WEDNESDAY 2 MAY 2001
_________
Members present:
Mr Giles Radice, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr Edward Davey
Mr Michael Fallon
Mr David Kidney
Mr David Ruffley
Sir Teddy Taylor
_________
DAWN PRIMAROLO, a Member of the House, (Paymaster General), MISS MELANIE
JOHNSON, a Member of the House, (Economic Secretary), MR IVAN
ROGERS, Director, European Strategy, MR PETER CURWEN, Head of EU and
International Tax, and MR RICHARD BROWN, Head of Agriculture,
Environment and Rural Policy Team, HM Treasury, examined.
Chairman
1. Welcome. It is always a pleasure to welcome you to the Treasury
Select Committee. I understand that it is your birthday today, so it is an
even greater pleasure. Many happy returns.
(Dawn Primarolo) I could not think of a better way to spend my birthday
- it says here in my notes.
2. Is there anything either of you would like to say to begin with?
(Dawn Primarolo) No, I do not think there is, Chairman, except to
introduce the people sitting at the table with myself and the Economic
Secretary. Peter Curwen, on my left, is Head of the European and
International Tax team. Next to the Economic Secretary is Ivan Rogers, who
is the Director of Europe, that is Her Majesty's Treasury. At the far end is
Richard Brown, Head of Agriculture and Environmental Policy, Her Majesty's
Treasury.
3. Thank you very much indeed.
(Dawn Primarolo) I do not know who these are behind us but I thought
they were your fan club.
4. Maybe they are yours.
(Dawn Primarolo) I do not have one.
5. This may even be my farewell question. I would just like to ask
you what difference has it made to Ecofin having the Euroclub, or the
Eurogroup as it is called, Euro-X or Euro-12, whatever it is now called? I
think it is called Eurogroup. Has it made any impact?
(Dawn Primarolo) If I could say, Chairman, on the question of tax and
the discussions around the major tax agenda, of course Ecofin has continued
to be the forum, matters settled by unanimity.
6. So it has made no difference?
(Dawn Primarolo) There is no change in that respect. I am not actually
aware, unless the Economic Secretary wants to add any points, of necessarily
an impact but certainly not on the tax side, no.
7. Economic Secretary?
(Miss Johnson) There have been suggestions that have come out for a
better informal organisation of the Eurogroup and hence better visibility,
including better communication between the Eurogroup and the ECB and, indeed,
the markets. We welcome those developments and I think that those are
positive as far as we are concerned. As the Paymaster General has said, the
fact remains that Ecofin is the prime forum in all of this and has a central
role in economic policy co-ordination and that remains as it has always
remained.
8. The fact that the Chair of the Eurogroup is somebody different
from the Chair of Ecofin, has that made a difference?
(Miss Johnson) I think it provides another alternative set of energies
going into leadership in Europe and that is only constructive given the
developments that the Eurogroup have been making along the lines that I have
already mentioned. I think greater visibility and better co-ordination are
real positives.
9. When you arrive out there on the continent of Europe for your
meeting at Ecofin, the fact that Eurogroup may have met in the morning does
not make any difference?
(Miss Johnson) No. If you are, as you would be, at the lunch there is
much discussion of what has happened at Eurogroup as part of the luncheon
discussion as well. We are very much included in that and, in my experience,
it makes very little difference. There certainly is not a feeling of being
outside of things, if that is what you are suggesting.
Chairman: I was possibly.
Mr Davey
10. Can I just check that no British official or Minister attends the
Eurogroup meetings, is that correct?
(Miss Johnson) That is correct.
11. Do we receive the minutes of the Eurogroup meetings?
(Miss Johnson) No, we do not.
12. So we do not attend either in an official capacity or a
ministerial capacity and we do not receive the minutes. Anything we find out
about what goes on in those meetings comes from informal briefings over lunch,
is that correct?
(Miss Johnson) Yes, but those informal briefings are fairly full and do
include some discussion around anything that is of interest to the whole group
and, indeed, often there is obviously an overlap between the subjects that are
being discussed.
13. Let me just press you on that. Say, for example, the members of
the Eurogroup had read or seen in the press that the British Minister going
to Ecofin was going to take a particular position and they decided that they
did not support that position and discussed it at that group, presumably they
would not given you formal notice of that at the lunch. That could happen if
we do not have membership of that committee and do not see the minutes.
(Miss Johnson) All the decisions are actually taken amongst the 15 and,
as I said in my opening response to the Chairman's question, obviously Ecofin
remains the sole decision making body on EU economic policy and that is as it
has always been.
14. You do not think it possible for the Eurogroup members to stitch
Britain up then?
(Miss Johnson) We remain vigilant and we would resist anything that we
felt had that character to it. We are talking about recent Ecofins, and
indeed the Chairman started off by saying "when you are over on the continent,
as it were, actually at a meeting how does it feel", and I can only tell you
how it feels from personal experience and it feels that we are still very much
taking a leading role, we are influencing things from the centre, but Ecofin
is still very much at the heart of decision making, as is its proper
constitutional place in the framework. It does not feel as if there is any
kind of problem of the kind that you are trying to allude to.
15. Let us be very clear on this for the record. There are some
decisions taken by Ecofin which are not subject to unanimity rules and the 12
members of the Eurogroup would have the voting power amongst those 12 to vote
out Britain's opposition on an issue that did not require unanimity. That is
correct, is it not?
(Miss Johnson) The fact is that decisions are taken in the forum of the
15 unless they are explicitly ---
16. That is not the question. I have asked you to confirm the legal
position.
(Miss Johnson) You are saying if it is something related to majority
voting then obviously a majority can carry the day. That is a fact in any
context.
17. Thank you for confirming that.
(Miss Johnson) That is just a matter of fact, that is nothing to do with
the Eurogroup.
18. I want to you to confirm that the 12 members of the Eurogroup
would actually form such a majority. Can you confirm that for the record?
(Miss Johnson) I think you can see that 12 members are actually a
majority of the group.
Mr Davey: Thank you very much, that is all I wanted to find out.
Sir Teddy Taylor
19. Chairman, while I am sure we will all have been greatly heartened
by the Minister's summary of the situation of Britain being outside the
Eurogroup and not suffering anything, there is one particular issue on which
I would greatly appreciate her advice. That is on the apparent censure which
was given by Ecofin at the meeting of 12 February in which they said that the
Treasury's budget projections were "not in line" with the Stability and Growth
Pact. The figures show, I think, we are the only country that is looking
forward to a deficit, I think it is one per cent, in the year 2003-04. While
I appreciate, Chairman, the Government may take the view that Ecofin are being
a bit pessimistic and perhaps even cautious, what I would genuinely like to
know is what is the status of it? The reason I am asking is that in the
actual summary of the decision taken in June 1997 it said the British
Government commit themselves to taking the corrective budgetary action they
deem necessary to meet the objectives of their stability or convergence
programmes. I am wondering what is the status of this warning? They have
said to us "you are going to be spending too much", can we just ignore it or
is there some kind of standing and does Britain have any legal obligations to
change things?
