Examination of Witnesses (Questions 280
TUESDAY 11 DECEMBER 2001
MP, MR ED
280. That monetary effect will lead you to go
above trend output?
(Mr Brown) There is a variety of factors involved
in what happens to the economy over a period of time. We have
the world trading position; we have the fiscal position; we have
the monetary positionthere is a variety.
281. It sounds as if you are asking the MPC
to raise interest rates?
(Mr Balls) Our inflation forecast is set out on page
160 and shows that inflation is forecast to be 2 per cent by the
end of 2001, 2 per cent by the end of 2002 and then rise back
over that year to 2½ per cent in 2003 and 2004. What the
Treasury does is produce a forecast for the economy consistent
with meeting the symmetrical inflation target; and that forecast
has a period of the economy below trend, then a period above trend
as inflation returns to the forecast. Unless you are saying that
it would be better to have the inflation target below 2½
per cent, you have to have a forecast which has a period above
trend. You probably are not saying that. So this is the forecast
for the output gap which meets the inflation target.
282. A sceptic might suggest that the blip might
have something to do with the reconciling of numbers on the fiscal
forecast but I am sure the Chancellor will say that is not the
(Mr Brown) No.
283. The growth assumptions underlying the Pre-Budget
Report deficit forecasts are the same as in the Budget2¼
per centbut there has been a drastic revision in public
finance forecasts down by £10 billion. What is the reason
(Mr Brown) There are two reasons. First of all, what
has happened to tax revenues over the course of the year, and
it is undoubtedly the case that while consumer spending, output
in certain key sectors has maintained itself, that profitability
of corporate enterprises has been less this year and, therefore,
corporate tax revenues are down. That is the main factor influencing
what we have said. There is a change in income tax and stamp duty
and so on as a result of changes in equity prices, as a result
of changes in bonuses as a result of what has been happening to
the economy as a whole. The second reason that it has got to be
built into this forecast for next year is that we are cautious
about what is likely to happen in future years; and, therefore,
we audit all our assumptions. We obviously see the follow-through
from lower equity prices in our expectations for revenues next
year. We have audited assumptions for oil prices, for equity prices,
for all these things; and these have a follow-through effect on
the calculated revenues for next year.
284. Is it fair to say that you are erring on
the safe side?
(Mr Brown) I think in everything we have done on the
fiscal side we have tried to be as cautious as possible. First
of all, our trend on growth rate is 2 per cent. We reduced that
when we came in, and obviously that is an issue we will continue
to look at. Secondly, if you look at the two rules we have to
meetour current balance is in surplus and comfortably soalthough
our rule is that over the cycle we must simply balance the current
budget, but we are several billions in surplus. Therefore, that
is another measure of caution. If you look at how we deal with
our audited assumptions, then you will see that we will not make
mistakes that were made ten or 20 years ago. If you take unemployment,
for example, if unemployment is falling we do not include potential
social security gains as part of our public finance forecasts.
If unemployment is rising then what actually happens is we do
not use our own forecasts, we take the average of independent
forecasts; in other words, we take what is most likely to be the
least favourable to us in making our calculations about what is
the likely pressure on social security funding. Equally, we do
not count, as we used to do in the past, indirect as well as direct
savings from measures we take. We do not make assumptions as used
to be in the past about privatisation or sales revenues that sometimes
do not exist but were just thrown into the figures. We are far
more cautious in estimating VAT revenues for the future. Oil price,
equity prices, all these things we use them as cautious forecasts
for that. It is for these reasons, I think, that the fiscal position
has remained much in line with what we had expected over the last
285. In this morning's IMF report the author
writes that ". . . revenue prospects are uncertain. The buoyancy
of tax receipts in the last few years is partly unexplained and,
thus, the revenue shortfall this year may not prove as temporary
as expected". Page 3, section 5 of this report. That is bearing
out very much what you have just said. He is actually speculating
that this could be a phenomenon that lasts for an unknown period
in the future. Would you agree with that?
(Mr Brown) I do not necessarily agree with that; but
the cautious assumptions we have made are, therefore, very much
taking all that into account. Because there are uncertainties
in both the world economy and its effects on the British economy
it is more than ever the time to be cautious about what you expect
in terms of revenues. Just to put the IMF report into context,
however, it does start by saying in paragraph 2, that the remarkable
performance of the British economy owes much to the Government's
strong policy framework. Therefore, without labouring the point,
I think your issue in relation to the revenues should be put into
that context. I will not embarrass the Committee by reading more
from the report at the moment!
286. My final quick question, which we raised
briefly with your advisers last week, this bias towards erring
on the safe side towards caution, does that not give a policy
difficulty for the companies and individuals trying to base their
own plans on Government forecasts? Would it not be better to have
a best estimate rather than a safe estimate?
