Examination of Witnesses (Questions 380
TUESDAY 11 DECEMBER 2001
MP, MR ED
380. You do not have an estimate of the ratio
that would go in pay and prices as against improving services?
(Mr Brown) I think you will find that most of the
money is going to improve services.
381. The only reason I ask that isyou
have said "most will go" which means more than 50 per
centthat the King's Fund's view is that 75 per cent will
go in pay and prices.
(Mr Brown) I think 75 per cent of Health Service expenditure
is on salaries. We are increasing the number of doctors and nurses,
so it is hardly surprising that some of the additional money is
going to hire more doctors and hire more nurses. Equally, I think
the intention has been to get the money down to the hospitals
and to get the money down to the health trusts so that they can
spend it to best effect.
382. I think the public will note that from
thinking that more than half will go in increased services, now
you seem to be saying that only a quarter will go. Presumably
the rest will go in increased pay and prices, as the King's Fund
(Mr Brown) Hold on. "Increased services"
could mean an increase in the number of doctors, it could be an
increased number of nurses, it could be an increased number of
treatments provided by the purchase of more drugs. Pay and prices
commonly refers to the pay bill, which includes the number of
doctors and nurses, and prices includes the cost of drugs.
383. Chancellor, just one very quick question
for you as well. Can I try and find some cross-party consensus
on this health issue, perhaps. You have rejected the idea of pure
hypothecation a couple of times now, but would it be reasonable,
given the need to ensure that any increases in taxes that are
necessary to fund your commitment meet with public approval, that
if you were to have to put up taxes to fund higher health spending
you might put up a specific taxfor example National Insurance
contributionsand so all of that extra revenue is going
to go to the Health Service? Would you consider that a sensible
kind of move?
(Mr Brown) First of all, we have still got to get
the Wanless Report about the needs and resources that the Health
Service requires in the future years, and we will have to make
a judgment after we have seen that report about what is needed.
Secondly, I have rejected pure hypothecation, which I think most
people looking at the issue would want to do, but obviously you
want to see the taxes that we pay linked to the services that
are provided, and that is a debate that will go on. I am not proposing
to draw any conclusion on that.
384. That kind of impure hypothecation might
be quite sensible?
(Mr Brown) I am not in favour of pure hypothecation,
but I think the debate is quite a different one; it is about whether
people see the benefit in the services that they receive from
the taxes that they pay, and how they see the link. That requires
more information to the taxpayer as well as better services and
it requires us to justify any changes that have been made. So
the link means a number of different things, and that is what
the debate over the next few months can be about.
385. Chancellor, can we move to your interview
with The Sun at the end of November where the article that
followed said "He [the Chancellor] insisted no cash would
be spent until a shake-up of the NHS bureaucracy was complete.
He said: `There will not be one penny more until we get the changes
to enable us to make the reforms and carry out the modernisation
the Health Service needs'". What value-for-money and efficiency
measures are you considering over and above the Public Service
Agreement targets with the Department of Health?
(Mr Brown) What I meant there is that for the next
spending round we will not provide the money until we have signed
and agreed the new Public Service Agreements with the individual
department. That is what I mean by money dependent on modernisation;
the resources linked to the results that we expect to see. What
are the changes that we do want to see? More local devolution
is one thing; new contracts have still got to be agreed with the
members of the staffing professions in the National Health Service;
we want to see the primary care trusts, obviously, up and running
and working well, and we want to see the modernisation that has
been agreed as necessary in the Health Service actually taking
386. Are you saying the extra cash is dependent
on the reforms having been made, or is it sufficient for there
to be plans for that?
(Mr Brown) When we allocate money in the next spending
round, we will have with it the new Public Service Agreement with
each department, and that means that far more closely than ever
before payment of money is linked to the outcomes, and that is
why hand-in-hand goes modernisation and money, because you have
got the Public Service Agreements with the departments at the
same time you allocate the money.
387. We have had two lots of Public Service
Agreements so far: Comprehensive Spending Review One and Comprehensive
Spending Review Two. What went wrong with those?
(Mr Brown) What we have been doing, over a period
of time, is both improving the health care system and, therefore,
setting new targets for outputs for future years. It is hardly
surprising that you start with one set of output targets and you
move on, as you achieve some of them, to other things that are
more pressing. The ten-year health plan really sets out what we
want to achieve with the Health Service over a long period of
388. Your reference, in The Sun, to "changes"
that you want to see, those are changes in what you previously
(Mr Brown) Yes, because when we have the new spending
round we will be agreeing new Public Service Agreements with the
departments about what we ought to achieve over the next few years.
389. If elements of the Health Service do not
deliver, are you really saying they will not get the cash?
(Mr Brown) What I am saying is that you do not pay
out the money in the spending round until you have also signed,
at the same time, the Public Service Agreements for future years.
That is what links the money to modernisation.
