Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 47)



  40. But we will not hit the wall until 2006-07?
  (Mr Emmerson) The plans they have to 2005-06 are costed in here are consistent with the fiscal rules and can be paid more out of the change in growth assumption and the tax increases.
  (Mr Barr) I have to say I cannot really get too excited about what the projections might look like for something that is five years away given the one year ahead error on my own personal public finance forecasts from working in the City. Looking at the gap in NHS spending of 0.7 per cent GDP for those two years, they could just freeze, for example, other spendings. Total expenditure is going to rise by something like £25 billion a year just to come up in line with nominal GDP over the profile of those two years, so it would not be that difficult to cost it and hold back other departments for a couple of years if you wanted to. It is so far down the line I personally cannot get that excited about it.
  (Professor Congdon) Just a couple of points. One is that the structure of the economy at present is very helpful to tax revenues. We have had several years now when consumer spending has been rising faster than national output and imports rising faster than exports. A lot of taxes are paid on consumption, VAT and excise duties. If you have, as seems to be implied at some point over the next three, four, five years, exports growing strongly, as by the way is assumed in the forecasts, consumption coming back, then that would reduce tax buoyancy. The present healthy state of public finances is partly tied up with the imbalance in the economy, weak net exports and strong consumption, and that may change. The second point, which I am slightly reverting to, is if one believes that taxes have got to rise to pay for this extra spending, and I think I agree with the verdict of my colleagues here that they are going to rise a bit, then the question is "which taxes?" because, as I was saying earlier, this Government has made some promises on direct taxes on persons, there are taxes on companies, there are indirect taxes but then there is the effect on RPIX and the price indices. So you are back to national insurance contributions but then you get this question of can national insurance contributions be used in this way, the question that was raised earlier. I think that one thing that you might want to think about is there have been these plans for spending, does it mean more taxes, but then what taxes?

Mr Plaskitt

  41. Can I just ask you to do a little exercise in your head, which you might be able to do. Cancel the proposed national insurance increases, assume everything else in the Budget is as stated, what growth would have been possible in National Health Service spending under those circumstances in terms of growth? How much smaller than the 7.4 per cent average would it be without the NI revenues?
  (Mr Weale) My quick answer is that if we remain in the current economic cycle until the end of the budgetary period then that growth, although not the same level of spending, could have been financed out of the cumulated surplus so far during the cycle.

  42. Anybody else?
  (Mr Weale) And the golden rule would have been met.

  43. I am saying assuming everything else.
  (Mr Weale) Having cumulated the surplus of £50 billion so far, since the Treasury believes the current cycle started in 1999, the sorts of revenues that are raised from the national insurance increases—and I have done this in my head, I have not checked the numbers—I think the cumulated total of those over the next four years will be less than the £50 billion surplus that we have accrued already.

  44. I think you are saying that it might have been possible to get the 7.4 per cent real terms growth in NHS spending without the national insurance increase.
  (Mr Weale) He would have needed then a sharp increase in tax after this £50 billion surplus had run out.

  45. Right.
  (Mr Weale) I do not think that would have been a sensible fiscal policy but it would have been largely coherent with the fiscal rules.
  (Mr Barr) Page 154 costs it out where it tells you how much you are raising. It is about £8 billion per year, not cumulative obviously just £8 billion, which is, what, 0.8 per cent of GDP. If you remove that and everything else is locked up and there is no change he would have lost 0.8 per cent of GDP which would wipe out his current surplus over the projection because it is roughly 0.7 per cent of GDP. So he could have, if you like, kept his NHS very broad spending plans for the foreseeable future but he would get to a situation where he had no buffer whatsoever on his golden rule, if everything else was kept as comparatives, just using those eight to nine billion figures there.
  (Mr Emmerson) Another way to look at it is between the current financial year and 2005-06, the end of the next spending round: NHS spending is increasing by one per cent of GDP, the NI changes are about 0.8 per cent of GDP, so they are paying for four-fifths of the increase as a share of national income. So if he wanted to be as cautious as he is in this Red Book and not increase NI he could have increased NHS spending by 0.2 per cent of GDP instead of one per cent of GDP.

  Mr Plaskitt: Right. Okay.


  46. Again, some commentators have said this is a new Labour budget and others are saying it is old Labour. What is your view? One simple answer, please.
  (Mr Weale) Could I say simply that, if the Wanless proposals are implemented in full, the solid progress arrangement, and all the extra revenue is collected from the basic rate of income tax, which it presumably would not be but that is a reasonable thought experiment, over and above the national increases then we would be very close to the 35p in the pound that we enjoyed under the 1970s Labour Government. So, in that sense you might say taken all the way, it would take us back to old Labour but, of course, the Budget itself does not take us all the way.
  (Professor Congdon) Could I just say in one respect this is not like old Labour because the Government's finances are in good order. Perhaps the years of surplus are over but nevertheless the ratio of net public debt to GDP is only 31 per cent and the envisaged deficits are really quite small. That is different from old Labour. I think that the Labour Party, both old and new, does believe, I am sure it does, in more spending on health and education and it is paying for them in responsible ways but it does mean higher taxes.
  (Mr Barr) I think my definition of the old Labour, new Labour thing would be you will know in three or four years when we see how the money has been spent and whether it is—reflecting what Martin was saying—spent well. There is a lot of extra money being thrown at the NHS and I think the key thing is to make sure that it is spent well and it does not just disappear into some sort of black hole and does not deliver improvements. We are starting to get worrying reports about massive pay increases. Working in the private sector I would be the first to argue that public sector pay has fallen to below where it should be but if that does not deliver results, if it is just thrown at a white canvass, then that is going to be the defining test of whether it is old Labour or new Labour to my mind.
  (Mr Emmerson) The Budget means that the period of NHS spending from April 1999 through to March 2006 will be the record period of investment over that period since the NHS was introduced. It means also that on average the bottom 40 per cent of the income distribution will gain and on average the top 60 per cent will lose.

  47. There is a hint of wise Labour but verify. We have to bide our time and wait and see. Is that what you are saying?
  (Mr Weale) I think so, yes.

  Chairman: Thank you very much for your time, that is very valuable for us. We have a few meetings left this week, not least with the Chancellor on Wednesday. Thank you.

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