brown) I said that the facts in the Red Book are accurate, and I have said that every time I have come before this Committee. The idea, Mr Chairman, I have given the impression that the facts in the Red Book are inaccurate is wrong. The facts in the Red Book are accurate; but I am pointing out to you that, as far as the inherited situation was concerned, the tax burden was due to rise to 38 per cent. Mr Davey 271. A quick supplementary to Mr Ruffley's. The figures you read out of the tax burden as predicted by the last Conservative Chancellor, those figures which you said go up to 38 per cent., are they calculated on the same basis as the figures in the Red Book? (Mr Brown) Yes. 272. On exactly the same basis? (Mr Brown) Yes. 273. Thank you very much. Chancellor, will you be spending more or less next year than previously planned? (Mr Brown) I will be spending more over the next three years ----- 274. No, next year. (Mr Brown) I will be spending more over the next three years than we planned in the Spending Review in July 2000. 275. Next year, will you be spending more or less than previously planned? (Mr Brown) Next year the figures will be 393.7, compared with 392.9. I may say for the benefit of the Committee, what has actually happened over the course of the last year is something I hope the Committee will want to draw attention to. We have substantially cut, above even the projections in the Comprehensive Spending Review, the amount of money that is being spent on debt interest, and we have cut the amount of money that is being spent on unemployment. As a result of that, there are considerable savings, and the savings are being used to fund a rise in pensions; to fund a rise in children's benefits; and to fund the increased spending in health, education and in public services. For the benefit of the Committee ----- 276. Thank you, Chancellor, for your answer. Can I ask you another question, please. (Mr Brown) For the benefit of the Committee, should I not draw attention to these figures so that people do know. 393.7 rising to 417.8, rising to 442.6 in 2003-04. 277. This saving and this underspend that you have just been helpfully telling the Committee about, are you fully reallocating this underspend, or are you paying off the debt with some of it? (Mr Brown) We are paying off the debt as a result of very substantial savings from unemployment and debt interest. Equally, we are spending more over the course of the next year. If you would like the figures for health and education, I am very happy to give you them, to show the additional amount of money we are going to be spending on these areas. 278. Could I just ask you a particular question - you may have this figure. What was the average spend by the Government on health in the last Parliament as a proportion of national income? Do you have that figure? (Mr Brown) I do have the figure. 279. You have the figure of the average spend by Government on health in the last Parliament? (Mr Brown) If you will allow me to get to it. What I can say is that the real annual growth rates in Health Service expenditure in the last Parliament was 2.6 per cent; in this Parliament it will be 4.9 per cent. As a result of the Spending Review 2000 it will be 5.6 per cent. In other words, it will be twice the rate of growth of the last Parliament, and twice the rate of growth of the Conservative years. 280. Thank you for those figures; they were not the figures I was actually asking for. (Mr Brown) What figures would you like. If you want the share of national income then the expenditure was 5.7 per cent. in 1996-97; and next year it will be 6.4 per cent. rising to 6.7 per cent. In both cases, to be absolutely clear, there are substantial increases taking place in spending on health. I was able to put additional expenditure into the National Health Service in the Budget so the spending figures for health in 2001-02 will now be 59.1 billion - and that compares with 40.8 billion the year we came into power; and in the year after that 2003-04 it will rise to 69 billion. 281. Chancellor, thank you for that. The figures I asked you for were the average spend in the last Parliament as a proportion of national income. The figure I have from the House of Commons Library is 5.5 per cent. If you ask the House of Commons Library for the average spend by this Government in this Parliament as a proportion of national income it is less than that, it is 5.4 per cent. The Health Service over this Parliament, compared to last Parliament, has had on average a smaller share of the national income. Could you confirm that? (Mr Brown) No, I do not accept that. I have just given you the figures showing that the growth rate of health in the last Parliament was 2.6 per cent; the growth rate in this Parliament, even taking into account our first two years when we had to deal with problems of the deficit, is 4.9 per cent. As a result of the Spending Review, it will be rising by 5.6 per cent. As a share of national income, I think you would agree with me, when you have figures that show that the share of health in national income is rising from 6.2 per cent. to 6.4 per cent. to 6.7 per cent., it is now quite wrong for you to deny that there is an increase in spending taking place both in cash terms, in real terms, as a share of national income and as a growth rate as compared with the previous Parliament. 282. Chancellor, you accuse me of doing something I was not trying to do. What I was trying to ask you for was a figure of the average in the last Parliament and the average for this Parliament. The figures I gave are from the House of Commons Library and they show that, on average, we are spending less than we did in the last Parliament. Can I give you the figures, Chancellor. For education in the last Parliament ----- (Mr Brown) You do not want to continue to talk about health? 283. My question is about education, Chancellor. (Mr Brown) Can I just put into the record the figures on health. In 1996-97 - and this is the most generous to the previous Government, the last year - 5.7 per cent. In 2000-01 the figure is 6.2 per cent. of national income. 2001-02 6.4 per cent. of national income. 2003-04 6.7 per cent. of national income. I hope that the questioner will accept that is a rising trend of national income. 284. Now we can go on to education. The average spent in each year as a proportion of national income on education in the last Parliament was 5 per cent; in this Parliament to the end of this financial year it is 4.6 per cent. How can you explain that on average in this Parliament we are spending a smaller share of national income on education? (Mr Brown) The figures I have for expenditure are 5 per cent. in 2001-02, and 5.4 per cent. in 2003-04. The reason that that is the case is because education expenditure (and I do hope you will look at the actual figures) is rising from the 36 billion we inherited to 46 billion in 2000-01, that is this year, and then rising again to 49.8 billion in 2001-02; and rising to 58.1 billion in 2003-4. The growth rate for educational expenditure is 5.4 per cent. as a result of the Spending Review, compared with 1.6 per cent. in the last Parliament and 1.5 per cent. in the Conservative years. You can produce as many figures as you like, Mr Davey, but you cannot deny the fact that educational expenditure is rising by something in the order of œ4-5 billion a year, and it is going to do that consistently for the next four years; and that is far higher than could ever have been achieved simply by a one pence change in Income Tax, but is twice as much as could be achieved by that. 285. Chancellor, the only reason I was drawing attention to the figures as a share of national income was because in your manifesto you said you would increase them and in the first three years of this Parliament it actually fell. (Mr Brown) The figures I have got, Mr Davey, are 4.7 per cent., which we inherited, then rising to 4.9, then 5 to 5.4. 286. I would like to know which years you are quoting. (Mr Brown) These are figures rising to 2003-04, 2001-02, 2000-2001, but starting in 1996-97. 287. Chancellor, you have read out your series, can I just read out my series. I agree with you that in 1996-97 it was 4.7 per cent. of national income; it then went down to 4.6; it then went down to 4.5; and in 1999-2000 it was 4.5. In this year, and in the years that you have predicted for the future, is it increasing? (Mr Brown) Can I read out the figures for the future years? 288. No, you have already done that. (Mr Brown) You accept my figures. 289. What you have done is cut expenditure in the first three years and then you are having a boom at the end. Schools and colleges are being deprived of money for the first three years of your stewardship, and now you are giving them money. I am afraid that the standards have fallen for the first three years and you have deprived the schools. (Mr Brown) It seems to me that this member of the Committee is working on the assumption that it would have been right to do nothing about the deficit we inherited, and right to do nothing about the overall level of debt we inherited. I do not apologise to the Committee for taking the action that was necessary to deal with both deficit and debt. The result of that is that we have a solid foundation on which to build; and the solid foundation is shown by the figures that he did not read out, which is that educational expenditure will rise to 5 per cent. and then to 5.4 per cent. of national income. The actual figures for expenditure are 2001 46 billion; rising to 2001-02 49.8 billion; rising to 2003-04 58.1 billion. That is a very substantial rise in educational expenditure over the next few years built on a solid platform from which we can actually have sustainable rises in educational expenditure. I would like the Committee to note that, as far as my view is concerned, it would not have been possible to have these substantial rises in educational expenditure if we had not dealt with the problems of the deficit and debt in our first two years. Mr Plaskitt 290. Chancellor, at the time of the pre-Budget Report 2000 you estimated total managed expenditure to come out at 371.6 billion. You told us in the Budget that would in fact be 368.3, an undershoot of about 3.3 billion. What money was not spent, and what were the principal reasons for the undershoot on that? (Mr Brown) The numbers result obviously, first of all, from the substantial cut in debt interest payments, and that has made it possible for us to reallocate resources to health and education; but it also comes from the substantial cut in the amount of money we are spending on unemployment benefits. There have been two big changes that have diminished the pressure on one section of our budget. They are actually set out on page 27, Table 2.3 of the Budget Report. They show that over the period we have saved about a billion on social security benefits, indeed, 2 billion in 2001-02; and on debt we have saved something over 4 billion. These are big changes as a result of a reduction in the share of debt in national income. 