Examination of witnesses (Questions 20-39)
WEDNESDAY 2 MAY 2001
DAWN PRIMAROLO
MP, MISS MELANIE
JOHNSON MP, MR
IVAN ROGERS,
MR PETER
CURWEN AND
MR RICHARD
BROWN
20. So basically the Government does not feel
under a legal obligation of any sort to do anything about this
apparent condemnation of our practice?
(Miss Johnson) No, and, indeed, I think condemnation
is putting it too strongly anyway.
21. So basically there is nothing we have to
worry about?
(Miss Johnson) No, we do not believe that we have
anything to worry about. The move into deficit in the medium term
results from a more than doubling of net investment over the next
three years and that investment is going into schools and hospitals,
law and order, to address the long standing under-investment in
the UK. At the same time as that we have actually been able to
cut debt borrowing by £44 billion since 1997, which is an
impressive record and indicates our ability to manage the economic
situation.
22. I appreciate that. What I am just asking
is as we did commit ourselves to taking corrective budgetary action
once we had an early warning, and this seems to be an early warning,
the point is the Minister does not feel that has got any legal
standing, it is nothing we need to worry about?
(Miss Johnson) No, it is non-binding. It is a view
and it is not a view that we feel we need to respond to. Indeed,
I have sketched out, and I can sketch out in more detail if you
like, why we do not feel that it is necessary to respond to that.
23. I appreciate that but just a final question.
Does the Minister appreciate that there is more than Ecofin expressing
concerns about the budget? I just mention this report published
by PriceWaterhouseCoopers, apparently quite remarkable accountants,
they seem to have quite a good name, who have said that in their
view the spending plans would involve substantial tax increases.
Do you think that is just a lot of nonsense?
(Miss Johnson) The fact is that the majority of recent
major commentators have commented reasonably favourably on all
the projections and our forecasting and the decisions that we
have made, including the IMF and the OECD, both of whom have made
recent favourable remarks on the economic climate in the UK and
the decisions made in Budget 2001.
Sir Teddy Taylor: Thank you very much.
Mr Fallon
24. Why are we going to be the only European
country in deficit in 2004?
(Miss Johnson) We are in the position of having locked
into fiscal stability and economic growth and we are making it
plain that our policy, in fact, makes us much better placed in
the face of global instability than governments have been in the
past. As a result of that we have actually got a foundation of
strength which is enabling resources to be released into the Government's
priorities without putting at risk long-term stability. As I said,
one of the ways in which we are doing that is to double the investment
in public services and that investment is sustainable, it has
shown that it is sustainable, because we have one of the lowest
debt ratios in the EU.
25. Why did you tell us at the time of the Budget
that the Budget was in line with the Stability and Growth Pact
and the Commission now say that it is not?
(Miss Johnson) We believe that it is. The question
is about the notion of significance—
26. About what?
(Miss Johnson) About the notion of significance in
the Stability and Growth Pact formulation. We believe that it
is not significant. They are saying that one per cent is significant
and we are saying that it is not significant.
27. They are also saying—and I quote—".
. . the expected ratio of public sector current expenditure to
GDP should not exceed . . . 37.3 per cent . . ." projected
in the Budget 2001.
(Miss Johnson) We do; we have the second lowest public
expenditure in Europe.
Chairman
28. Is that the 37.3 per cent?
(Miss Johnson) And the third lowest debt to GDP ratio.
29. That 37 per cent you are saying is the second
lowest?
(Miss Johnson) Yes, second lowest.
Mr Fallon
30. The Commission in its statement on page
63 is saying—and as the percentage reminds me—that
you should not exceed it in 2003, which you are planning to do.
(Miss Johnson) As I said, the reason why we are planning
to do that is because it is going into investment, it is not going
into revenue expenditure. We are doing that because we know that
we are on track to meet our fiscal rules, that we have got the
frameworks in place which will tackle short term risks and unexpected
events and will also lead to economic stability in the long term.
We have been able to cut the public sector net borrowing by £44
billion since 1996-97. We have got net debt reduced by 12 percentage
points and we have been able to reduce the percentage of debt
to GDP down to 31.6 per cent from 44 per cent. All of these indicate
that the public finances are in a good state of health and that
we are able to afford what we are planning to do.
31. What you are planning to do is break the
Commission's rules?
(Miss Johnson) We do not believe that it is a matter,
nor indeed does the Commission believe, I think, that they are
making rules in this context at all. It is a judgment and a recommendation,
as I said earlier on. These things are non-binding. The fact is
that they are making comment, others have made different comment,
and we have taken a view about this and it is the view that is
outlined in detail in the Red Book and indicates what our forecasting
is for the UK economy over the next few years. We still stand
by those forecasts. We are confident those forecasts are good
forecasts.
32. In ignoring the recommendation are you denying
that the Commission is entitled to make those recommendations?