(Miss Johnson) The Stability and Growth Pact actually provides non-
binding guidance on the orientation of Member States' economic policies. All
I can do is emphasise the fact that those are non-binding.
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 PriceWaterhouse Cooper,
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 œ44
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 surveyance
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 surveyance 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.
Mr Beard
40. Could I just move on to what appears to be another contradiction
between Government policy and the criteria that the Ecofin is applying in this
respect. The Chancellor in a written answer on 12 February this year said
that the opinion of Ecofin, "...notes the United Kingdom is projected to move
into deficit in the medium term. I made clear to the Commission that this
reflects a more than doubling of net investment." If you take what Ecofin
say at face value it rather implies that it does not accept that borrowing
should be used for investment, it rather implies that a balanced budget has
got to cover both current expenditure and investment and borrowing is
inconsistent with the Stability Pact.
(Miss Johnson) The deficit is as a result of a doubling of net investment
over the next three years, as I mentioned earlier on. We believe that is
necessary to redress the long standing under-investment in key public
services. We have the public finances that will deliver that and we have the
monetary and fiscal frameworks which are delivering an economy capable of
doing so. The Government, by increasing investment as a share of GDP for a
transitional period, is acting firmly in accordance with the current broad
economic policy guidelines.
41. I have no problem with the Government's policy, all I am seeking
to do is to highlight that there is an inconsistency between the criteria that
seem to be being applied in providing this opinion where the implication is
that borrowing is not acceptable and Government policy is plainly based,
reasonably, on borrowing to provide for investment.
(Miss Johnson) We have set two fiscal rules - you are well aware of what
they are - and we are acting in accordance with those fiscal rules. Those
fiscal rules are part of the framework that has ensured that we have been able
to deliver an exceptionally low inflation economy with very low interest rates
and, as you know, we are able to make the investment that we have done in
public services as a result of that, making this dramatic cut in debt as well
at the same time. Therefore, for the first time we are able to put more money
into education and health than we have into the costs in this country. Over
the period of the last government more money actually went into the costs of
unemployment and debt servicing than went into the money that was going into
funding the health service or education. We are now putting much more - 30
billion more next year - into health than we are into the costs of debt and
the costs of unemployment.
42. I understand that and I accept it entirely. What I am seeking
to point out to you is that there seems to be a difference in the criteria
that are being applied in interpreting the Stability and Growth Pact in
relation to the United Kingdom's economy between the Commission and the United
Kingdom Government. The question is, if that is the case does the slightly
censorious view that is being put really mean very much and what are we doing
to sort this out because they are fairly fundamental differences?
(Miss Johnson) I do not really think that they are fairly fundamental.
In setting our two fiscal rules we have always emphasised, and indeed the
Chancellor said in his statement to the House in October 1997, that "we will
ensure that our fiscal rules and our deficit reduction plan continue to be
consistent with the terms of the Stability Pact". That is what we believe we
are doing. As I say, I think the main debate is about the question of whether
one per cent is close to or significant, or not. That is what the only debate
is to be about on this and I do not think it is a very significant debate.
43. It does seem that we are being censured because we are the only
country with any deficit at 2004.
(Miss Johnson) I do not like the term "censure", and perhaps I should
have picked it up when you said it earlier. The term "censure" is wrong. It
is a judgment, it is a recommendation, it is an opinion. It is not a censure,
it does not carry that force with it. They have expressed an opinion and
obviously we are aware of that opinion.
Mr Kidney
44. Could you just help me with the Commission's opinion. They are
not saying that we should not invest in our infrastructure, indeed they say
"allow public investment to double as planned as a share of GDP", but they say
"while at the same ensuring that the terms of the Stability and Growth Pact
continue to be respected" and by that they mean have a balanced budget and not
a one per cent deficit. What do you understand their opinion is of what
action they think the British Government should take?
(Miss Johnson) We would not be happy about them expressing a view about
tax and spending, for example, because we believe that providing we are
meeting the main rules of the Stability and Growth Pact it is a matter for
national governments to decide in all cases what tax and spend policies ought
to be. Therefore, I think it would be wrong to draw the conclusion that they
are making any remarks about this. As I said, this is a non-binding opinion.
45. Is it not obvious that they are saying that current public
spending somewhere else should be cut in order to make way for the financing
of the capital borrowing?
(Miss Johnson) They do not actually say that.
46. But is it not obvious that that is what they mean?
(Miss Johnson) I would not wish to put words into their mouths.
Chairman: This may all be very hypothetical. Michael Fallon.
Mr Fallon
47. It is not just an opinion, is it? The Commission's job is to
facilitate the strict, tight and effective functioning of the Stability and
Growth Pact. They have required you - the word is "should" - to cap your
public expenditure at 37.3 per cent. You are ignoring the Commission ruling,
are you not?
(Miss Johnson) No, it is not a Commission ruling at all. As I said, it
is a non-binding opinion, it does not have that force. The opinion simply
confirms that the UK is meeting its obligations under the Stability and Growth
Pact and it has delivered a sound, stable macroeconomic performance. Indeed,
the views of others - I have already quoted the IMF and we can turn to the
views of other international authorities - are in line with the views that I
have just quoted from the IMF.
48. Why do you think that the United Kingdom is the only country to
receive this warning? Do you think it is because we are the only country in
deficit or do you think there is another reason?
(Miss Johnson) I cannot comment on why the Commission might do certain
things because I am not in the mind of the Commission.
49. Okay. What about the Ecofin recommendation that Ireland should
amend its budget? Do you think that should be taken seriously or ignored as
well?
(Miss Johnson) Again, it is non-binding. It is important to recognise,
I think, that individual Member States remain responsible for their own fiscal
policies and I was just emphasising that in relation to the UK too.
50. So you think Ireland should take notice of this?
(Miss Johnson) The recommendation was issued under the broad economic
policy guidelines in the Irish case as well, as you say, and those provide
non-binding guidance on the orientation of Member States' economic policies,
including their fiscal policies. As I say, their fiscal policies remain a
matter for individual Member States.
51. Ireland should take account of what the Commission has said but
you can ignore it?
(Miss Johnson) We cannot comment on what the Irish Government response
might be, this is UK Government.
52. Can I finally ask you whether you have made any initial estimate
of the impact of the foot and mouth epidemic on growth? Have you been able
to make any estimate yet?
(Miss Johnson) We have a figure that you probably already are aware of
in relation to the costs of foot and mouth, which is something in the order
of half a billion pounds at the current time.
53. Yes, sure, but I asked you whether you had made any estimate of
the impact on growth yet?
(Miss Johnson) We do not expect there to be a very significant impact on
growth at all. The fact is the total cost at the moment to the UK economy is
a bit over half a billion pounds as a result of the assistance we have given.