291. There were no significant instances of spending departments failing to deliver on their programmes? (Mr Brown) We had an issue that I raised right at the beginning of my opening remarks, where we are determined to push up the levels of public investment in those services that have been under-invested in over a long period of time. That is why we have departmental investment strategies. We have to do more, and we have to do better, and our aim is to raise the share of national income taken by public investment to 1.8 per cent. We are making progress, but there is still more to do. 292. That is on the capital side rather than on the revenue side. (Mr Brown) On the revenue side, if this were under the old system and there was nowhere near flexibility, one might be disappointed if there was money left at the end of the year; but this is money that can be carried over by the departments. We are avoiding a end year rush to spend money perhaps not on the best projects, so the money is carried over. The important thing, as I said to Mr Davey, is that expenditure on health, education, policing and transport, all the key public services which people rely on, is rising very substantially this year, next year and the year after. Indeed, I might have made the point to Mr Davey that expenditure in real terms on education in the last year has risen by more than 10 per cent. 293. Is it fair to say that the money the Treasury is saving as a result of lower unemployment and lower debt interest payments is money released and made available for spending on health and education? Are you simply transferring savings from that area to those services? (Mr Brown) I have made the point in the Budget itself that, whereas in the years 1979-1997, of every additional pound spent 42p (and indeed in the early 1990s it was 50 per cent. of every additional pound) went to debt, unemployment or social security - it is now only 17 per cent; therefore that leaves 80 per cent. free for health and education. Can I just emphasise one comparison: the average for the years 1979-1997 was that more money was spent on debt and unemployment than on the National Health Service. We are now able next year to spend œ30 billion more on the National Health Service than the combined requirements for debt and unemployment. We are now spending twice as much on the Health Service as we are on the bills for debt and unemployment. It is that change in the composition of overall spending that is making it possible to answer the points that have been made to put more money into health and education. 294. Is the Treasury adding more to the spending on health and education, for example, than the amount simply released by the saving on lower debt interest payments and unemployment? (Mr Brown) Overall, yes. 295. Is it a transfer from one saving account to another spending account? (Mr Brown) Overall, yes, because as you know we plan public spending to rise by 3.7 per cent. a year over the next three years. The substantial additions in Health Service spending of around œ5 billion a year, and then the extra money on top of that, that was put in in the Budget, and the extra money on education I have just read out the figures for, are in excess of some of the savings we made on unemployment and debt. There is a reallocation of money, but of course there is more money going to public spending as a whole. 296. As you say, average annual public spending is set to rise 3.7 per cent. a year for a number of years through the next part of the Comprehensive Spending programme - that is considerably higher than the trend rate of growth in the economy. Are you comfortable with that difference? (Mr Brown) I think it is the right thing to do. As you know, current spending is rising but public investment is rising even faster. I think that is the necessary means by which we correct the long-term under-investment in Britain's infrastructure, in our hospitals, in our schools, in transport generally and even in policing and in other areas. I believe it can be both justified in macroeconomic terms, because we meet all the fiscal rules that are required of us; but also it is an essential element of rebuilding the fabric of British society. Mr Fallon 297. Chancellor, you will recall a couple of years ago that this Committee reprimanded you for triple counting. Just to confirm we have got you off this habit - the education spending of a billion is over three years, that is right, is it not? (Mr Brown) The educational expenditure is over three years as I have made absolutely clear in the Budget Statement. 298. It is also right, is it not, that the Secretary of State has written probably to you as well as me. He wrote to me on 14 March, "Dear Michael, As a result of the Budget there will be 100 million more per year for direct grants to schools, and 100 million more for capital funding". That is right, is it not? (Mr Brown) There is actually around œ300 million more a year for eduction. Some of the money is going to direct payments to the schools, and this is to increase the direct payment that was announced in the last Spending Review. So some schools will get about œ110,000. Additional money will go to the recruitment of teachers. You will have seen the measures announced by the Secretary of State for education. 299. The capital funding that the Secretary of State says will boost schools' capital, for example, for new classrooms - how does œ2,000 get you a new classroom? (Mr Brown) The capital funding allows some of the renovation work to be done. Equally, he has announced a new programme of PFI credits, a new programme of increasing the amount of repair work and renovation done in schools. I think it is now the case that nearly 20,000 schools have been repaired and renovated under the New Deal Programme, which is in addition to what you are talking about. 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, 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 to raise 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 in 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 go, 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 Review. 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 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¬-4« 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. 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 œ150 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 œ115 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 per cent. last year to 3¬/3« per cent. this year, and then 2«-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 0.01 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 go 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 mind 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 œ10 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 flow 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. We have 22 rates of company car tax, we have different rules for mini ISAs and maxi ISAs. There are families who have got children's tax credit, child benefit, baby bonuses to come, all the clawbacks and take-ups. 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. 340. But the criticism is not of the credits in principle; it is with the reliefs, the clawbacks, the takers. Arthur Andersen told us: "The problem with so many of these reliefs is that they are complicated to claim and difficult to administer." Help the Aged said that it is a massively complex system, endless form-filling for pensioners. Why are you sending pensioners a 43-page form that asks whether they are pregnant or on strike? (Mr Brown) You know that that form, which I think existed under the last Government, is being dealt with. Equally, on pensions I would have thought that the most difficult situation for pensioners is the alternative policy that I have seen presented over these last few weeks, where there is a guaranteed winter allowance and a guaranteed free licence for the over-75s and a guaranteed Christmas bonus to be backed up by the rise in the basic pension. The new proposal that I have seen from your Party is to have a choice between the two. Mr Darling at Social Security says that would mean 3,000 additional civil servants simply to administer that. Far from our proposals increasing complexity and the proposals of the other side reducing them, I think it is recognised that when you have to have 3,000 additional civil servants simply to administer one separate policy of the Opposition, that is where complexity arises. As far as pensions and the pensioner credit system that will operate as an integrated tax and benefit system over time as well are concerned, I believe that over time that will come to be accepted as well. 341. Why do you think it is that 670,000 pensioners out of two million eligible have failed to claim the minimum income guarantee? Do they not find it too complicated? (Mr Brown) The reason that many people have been unable to benefit from the minimum income guarantee until now is because of the capital rules that we inherited from the previous Government, that where people had a limited amount of savings they were deprived of the opportunity of getting the minimum income guarantee. We have now changed these capital rules and over next year and the year after these rules are being modified in such a way that more people, even with modest savings, will be able to get the minimum income guarantee. The fault was in the old capital rules. As far as the claiming of these benefits is concerned, when the Social Security Department ran a take-up campaign, they had, I think I am right in saying, half a million people interested in taking up this benefit. One of the problems was the capital rule and that is now being changed. 