Examination of Witnesses (Questions 140
TUESDAY 23 APRIL 2002
140. If you had not revised up the trend related
growth but still worked on the old figure, what impact would that
have had on the projected deficits?
(Mr O'Donnell) It adds a billion in revenues and it
accumulates up, but we wanted to be very explicit about that so
it is in the tables.
141. Perhaps we could give you a little rest,
Mr O'Donnell, and turn to tax policy and Mr Gibbs. What proportion
of the rise in tax receipts since 1996-97 is due to policy measures?
(Mr Gibbs) The rise in receipts from which year?
142. The rise in tax receipts since 1996-97.
What proportion is due to policy measures?
(Mr Gibbs) I do not have a breakdown.
143. You provided us with a breakdown before
when we asked this question.
(Mr Gibbs) I do not think so.
144. I quote the then Director of Budget and
Public Finances, Mr Colin Mowl, who said "about half might
be due to policy changes". That was on the PBR 2000. Have
you changed that estimate?
(Mr Gibbs) I have not changed it. I am afraid I do
not have it.
(Mr O'Donnell) The reason it is very difficult to
come up with these things is that they are by their nature very
difficult estimates to come up with because they depend on all
sorts of assumptions about behaviour and the like, so we have
tended to say that these are not very reliable figures, and therefore
we do not think we can make that breakdown with the degree of
certainty with which we want to provide you with reasonable figures.
145. So the 50 per cent was wrong, was it?
(Mr O'Donnell) Well, it is subject to a very wide
margin of error.
146. What about the forecast change in the tax
take? What proportion of that is due to policy measures?
(Mr O'Donnell) There are various estimates of what
individual tax measures will bring in, certainly, and they are
all listed in the tables.
(Mr Gibbs) Table A1, page 154-155, lists all the measures
in the Budget, and it is possible, looking at the table, to see
the revenue cost or the revenue yield of each of the individual
147. I understand but, looking at the total,
C9, page 218, it shows current receipts going up from last year
£383 billion to £520 billion. What proportion of that
increase is due to policy changes rather than simple inflow from
increased economic activity?
(Mr Gibbs) I think to try to translate the first table
into the second raises the same issues of uncertainty that Mr
O'Donnell has just mentioned. I do not have that estimate.
148. Mr Mowl was able to do it for us a year
and a half ago.
(Mr O'Donnell) Like I say, those figures are in our
view not reliable because they are subject to excessive uncertainty.
What I will say is that estimates of things like the change in
trend growth we have made a stab at, and those figures are given
to you, because that is quite important and we are more certain
about that specific number.
149. Could you help us by providing us with
a note on that?
(Mr O'Donnell) Certainly.
150. Who is the Director of Budget and Public
Finances? None of you seems to be described as that. We asked
this question a year and a half ago and it was answered by somebody
called the "Director, Budget and Public Finances". Who
is the current Director, Budget and Public Finances?
(Mr O'Donnell) Colin Mowl is the Director, Budget
and Public Finances.
151. Why is he not here?
(Mr O'Donnell) Because Mr Gibbs is perfectly capable
of handling all the questions on tax policy.
Mr Fallon: I see.
152. We had quite a discussion with expert witnesses
on health spending. You will see I think John Appleby from the
King's Fund was quoted in the papers today saying that perhaps
40 per cent of the increase could be taken up by pay and other
measures. The Chancellor has announced plans to raise health spending
by 7.4 per cent per annum for 2007 and 2008, but you have made
tax projections to 2006 and 2007. Are the projections of the tax
receipts currently understating the required level of taxation
required to finance the spending plans?
(Mr O'Donnell) No, I do not think so. Our numbers
are there throughout. Given the spending plans and what we have
done on tax as well, the deficits, the borrowing numbers, will
be exactly as they are. I do not think there are any problems
there. It all adds up; all the spending numbers are in there.
We have gone out of our way to score all these numbers so they
are in there, and our revenue projections are based on our projections
for GDP. The only point I would emphasise there is that we are
still using what we regard as a cautious growth estimate, and
we build in caution on the receipt side by a number of the assumptions
that are required under NAO auditing. I would point out, for example,
that these are based on an oil price that is quite a lot lower
than the current oil price, and we still assume that the effective
VAT rate declines through time at around 0.05 per cent per annum.
So we still believe we are erring on the side of caution in these
numbers so the outturns may turn out to be somewhat better.