We recognise that there is a very wide range of estimates on the question of
the impact on growth in the UK and that very wide range of estimates suggests
on the whole a modest impact on the economy relative to normal fluctuations
and this is only one potential cause of a fluctuation against others.
Obviously for the individuals concerned it is a very significant economic
event at the level of households and farms and so forth, it is a very
different experience, and I would not want to do anything to suggest other
than that. If you are looking at the impact overall on the economy, we do not
believe that that will be other than fairly modest.
54. So it would not cause you to revise your estimate of growth in
any way?
(Miss Johnson) No. Indeed, our estimates are on the very cautious side
just because they are designed to take account of any fluctuations that may
occur. Obviously this was an unforeseen one but they do take account of
fluctuations of this kind and they are cautious enough to do that.
Mr Cousins
55. Looking back to this period in February which my colleagues on
the Committee have been taking you back to, of course we have had a lot more
information about the movement of the world economy since February and I just
wonder if more recently there are indications of other European Union
countries loosening their fiscal policy in order to respond to more recent
economic information?
(Miss Johnson) I do not have any indication of that at this moment, no,
but I do not know whether Ivan wishes to add anything or not?
(Mr Rogers) No.
Chairman: If you have not got any further questions on this I think we
are moving to Lamfalussy.
Mr Cousins
56. Lamfalussy. Do you accept the case in principle for a single
European Securities Regulator?
(Miss Johnson) We are very much in support of the conclusions that the
Lamfalussy Wise Men group came to. We believe that the answers that they have
produced are the right sorts of answers. We think it is very important to see
the completion of a single market in financial services and the Report did not
actually advocate the creation of a single regulator. The Report, as you
know, advocated a four level structure to deal with regulation across Europe
in a way which I think is sympathetic to the needs of the financial services
sector and the fact that it needs to have flexible regulation of the kind
which will allow it to adapt and grow over a period of time. I think that is
quite an important consideration and one that the Lamfalussy Report
recognises.
57. Do you not see the creation of a European Securities Regulators
Committee as being the first step towards the creation of a single European
Securities Regulator?
(Miss Johnson) No.
58. The Lamfalussy Report advocates if this cannot be produced by the
private sector there should be a public sector involvement setting up a single
European clearance and settlement system. Is that the policy of the
Government?
(Miss Johnson) We do not take a view directly on that matter. We are
keen, however, as I say, to see the completion of the single market in
financial services and the target for the capital markets and the other
targets met on financial services so that we make progress on these matters.
59. Indeed, but the Lamfalussy Report is quite clear that in the
event of the failure of the private sector to create a single European
clearance and settlement system that it may require public sector involvement.
Does the Government accept that?
(Miss Johnson) At the moment the concentration of work that we are
putting in is into seeing that the Lamfalussy Report is appropriately
implemented and that the benefits are, therefore, to be gained for financial
services obviously in the UK but more widely across Europe in seeing those
arrangements supporting the further development of a genuine single market,
first of all in securities but then more widely in other aspects of financial
services.
60. Does the Government see the creation of a single European
clearance and settlement system as being a precondition for that single
financial market you have been referring to?
(Miss Johnson) No.
61. You do not?
(Miss Johnson) No.
62. It is Government policy that we could have a single European
financial market and continue to operate with a number of different, separate
and, maybe in some respects, competing clearance and settlement systems?
(Miss Johnson) I can write to you further on this but I think I am right
in saying we have not taken a firm view on this matter. Indeed it is not the
focus of our energies in this matter. You seem to take it the Lamfalussy
Report is already done and dusted. Obviously whilst we have made good
progress on it, there are issues still to be resolved and we want to see those
issues progressed.
63. The Lamfalussy Report dusted but not done?
(Miss Johnson) It is a matter for the markets to take a view on, well,
the market does not have a view, but for the market to resolve the issue of
the future form of clearance and settlement arrangements across Europe.
64. The Lamfalussy Report goes a tad -- an imperial measure I am
thinking of for tad.
(Dawn Primarolo) What is it in metric.
(Miss Johnson) It is a very good measure.
65. Yes. The Report goes further than that, it says "...in the event
of market failure to produce a single European clearance and settlement
system, public orientation ..." I think that is the phrase of the Lamfalussy
Report "... may be required". Is that the policy of the Government?
(Miss Johnson) I am not sure what the words "public orientation" mean.
66. You have had the opportunity of participating in the reports to
discuss the Lamfalussy Report. You have had a better opportunity than me.
(Miss Johnson) You are picking out two words out of context. They are
not words that immediately spring to my mind. What we are keen to do is to see
consultation going on about the decision making process that takes it closer
to the market participants and the end users and to see a more democratic
system than the existing system. I do not have a view about the particular
phrase which you have just raised with me.
67. Taking firstly the European Securities Regulators Committee, as
proposed by Lamfalussy, which will be implemented.
(Miss Johnson) Yes.
68. There is a danger of remoteness from scrutiny and from openness
and democratic transparency of the workings of such a committee. Would it be
your view that the Financial Services Authority - who presumably would be
present on this European Securities Regulators Committee - should be
accountable to Parliament in some way for what it does there?
(Miss Johnson) One of the things the Committee needs to do is it will
need to maintain the confidence of the European Securities market, that is
quite important, because one of the whole purposes of having any form of
financial services regulation is to ensure that it provides confidence both
about the market and within the market. Therefore, we see that as being very
complementary to what is going on in the UK at the moment. I do not agree with
you at all that there is some kind of lack of transparency or accountability
in all this. The four fold structure which Lamfalussy has proposed allows, in
my view, and in the view of the Government, appropriate decision making and
rule making and legislative, if you will, in general terms, functions to be
exercised at the right and appropriate levels. With good communication and
good relationships between those models this should ensure the right kind of
framework operated in the right way, as I say, to enhance the development of
the single market in securities and ultimately more widely in financial
services.
69. I think you would have to agree that it is a complex structure
and involves the creation of two new European wide bodies: the European
Securities Regulators Committee, and I confess myself to be a little
disappointed that you did not visualise the Financial Services Authority
reporting to Parliament, possibly through this Committee, what it does there
but turning to the ---
(Miss Johnson) Can I just be clear, the Financial Services Authority
certainly does produce an annual report and through mechanisms such as coming
before the Treasury Select Committee is certainly accountable to this House.
I would not want to suggest anything different. It is accountable for all its
activities, whatever those activities may be. It can be called to account by
this House and certainly by this Committee in particular.
70. I will take that reply as being an encouragement that our
successors on this Committee should indeed do just that. The European
Securities Committee, which of course will be a ministerial body, how do you
visualise that reporting to Parliament?