342. But a third of those we were told were eligible to claim have failed to do so. That is the position. (Mr Brown) I am not sure that that is the position, but obviously you can consult the Social Security Department about these exact figures. What I do know is that when campaigns have been organised for take-up there has been a very big reply. Of two million pensioners who have been written to, and of course the two million pensioners that we mention have been written to, we could not know whether their savings or other attributes of their income met the circumstances that would entitle them to this benefit, but 846,000 did reply, which shows that there is an interest in taking up this benefit, and 846,000 is a very high figure compared with about two million in total who get the minimum income guarantee at the moment. 343. Why are Help the Aged complaining about the massively complex system and endless form filling? (Mr Brown) Inevitably when you make a change in a system people take time to adjust to it. I think that is true of any change that has taken place, whether it is the working families tax credit or whether it is, under previous governments, things like decimalisation to everything else. It takes time for people to adjust to these changes. If you agree, as you say you do, with the principle of a credit system, in other words the principle of integrating tax and benefits, then the teething troubles in introducing that system are, if regrettable, worthwhile so that we can get the end result that you say yourself you seek. I am pleased to know that there is now all-party support for the tax credit system that we are introducing. 344. You have told us this morning that you have had to modify the pensioners' credit with the various capital rules. (Mr Brown) Sorry; on this modification the minimum income guarantee is what we are talking about initially and the capital rules that were depriving people of the chance to claim the minimum income guarantee have been changes, yes. As far as the pension credit is concerned, that will be introduced in 2003 and that will be available for pensioners who have income, including income from savings, of less than œ200 if they are a couple and less than œ135 if they are a single person, and so the majority of pensioners will qualify for this, or the majority will. 345. The working families tax credit, which people complain is very complex, you are changing that as well, are you not? (Mr Brown) The working families tax credit will become the children's integrated credit and an employment credit over time. Again, that is to deal with some of the issues that you yourself and others of your colleagues have raised, that we want the money by 2003 that is available in children's benefits to be paid to the main carer, and that is what will happen in 2003. 346. It does not sound to me as if it is simplifying it. I will leave it there. (Mr Brown) It seems to me, Mr Fallon, that if people support the principle of tax credits, and the principle has now been introduced of course in the United States of America for many years as an earned income tax credit. France is now looking at the introduction of a tax credit. Other European countries are now looking at it. It was the spirit of what was advocated in 1972, what Mr Fowler wanted to do in 1986. If we support the principle of tax credits then obviously we have to deal with the hurdles that exist when you are moving from one system to another, but in the long run an integration of tax and benefits will be a fairer way of dealing with many of the problems that particularly low income households face but generally households of middle and more incomes also face. Mr Ruffley 347. Chancellor, have you read the highly damaging allegations in today's Daily Mail about the conduct of investigations into Geoffrey Robinson and of the Minister? I ask that question because part of the hearing today covers the Treasury remit and machinery of government questions inside the Treasury. (Mr Brown) Mr Chairman, I am going to deal with serious issues today. I am happy to answer all the questions about the Budget and indeed about your previous report and your investigations into other issues like Equitable Life, but the Treasury has already issued a statement about this completely misleading report in the Daily Mail and I propose to say nothing more than that. Chairman: Not all of us believe that the Daily Mail is necessarily a fountain of truth. Mr Ruffley 348. There are remarks in reported speech by Sir Terence Burns who makes some highly damaging allegations. You are not prepared to answer those today? (Mr Brown) There are not statements made by Sir Terence Burns. If there are statements made by Sir Terence Burns, who is now Lord Burns, perhaps you will draw my attention to them. 349. Yes, I will, if I may. Do you remember a telephone call you made from New York on 5 December 1997 to Sir Terence Burns? (Mr Brown) That is nothing to do with statements made by Sir Terence Burns, or Lord Burns, and I am not prepared to diminish this ----- 350. You cannot remember a telephone call ----- (Mr Brown) Mr Chairman, I am not prepared to diminish this hearing on the Budget by getting into arguments about gossip. Chairman: We do not have to follow what the Daily Mail says. Mr Ruffley: There are actually quotes, Mr Chairman, and I thought the Treasury remit included in this hearing --- it is written down by the Clerk about the Treasury remit and how the Department operates. Chairman: That has got nothing to do with the allegations in the Daily Mail. Mr Ruffley: But the way in which the Chancellor has managed ministerial responsibility ----- Mr Beard: This is a meeting about the Budget. Chairman: We can look at the remit and then if you can ask questions directly on the remit, that is fine, but ----- Mr Ruffley: I will if I may. Chairman: Well, get on with it then. Mr Ruffley 351. You had a discussion on 5 December 1997 with Sir Terence Burns where you asked him to approve a statement where he approves the registering of interests by Geoffrey Robinson; is that correct? (Mr Brown) There are no quotations from Lord Burns among ----- 352. Is that correct? (Mr Brown) I said, if you could point to quotations from Lord Burns that the Daily Mail had attributed to him correctly, ----- 353. Yes. (Mr Brown) But you have not done that, Mr Ruffley. 354. I will do that now, Chancellor. In a conversation he said, "I refuse to be involved -----" (Mr Brown) Mr Chairman, can I say first of all ----- Mr Ruffley: Did he say that to you, Chancellor, in that conversation? Chairman: There are not any ----- Mr Ruffley 355. The quotation is, "I refuse to be involved ...". (Mr Brown) Mr Chairman, I was invited along to this Committee to discuss the Budget and related matters. This is nothing to do with ----- 356. Are you denying Sir Terence Burns, as he then was, ----- (Mr Brown) This is nothing to do with this. I issued a statement saying that this is fictional nonsense. You have been unable to point to quotations from Lord Burns that are attributed to him directly because there was none --- -- 357. It is directly attributed to him. (Mr Brown) ----- because there was none in the article. 358. Saying, "I refuse to become involved -----" (Mr Brown) I am not in a position to answer based on non-quotations from Lord Burns. Mr Beard: This is nothing to do with the Budget. Judy Mallaber: Chairman, this is not about the Budget. Mr Ruffley: I think the record will show that he is not prepared to answer that question. There is a quote about this given by Sir Terence Burns on 5 December 1997. Chairman 359. Let us get on to the remit. We have produced a report and that was what I thought you were about to cover. You are actually just dealing with a scurrilous article in the Daily Mail. (Mr Brown) Mr Chairman, I have already issued a statement on this this morning - in fact, the Treasury has issued a statement - saying that these matters are fictional nonsense. I am prepared and happy to deal with the very serious issues arising from the Budget and the management of the economy. I am not prepared without prior notice to go into issues relating to gossip and relating to fiction that I have no knowledge of ----- Mr Ruffley: Did you order an independent inquiry into Geoffrey Robinson? Chairman 360. He has just said he is not going to answer them. (Mr Brown) ----- that I have no knowledge of and are not based on actual quotations from Lord Burns at all, as is becoming clear as Mr Ruffley reads this out. Mr Ruffley 361. "I refuse to be involved ..." in relation to that conversation on the 5 December 1997. That is the quotation. (Mr Brown) I think, Mr Chairman, that Mr Ruffley is bringing the whole of the Select Committee system, where we are examining the Budget, ----- Mr Ruffley: You would say that, would you not? Chairman: It is clearly the run-up to the election. The Daily Mail is very interested in muck-raking about the election. Unfortunately one member of the Committee is prepared to act as the Daily Mail's ----- Mr Ruffley: I am quoting Sir Terence Burns. Judy Mallaber 362. Chairman, can we return to the Budget? (Mr Brown) These are not quotations from Lord Burns as you very well know. Mr Beard: This is out of order in a session on the Budget. Chairman: The majority feeling is that this is out of order. The Chancellor has made it quite clear he is not answering your question, so give way to further questions. Mr Ruffley: I have no further questions. Chairman: That was not a particularly useful use of time, I did not think. Mr Davey 363. Mr Macpherson, you are Director of Welfare Reform in the Treasury. (Mr Macpherson) Yes. Mr Davey: Is the Treasury more involved in welfare reform nowadays than it used to be? Chairman: That seems to me, if I can draw a distinction between these two questions, a perfectly valid question to ask on the remit and it is part and parcel of what we are doing. Mr Davey 364. Good. Mr Macpherson: is the Treasury more involved with welfare reform than it used to be? (Mr Macpherson) The Government is committed to bringing the tax and benefit systems closer together. It also is committed to raising employment. It is inevitable that, given those objectives, the Treasury plays a bigger role at the current time in these areas. 