Examination of Witnesses (Questions 80
TUESDAY 4 DECEMBER 2001
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.
(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.
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 thisthis is a
joint Treasury/DTI documentto 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 meI mean, shortly we are going to talk about Pension
Credit and you will understand I do not carry all these documents
with methe 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
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
(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.
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.
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