(Miss Johnson) I do not think it is resolved that it is necessarily a
ministerial committee. The report suggests it could either be junior
ministerial or at official level, that is not yet resolved. Indeed, given the
different structures of ministers and officials in different EU countries
anyway, sometimes those who would be classified as officials in some countries
are effectively graded as ministers in others, so it is not necessarily a very
clear cut set of distinctions.
71. In the event of it being what you describe as junior ministers,
how will those junior ministers report to Parliament? In the event of it
being officials, how will they report to Parliament on their work on the
European Securities Committee, which will be laying down codes and rules and
directives that the securities markets will be following across Europe?
(Miss Johnson) I reiterate again that it is not necessarily junior
ministers, it could be officials. I just make that point for the record since
you, again, said junior ministers. The Commission will ask the new regulatory
committee to draft implementing measures in accordance with framework
directives and then the committee will act as a regulatory committee under the
comitology procedure and will vote on whether to accept the implementing
procedures or not. We actually think that the consultation and the
transparency that is built into these processes are an improvement and they
will take decision making much closer to the markets.
72. As part of the European Commission's views about Lamfalussy it
is said that there may be some matters which are particularly significant on
which it may take a different view from what is described as the predominant
view on the Securities Committee in order to inform its work on shaping
directives. Can you give the Committee any guidance on what sorts of issues
would be regarded as being so sensitive that a predominant view should be set
aside?
(Miss Johnson) No, I think that is very difficult at this stage. This
clause was introduced in relation to concerns by just one Member State -
Germany - and it is not entirely clear how that will work out in reality. I
do not think that is a significant problem with the present arrangements. Can
I just return to this question of transparency again because you were very
interested in it, just to emphasise the fact that Lamfalussy himself, or the
report, emphasises that the transparency will actually assist the scrutiny
committees in evaluating how the Securities Committee has worked generally and
in the identification of which specific measures are particularly significant
and, therefore, should be individually scrutinised. As I say, that clarity
and that transparency is going to help people to be involved in the right way
and to get the right decisions at the right levels.
73. How do you visualise this openness operating at the level of
something like the European Securities Regulators Committee, or this proposed
European Securities Committee? How will there be access to its work? Will
it issue reports? Could people like myself, the press, the public, go and
listen to the meetings? How will it report back to national parliaments as
well as the European Parliament? These are all important issues.
(Miss Johnson) Obviously we have mechanisms in the UK which are well
understood. Indeed, I often appear before various committees, not only
yourselves but other Committees in this House, to give accounts of various
European dimensions of the Government's work and no doubt there would be those
fora for discussing what arises in this context just as with a number of other
policy areas.
74. Will these committees be open? Will they publish minutes? Will
there be voting records?
(Miss Johnson) We have been in favour of transparency in a number of
contexts and we will be arguing for transparency in this context but, as I
say, that is already what the authors of the report themselves are arguing
for. Exactly how that is to be manifested I am sure is some of the detail
that is yet to be worked out because they are still very much at the stage of
agreeing the overall, over arching proposals and it is probably unreasonable
at this stage to think that the detail of the sort of thing you are now
mentioning could reasonably be expected to be in place. I am sure there will
be sensible discussion about this and, given the driving thrust of the report,
we are optimistic that transparency and consultation will be very much to the
fore.
75. So it is certainly the wish of the British Government that there
should be minutes, the presence of observers and things of that nature?
(Miss Johnson) I have not said exactly what the mechanisms will be
because I think we need to decide what is appropriate. We need to make sure
that those produce a high degree of transparency. We have argued for it in
other contexts, we have demonstrated it in the context of the Bank of England
and the workings of the Monetary Policy Committee, and it is something that
we would want to see in this context too.
Mr Ruffley
76. Paymaster, I have a draft agenda dated 12 January which sets out
what was to be discussed on 7 May, and I quote "Item No.6. Direct taxation:
Communication on company taxation. Presentation by the Commission". I also
have in my possession a draft agenda dated 27 April, again in relation to the
7 May Ecofin, where this does not appear at all. My question to you is did
any Minister, any UK Government official or any other UK Government
representative, ask for this to be removed?
(Dawn Primarolo) No.
77. Or ask any third party to seek its removal?
(Dawn Primarolo) No.
78. You can categorically confirm that?
(Dawn Primarolo) Yes.
79. Who removed it?
(Dawn Primarolo) The Commission itself.
80. Why did they remove it?
(Dawn Primarolo) I understand that the study is not complete.
81. Sorry?
(Dawn Primarolo) I understand that the study is not complete. The
Commission have not given a detailed explanation of why they have withdrawn
it except that they are still working on it. I am sorry, I cannot help you
any more than that because we have not had the reasons.
82. On 12 January they presumably thought that work was sufficiently
well under way to put it as agenda item number six and it does not now appear.
(Dawn Primarolo) Indeed, yes. I can only imagine that the pressure of
work on the Commission is such that ----
83. When were you notified that it was not going to be an item?
(Dawn Primarolo) If I could finish the sentence. That is the only
speculation I can make as to why it is not on the agenda.
84. Let us not deal with speculation. Can I ask you a simple
question: when was your Department notified that this would not be taken as
an agenda item on 7 May? When were you told? The date will be quite
sufficient.
(Dawn Primarolo) I realise that the date will be quite sufficient. At
the first Coreper that discussed the agenda in preparation we would have been
notified.
85. What date was that?
(Dawn Primarolo) I have not got that to hand but, Mr Ruffley, I can get
it to you. I would not want to conceal it from you. I promise this Committee
that I will give you the date. I will just need to check that when I go back
to the Treasury. Apologies, that was not something I thought I would need
today.
86. Did you want it discussed on 7 May?
(Dawn Primarolo) The discussion of the Commission study has been
outstanding for some time and their bringing forward their report. Quite
frankly, whether they brought it forward on 7 May or not was not an issue for
us. As I said, we made no representations on it.
87. Sure.
(Dawn Primarolo) It is absolutely up to the Commission when they make
their studies available. I do not know what was in their mind and I am sure
you would not want me to speculate.
88. No, let us deal with the facts in this Committee. How many
corporate taxes have you harmonised since you became Minister, or agreed to?
How many UK corporate taxes have you either harmonised or abolished since you
became Minister?
(Dawn Primarolo) None. Harmonise and abolish what?
89. Corporate taxes or corporate tax allowances or reliefs?
(Dawn Primarolo) None. All the decisions we have made with regard to
corporate taxation and reliefs have been specifically connected with the
decisions that the Chancellor has continued to take about reforming the
corporate tax system to make sure that the UK is a competitive place for
business.
90. Can you tell me about the Monti Group, because you were agreeing
to the removal of certain UK corporate tax allowances and reliefs, were you
not?
(Dawn Primarolo) Can I seek clarification here. Are we talking about
the Code of Conduct Group here?
91. Yes.
(Dawn Primarolo) No UK regimes within the Code of Conduct, which we
have discussed at length in this Committee on a number of occasions, were
found to be harmful and no action was suggested on any of the UK regimes.