365. When we did our inquiry on the workings of Her Majesty's Treasury under the Chancellor's stewardship we took evidence from Sir Michael Partridge, the former Permanent Secretary at the DSS, and he made similar comments to you, that the Treasury is more involved, but he did say: "Particularly in the last five years the Chancellor tends to cook up ideas and the DSS is either told at the last minute or not told at all. There is no chance to work it through like a proper policy and say, 'Will this really work? Is it feasible? Is it practicable? What is the best way to do it?' It gets rushed in and things get done and they do not work." That is a former Permanent Secretary of the DSS. Do you recognise that approach? (Mr Macpherson) No, I am afraid I do not recognise it. I think actually the unique nature of working over the last few years is that the Treasury has worked more closely with other departments than it ever has before. A very good example of that is the Taylor review which the Chancellor set up in 1997, consulting his colleagues, where Martin Taylor ran this task force and Treasury officials, DFEE officials, DSS officials and Inland Revenue officials all worked very closely together, they produced a report, this enabled a far better broader perspective to be brought to the problem which cut across departments. You are working here on the tax system which is the preserve of the Inland Revenue, and the benefit system which is the responsibility of the DSS. 366. Can you think of no example then where the Treasury has taken initiative within the welfare remit without informing the DSS and has just gone ahead with it? (Mr Macpherson) All I can speak about is from my experience where I work extremely closely with DSS and DFEE colleagues. 367. In the area of pension reform, for example, there has been no Treasury-driven initiative? (Mr Macpherson) The Chancellor was responsible for working with the Secretary of State very closely. I do not know if the Chancellor wishes to say anything ----- 368. I was coming to him. (Mr Macpherson) The pensions system is one of the biggest areas of public spending. There is a big tax aspect to pensions as well. For example, the Chancellor announced in the Budget an increase in the personal allowances for pensioners over the Budget period. I have worked in the Treasury since the early eighties. I have worked on the Fowler review of the state earnings related pension scheme and we worked very closely then with the DSS because these are big issues. Nigel Lawson - I do not know if I am outside my remit in terms of talking about what happened under previous governments ----- 369. Oh, go on. (Mr Macpherson) But Nigel Lawson and Norman Fowler worked very closely together. If you read Norman Fowler's book, he did have some questions about the extent to which Nigel Lawson would actually discuss tax issues with him. This is something which has always been the case. These are big areas, huge areas of expenditure. I do not have in front of me how much we spend on the state pension scheme but we are talking œ50 billion. It would be astonishing if the Treasury did not get involved in that. It would equally be astonishing if I did not work very closely with my opposite numbers in the DSS. It would equally be astonishing if the Chancellor of the Exchequer did not spend a lot of time talking to the Secretary of State, which indeed ----- 370. My point was that he might not be doing that sufficiently. Can I ask the Chancellor to comment on whether he has read the Committee's report on Her Majesty's Treasury, and when the Government expects to reply to that report? (Mr Brown) I would have been happier if, when you were doing your work on the Treasury, you had asked me to give evidence on it. You did not seem to think it was worthwhile before you had your report to ask one of the Ministers to give evidence on how they thought the Treasury was performing. As far as the individual points about the report are concerned, let me just say that despite the suggestion in the report that there has been a degree of centralisation around the Treasury, the fact that we have made the Bank of England independent and we have set up the Financial Services Authority, we have set up three-year spending reviews and not one-year spending reviews, we are signing public service agreements which give flexibility not only to departments but also to local authorities, we are setting up a new regime with regional development agencies where they have flexibility as well, the public sector pay is devolved to the departments, suggest that the Treasury has been devolving responsibilities rather than centralising them. 371. That is helpful but you did not actually answer the question. The question was, when are you going to reply in full to the report? (Mr Brown) We will reply in the normal course of events. 372. Do you think we could have a reply before the election? (Mr Brown) You will have a reply as quickly as possible. I would have thought it would come quite soon, yes. 373. In paragraph 21, which is a summary of conclusions, (e): "We are concerned that the Treasury as an institution has recently begun to exert too much influence over policy areas which are properly the business of other departments. This is not necessarily in the best interests of the Treasury or the Government as a whole." Do you reject that? (Mr Brown) I have just explained, and that is why I was answering the question. The Treasury is exercising less influence in many areas. We do not control monetary policy. The Financial Services Authority has been set up to deal with all the issues of financial regulation when we come to these in a minute. Public sector pay was traditionally an area where the Treasury exercised such control that people complained about that. The departments make their own decisions in relation to the pay review bodies, in relation to teaching, in relation to nurses' salaries. All these are matters where devolution has taken place and I believe that you have got to balance the need to have an integrated approach on pensions and social security and work related benefits, where we have been active, with the very big measures of devolution that started the first few days that I was in the Treasury when we made the Bank of England independent. 374. The criticism, we have heard from some of the witnesses, is that through the public service agreements the Treasury is micro-managing the other departments and getting very much involved in the minutiae of the work of other departments. Would you reject that? (Mr Brown) Yes, I reject that, because it is the opposite that is true. Instead of the old days where every iota of public spending representations was gone over in great detail by the Treasury, we have a three-year spending plan, we have the targets that have got to be met, and within meeting these targets there is a great deal more flexibility than existed before for the departments, including end year flexibility in relation to spending. The old public spending system that we inherited was essentially not dissimilar from that created by Lord Plowden in the early sixties. It was one year, it was ad hoc, it was incremental, it was based on failure to distinguish between investment and consumption, there was very little relationship between the private and public sectors in terms of investment programmes, and it was input driven rather than output driven. As a result of the changes that we have tried to make over time it is three-year and therefore long term, it is not incremental; in other words when these spending reviews take place they look at the different things that departments are trying to achieve and not just at whether you have an incremental basis for awarding additional money. It is driven by a distinction between investment and consumption. It is driven also by a desire to bring private finance in where possible and there is a degree of cross-departmentalism that was missing under previous spending plans, for example, in Sure Start, the provision of services for the young, or work amongst drugs or services for the elderly, all the departments that have an interest in these matters are brought together. In all these areas we have made big changes. These changes give the departments more flexibility, not less, in a whole series of different areas. I just point to this, which is totally unmentioned in your report, the measures of devolution that took place as a result of the first decisions we made when we came into the Treasury, which included making the Bank of England independent, creating a new Financial Services Authority and then, latterly, devolving public sector pay to the departments themselves. 375. Moving on to separate points in our report, Chancellor, paragraph 57, we say: "Parliament lacks the resources necessary to hold the Treasury fully to account". Would you be prepared to debate with the Committee, particularly in your formal reply before or after the election, and try to assist us in that and provide more resources to Parliament to hold your department to account? (Mr Brown) I do not quite know what you are suggesting. Perhaps you can tell me what you are imagining. 376. You referred to a Liaison Committee report and indeed a report by other Select Committees where we believe there should be officers of the House set up to enable Select Committees and individual MPs to have rather more information and rather more scrutiny of the accounts and spending plans. That would require more resources. I do not know whether you as the Chancellor would be keen to see that. (Mr Brown) That is a matter for Parliament itself. If Parliament decides, as it has in the past, that it wants to reform the Select Committee system and it wants to reform the way the Public Accounts Committee works, that is a matter for Parliament. If Parliament wishes to vote additional resources for that to happen that is again a matter for Parliament. 