Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. How much has that got an impact on the fiscal stance?
  (Mr O'Donnell) That has an impact as shown in the table 2.4 where there is the line which explains precisely the impact of those financial companies' profit numbers. So our judgments have made us lower our revenue projections by three billion for 2001-02, two and a half billion for 2002-03. But as financial sector profits come back to a more normal relationship with GDP the effect is zero plus one, plus two.

  101. In Box 2.1, page 15, it says in relation to the automatic stabilisers that you have already mentioned, Mr O'Donnell, that the impact can be seen by examining the differences between actual public sector net borrowing and the cyclically adjusted public sector net borrowing. When you do examine those differences in relation to table 2.6 you find you get zero in the year 2001-02, zero in the year 2002-03, minus 0.1 in the year 2003-04 and then two more zeros in the following years. Does that mean there is no impact of the automatic stabilisers at that rate?
  (Mr O'Donnell) The automatic stabilisers are not having much impact because this is basically quite a mini cycle that we are forecasting. Growth does not move very far away from trend. We are talking about a quarter point below followed by a quarter point above. You would not expect the automatic stabilisers to have all that much of an impact in those circumstances. For example, this year they have already kicked in, as it were. The good thing about automatic stabilisers is they are precisely that, they are automatic, so you do not have to do anything, they just come through.

  102. Effectively that means that in relation to the slow down of the economy we are looking largely to monetary policy to do anything about it and not fiscal policy at all?
  (Mr O'Donnell) No. These are small effects but I think they are important, even though they are relatively small on our projections. On top of those automatic stabilisers there is, as I said, the change in cyclically adjusted public sector net borrowing which is a one per cent of GDP change. Fiscal policy was indeed planned to be supportive of monetary policy through this period and it will be supportive of monetary policy.

  103. But much less significant?
  (Mr O'Donnell) No, not less significant, it is around over one per cent of GDP support to the economy through this period.

  104. Could I just take you to the Spending Reserves because the Annually Managed Expenditure Margin is shown in this Pre-Budget Report as 0.2 million. We are only two thirds of the way through the financial year. It started off in the Budget as one billion. Would it not have been reasonable to have restored it to the one billion at this stage? What is going to happen if unforeseen events come along in the next third of a year that is past the £200 million charge?
  (Mr O'Donnell) In terms of annually managed spending, I think we are reasonably confident about where we are going. We know that some elements of annually managed spending are coming in lower than we thought, for example debt interest.

  105. Sorry, could you repeat that?
  (Mr O'Donnell) On annually managed expenditure one area where we know we will spend less over the next few months than we had expected at Budget time is in terms of debt interest payments because short interest rates have come down substantially so there should be some savings there which are not factored in to these calculations which should allow for that forecast to be reasonably safe.

  106. On the departmental expenditure limits, the reserves have dropped by 0.2 of a billion since the Budget. What is the reason for that?
  (Mr Sharples) We have a table on page 186 of the Pre-Budget Report document which shows the latest position on the reserve and shows a reserve, on the current side within DEL, of 1.6 billion. I should emphasise that at this stage in the year we know about a number of commitments that will have to be met from the reserve. Some of those commitments have already been drawn down by Departments through supplementary estimates and when that happens the amount drawn down is added to the Department's expenditure limit shown in that table. Also, we know about some commitments which have not yet been drawn down and those elements are still within the reserve figure shown at the bottom.

  107. It is an adjustment for what has happened already?
  (Mr Sharples) Not quite. We start the year with a reserve and over the year that reserve is drawn down as commitments are made, for example as a result of foot and mouth disease or developments in Afghanistan. As those are taken up through supplementary estimates they go into the departmental totals and what is left is what we have to cover us for the rest of the year. The point I was making is that what we have left is, to a degree, covered by commitments that we are well aware of already.

  108. Was there only one major cause of that £0.2 billion fall?
  (Mr Sharples) Well, draw down of the reserves so far has been for developments such as Afghanistan, allocations to the Ministry of Defence, the Chancellor announced an allocation of £100 million for that purpose, and for other issues such as foot and mouth disease.