92. What was likely to be the content of the discussion on 7 May when
the 12 January draft agenda was put together? What was in anticipation?
(Dawn Primarolo) I cannot specify that. The Commission set up two
panels, one of industry representatives and one of tax and accountancy
advisers. They were specifically, as I understand, looking at the operation
of the single market and barriers to business but I am afraid the Commission
have not shared, to date, the likely outcome of that study. They were asked
by Ecofin to report to Ecofin and in fact, if my memory serves me right, they
were supposed to have reported some time ago. This is not the first occasion
on which this particular study has not been ready for discussion when the
Commission had initially indicated it would be. There is no conspiracy here.
This study has slipped a number of times.
93. What specifically is within the remit of this study?
(Dawn Primarolo) The remit of the study and the mandate was agreed in
July 1999. It had been circulated to this Committee before. I have it in
front of me. It is, as texts tend to be, rather long but, Chairman, I am
happy to circulate it. It has been part of the outcome of the European Council
decisions.
94. That would be helpful. Are there any measures or proposals
flowing from that which would approximate to any tax harmonisation?
(Dawn Primarolo) No.
95. Any removal of relief or allowances?
(Dawn Primarolo) No.
96. No tax harmonisation of any description?
(Dawn Primarolo) No, not as far as I am aware on any one of those
questions. The Government's policy is clear on that.
97. When does Ecofin discuss tax harmonisation?
(Dawn Primarolo) It does not.
98. Why not?
(Dawn Primarolo) Because determination of tax matters is a Member
State's determination and any decisions which are taken with regard to tax
measures, for instance taxation of savings - if I may say so a triumph for
this Government - are taken on the basis of unanimity. A specific point on
"shall we harmonise tax" is not an issue at Ecofin, as the Chancellor has
repeatedly made clear and indeed as other Member States have made clear, in
terms of the way forward for the efficient operation of the single market.
99. This agenda item on company taxation, this study, which has been
delayed, about which you purport to know very little, you do not think it is
a bit fishy, do you, it has been pulled before the expected General Election
in this country?
(Dawn Primarolo) No, I do not consider it to be ---
100. It is not just a bit convenient for you, Minister?
(Dawn Primarolo) Mr Ruffley, if I could just perhaps answer one
question at a time. Let us be absolutely clear. This is a Commission study.
They will determine when it goes on the agenda. It is not influenced by
anything else, except the Commission having completed the study. Originally
the study was asked by Ecofin to have been available at an earlier stage. For
some reason, I am sure due to pressure of work, the Commission have not been
able to complete. When they have completed it will be available and then I
will be able to answer the specific questions on anything which may be
contained in that. It is not shared with us at this stage.
101. That is a kind of "the dog ate my homework" explanation?
(Dawn Primarolo) The dog never ate my homework.
102. Maybe it should have done.
(Dawn Primarolo) Did it eat yours.
103. The report in the Financial Times, 30th April, where it was
reported that "...Her Majesty's Government has tried to encourage the Belgian
Prime Minster and the Belgian Finance Minister to tone down their
interventionist ambitions particularly in relation to tax harmonisation", have
you read that report?
(Dawn Primarolo) I saw the report, yes, in the Financial Times, as I
am sure we all did. There is often much speculation around with regard to
European issues and particularly the sensitive issue of tax because of its
importance as a Member State determined matter on unanimity. It is simply
wrong to suggest that tax harmonisation is on the agenda or, as we have
discussed many times before in this Committee, is a necessary part of a single
currency. I can answer questions specifically on Government policy but
speculation in the press, as you have already suggested to me, I should not
engage in speculation.
104. Is tax harmonisation popular in this country, do you think?
(Dawn Primarolo) I think the people in this country concern themselves
with the prospects that they have for security in their employment and
security in the future and what they want to see is a dynamic economy here in
the United Kingdom. As we all know it is a matter of some discussion in our
communities of the best place for the UK economy to flourish, whether that is
within a single currency or not.
105. It is convenient, is it not, that tax harmonisation, which is
not universally popular in this country, is not going to be raised prior to
what most people expect to be a General Election in this country? I therefore
ask you finally, Minister, in connection with that, can you give a categorical
denial to this Committee that the United Kingdom Government in any manifesto,
any official, any representative, any minister, has not sought to get the
Belgian Presidency to downplay or otherwise marginalise tax harmonisation
issues because of the proximity of a likely General Election in this country?
(Dawn Primarolo) To date, the Belgian ---
106. What I want is a categorical denial so we are absolutely
clear.
(Dawn Primarolo) I know what you want. You want an answer and given
that there are no proposals on the table to date made by Belgium then your
assertion that something has gone on is simply incorrect.
107. You will not tell us what is in this report?
(Dawn Primarolo) We are awaiting the next Presidency, as all
Presidencies do, laying out their intentions for the Presidency. The only
thing that I am aware within my remit that the Belgians have made a clear
statement in different places about is their commitment to take the tax
package forward in the same way as this Presidency and the previous Presidency
did.
108. I will repeat the question so that you can have a second
attempt at either confirming ---
(Dawn Primarolo) There is no need to be rude, Mr Ruffley, you can put
the question ---
109. I will.
(Dawn Primarolo) --- but the answer is there are no proposals from the
Belgian Presidency on the table and, therefore, we have not responded to any
proposals because there are not any on the table.
110. Has any representative of the United Kingdom Government made
representations to the Belgian Presidency about tax harmonisation issues?
(Dawn Primarolo) We have no proposals from the Presidency.
111. Is that a no or a yes?
(Dawn Primarolo) We do not approach on the basis of something that we
do not know. Tax harmonisation is not on the agenda. Other Member States do
not support the prospect of tax harmonisation. The way forward has been
accepted as dealing with harmful tax practices and in dealing with the
efficient operation of the single market and using exchange of information and
enhancing transparency as a way of developing all our economic agendas. There
has been no indication from the Belgian Presidency that they intend to run
their Presidency any differently from those principles.
112. That was not the answer to the question, so let the record
show you do not deny it.
(Dawn Primarolo) Too many Perry Masons here.
Mr Beard
113. The Treasury submitted a paper to the informal European
Council meeting in Stockholm entitled "European economic reform: Meeting the
challenge" which called for national governments to undertake enterprise
policies to promote research and development and venture capital. Could you
say what progress has been made in that?
(Miss Johnson) I am sorry, I thought you were originally directing your
inquiry to the Paymaster-General. I think it may be more appropriate to me.
I am very sorry, could you possibly start from the beginning again. My
apologies.
114. The Treasury submitted a paper to the informal European
Council meeting in Stockholm in March this year entitled European economic
reform: Meeting the challenge. The basic theme of that was to call for
national governments to undertake "... enterprise policies to promote research
and development and venture capital with greater effort in basic research and
the arrangement of entrepreneurial spin-offs from universities". I wonder if
you could say what progress has been made in that direction?