377. What I asked you was for you to express a view on it. (Mr Brown) I support parliamentary scrutiny. I support the maximum parliamentary debate possible on these issues. This is a matter for which you should not criticise the Treasury. It is a matter where you ought to be looking at how you could improve or make suggestions for improving parliamentary procedures. It is a matter in the end for Parliament itself. 378. With respect, Chancellor, the Liaison Committee, which is an all-party committee, has produced a report and put that forward. I am asking you whether you would look at those reform proposals seriously to assist this Committee and other Committees to do their scrutiny job, which you said you supported, more effectively. (Mr Brown) Of course I am happy to look at it. I just stress to you that if Parliament wants a greater role in these matters it is a matter for Parliament to look at it in detail. Mr Davey: We have and we are looking for your response, Chancellor. Sir Michael Spicer 379. Can I just be quite clear, having chaired that Sub-Committee, exactly what you are saying, Chancellor? Would you support something similar to the Congressional Budgetary Office that they have in the United States to look at Treasury matters? (Mr Brown) I did not realise that you had recommended that. Is it your recommendation? 380. It is one of the indications, yes. (Mr Brown) We would have to look at that. 381. What we have said is that there is a range of options that one could have. (Mr Brown) Which one are you suggesting then? 382. I am asking you what your view would be about Parliament having something similar to that operation in the United States. (Mr Brown) As I said, Sir Michael, I find it quite surprising that you have had an investigation into the role of the Treasury and you did not think of inviting a Minister to give evidence, but that is a matter for you, obviously. As far as your recommendations are concerned, we will reply to your recommendations but I think you have misunderstood some of the changes that are taking place in the Treasury. Perhaps if you had had a Minister before you as you undertook your work you might have seen that we have devolved a very substantial amount of our work, and rightly so, including the independence of the Bank of England which I believe you support. 383. In that case presumably there is a case for you giving an answer to this report as quickly as possible. (Mr Brown) Obviously the priority over the last few weeks has been the completion of the Budget and we will look at these matters and deal with them as quickly as possible. 384. Within the next week or so? (Mr Brown) I do not know about the next week, Sir Michael, but as soon as practicable. We reinforce the view that I have put to you that there are substantial numbers of things in this report that appear to be wrongly based because you have not asked us in advance before you have made your recommendations. 385. That is a matter of judgment and view. So far as parliamentary accountability is concerned you would, from what I have just heard you saying, approve of recommendations in principle which would strengthen parliamentary accountability of the Treasury? (Mr Brown) In general terms yes, but obviously you have now got a range of proposals rather than simply one and we would have to look at them in detail and give you our views if that was the right thing to do. Judy Mallaber 386. Chancellor, I would quite like to return to the details of the Budget, although it has been an interesting diversion. (Mr Brown) I thought I was here to talk about the Budget actually. 387. You have already answered a number of my points that I was going to ask on tax credits but I do have a couple of other questions. Mr Macpherson told us that 3.3 million have already claimed the children's tax credit. That leaves 700,000 eligible families who have not. Do you regard that as a good take-up rate or are you concerned about it and what are you going to do to catch those other 700,000 families? (Mr Brown) We do not have all the detailed information about family finances. Our estimate is in the order of four million. The take-up campaign has been successful in getting quite a lot of people applying where they previously have not done so. There is a history in Britain of people applying anyway for these things at the last minute, so I expect there to be more applications as we start the financial year. Generally speaking we are introducing a new benefit. It does take time for people to understand this tax credit and how it works because it is not simply a benefit; it is a tax credit and therefore over time I believe that there will be a greater take-up. 388. A number of MPs like myself have made suggestions about how to make the arrangements for other tax credits, particularly the working families tax credit and the children's tax credit, more flexible. Are you able to confirm what I thought was Mr Macpherson's extremely helpful statement that you are shortly going to be looking very concretely at how to do this and how to make it easier to claim those benefits? (Mr Brown) Yes indeed. I think the integration of tax and benefits, once it is understood that a tax credit system works in such a way that you could receive money as well as pay money, there will be a greater public understanding there of it as we move forward. As far as the working families tax credit is concerned, we are making it easier for people to claim it. For example, where there is a new birth in the family and where the numbers of employees become one instead of two, we are making it easier for people to claim that benefit. 389. What about the eligibility for child care tax credit, for example, proposals that were maybe too limited in the range of child care arrangements that were eligible? (Mr Brown) The numbers of people claiming child care tax credit from the original scheme under the last government have risen from something of the order of 40,000 to 50,000 to 125,000, so there has been a substantial increase in take-up, but obviously, as we said in the Budget documents, we are consulting on the precise definition of child care, particularly this issue of whether, if the child is being cared for in your own home, that could classify as child care for the purposes of the credit. 390. I am very conscious, previously being on the Employment Select Committee, of the detail of the evaluation that has gone on with New Deal. What priority are you giving to evaluation and independent evaluation of how the tax credit systems are working both in terms of their take-up and of their impact? (Mr Brown) As we introduce it we have been listening to what people have said. There has been 30 per cent or more increase in the take-up of working families tax credit compared with family credit. I think that is a significant figure. We are listening to what people are saying and to what employers are saying as well, because obviously it is a new system for them. I believe there are substantial benefits for employers in this system but we have got to help them make that work. We will listen to what people say. We have a group of people who are specialists in issues relating to children which meets regularly, as we do in relation to issues affecting women, so again we will listen to the representations that are made. 391. What mechanisms do you have for detailed evaluation and is any of that going to be conducted independently of Treasury? (Mr Brown) There are studies being done but perhaps Mr Macpherson could say a few words about it. (Mr Macpherson) As I said the other day, the Inland Revenue have commissioned a really quite far-ranging programme of evaluation using independent experts. Inevitably it takes time for the results to come on stream because you have to analyse precisely what is going on. That requires surveys and so on. The Government I think is committed to publishing independent results. 392. Moving on to broad maternity arrangements, what do you think the net effect of those reforms is going to be on participation in the labour market, and in particular, as part of that, do you think it is going to assist where we have areas of labour shortage and has any evaluation been done on this? (Mr Brown) I do not know about the independent evaluation and perhaps Mr Macpherson could mention that. I can give you my view. (Mr Macpherson) On the evaluation there has been a lot of work around the consultation process which has tended to confirm that the better the maternity pay arrangements the more likely it is that women will remain in contact with the labour market and therefore labour market activity will be higher than if you did not have these arrangements. (Mr Brown) I would agree with that. We are now seeing through the participation rates, particularly for lone parents, that the numbers of people taking up job offers is rising. Since 1997 the numbers have risen from 42 per cent to nearly 50 per cent. We anticipate these figures rising quite substantially in the years to come. In fact, we have set an objective of 70 per cent but that is over a long period of time. I believe the combination of the working families tax credit and the helpful child care that is available is making it possible for people to have real choices. You will know, having been on the Employment Committee, that the new programme, New Deal for Lone Parents, and the choices are coming in in April on a nationwide basis, and the experience of the original pilot suggests that there will be quite a marked take-up in job opportunities. 393. Would you accept that there is an argument for either tapering the small employer's relief or extending the limit for that so that you can scotch the suggestion that the new arrangements will actually deter firms from taking that link? (Mr Brown) We are happy to look at these things as we see the effects of the introduction of the measure. I would say that for a small or medium sized firm trying to attract new employees for the working families tax credit to be related to the wage packet, in other words the money that people receive at the end of the week or month, is an additional incentive that they can offer employees as they start work. Mr Davey 394. Chancellor, how much Treasury financial support, cash from central government, will there be next year, 2001/2002, for the London Underground? (Mr Brown) We are in discussions at the moment through the Department of Trade and industry's negotiations with the new London authority. 