(Mr Brown) No, I do not think so. If you look at what
happened at the beginning of the 1990s, for example, a surplus
of 4 billion was turned within two years into a deficit of 50
billion; and that was because it was incautious assumptions that
were being used by the government of the day. In other words,
it was always tempting in the past, without rules, without audited
assumptions, to fall back on a whole series of suggestions or
hints about what might or might not happen; and, therefore, lots
of figures were thrown in without being audited properly and without
the independent auditing that the National Audit Office does.
If I refer you to page 169 it lists all the key assumptions that
are audited by the NAO. This was a new means of doing things that
we decided on in 1997privatisation proceeds, trend GDP
growth, unemployment, interest rate assumptions, equity in prices,
VAT assumptions about what level of VAT revenues you can expect
from a given level of consumption, what is happening to the GDP
deflator and the composition of GDP and oil prices, all these
things are now audited assumptions which the NAO decree. Therefore,
I would say at a time like this in particular safety and caution
are the ways to proceed if you are estimating what public finances
are likely to be.
287. Chancellor, just a quick question on this
section. You were talking about cautious forecasts that you are
using in your budget predictions for the current surplus. When
we saw David Walton from Goldman Sachs last week he took a different
view of some of your assumptions, which he thought were not actually
very cautious. I refer you to his recent pamphlet entitled Throwing
Budgetary Caution to the Wind.
(Mr Brown) I am afraid I do not have it.
288. There are two points he makes in that.
The first is that he criticises you for not including the estimates
of your two new tax credits in the estimates which the IFS have
said may be up to 3 billion which would, therefore, reduce your
surplus. The most significant criticism he makes is that in the
next CSR period beyond 2003-04, you seem to be using an assumption
of the growth in public spending which is extremely modest, it
is around the trend rate of growth of the economy, and this would
imply a very big slowdown in the growth of spending compared with
the last CSR. What is suggested is that the outturn in terms of
spending growth will be very much higher, and that is why he projects
a much bigger deficit of 20 billion next year. I wondered what
your comments were on those two areas?
(Mr Brown) On the first, obviously I have said throughout
and have been saying for the last two years since the last Comprehensive
Spending Review that decisions about spending after 2004 will
have to be made as a result of the Comprehensive Spending Review;
and these are decisions we will have to take. There is a debate
going on in the country at the moment about health in particular.
We will always have to meet our fiscal rules. The requirement
upon us is that whatever spending decisions we make, we must meet
these two fiscal rules: the current budget must be in balancein
fact it is in surplus; and debt as a proportion of GDP, which
is what we might call the sustainable investment rulea
level we have been following for investment that is allowable
as long as you have debt in orderwe have seen that reduce
from 44 per cent of GDP to 32 per cent of GDP. We paid off more
debt last year in one year than paid off by all governments together
for over 50 years. We have met our two rules and the obligation
upon us is to continue to meet these rules. If I just may remember
the history of British economic policymaking over 50 yearspoliticians
set rules for themselves that they never met. We are meeting these
two rules; we have met them consistently over the last four years;
then what happened in the past was, having failed to meet one
rule, they changed them, adopted a new rule, and then there was
another rule and another rule and these rules were never met.
We are meeting our rules and that will be the context in which
the Comprehensive Spending Review will be carried out.
289. Do you think it is realistic to assume
that in the next PSR public spending will only be growing at around
2½ per cent the same rate as the economy, which is growing
at more like 4 per cent now?
(Mr Brown) That is a debate we have to have over the
next few months and we will make our decisions in the Spending
Review. We have moved from an annual spending cycle which was
chaotic for both Government and for pressure groups and everybody
else trying to influence the process. We have got a three-year
spending focus. I believe that has served us well over the last
few years; but of course these decisions will be made at the appropriate
time and will be a matter of public debate. I keep saying to you,
the most important thing is, whatever decisions are made, we will
meet these two fiscal rules and we will maintain a level of consistency
in doing so that has not been true of past governments of whatever
colour. On the second question, which was your first tax credits
question, we do say in the Pre-Budget Report that these are matters
we will consider. It is actually in two areasresearch and
development tax credit and the children's tax credit in relation
to the Budget, and we will announce our decisions then. We are
meeting the terms of our fiscal responsibility act by stating
that in the Pre-Budget Report. On the research and development
tax credit, of course we cannot reach a decision at the moment
because we have got further consultation with business on the
nature of that tax credit for large firms. There has been a considerable
interest in the consultation period about volume versus incremental
bases for the research and development tax credits. We are consulting
further on that matter and we will announce our decision in the
Budget. On the children's tax credit, we have just completed what
has been a lengthy consultation on the new child tax credit. That
led to 170 representations from organisations, from the Institute
of Directors to the Child Poverty Action Group, consultations
in each region of the country. We have just published the Bill.