(Miss Johnson) There was endorsement at Stockholm of the Chancellor's
proposal that there should be a research and development and innovation study
and that should be ready for the spring Council in 2002. That will share best
practice for raising research and development and innovation performance. We
think this is a very productive discussion and study and there was renewed
support at Stockholm for reforms to the EU research and development budget
aimed at creating a critical mass for the EU in the most promising research
areas. There is also work going on on how to promote biotechnology, which is
obviously a key technology for the future, consistent with common fundamental
values and ethical principles which are obviously issues that arise in this
context.
115. Are you aware that the Select Committee on Science and
Technology partly addressed this question in looking at why engineering and
the physical science based science of industry were so poor at innovation and
came to the conclusion that it was not for lack of money put into fundamental
research but for lack of money put into the much more expensive side of
development? The European Union in its various programmes that have supported
research has been particular about putting money only into basic research and
not getting too near the market and as a result we find that we end up with
a large queue of good ideas coming forward out of basic research but we do not
do anything very much with them in Europe because we do not put the money into
the development. Would you use your good offices in promoting this to ensure
that those points, highlighted very clearly with a mass of evidence in the
Select Committee's report, are taken into account in assessing how this scheme
will work?
(Miss Johnson) I am very grateful to you for mentioning them because I
personally was not aware of them but I expect that officials in the Treasury
are well aware of them and that the Chancellor is well aware of them. We will
certainly bear those points in mind. I think it is exactly the right timing
for those sorts of things to be taken into the discussions that are going on
in this area to make sure that we do get the best out of our R&D investment
in an EU context.
116. Could I just direct this question to the Paymaster General.
It is about the Code of Conduct covering tax havens. Until last year the
Government had delayed giving Royal Assent to the 1998 Finance Bill in Jersey
because it contained a clause for allowing designer tax. In other words, a
company determining the tax level it would pay in Jersey on the criteria of
whether it allowed it to avoid tax in its home base. But now the United
Kingdom has accepted the practice of designer taxation contained in the 1998
Finance Bill in Jersey. Could you say why?
(Dawn Primarolo) No, we have not accepted the particular mechanism that
you are talking about, the designer rates. The UK will continue to seek an
end to what we consider to be predatory tax measures. Indeed, we introduced
a defence against possible loss of revenue as a result of the introduction of
that particular regime. I am sure you are aware that the regime in question
was within the Finance Bill for Jersey which had a number of other issues to
do with Jersey. As I have explained here, again on a number of occasions, our
relationship is bound by the constitutional arrangements. What we did not
want to do, and we tried very hard to persuade Jersey on that particular
regime, was there was no way we wanted to be seen to condone such tax laws
because we consider them to be totally unacceptable. For some time there was
discussion with Jersey on this particular regime but in the end, on advice
taken within the broader considerations of our relationship with Jersey and
given that it had other items in it that were perfectly okay and have been in
since 1998, we were required to give Royal Assent. I think this highlights
something that Sir Teddy has concentrated on a great deal at different times,
both in the Chamber and in this Committee, about the constitutional
relationships between ourselves and Crown Dependencies and overseas
territories, which is one of persuasion. We will continue to discuss with
them this particular regime.
117. Is this measure of designer taxation that is within the
Jersey Finance Bill compatible with the EU's Code of Conduct? Are you saying
"no, it is not but we have got to accept it because they have threatened us
with legal action"?
(Dawn Primarolo) I must admit I think I would need to look just in
detail. My initial reaction is no it would not be compatible with the Code,
which I know you understand is voluntary and non-binding. It is a political
agreement. As part of that it is clearly stated that "...All Member States
with dependent and overseas territories would use their best endeavours within
the constitutional arrangements to see that niche regimes ...". This is
basically where companies can design their corporate tax rate in order not to
have to pay tax in the country which would normally otherwise have expected
to have received it. I am sure all of us would want to say that practice is
totally unacceptable. I do not remember - and I would have to check the list
-that this particular regime was within the listed regimes which were
considered by the Code of Conduct as of its report to November Ecofin 1999
without unseemly ruffling through all my papers.
Chairman
118. Perhaps you can drop us a note on that?
(Dawn Primarolo) Yes, but I think the absolute thing is that we
encourage our overseas and dependent territories to comply with OECD, to the
highest level, of what we believe is behaviour of an international standard
that is acceptable, and we have some persuasion still to do clearly.
Mr Beard
119. Would it be fair to summarise this as the position, that we
tried to get Jersey to conform with the Code of Conduct, they would not, and
we could not do much about it for legal reasons, especially because they
threatened us with the law?
(Dawn Primarolo) Well, with respect, it is wider than the Code of
Conduct. Her Majesty's Government found this particular proposal offensive
and, regardless of whether there was a Code of Conduct or discussion at the
OECD on harmful tax practices, this would be a straight forward issue in terms
of tax practice which Her Majesty's Government would wish to discourage.
Indeed, we had to announce introductions into our tax regime to try and defend
ourselves against loss of action and that was announced in October 2000.
Frankly, the issue about whether it is in the Code or not, it is an issue that
it should not happen. We, vis a vis Jersey, regardless of anything else, took
the view that it should not happen.
120. We do not like it but we have to live with it because the
constitution does not allow us to do anything about it, is that the position?
(Dawn Primarolo) The legal advice was that Royal Assent should be
given, yes, because it was a package wider of other things that were perfectly
acceptable and Jersey did not want to amend the package.
121. Is it policy now to live with it indefinitely?
(Dawn Primarolo) We have very extensive and continued discussions with
our overseas and Crown Dependencies on these issues and will continue to do
that. Jersey is in no doubt that we are not enamoured and do not like this
particular regime but, as I have said, on legal advice Royal Assent was given.
122. Could you say what estimates have been made of the impact of
this on Treasury revenue and company location decisions?
(Dawn Primarolo) I am afraid I do not have that figure to hand and I
doubt very much whether we would be able to specifically quantify it, except
to say that we took immediate action. We considered it to be a considerable
loss, hence announcing it in October 1999 and actually legislating in the
subsequent Finance Bill, which we only do for anti-avoidance on measures that
are considered extremely serious. I would have to look back at what we said
in terms of our press releases, which would have had to have been very
specific on that issue, and I am happy to make sure you have that paperwork.
123. Will that cover company location as well as tax revenue?
(Dawn Primarolo) Location is rather a moveable feast. Location is not
necessarily a tax point, that is the whole point about the designer regime.
I understand the point you are making and I will see whether there may be
something we may say. I have to be honest and say I doubt it on the second
point but we could be specific.
Sir Teddy Taylor
124. Very briefly, Minister. Very helpful reply given. Would you
just confirm that Jersey and the other Channel Islands, through their
activities bring great benefit to the economy of the United Kingdom? Is that
the view of the Government, that with the transfer of the funds to London and
with the other activities they have overall they bring great benefit to the
United Kingdom?