395. Trade and Industry? (Mr Brown) It is DETR, sorry, who are in discussions at the moment. It would be wrong to give figures that are part of our discussions. 396. How much was previously planned before these discussions? (Mr Brown) What I can say is that the figures that we have set aside are not going to change and have not changed. 397. The figures you have set aside have not changed and are not going to change. Can you show me where these figures are? (Mr Brown) These are market sensitive figures. We are in negotiation that involves private companies at the end of the line. 398. You publish for the Budget for public spending in some detail, as you remind us, so somewhere in this vast number of statistics presumably you have made some arrangements. Is it a contingency fund? Where would I find it if I were looking through the Budget Book? You are interested in parliamentary scrutiny. Where would I find it? (Mr Brown) If you are interested in getting the best arrangement for the taxpayer at the end of the day you will respect the fact that these are market sensitive issues. But of course the funding for the DETR is in the departmental expenditure limit. 399. So somewhere in the departmental expenditure limit for the DETR you have made some provision, some money that is not yet allocated, that you have not identified yet, which will go to London Underground for next year. Is that right? (Mr Brown) The allocations are in the end a matter for the DETR themselves. I know that this Committee has normally in the past respected issues where there is market sensitivity. I think you would understand yourself that when you are in negotiation these matters need to be recognised to be market sensitive. 400. I would certainly accept that, Chancellor. What I am trying to understand is, when you are making your prudent and careful long term provisions for the future, where in these sums that you have told Parliament you have provided for transport we will find it. You have said it is in the DEL. You have said that it is up to the Deputy Prime Minister to allocate that. You must in negotiations with DETR have given some indication to the Deputy Prime Minister about what he would be able to spend next year on London Underground. Do you give those sorts of indications to him? (Mr Brown) We do have an understanding but these figures are market sensitive and I think you have already said that you respect the fact that they are. 401. That is why I am not pushing. (Mr Brown) You are asking the question: is the money available to move ahead with the investment that is necessary? The answer is yes. 402. What you have said is that it is in the DEL for the DETR. Previously when the PPP was announced, and you confirmed this to this Committee, there was going to be no extra funding from the Treasury. There is only one conclusion from that and that is that other transport schemes will be cut back in order to fund the money that you will have to agree in these negotiations. Is that right? (Mr Brown) No. The Treasury is making provision for these things. It is understood in our discussions with the Deputy Prime Minister what level of funding can be made available, that the departmental expenditure limit will contain resources for that. Of course there are other means by which resources are provided but these matters are, as far as the overall figures are concerned, market sensitive. If you do say to me that you respect that, then I hope that you will respect that. 403. I am, but I am trying to understand the workings of the Treasury. You have said there are other means by which these resources are provided. What other means are they, other than the DEL? Where is it going to come from? (Mr Brown) I think you can look at the different means by which the overall Budget is made up, the overall spending figures. 404. Can you be rather more precise on this? The money is either allocated within the departmental expenditure limit or it is in the annually managed expenditure or it is in some other contingency. (Mr Brown) Exactly. 405. So it is somewhere in those? (Mr Brown) Exactly, but again, Mr Davey, you say you respect the fact that these matters are market sensitive, but now you are virtually carrying out a negotiation on behalf of one of the partners. 406. I wish I were carrying out such a negotiation because I would not start from here. We have had newspaper reports, and I am not asking you to confirm or deny them, ----- (Mr Brown) You do not need to put the question to me then. 407. I will come to that, Chancellor. Just be patient for a second. We have had newspaper reports over the weekend suggesting that an extra œ600 million is going to be put by the Treasury into London Underground, possibly rising up to œ700 million, even œ900 million, over the next few years, looking at a total bill of four billion pounds that was not currently expected to be provided by central government coffers because, when the PPP was originally announced to Parliament, it was said that there would not be any extra money coming from central government. Therefore it is a rather large amount of money and I am not asking you to deny or confirm the sum. What I am asking you to give a clear indication of is where is this large sum within your public expenditure plans that you have published? Surely you cannot hide four billion pounds over the next few years within your Red Book? (Mr Brown) First of all, you are not asking me to confirm or deny figures, and I think you are respecting that they are market sensitive. Secondly, there has always been an understanding - you are completely wrong - that there is a public sector contribution to this. The third thing I need say is that the whole purpose of the private finance initiative in relation to the London Underground is that, given that we are spending as a country something in the order of œ12 billion to œ15 billion on re-vamping the Underground, that is roughly speaking six times as much as was spent on the Jubilee Line, over the next few years, it would be far better for the country if we could get a better arrangement than was the one that transpired when the Jubilee Line was built when there were massive cost overruns, there were huge delays, and the public sector (that is you and I and everybody else) ended up paying far more than we ought to have paid under these circumstances. It is the search for a better relationship between the public and private sector that has been at the heart of these negotiations, but of course you would not expect me to give figures that would be market sensitive. 408. Are you still happy that the PPP scheme, currently under final negotiations, will represent good value for money for the taxpayer? (Mr Brown) There is a comparator that has got to be met. Yes, I believe that the proposals that we have put forward are good value for the taxpayer. 409. There is a possibility that the safety and maintenance requirements that are clearly needed in such an operation as the London Underground might be retained in the public sector. Would the Treasury support that? (Mr Brown) Safety is a matter that has been dealt with by the Department of Transport. There is no risk contemplated to safety by the arrangements proposed. 410. That was not what I asked. Would you be happy for safety and maintenance arrangements to be kept in the public sector? (Mr Brown) There is no risk to safety in the arrangements that we have proposed. It is a matter for negotiation as to how the eventual relationship between the private and the public sector is agreed. 411. Has the Treasury had any involvement at all with these negotiations? (Mr Brown) I have not personally been involved in the negotiations, but obviously there are Treasury officials who are aware of what is going on. If we are to properly manage public finances you would expect that to be the case, would you not? 412. Have you have meetings with the Deputy Prime Minister or the Prime Minister on these negotiations? (Mr Brown) I have had meetings with the Deputy Prime Minister and the Prime Minister many times. 413. Have you discussed these negotiations at these meetings? (Mr Brown) Many times. You do not expect me to go into confidential discussions I have had with the Deputy Prime Minister. 414. No, I am not asking you to tell us the content of the discussions, I am asking you to confirm that you have had them. (Mr Brown) If you are saying that London Underground is a matter that the Government is interested in, the answer is yes. 415. When do you expect there to be a deal? (Mr Brown) That is a matter for the people who are involved in the negotiations. Mr Plaskitt 416. Chancellor, what is your view of the productivity performance of the economy over the last four years? (Mr Brown) That there are improvements and we have got a great deal still to do. We have embarked upon a course where the long-term benefits in my view will come, but we have got to continue to work at these issues. That is why the measures in the Budget included the competition policy changes that were announced by the Department of Trade and Industry including, of course, over time the setting up of an independent Competition Commission. That is why we did more for research and development and for innovation, that is why we tried to improve the situation in the tax reliefs as far as businesses are concerned and that is why on infrastructure and skills and on the renovation of inner city areas that are in need of improvement we are taking important changes forward as well. 417. We have seen over a million new jobs created over the last four years and we have, I think, an historically high participation rate now. What has the impact of that been upon productivity? Has it been helpful or unhelpful? (Mr Brown) It is said that when you add an employee or add a group of employees that these are not the employees who give you the greatest boost to productivity as they start. It takes time for them