The Second Reading was debated last night. At least one person
here spoke in the Second Reading Debate last night. So the tax
credit proposals have led us to this consultation which has just
been completed, publication of the Bill and, as I have said before,
we will announce the greater details when it comes to the Budget
and publish all the figures that are necessary then.
290. Chancellor, in your Pre-Budget Report you
say you assume a fall in company taxable profits this year is
temporary. That is right, is it not? But the CBI in evidence to
us have pointed out that the tax burden is now higher than that
not only in the United States but also competitors like Germany
and the Netherlands. Does that worry you?
(Mr Brown) I do not accept that. The tax burden on
business through corporation tax has fallen from 3.8 per cent
of GDP to 3.4 per cent of GDP during the period that we have been
in office. There is a very simple reason why that has happened.
We cut corporation tax from 33 per cent, which we inherited to
30 per cent. We have introduced a small business corporation tax
rate that has fallen from 23 to 20, and then a 10p rate for profits
in the run-up to £50,000. We have actually cut the tax rate
for business, and we have cut the tax rate for small company corporation
tax. We have also cut capital gains tax for business assets from
40p after two years to10p.
291. But the question was about the overall
tax burden, and not about particular rates.
(Mr Brown) Which items are you referring to? I am
talking about corporation tax here, and then I mentioned capital
gains tax. On corporation tax the burden has fallen from 3.8 per
cent to 3.4 per cent. Our corporate tax rate is actually the lowest
of all the major industrialised countries and, despite what came
out a few weeks ago, it is lower than Germany.
292. You are talking about corporation tax here
and not about the overall burden.
(Mr Brown) What I am referring to are the figures
for the corporate tax rates, which is 3.8 per cent down to 3.4
per cent. I think you will find that business finds that the corporate
tax rates we have set for Britain, which are the lowest of the
G7, are favourable to business activity in this country.
293. Let us look at the overall tax burden.
You published in Table B9 for the first time, I think, your tax
burden for 2006-07 which, if you are re-elected and you yourself
are still hanging in there, will be your tenth anniversary tax
burden. It is 36.8 compared to 35.0 of 1996-97, which is where
you started, so that is an increase of 1.8 per cent, is it not?
(Mr Brown) If I just go through this with you. When
we came into government we inherited a forecast of exactly the
same nature which would have put tax at 38 per cent in 2001-02.
That was the Conservative Government's forecast for taxation.
In actual fact the figure is estimated to be 36.8 per cent, according
to these figures. If I may just remind you, the highest tax burden
in this country was under a Conservative Government of 38.9 per
294. I just want to be clear about the ten-year
record which has gone up from 35.0 on these figures on page 175
to 36.8 in 2006-07. That is the ten-year record, is it not?
(Mr Brown) You cannot say what the position is going
to be in 2006-07.
295. These are your figures.
(Mr Brown) No, these are current estimates; but they
are not based on Budget decisions that have still got to be made;
nor are they based on what the actual level of economic growth
is, which is one of the main determinants of whether tax revenues
are high or low. If, for example, economic growth is high then
tax revenues are high. Therefore, nominally the share of tax in
GDP rises as a result of economic growth. Not all the figures
that are published are the result of decisions of the Government,
but the result of what happens to economic growth. I would just
remind you for the record, if you want to use their figures the
highest level of tax in this country was 38.9 per cent under a
296. Let us go to your best estimate. This excludes
any increase in taxes to meet the 8 per cent increased target
on health spend, does it not? There is no provision for that.
(Mr Brown) This excludes any further decisions that
have got to be made, either to lower or raise tax rates or taxes.
It is a matter of what the current estimate is, based on what
is happening at the moment, yes.
297. It excludes any implications of the Wanless
Report and health spending plans?
(Mr Brown) I said in the Pre-Budget Report that, as
you know, we wanted to increase the share of national income going
to health. That is a matter of waiting until the Wanless Report
gives us what it believes to be the situation for the future.
If I may say on health, there are two aspects of this: one is
more concerned about outputs and not just inputs; and, secondly,
the correct level of expenditure for Britain in future years will
be what we decided after Wanless and the debate about Wanless's
recommendations on the technological, demographic and other expectational
pressures on the health service for future years.
298. Chancellor, have you said you will not
raise the basic rate of income tax in this Parliament?
(Mr Brown) In our election manifesto we said that
the basic rate of tax will not be raised; in fact the basic rate
of income tax, as I have said before, was reduced in the last
Parliament, and I hope people will give us some credit for that.
The basic rate of income tax was 23p when we came into power;
it is 22p now and we will not raise the basic rate of income tax.
299. Have you said you will not raise the top
rate of income tax?
(Mr Brown) We have also said in our manifesto a number
of other things about taxation, and one is that the top rate of
income tax, which is 40 per cent, will not be raised.