Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 80 - 99)



  80. It does not actually mean that on health spending or transport you might be publishing figures beyond the next CSR period?
  (Mr Sharples) I cannot say what we will be doing on that because, for example, the Wanless Report will be looking at health spending over the next two decades.

  81. Yes.
  (Mr Sharples) Clearly, ministers will want to consider their response to that report looking over the long term as well as the short term.

  82. That is what I was getting at. There is a possibility in ministers' minds that if, for example, Wanless comes up with a particular formula for growth in spending on the NHS, given all the different factors which enter into it, ministers might be willing to publish plans for the NHS for, say, five years or ten years as opposed to just the CSR period?
  (Mr Sharples) I do not want to speculate on what they might or might not do in response to the report. We have had the interim report, that is now out for consultation and we are looking forward to getting the final report in the new year.

  83. That is an option?
  (Mr Sharples) As I say, I cannot predict what ministers will want to do in response to the report.
  (Mr O'Donnell) Could I add though, remember under the fiscal code we are required and will publish in the Budget updated illustrative long-term projections which look much further ahead at fiscal sustainability issues.

  Chairman: Can I just say that we are very grateful you have come along and answered the questions in such a co-operative way. With that comment could I pass on to Mr Cousins to look at the issue of public sector finance.

Mr Cousins

  84. I think, Mr Sharples should go to Number 10, not Mr O'Donnell. Mr O'Donnell, are you confident that public sector finances will not decline into a steep deficit compared with the figures you have outlined earlier to us?
  (Mr O'Donnell) The fiscal revenue projections that we have got here are our best estimates of what they will be, conditional on growth turning out to be at the bottom end of the opportunity range and conditional on the NAO audited assumptions. We do not get a free hand, as it were. If you ask me to project revenue proceeds, a sensible estimate based on the economy, that is not what we do. We are constrained in all sorts of ways by the NAO audited assumptions as to what we can put forward on receipts. I think those assumptions build in a degree of caution. Obviously as you go forward, when things turn out not quite as you had expected, particularly in the area of financial sector companies, that does create somewhat more uncertainty. The real issue there is, given the particular downturn in financial sector companies this time around, because their corporation tax payments are down quite a lot, also their bonus payments are down quite a lot which shows up in income tax figures, is how far will that bounce back and how far is that cyclical? The way we work out our cyclical adjustments tends to put those in a separate category and not regard them as cyclical. I think there is one question mark there as to whether the financial sector may turn out to be slightly more cyclical than we expected. In some ways we are putting something outside the cyclical adjustments that perhaps should be in there.

  85. You are absolutely right to point out the significance of the changes in assumptions about financial company profits because they are almost half the anticipated shortfall in receipts this year.
  (Mr O'Donnell) Yes.

  86. But less the following year and with no change in the pattern of receipts in 2003-04.
  (Mr O'Donnell) Yes.

  87. Now, am I understanding from your reply that, if you like, you are flagging up an element of caution about whether that is correct?
  (Mr O'Donnell) No. In these numbers here what we have done is we have said that financial sector profits as a share of GDP came in lower than we expected, hence the drop in corporation tax receipts. The forecasting judgment we then have to make is do we think that the financial sector profits are permanently going to stay lower as the share of GDP? We have said that we do not think that. What we have said is that this particular slow down has been more than usually directed at financial sector companies. We have not got a bounce back so they recover those lost profits but what we have got is financial sector companies' profits as a share of GDP returning broadly to where they were before so in due course we go back on the previous path. The question I was raising was simply whether when we look back on this we will see we should have classified rather more of that change as cyclical, that is all. At the moment, none of it counts as cyclical.

  88. That is an interesting point. I wonder if I could turn to something else, with the Chairman's permission. On page 114 at paragraph 6.56 of the Pre-Budget Report there is a reference to carrying out a study on the impact of spending on regions in the 2002 Spending Review.
  (Mr O'Donnell) Yes.

  89. Also, seeking to ". . . ensure that spending is fairly distributed and targeted", that is the phrase that obviously you are used to.
  (Mr O'Donnell) Yes.

  90. I wonder if you could tell us something more about that?
  (Mr O'Donnell) The one thing I would say is that the background to this is in this document, "Productivity in the UK", which we put out at the time of the Budget the regional dimension which tries to explain differences in regional productivity levels and reasons for differences in regional economic performance. We have been doing quite a lot of work on this—this is a joint Treasury/DTI document—to try and see whether there are policies which can help those regions which are underperforming to bring their standard up to the best.