to make their contribution to the growth of the firm. I rather think that Britain is in the situation that America was in in the mid-1990s. We saw in America at that time a big boost to employment and we are seeing in Britain a big boost to employment. It took time before the productivity gains came through to full effect but, of course, in America they are estimating that productivity and growth in the economy is something in the order of four per cent. We are seeing employment gains, we are seeing some productivity gains. The latest whole economy productivity figure is 2.6 per cent on the year to quarter three 2000, so we are starting to see some of the gains, but of course we know we have got a long way to go because there are sectors of the British economy that need to be more productive and the economy as a whole needs to be more productive if we are going to secure prosperity at the level that people want it. 418. Are you therefore expecting productivity growth to pick up because there is a lag, as illustrated in the US economy, or do you still think that there are further interventions or measures Government has to take and not rely on the figures just coming right in the way they did in America? (Mr Brown) There is no complacency, it is a continuing challenge. To improve the productivity rate and the growth rate in productivity of an economy normally takes time, it takes a number of different measures. We have set up a Cabinet Committee that looks at all issues relating to productivity and therefore it can look at issues that are not simply issues that would normally be referred to in a Budget about taxation and about investment incentives and everything else. It is looking at the work permit system, it is looking at the system that governs planning laws so that we can make changes where necessary, so that we can improve the way applications are treated from new businesses because a lot of our planning law is based on ideas that came from the 1940s. We are looking at the whole issue of skills and how we can make the economy more productive. There is a range of measures but those measures include many of the Budget measures that I believe will make a contribution to productivity growth in the future. 419. Have you got a target in mind of where you would like to see productivity growth get to? (Mr Brown) Over the next ten years we want to see a faster productivity growth than other countries because we have got a long way to go to catch up with some of them. Equally, of course, we want to see improvements happening if we are going to be the most competitive of countries in the European Union and elsewhere. So there are labour market reforms, there is the Myners Report obviously on capital market reforms and with the competition policy changes there are product market reforms. So there is a big agenda of change taking place that I hope will yield greater results as we move forward. Mr Beard 420. Chancellor, you have just mentioned the Myners Report. How much do you think the implementation of the Myners recommendations is going to affect productivity growth and economic performance? (Mr Brown) The Myners Report has now been published. We have said we support its main recommendations. There is obviously a period in which there is going to be consultation on some of these detailed proposals that he has put forward. We have said that we would consider legislation if necessary, but obviously many of the changes can be introduced by the companies, the institutions, the organisations themselves and we look forward to that happening. I think the debate that is now taking place in the media and elsewhere shows the importance of some of the measures that he has put forward. 421. Do you expect them to have a significant impact on productivity when they are implemented? (Mr Brown) I do believe that the role of the big institutions and an enhanced role in the economy could lead to greater productivity, yes. 422. If legislation may be necessary, for instance, to deal with the Minimum Funding Requirement, when may the legislation happen? (Mr Brown) The legislation in the areas where we are committed to legislation will obviously happen as soon as possible. I would like to see some of the other changes that he has recommended coming in by voluntary agreement. Mr Fallon 423. Chancellor, we also took evidence on double taxation relief which was in last year's Budget and attracted a barrage of criticism from a number of British companies, including Vodafone who said you had got it completely wrong. You then had to change it during the Finance Bill last year. Now in this year's Budget you had further regulations, and the period of consultation expired yesterday I think, and your Mr Gibbs told us that this was a "final safety back check". Given that you made a complete horlicks of double taxation relief, have you got it right now? (Mr Brown) It was a change on double taxation relief that has been made actually in relation to moving from offshore holdings in this matter to dealing with it on-shore and I think that is an improvement. As far as the Vodafone case you are referring to, that was not essentially double taxation relief, that was about the use of controlled foreign companies, CFCs. That was a change that we recommended that I think most people have accepted is necessary. 424. If you have got it right now, your own Red Book shows on page 150 that you are gaining five million next year, five million the year after and then losing 15 million in the third year. What is all that about? (Mr Brown) We never said that the purpose of these changes was simply revenue. The purpose of these changes was to create a better system for multinational companies operating in the United Kingdom. We are discussing the improvement of the system continuously with them. When you look at changes as far as revenue is concerned, the whole problem of controlled foreign companies, and to some extent of DTR, is the protection of revenue that might otherwise have been lost if we did not take action and I think you have omitted that when you read out these figures. 425. But if you are trying to protect revenue, why have you got a net loss of five million over three years? (Mr Brown) Because the danger was, particularly with the CFCs, that if the practices that had been devised by accountants continued there would be a massive loss of revenue over a period of time. So the measures we took were to protect revenue. I think people who have worked in the Treasury know that a lot of the measures we have to take in Budgets are measures to stop a loophole developing that leads to avoidance and, therefore, to the loss of revenue. These are measures to protect revenue that might otherwise be lost. 426. I understand that but if they are to protect revenue why is the net loss five million? (Mr Brown) Because we are looking at an improved system for dealing with the treatment of what are essentially the big international companies in the United Kingdom. The purpose of the measure was not just to either protect revenue or, indeed, to increase revenue; the purpose of the measure was to create a more modern system for multinational companies operating in the United Kingdom. That is why we are discussing with them, for example, the treatment of intellectual property. We need a more modern system of taxation to deal with this issue of intellectual property. We are also discussing with them, and there are detailed documents, the treatment of capital gains when there are the sales of subsidiaries. Again, that is a modern issue that has got to be dealt with properly so that we can have a more attractive system and make us the best environment for international companies to operate in throughout the world. So the change is, yes, to protect revenue but, yes, also to create a more modern system for international companies to operate in. 427. You keep calling it modernisation but there is a net loss of five million over three years. (Mr Brown) But if you are modernising the tax system, for example, giving a tax relief for intellectual property, which is one of the things that we are proposing, then you will not get additional revenue from doing that. You are prepared to sacrifice revenue to get a more modern system of taxation. This is what the companies want and this is what we think is the right thing for Britain to be the best environment for international companies to locate in. Mr Cousins 428. Chancellor, I wonder if I could ask you, in the Budget there is a very helpful proposal to raise the VAT threshold on small business but overall have you made any calculation both in terms of tax and the regulation that goes with tax of the impact of the Budget on small business? (Mr Brown) The small company taxation as a whole has been cut from 23 pence to 20 pence and there is a new ten pence rate for small company taxes. Therefore, over a period of time the tax burden on small companies has been reduced by something of the order of 20/25 per cent. The additional measures that we are introducing in this Budget are essentially helping even smaller companies that are not registered for corporate tax, they are often just registered for income tax. There is a proposal to raise the VAT threshold initially and then to deal with a more simpler system with the VAT requirements of companies with turnovers of less than half a million pounds. I believe that this could make it a lot easier for companies to operate. It is itself a measure of deregulation. We are consulting with the companies now on introducing it and we will be able to report back later on the progress we make on that. 429. Do you have any idea when you will be able to report? (Mr Brown) I do not know if we have got a timetable for that but these discussions are taking place now. I can write to the Committee and tell you. 430. Can I just point out that I am going to ask the Chancellor a question about life assurance, which is in the proposals for the Finance Act, and then go on and ask a question about Equitable Life. I am drawing the attention of colleagues on the Committee to that, if it might be helpful to do so. The suggestion is, according to an Inland Revenue Budget Notice, that there will be legislation in the Finance Bill to