390. Given that you have had to improve your
first two Public Service Agreements, is there any kind of sanction
if they fail for the third time? If the Health Service fails to
deliver on the third PSA, what is the sanction?
(Mr Brown) In many ways the Health Service is delivering.
Let us be clear about this, there are 600,000 more operations
taking place, there are more doctors and nurses making possible
improvements in the way we deal with cancer and the way we deal
with heart disease, and there are specific targets agreed for
these areas. The more you achieve the more you will sign agreements
for the future that are more demanding about what we can do in
terms of waiting times and in terms of other things. There is
nothing wrong with the system that in each spending round you
link the spending that you are prepared to make to the agreed
targets for outcome that the departments are wanting to and then
sign up to achieve.
391. Chancellor, I have been concerned about
a number of issues raised this morning. As you know, I have been
long-term supporter of having three-year programmes for spending.
I think some colleagues have forgotten that although we might
have had projections for three years we actually still had a year-on-year
spending round. Are you concerned that we now do experienceparticularly
on health spendingsome problems with underspending, taking
account of some of the answers you have given to us this morning
and the expectation that the primary care trusts will be in place
in the next three months yet, because of some PFI programmes,
you have some overspend in some areas on the building of hospitals?
Do you think the underspend should be measured against some of
the over-spend, or should there be more targeted investment?
(Mr Brown) I think it is very importantand
I am grateful to youto establish what actually happens
in relation to a particular service during the course of a year,
and why there are underspends. The NHS is managed by 600 different
authoritieshealth authorities, primary care trusts, NHS
trustsso it is inevitable that when we take these 600 groups
together there will be some underspending, which is not necessarily
a bad thing if the money is transferred to the next year and not
wasted in an end-of-year rush for spending, which turned out in
previous years to be unproductive. Obviously, also, each health
authority is going to take account of the need to plan for contingencies.
If, for example, there is a particularly severe winter epidemic
in a particular arealike flu or something elsethen
there will be additional costs. Now they have got to budget for
that, and therefore they have to have a reserve ready to meet
that particular contingency. So if, in one winter, there is less
pressure than others it is inevitable that will change the final
outcome of the figures. As far as the management of the capital
programme is concerned, we are looking all the time at how we
can improve the delivery of the capital programme, but again capital
slippage, which was only £140 million last year, was spread
across 450 different investors, NHS trusts and other health bodies,
so it is hardly surprising that you do not get a mathematical
result that is absolutely the same when you have so many different
providers600 in totalover the course of the year.
Where there is underspend the most important thing to note is
that these authorities and the Health Service as a whole can carry
forward that money into the next year, so it is not money lost
to the Health Service it is money that, in some cases, they can
use more efficiently at the beginning of the next year.
392. Chancellor, is it not a bit confusing for
people, with strategic health authorities taking over from area
health authorities, if they are inheriting an overspend from the
area health authority, often due to capital expenditure which
we might well want to applaud? It looks a bit confusing if the
department as a whole has underspent, particularly in the context
of the Wanless Report and the debate we are having now about how
much investment there should be overall projected into the future
against EU averages.
(Mr Brown) I think you have got to put it in its proper
context. The underspend last year was less than 1.5 per cent of
the total budget, and a third of that was certainly money that
was to be for contingenciesto meet particular emergencies
that might have happened during the course of the year and, therefore,
was a planned contingency. So the actual percentage of underspend
is very low in relation to the total budget. As I say, it is spread
over a large number of different authoritieshundreds of
them. None of the money is, therefore, wasted, it all goes into
the budget for future benefit of patients in the next year.
393. Any large organisation which has a major
reorganisation, however desirable that may be, also has costs
associated with it, commonly postponement of other activity while
they sort themselves out. Are you not concerned that a simultaneous
drive to improve delivery and to shift responsibility down to
PCTs is going to conflict?
(Mr Brown) I think the plans have been laid for some
time for this greater devolution of power. I do not think anybody
wants to see the NHS as a central command and control organisation,
and the Health Secretary for England (and, of course, the Health
Ministers for Scotland, Wales and Northern Ireland) are intent
on a far more devolved model of health care. I think it is the
right thing to do. That will make itself for greater efficiency
and better use of resources in the long-run. So I think these
reforms have got to be made and the Health Secretary is certainly
determined and successfully pushing these reforms forward.
394. Now we have all had our say on health,
Chancellor, we will move on to productivity. Last week we had
evidence from Martin Neale, amongst others, of the National Institute.
We were looking at this as an issue and he said: "At the
moment it has to be said that the policy [towards improving productivity]
does not look as though it is succeeding". Given that this
is a centrepiece of the Government's approach since 1997, why
have the policies not produced any success so far?
(Mr Brown) I do not accept that. I think we have had
a very big increase in employment and we have still maintained
an increase in productivity. In fact, in manufacturing the productivity
increase last year was more than 5 per cent, but I do accept that
we have got a long way still to go. To bridge the productivity
gap, particularly with America but also with some of our European
competitors, requires more investment, requires high level of
skills, requires a greater degree of competition in the economy
and requires support and encouragement of innovation and enterprise.