(Dawn Primarolo) Indeed. Our relations with our overseas and dependent
territories, yes, of course, are positive and mutually beneficial, as they
gain a great deal from the partnership with us, of course, hence the
relationships. That does not mean, Sir Teddy, that we do not have a view on
what should be the highest and best practice and believe their best future
lies in reaching those highest international standards and, therefore, will
express views to them in the numerous meetings that we have with them on a
whole range of issues.
125. Secondly, would you confirm that Jersey and the other parts
of the Channel Islands are not part of the European Union?
(Dawn Primarolo) Indeed, yes.
126. Can you confirm that for us?
(Dawn Primarolo) Yes.
127. The third thing is would you confirm, because of the
structure of their economies, there is no way at all in which Jersey and other
parts of the Channel Islands because of the very limited expenditure they have
would not need to apply anyway the levels of taxation which, for example,
Britain has to do? Inevitably their level of taxation would be a great deal
lower.
(Dawn Primarolo) Their taxation levels are a matter for them. We have
discussed this at committees before. Any country's preference for their level
of taxation, what they use it for, how they raise it, is a matter for them.
What is a matter for consideration by Her Majesty's Treasury, and representing
the best interests of the United Kingdom, would clearly be to ensure that our
best interests are advanced as well and that we have a duty in discussions
with all of our Crown Dependencies and overseas territories to keep them
informed and encourage them for the security of their economic future that
actually they comply with the very highest of standards in economic markets.
That will be their best security. All countries will be concerned, as we see
repeatedly in the press, when they feel that revenue which should have rightly
paid tax in one country finds itself, because of a predatory tax measure,
being paid somewhere else. I am sure that would be of concern to you because
if that happens that would have a direct influence on our ability to fund
public expenditure or our tax rates, which I know is dear to your heart.
128. Final question. Does the Government, therefore, accept that
the only way forward is positive and constructive dialogue with Jersey and the
other Channel Islands? There is no question that the Code of Conduct or any
other practice provides the right for the British Government to determine the
tax policies of the Channel Islands?
(Dawn Primarolo) I would say yes to the first part of your question
that clearly a positive dialogue is always the best way forward. That is the
way that we would want to proceed and we are proceeding, and very
productively. On the second issue - and these are the precise words that I
have used before because it is important in these issues of constitutional
arrangements - it would be unprecedented for Her Majesty's Government to
legislate for the overseas territories on taxation and would be contrary to
the policy of successive governments. Therefore overseas territories have the
greatest measures of autonomy in their internal affairs, and we need to
maintain that, and that those affairs are consistent with the ultimate
responsibility the UK has for their good governance. That is the precise
wording which makes clear that our relationships are guided by the
constitutional arrangements between us.
129. Could I thank the Minister for her very helpful answers which
I am sure will be read with great encouragement in the Channel Islands.
(Dawn Primarolo) They hear it quite a lot from me, I can assure you.
Mr Kidney
130. Paymaster General, the Chairman did not say earlier, would
that be your 21st birthday?
(Dawn Primarolo) That is two drinks I owe you now. I think it is 21st
second time round plus a bit.
131. We have not quite finished with the dependent territories.
Can I just ask you how you are getting on in promoting the adoption of the
exchange of information measures in our dependent territories?
(Dawn Primarolo) A number of dependent territories and Crown
Dependencies have indicated their willingness. There are a number of agendas
here. There is the OECD, the G7 quite recently had something to say on the
exchange of information, and, indeed, the specific proposals like taxation of
savings within the European Union, and the general agenda. I had my officials
compile a list of the number of occasions on which we have met to discuss
this, which is rather long and I will not read it out. We are progressing
with those discussions and they are going well, but I am sure that you can
appreciate, as Sir Teddy has indicated in his contributions, there are real
concerns that progress must be made on a level playing field and that all the
changes are of benefit to all of us and there are not extreme adverse effects,
so there are a number of issues that are still current in those discussions.
I am trying to remember the list of countries that, for instance, have agreed
with the OECD. I think the Isle of Man has just agreed. I think Jersey and,
before that, indicating to us, Bermuda and the Cayman Islands on the question
of exchange of information and the wider discussions in the OECD. There is
progress there but, as we have discussed before, these are very delicate and,
for some countries, difficult issues. So, as Sir Teddy has implored us, by
persuasion and dialogue we are progressing.
132. When the Council comes to adopt the Directive some time next
year we will not be in the position, will we, of the British Government saying
"we are so very sorry but because of our quirky situation we cannot actually
make this stick in our dependent territories"?
(Dawn Primarolo) No. We have made it clear at every point, both in the
discussions on the Code of Conduct and in the discussions on the draft
Directive on Taxation of Savings, precisely what our constitutional
arrangements are. In fact, all the Communiques make it clear that they are
imploring Member States to commit themselves within the framework of their
constitutional arrangements to see the adoption of principles. We have always
been very clear that we do not promise what we cannot deliver. As I have
said, in the wider agenda in consideration of international standards, we
believe that financial centres will need to reach those very high standards
and we need to encourage them accordingly.
133. The Council has to agree by unaninimity to adopt the
Directive next year.
(Dawn Primarolo) Indeed.
134. And, again, if we went to the meeting and said "Because of
our quirky constitution we have failed to deliver in our dependent territories
this exchange of information" it is conceivable that Member States would not
want to agree the Directive, is it not?
(Dawn Primarolo) There are a number of issues that will need to be
settled. As you will know, on the decision by the Council and the discussions
that will happen with third countries and the question of equivalent measures,
there will need to be a report back to Ecofin before the final decision is
taken on the draft Directive. There are quite a large number of variables
there and it is impossible at this stage, until we see the report and
discussions with third countries, to know what the issues are. Naturally one
of the points that the overseas territories are making, not unreasonably, is
that they want to see a level playing field and that will be part of the
discussion.
135. How do you understand the exchange of information is being
received by, as you quoted, third countries outside the European Union?
(Dawn Primarolo) For instance, Switzerland have committed themselves
to the document published by the OECD, whose title escapes me at the moment,
I think it came out in June 2000. Somebody will tell me the name of the
document in a minute, I am sure. This is a difficult subject and goes into
the very complex question of banking secrecy. I would not want to either make
comments that are unhelpful to those discussions when the transcripts of this
Committee are read, or mislead the Committee. Those discussions are going on
now and we will have a report to Ecofin on the progress and then the Council,
by unanimity, will have to decide whether that is enough.
136. What you describe there is the triumph of the British
Government of turning round that great movement inside the European Union for
the taxation of savings into an exchange of information regime. Would you
agree that is so far a half triumph and the full triumph is when we have got
the Directive agreed unanimously next year?