simplify the tax treatment of shares and life assurance products and to require insurance companies to give details of life policy gains to their policy holders. That clearly must be a helpful thing, that policy holders are going to be kept informed of the gains in the life policies that they have. (Mr Brown) Yes. 431. But do you not think that perhaps other information as well should be disclosed, for example about the policies on reserving and things like free asset ratios? (Mr Brown) I think you are absolutely right to draw attention to these very important issues that sometimes we do not have time to discuss in detail. It is true that we have taken a number of initiatives. There are proposals on greater transparency and we have had the introduction of these better standards, CAT standards, that I think are a means by which we can protect people with policies. Can I just bring the Committee up to date. The FSA has obviously told this Committee itself that it is going to carry out a review of with-profits business. It has a report into an issue that you may want to raise about Equitable Life. We are commissioning an independent review of capital and information flows regarding personal investment products. That is a broader scope than the FSA review. The FSA review will concentrate on the amount of discretion management should have over with-profit funds and about greater transparency in how they work. We are going to look with an independent review at capital and information flows regarding personal investment products as a whole. I hope that the Committee will welcome that as a sign that we are taking seriously these issues in the modern context in which they arise, and that is the protection of consumers. Mr Cousins: Thank you very much, Chancellor, for that information. Turning now to Equitable Life itself, and I am conscious of the time and I am also conscious of the fact that the Committee is engaged in a number of excursions already and I do not want to launch into another one, and I also think there is a distinction to be made between scrutiny and knockabout. Chairman: Which has perhaps not always been observed this morning. Mr Cousins: That is for you to say, Chairman, I make no comment on that. Mr Plaskitt: You just have done. Mr Cousins 432. The Committee finds itself in a genuine dilemma here which Sir Howard Davies has described as being "new constitutional waters". You have previously reproved the Committee, in my view correctly, for not inviting ministers to comment on the report on the Treasury. Coming to Equitable Life, there is a genuine dilemma for the Committee. The FSA is conducting an inquiry into its own record on regulation with the Treasury's record on regulation up to the point where the FSA took over as background. Mr Roberts and Mr Allen, who were originally at the DTI, then went to the Treasury and are now at the FSA and throughout were responsible for the regulation of insurance companies. Mr Roberts has absolutely explicitly and directly refused to answer questions from the Committee about what happened prior to him moving to the FSA on 1 January 1999. Sir Howard Davies intervened to say that in his view the Committee could not put questions to Mr Roberts about that and described this as being "uncharted constitutional waters". I do not intend to press you on this point this morning but could I at least invite you to consider the situation in which the Committee finds itself which is a difficult one. We must be in a position to make some enquiry into the regulation and its effectiveness prior to the FSA assuming responsibility on 1 January 1999 and yet Mr Roberts, who was responsible for it in a practical sense, is refusing to answer the Committee's questions because he regards that as being part of advice to ministers which he cannot disclose to the Committee. I do not intend to pursue the substance of this this morning but you will readily see the dilemma that the Committee finds itself in. If you could see a way in which you could assist the Committee to find a way through that dilemma I think we would all be grateful. (Mr Brown) Can I thank you for the way you have put this question because we are dealing with quite a detailed issue here and it goes back a number of years. The Treasury was responsible for the prudential regulation of insurance companies from 5 January 1998 to 31 December. Then it went to the FSA under contract to the Treasury and now, of course, to the FSA under the Financial Services and Markets Act. The inquiry that the FSA is conducting is into the events surrounding the problems that Equitable Life have had. I can just report to the Committee - and this may help Sir Michael in the issues that he raised with the Economic Secretary when she came to the Committee on 1 March - the Economic Secretary has replied to Sir Michael today, I do not know if he has got the letter yet, saying that "the FSA Report will, according to the information that we have, set out the background and events leading up to the point at which responsibility for prudential insurance passed to the FSA". So that issue is not ignored in the report that is being conducted. I have also said to you that the Treasury is going to look in future with an independent review at capital and information flows regarding personal investment products. That is a more general issue, not precisely about individual companies. There is no suggestion that the issues that have been raised are going to be left without any further investigation. 433. I do understand that and I do think that is helpful, particularly, if I may say so, the last point. However, if it wishes to enquire into the effectiveness of regulation of Equitable Life, which is an issue of genuine public interest, before the period of the FSA's takeover, the Committee has effectively been prevented from asking those questions by Mr Roberts. I fully understand Mr Roberts' position, I am not in any way criticising him, but there is a dilemma for the Committee. (Mr Brown) Can I put it another way. We must await, and I think it would be to the Committee's benefit also to await, the report of the FSA and then we can draw conclusions once we have seen what that report has said. What I want to point out to you this morning, which I think deals with at least part of your point, is that the FSA Report will set out the background and events leading up to the point at which the Treasury and then the DTI passed over its regulatory responsibilities to the FSA. 434. And you would at that point ---- (Mr Brown) I think it is then for the Committee, having seen the report, to consider what action is next appropriate. I just say on a more general issue that we are looking at some of the general points, as are the FSA, that arise from this instance. Sir Michael Spicer 435. Two quick unrelated points. Chancellor, have you had any second thoughts about IR35 in view of the disastrous effect it is having on small contractors, particularly in the computing industry? (Mr Brown) The IR35 proposals were subject to a considerable amount of consultation and then they were amended in the light of the representations that were made. I see no case for making a complete shift in the policy of the Government. We will, of course, continue to listen to what people say. We did analyse the effects that were likely to follow and it is not our evidence that there have been large scale movements out of the country and I do not believe that to be the existing position. 436. The other question, if I might, is just to ask you whether you will lend your weight to publication by Customs and Excise of the Rocques Report into the management of vast losses of revenue which seem to be apparent there now? Particularly in the Sub-Committee we have been pressing very hard on Customs to publish their report, and so has Mr Rocques himself. I just hope that ministers will put their weight behind it as well. (Mr Brown) I think you should know the background. The Chairman of Customs and Excise has already made a full disclosure of the revenue losses in the trust statement to the 1999-2000 accounts. As far as the Rocques Report is concerned, ministers are considering this report. No decision has yet been made on publication but I hear what you have to say on that. Let us be absolutely clear, so that the Committee does know, this is dealing with losses of excise duties in the years 1994, 1995, 1996, 1997 and 1998 that amounted to the figures that were set out by the National Audit Office. So we are dealing with a period that started quite a long time before we were in Government. 437. That may or may not be relevant, but the fact is there are management practices within Customs which the Committee has been quite critical of and which relate to what we understand to be some of the Rocques Report recommendations and the quicker these reach the light of day the better for the future I would have thought. (Mr Brown) Appropriate action has already been taken by Customs to deal with the lack of controls. Obviously I hear what your proposal is. Ministers are considering the report at the moment but the actual findings, in fact, of the report as far as the losses are concerned are contained in the reports that have been made by the Chairman of Customs and Excise and by the National Audit Office. 438. I do not want to pursue this at this time of day but "appropriate action" are words that have been given to us by Customs and Excise on many occasions and we have found that the action has not been quite as appropriate as they have said. I hope that this report will reach the light of day very soon. (Mr Brown) Just so that the background is fully understood, when these losses were reported to the National Audit Office and to the Paymaster General, she immediately commissioned an independent inquiry into the matter and it is that independent inquiry we are now looking at. 439. Again, I do not want to pursue this but it was indicated that the report would be published very early in the new year and it has been about for some time now. I repeat, I hope that you will give your weight to publishing this as soon as possible. (Mr Brown) Ministers are considering the report at the moment. Chairman: Thank you very much, Chancellor.