(Miss Johnson) No, no. They are perfectly entitled
to make comment but it is not binding on us. I have just located
the couple of quotes I was looking for. For example, if we look
at other comments on our fiscal strategy, if we look at the IMF
recently in February they commented that "staff broadly agree
with the authority's medium term strategy . . ." that is
the UK ". . . particularly the need to enhance public infrastructure
and human capital while maintaining a sound overall fiscal position".
Again, they commented a week or so later, again in February this
year that ". . . the strengthened macroeconomic and structural
policies underpinned by improved monetary and fiscal policy frameworks
have contributed importantly to the UK's achievements." They
go on to talk about the value of the independence of the Bank
of England, a clear inflation target and the increased transparency
of monetary policy decisions, for example. There are different
views around and, as I say, this is a view which one particular
body has taken. It is not a binding view on the UK and we take
the view, rightly, that we should proceed with our own forecasts
and our own economic decisions as we have done up to this time.
33. If you accept the Commission is entitled
to take a different view, why did your official tell the Financial
Times on 26 April "this is entirely a matter for the
individual Member States. We believe the Commission has overreached
itself, the Treasury has said"?
(Miss Johnson) I am not going to comment on quotations
in the paper because they are not always taken in context and
they are not always absolutely accurate. What I would say about
that is that I said they were entitled to make a comment on this
matter if they so wished to do and I stand by that.
34. They have not overreached themselves?
(Miss Johnson) Whether they have commented entirely
within their remit, they are entitled to make comments. Those
comments are purely judgments that they are making. As I said,
I have just given you a couple of very recent quotations from
the IMF on a similar area of policy who are taking a very different
view about this matter. Indeed, we feel very confident with what
we have done in the Budget and the forecasts that we have there.
Perhaps I could just add one thing. What is important in relation
to their comments is their comments about the explicit levels
of expenditure were probably beyond what would be normally considered
right but they are, as I said, quite entitled to comment in this
general area, and, indeed, that is one of their roles.
Mr Beard
35. It is difficult to understand the background
to the Ecofin comments. The resolution of the European Council
in 1997 said the European Union Member States ". . . commit
themselves to respect the medium term budgetary objectives of
positions close to balance or surplus and to take corrective budgetary
action". How does that medium term close to balance or surplus
differ that much from the Government's idea of balancing the budget
over the economic cycle? Are they saying that whatever the position
in the economic cycle in three or four years' time the budget
has got to be balanced? Is that what it implies?
(Miss Johnson) All our projections are still consistent
with the terms of the Stability and Growth Pact. Our Government
debt is well within the Treaty reference value which is 60 per
cent of GDP, obviously it is way below that, and as I said it
is one of the lowest in all Member States. The third lowest, I
think, in all Member States. The Government deficit is also under
the three per cent reference value and remains close to balance
throughout the projection period. We do not see a problem with
this, therefore. What we are doing is entirely consistent with
those things that we need to meet in this particular context.
36. You are saying over the medium term the
phrase I have just read out means the same thing as the Government's
wish to have a budget balance over the cycle?
(Miss Johnson) Obviously the medium term and the cycle
are not necessarily the same depending on where we are in the
cycle.
37. The medium term could mean three or four
years hence. It could be exactly the wrong point in the cycle
to have a budget balance. The statement says it should be.
(Miss Johnson) Sorry, whose statement says it should
be?
38. The statement I have just read out which
is the resolution of the European Council Stability and Growth
Pact of 17th June 1997. It is saying that it should be balanced
and the phrase, the operative words are the European Union Member
States ". . . commit themselves to respect the medium term
budgetary objectives of positions close to balance or in surplus".
The comments we are now focusing on are all based on that phrase
because the essential reason why the United Kingdom has been singled
out is because we seem to be the only one with a budgetary deficit,
albeit one per cent, in the medium term. What I am getting at
is that phrase could be interpreted as being consistent with the
Chancellor's own policy of balancing it over the cycle or it could
be interpreted as inconsistent. The Ecofin seems to be interpreting
it as inconsistent.
(Miss Johnson) I think the fact is that it is the
definition of "close to" which is at issue here. As
I said, it is a question of whether it is significant or insignificant
earlier on. Basically we are talking about one per cent, we regard
that as being close to. A different view has been taken elsewhere
on this. We are still quite confident about our projections and
about what we are doing. I have to say also that we think the
peer review process is a good one in general. We believe in the
multilateral surveillance and the greater openness that these
processes involve and, indeed, that is why we participate in similar
exercises involving the OECD and the IMF too. We think there is
a benefit in general to these processes.
Chairman
39. You are basically saying the European Commission
is just one voice amongst this multilateral surveillance and there
are other voices too?
(Miss Johnson) There certainly are other voices. I
have already quoted from the IMF and I can probably dig out some
more quotes if you want me to. There is a very different perspective
being offered elsewhere. I think it is an argument about nomenclature
as much as anything. We are happy with where we are.
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