On all these things we are moving forward with reforms that are
actually taking place at the moment. I think we should look at
what is happening in Britain as similar to what happened in America
in the 1990s, where for the first year or two there was a big
boost in employment and then after that employment and productivity
moved forward together. Productivity is rising in this country
and I believe we are creating the right conditions, with our competition
policy, our innovation policy and some of the other changes where
firms are able to do more in future years.
395. When can we expect the gap between UK productivity
and our main competitors to close? What further substantive policy
measures are you intending to take to reduce the productivity
(Mr Brown) The aims we have set are over ten years,
so we expect changes to produce a higher level of sustainable
growth of the economy. That will be shown over the next period
of time. We have made progress in closing the gap with Germany
and France, and we will continue to make progress. The figures
for productivity, given the rises in employment, encourage me
that we can make even greater strides in the years to come.
396. On the issue of Capital Gains Tax, Chancellor,
a number of commentators have remarked that it is astonishingly
generous; the UK is now ahead of the US with the long-term CGT.
Some comments have been made that this could create tax avoidance
opportunities by creating such a big incentive for gains to be
taxed as capital rather than income, and what we will see (and
it has been mentioned it would be right) is the emergence of tax
planning schemes that will attempt to turn what should be income
into capital gains, and that this could spread like wildfire.
What comments do you have?
(Mr Brown) That would certainly be a bigger problem
if we abolished Capital Gains Tax altogether, as some people have
been proposing, but that is not what we have done. What we have
done is introduce a generous tax rate for business assets and
for investments held for a period of time, and for investments
held for two years we have got a far more generous tax rate than
investments held for one year. We have a range of anti-abuse measures
that would make it hard for people to take advantage unfairly
of the new rules, which are intended to reward entrepreneurship
and encourage investment. Of course, we could use anti-avoidance
provisions that have existed for some time, where we foundif
it was the case and there is no evidence of thisthat people
were just earning money as income and trying to transfer that
into being seen as capital gains. We would be able to take action
to deal with it. Generally, however, we should be proud of the
fact that we have managed to make these changes in Capital Gains
Tax which put our encouragement for entrepreneurship in relation
to business assets on a par withindeed, in some cases,
better thanthe United States of America. We could have,
when we came into power, said "Let us not use any of our
resources for a reduction in Capital Gains Tax; we should put
all the money into education, health or pensions or something
else". We decided it was important for the long-term productivity
of the economy that we did more to encourage entrepreneurship,
and that is exactly what we have done. We will not allow this
measure to be abused.
397. It was suggested to me by one City commentator
that a simple ruse would be for an individual to remain an employee
for as long as possible, so the business person who wanted to
retire may, instead, opt to work part-time, say, for one hour
a week so that he will still qualify for business asset rates
of relief. Can you assure us that that type of ruse will be eliminated
and, secondly, can you assure us that the share incentive scheme
plan will not be damaged by this?
(Mr Brown) On the second, we will be very vigilant
to make sure that the share incentive plan is not damaged. I think
you have already outlined an avoidance scheme that would be well-known
to the proper authorities, and if there was any evidence of abuse
of what is intended as a reward to entrepreneurship but not to
encourage people to transfer their income to simply be treated
as capital gains, if there was any evidence of abuse we would
take every action where necessary. We want to encourage people
to use the new system legitimately because we want to give greater
rewards but we are not going to allow people to abuse the system.
398. Chancellor, on this point, on page 180
of the Pre-Budget Report, you have got the yield from Capital
Gains Tax over the three yearslast year, this year and
next year. Do you have that with you?
(Mr Brown) No, but I will get someone to look it up.
I think I can understand the point you are getting at.
399. You are probably aware that the difference
between last year and next year has pretty much halved from 3.2
to 1.8. Obviously, some of that is because of the decline in share
prices. How much of it is because of the lower rate that people
will be able to get10 per cent on capital gains?
(Mr Brown) I am quite happy to send a letter to you,
but almost all of this is due to the audited assumptions that
we ourselves follow, therefore, when we are estimating revenues
for future years.
So you know what has happened to equity prices; that is, therefore,
built into the assumption for Capital Gains Tax revenue. Almost
all of the changeand we can quantify it for you in a noteis
due to the change in equity prices. I think we have the figure
here, if you would like Mr Balls to read it out?
(Mr Balls) The cost of shortening the
business assets taper is 0, £10 million, £20 million,
£40 million, between 2001-02 and 2004-05. The reason why
shortening the taper does not have much impact is because the
bulk of disposals are of assets held for more than four years
anyway, so shortening the taper does not make any difference to
that, they would have qualified for the 10p rate anyway.
6 See Ev 64 para 5. Back