(Dawn Primarolo) Yes. I suppose, having been closely involved in it,
I sort of see the triumph in several levels. Firstly, we went from a minority
to unanimity. Secondly, and most importantly, we established that exchange of
information as a principle was the correct way forward, that tackling harmful
tax measures was also the correct way forward. The question that Mr Ruffley
referred to earlier on about tax harmonisation is simply not on the agenda.
I think it does not have to be measured just in terms of this particular draft
Directive but also in terms of the way the whole debate is now progressing
within the European Union.
137. Mr Ruffley, would that be the Mr Ruffley who asked his
questions and has now left?
(Dawn Primarolo) Indeed.
Mr Cousins
138. Just a follow up question to those issues that Mr Kidney was
raising with you, Paymaster-General. Is there any indication on this issue
of the exchange of information, both on savings issues and more generally on
tax, of a change of attitude by the incoming American administration?
(Dawn Primarolo) Given everybody avidly reads the Financial Times -
compulsory reading - there were some comments attributed. All I can say is
that at the last G7 the statement that was issued, including with the support
of the US, was "... to reaffirm support for all of the objectives of the
multilateral effort to fight against tax abuse of the global financial system
..." I am quoting directly from that. The American Government is very keen,
as all governments are, to ensure that they get the correct amount of tax due
by their taxpayers and therefore they are continuing to support the OECD and
the G7 initiatives.
Mr Davey
139. A quick point on that. Would you like to see the
constitutional arrangements between the UK and its Crown Dependencies changed?
(Dawn Primarolo) That is not a matter for me.
Sir Teddy Taylor: Hear! Hear!
Mr Davey
140. Can I come back to the subject that the Chairman and I were
discussing at the beginning of the session. The European Commission has
proposed creating a subgroup of the Economic and Financial Committee to aid
the Eurogroup. What is the UK Government's view on this proposal?
(Mr Rogers) If I may just answer that. We have clearly no problems
with that providing that on all issues which concern us, and in the
preparation of Ecofin and indeed of Eurogroup, the meeting is at 15 which it
is.
141. Can I just check what you are saying there. If there is a
group set up, under the auspices of the Economic and Financial Committee, to
aid the Eurogroup, that is the 12 not the 15?
(Mr Rogers) Yes. It will be at 15.
142. I beg your pardon?
(Mr Rogers) It will be at 15 at preparatory level, so British
officials will be present.
143. But the Eurogroup is 12 Member States who have the euro as a
currency.
(Mr Rogers) Yes.
144. As I understand it, the Commission's proposal is to set up a
group that will support and aid meetings of the Eurogroup to which the UK is
not a member. That is the proposal.
(Mr Rogers) Yes, but, as I recall, there is no clarity in that
proposal which in various respects has met with a fairly dusty answer from
several Member States. There is no clarity as to the composition of that
committee but what is very clear is that there is every disposition on the
part of all Member States that all preparations, including for Eurogroup,
should remain at 15 as they are at the moment. All preparations of all Ecofin
and Eurogroup discussions remain at 15 and we are present throughout.
145. So if that proposal went forward there would be a sub-group
of the Economic and Financial Committee which would have input from all 15
Member States for documents servicing a group called the Eurogroup which only
represents 12 Member States. Is that what you are saying?
(Mr Rogers) I do not think there is tremendous clarity on the extent
to which the current arrangements, which are extremely informal --- There are
very few documents, there are no minutes of Eurogroups from which we are
excluded in terms of seeing them. This is a much more informal set-up than
Ecofin, not least, as Ministers have explained, all formal decisions are taken
entirely by the Council. If anything, there has been in our view, and in the
view of some members of Eurogroup I imagine, rather too scanty preparation of
Eurogroups and our general view is that sometimes they would benefit from
greater and more detailed preparation and occasional detailed documentation.
Not the sort of documentation we have to prepare for Ecofins but,
nevertheless, occasional short texts. We are relaxed about that but only
providing that all preparation is done in the same composition at the EFC as
it is currently done.
146. I think that was a yes. I think what you are saying is that
the UK is happy for a new sub-group to be set up to provide better quality
information for the Eurogroup. Is that what you are saying?
(Mr Rogers) Yes. Clearly we want the Eurogroup to function as well
as it can in dealing with all matters that are appropriate for the Eurogroup
to deal with consistent with the Luxembourg Agreement about what the division
of labour between the Eurogroup and Ecofin should be. So providing that
Agreement remains in tact, which it does and no-one questions it, and there
is a clear distinction between those matters that are appropriate for
Eurogroup discussion and those that are appropriate for Ecofin discussion, we
have no objection, on the contrary, to the idea of preparing Eurogroups better
and making them a more effective forum for dealing with the business that
Eurogroups should transact.
(Miss Johnson) Those preparations and decisions are being taken by the
full 15.
(Mr Rogers) Exactly.
147. My concern on this is that the UK obviously is not at the
table when the Eurogroup is having its discussions and, while I take the point
that we want the Eurogroup to have its discussions armed with the best quality
of information, the question is will that quality of information and will
those discussions consider the UK interests as well? Mr Rogers has said that
there will be UK input to those documents going to the Eurogroup, which is
reassuring to an extent, but the negative side of this surely is that the
Eurogroup is now becoming a more substantive group with a bureaucracy of its
own and, therefore, if it is getting that role surely you are stepping up its
influence, stepping up its position, and the UK is excluded from that?
(Miss Johnson) I think I already answered this main point earlier on.
I will just go over it again. The fact is that Ecofin has the central role
in policy co-ordination and it maintains that central role. We have been
perfectly relaxed, and indeed we are perfectly relaxed, to see that the
Eurogroup themselves have a better informal organisation and they have better
visibility and, in this case, more provision of information. Were there to
be anything that would in any way threaten Ecofin's status and its lead in a
decision making role, we would resist it. We do not perceive that there is
anything of this nature and indeed, as I say, if you are involved in Ecofin
meetings you feel very much that we are at the heart of things and a key
player in Europe.
148. There is now this Eurogroup discussing economic policy in
Europe, maybe issues which are not formally required to be discussed at
Ecofin. Now with the groups of officials meeting potentially on a more formal
basis to provide support we suggest a more formal role for the Eurogroup and
the UK again is outside that. I am surprised you are not more worried.
(Miss Johnson) The role of the group is set out vis a vis Ecofin's role.
The inter-relationship of the two is not going to change. There are no
proposals for change. Indeed, you are speculating about what might be the case
to try and make the suggestion that there is some kind of problem here. We are
confident that what is being discussed in the Eurogroup is what is appropriate
for the Eurogroup to discuss and indeed, as I said, we welcome that. We think
that the higher visibility and the well functioning of that group is useful
and all matters that do relate to Ecofin are coming to the actual Council
meetings. I cannot really add anything to it, I think we are going round the
same circuit otherwise.
Mr Davey: Thank you.
Chairman: Thank you both very much.