  109. On to the micro economic issues. Four years ago the Government made a great song and dance about productivity. Why have the policies not worked in that area?
  (Mr O'Donnell) John?
  (Mr Kingman) I do not think I accept that the policies have not worked but I would accept that this is a very long term challenge. We are talking here about the central driver of the long term growth performance of the UK economy. It is an issue which has preoccupied many governments in the past. I do not think that anyone in Government is under any illusions about the scale of the challenge that is involved here. I think that the Government has articulated an agenda that is well rooted in analytical evidence and has made a number of reforms which are much more likely to be productivity benign than productivity malign but I think that has to be judged over the long run.

  110. How much emphasis do you put on productivity figures? A number of economic commentators we have spoken to over the past few weeks, and last week we had the Governor of the Bank of England here, are telling us to look at the figures with caution.
  (Mr Kingman) I think that advice is right. Productivity numbers obviously, firstly, are highly affected by the cycle and, secondly, both the numerator and the denominator are affected by the cycle in different ways. Quarterly figures jump around a great deal and productivity performance ought, in any event, to be judged over the cycle. So, for example, the target the Government has set for 2004 of narrowing the productivity gap is one that we will judge over the cycle rather than on any quarter by quarter figures.

  111. You will remember looking at the Treasury records that 1965 was designated by the Prime Minister at the time, Harold Wilson, as a national productivity year. It does not seem as if we have moved on very much since then?
  (Mr Kingman) I think he even issued a stamp. This is something that previous Governments sought to tackle, and this Government has sought to tackle. It does not mean that it is not the right thing to seek to do.

  112. This Government is doing well?
  (Mr Kingman) It has the right policies.

Kali Mountford

  113. Does it have enough of the right policies? I am looking at a list here on page 31 and there is other evidence on page 35 of the sorts of interventions that the Government deems necessary, largely tax credits but much of it softer stuff about disseminating information. Do you think that is enough intervention to make sure manufacturing does not fail?
  (Mr Kingman) Could I first take issue slightly with the proposition that the central intervention here is through tax credits. If I had to highlight the most important measures that the Government has introduced that are likely to be productivity benign, I think we would highlight the macro economic framework, competition reform, changes in support for the science base, the planning reforms that are forthcoming later this month. I do not think any of this is in any sense soft stuff, though I do think the effects are more likely to be long run.

  114. That would imply that businesses ought to be able to thrive at the same rate but they do not, do they? Some are doing very badly indeed, how would you explain that?
  (Mr Kingman) I think that is an inevitable pattern in the economy and I think that it is an illusion to believe that the Government can or should seek to micro manage the economy from month to month, quarter to quarter. I think the Government's philosophy in this area is very much based around trying to create the right environment for doing business. I think that philosophy does have wide support in, for example, the academic community and commentators widely.

  115. Would it be fair to say that philosophy is based very much on what incentives can be offered for changed behaviour?
  (Mr Kingman) I think some of it is, yes.

  116. What analysis have you made to see whether or not businesses do change behaviour according to incentives?
  (Mr Kingman) On a number of the tax areas, for example, obviously analysis is being done and will be done of the extent to which the tax measures change behaviour. I think one can seek to look at approximate indicators such as new business creation, business investment, business R&D and so on. We published some analysis of that, for example, alongside the last Budget. Trying to single out the effects of policy is obviously rather complex here because there is a lot else going on. There is a lot which would have happened anyway. There are the effects of the economic cycle. Trying to identify the effects of Government policy is never going to be absolutely straight forward.

  117. You have been checking success, have you been checking failures?
  (Mr Kingman) We are checking whether there has been success or failure, of course. That analysis is going to be medium run effects and long run effects, we are not going to look quarter by quarter.

  118. I was interested in answers about the RDA in regions. How dependent are you on information from them?
  (Mr Kingman) I think the RDAs are an important source of information. In the document we published alongside the Pre-Budget Report obviously we highlighted the important role they play and that is why we have given them both more resources and more flexibility. I think the importance of the document that we published is in setting out very clearly that there is a regional dimension to the productivity issue. It has been very long and very persistent.

  119. What part does the RDA play in delivering the strategy? How important are they?
  (Mr Kingman) They are very important. Obviously it varies from RDA to RDA and region to region and to some extent they are developing their role in response to the flexibility that they have been given. The very fact of giving them flexibility gives them the opportunity to make a difference in using their budgets and using their influence in the region. The extent to which they do so will obviously vary.

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