153. Mr Macpherson, the IFS in their Green Budget
this year said that for the year 2000-01 they estimated Government
underspend was in total about £6.2 billion, of which £0.5
billion, in their estimation, was a Department of Health underspend,
about £0.9 billion was Department of Transport underspend,
and £1.4 billion was Department of Education and Employment
underspend. Are those figures accurate in your judgment?
(Mr Macpherson) What I can tell you is that table
C14 on page 227 sets out our current estimates of the outturn
for 2000-01 and our estimate of the outturn for 2001-02. Focusing
on 2001-02, in total there is an overspend on resource budget
of £0.2 billion but that is off-set by an underspend on the
capital budget of about £0.9 billion which gives an underspend
in aggregate of £0.7 billion. Obviously within that you get
all sorts of off-setting effects. The one thing which is absolutely
clear is that since 1998 we have had a system of end-year flexibility
which means that departments can carry forward any underspend
to future years, and our thinking on that is that it results in
a far more efficient system of spending. Taking work in the public
sector, in February and March of each year traditionally everybody
went out and bought computers, say, which often led to bad purchasing
choices, so I think we can be reasonably relaxed about the underspend.
Inevitably they build up but as departments can draw them down
you reach a steady state where any underspends are off-set by
overspends, and I think we are approaching that steady state.
154. That is a helpful reply because there is
a big debate about underspend, certainly in the press. I understand
end-year flexibility and I understand your answer on the policy.
You said you were reasonably relaxed about those numbers: is it
the case, then, that you would not be unrelaxed if, in future
yearsnext year, the year after and year after thatthere
were underspends in the health budget of that order of magnitude?
(Mr Macpherson) We set plans which we think are necessary
to deliver the sorts of targets in the NHS plan and beyond. I
would not expect structural underspends to emerge over that period.
155. Just to clarify, you are saying that you
would not expect that order of underspend that has been identified
earlier in this conversation, in health for instance, to occur
in future years?
(Mr Macpherson) I think it is worth identifying where
the underspends tended to emerge. They tended to emerge in the
capital part of the Budget which reflected really a very rapid
increase in available provision for capital spending in the last
few years. Inevitably, following years of really quite low public
sector investment, there was not the capacity in place to get
those projects going immediately and possibly we underestimated
how long it would take to get that capacity in place. We are pretty
confident now that the capacity is there. It is very striking
in the year just gone that capital spending did start rising very
rapidly, and I think I have the figures somewhere. Net investment
in 2001-02 is £12 billion which compares to net investment
the previous year of £5.7 billion, so there was a doubling
of net investment. As I say, I think capacity is in place: those
investment plans are now increasingly realistic; and I am pretty
confident that the systems are now in place in departments to
ensure that those capital plans are spent in a sensible way. The
last thing we want as the Treasury is for people to feel they
have to get that money out of the door and build buildings in
the middle of nowhere which are of no use whatsoever, which I
understand has happened in the past. In the future we are increasingly
156. Finally, because those are helpful responses,
could you outline for us what steps the Treasury is now taking
to make sure other departments do what you have said you think
they will do in future years, just looking at the mechanics? What
steps in policy and management terms is HM Treasury taking to
make sure these underspends do not happen again in the same way?
(Mr Macpherson) We are working very closely with departments
to ensure that they have the right systems in place to forecast
spending and to manage spending. We have put particular emphasis
on investment, asking departments to produce departmental investment
strategies which set out their plans over the next three years
in relation to investment, what they are trying to achieve, what
they are spending, and so on. We have also worked very closely
with the Office of Government Commerce who in turn are working
very closely alongside departments to ensure that capital projects
are managed even better than they are at present, so that the
taxpayer gets a decent product in return.
157. Finally, are there any Treasury sanctions
over and above what you have just described to make sure departments
deliver and avoid underspend?
(Mr Macpherson) There are big sanctions which the
Treasury can use. We are just entering a spending round: that
spending round will agree allocations not only across health but
also across all other departments. In agreeing new spending plans
we will have very close regard to both the performance of departments
in terms of how they manage their money, how they project the
funds they need and so on.
158. Finally, an underspending department might
be penalised in the spending allocations if they are persistent
(Mr Macpherson) It depends very much on the reason
for their underspends.
159. But it is conceivable they would be punished?
(Mr Macpherson) It is conceivable. If, for example,
you took the view that a department was structurally underspending,
ie to deliver the outputs which we want it to deliver but it needs
less money to do it, then that is a perfectly legitimate choice
in a spending review to reallocate that sort of surplus provision
to a department which needs it.