  91. Could I say that does not, in fact, really advance the argument because although I have not actually brought it with me—I mean, shortly we are going to talk about Pension Credit and you will understand I do not carry all these documents with me—the phraseology of the document you have just referred to is virtually identical to the phraseology in the Pre-Budget Report. So cross-referring one to the other does not actually clarify the argument.
  (Mr O'Donnell) No, what I am saying is that I think what you have got here is the analysis that is backing up that phrase, why we think this is an issue.

  92. Can I put it to you a different way? Will you be conducting some kind of exercise for the 2002 Spending Review which will look at a fair distribution of public spending across the regions? That is what is implied by this paragraph.
  (Mr O'Donnell) Right.
  (Mr Sharples) I think, as the chapter explains in the course of the Spending Review we will be looking at a number of issues which cross over departmental boundaries which impact on a number of different departments. There will be a number of cross-cutting reviews and a number of issues which affect the planning of public spending, such as the regional dimension, will be looked at as well. We are looking, also, at the impact of departmental policies and spending on sustainable development, for example. I think what we are saying is this will be a stream of work going on through the spending review. When we announce the conclusions of the review we will explain the conclusions on this particular issue.

  93. Can you point me to anything anywhere that would illuminate the concept which exists in paragraph 6.56 of a fair distribution of spending across regions?
  (Mr Sharples) We publish figures for the distribution of spending across regions each year.

  94. I know you do. I am not talking about the distribution of spending, I am talking about the concept of a fair distribution of spending.
  (Mr Sharples) As I say, we publish each year the figures to allow people to make comparisons between levels of spending in different regions and to understand the source of those differences. This will be looked at in the course of the spending review and a part of the conclusions of the review will be setting out more detail on that.

  95. Just to summarise then. In paragraph 6.56 we clearly do have a balance. It is inescapable, is it not, the concept of a fair distribution of spending across regions, but although there are figures and information about the distribution there is nothing you can point us to which would clarify the point of fairness?
  (Mr Sharples) As I say, this is an issue which will be looked at in the course of the spending review and this is simply flagging up that this is a bit of analysis that is going to be done.
  (Mr O'Donnell) It is forward looking rather than where we are now.[2]

  Chairman: We wish to go on to the micro economic issues. We are running a bit behind. If Nigel could quickly wind up this section we will be able to do justice to the micro economic side as well.

Mr Beard

  96. In the document, both relative to the Budget and relative to the Pre-Budget Report last year, there is a loosening of the fiscal stance. To what extent is that loosening going to support the economy in the next couple of years?
  (Mr O'Donnell) Certainly it is our objective and our rules are set in cyclically adjusted terms. We always allow the automatic stabilisers to operate. So if we go through a period, as we are forecasting, of below trend growth then we would expect fiscal policy to support the economy through the automatic stabiliser. On top of that there are a set of plans which have been laid out in the Budget and we are sticking to those. To look at it technically, take the change in the cyclically adjusted public sector net borrowing requirement, which gives you a measure of fiscal impetus, between 2001-02 and 2003-04. At Budget time we were expecting that to be around 1.2 per cent of GDP, that is the change in the cyclically adjusted number, as it were, supporting monetary policy, and in the PBR the number is 1.1 per cent, so it is much the same. We are talking about fiscal policy supporting monetary policy to much the same degree as expected in the Budget but the base level is expected to be changed somewhat.

  97. How much will it counteract the slowing down of the economy?
  (Mr O'Donnell) It would certainly make a positive contribution to GDP through that period and certainly it is an element of why we think we will be less affected than some other countries by the slow down.

  98. In calculating the public sector net borrowing requirement, I believe the Treasury has left out the fall in the financial companies' profits and treated it as though it is a cyclical factor rather than a structural factor.
  (Mr O'Donnell) The fall?

  99. The fall in the financial companies' profits.
  (Mr O'Donnell) As I was explaining, it is certainly the case that revenues from financial sector companies are coming in lower than we had expected, at the moment. There is a judgment to be made there as to whether you think the financial sector companies are going to forever have lower profits as a share of GDP. We do not think that. We think that financial sector companies' profits as a share of GDP are going to be lower for a while and then come back to their normal average level.

2   Ev 66, paragraph 10. Back

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