Examination of Witnesses (Questions 285
WEDNESDAY 24 APRIL 2002
285. Chancellor, can I welcome you and your
team to this question session this afternoon on the Budget. For
the sake of the shorthand writers, although we have seen quite
a number of them already, your officials were here yesterday,
can we ask you to introduce them.
(Mr Brown) Yes. With me is, on my left, Mr Gus O'Donnell,
head of macro-economics, Mr Holgate, head of tax and benefits,
Mr Ed Balls, the Chief Economic Adviser to the Treasury, and Mr
Alex, who is in charge of taxation. Alex Gibbs, sorry.
286. Thank you very much. We had a good session
with Mr Gibbs and Mr Holgate yesterday. Welcome, again, to this
session. There is a lot to discuss on this particular Budget.
If one was looking at the press comments this weekend we would
see comments such as tax and spend, that the horsemen of the Apocalypse
are back and are riding across Suburbia with tax and spend, perhaps
the business community has fallen out with Government, the money
for the NHS will go down a black hole. There are an awful lot
of issues that we wish to look at this afternoon. I know that
you would like to make a quick contribution to the debate. Could
I ask you to do that and then we will start with the questions.
(Mr Brown) I will be very brief, Chairman. I think
the Committee would like to know how we plan to proceed to move
from the Budget to the conclusions of the Spending Review. The
approach of matching money with modernisation leading to results
that guided our approach to health funding in the Budget will
also guide the precise allocations for departmental expenditure
limits in the forthcoming Spending Review. First, we must set
clear targets for results and national standards with proper accountability;
working with hospitals, schools, police forces and local government
to agree tough, output based targets and independently audit,
inspect and report on performance so people can see that the money
invested is producing results. Secondly, demanding national standards
and accountability must go together with local devolution of delivery
matched by the right incentives. The best way that a national
standard can be met is by giving the people who provide the service
the flexibility and the incentives to shape services around the
needs of the local community. Our third principle is that devolving
power and responsibility must be accompanied by increased rewards
for staff who perform well and the removal of needless bureaucratic
rules. But just as sustained economic growth demands responsibility
in setting private sector pay, so a sustained commitment to better
public services demands responsibility in setting public sector
pay. Finally, we need to give people more choice in the way they
receive their services and, where relevant, involve the voluntary
and private sectors in delivery. So, as in health, before committing
the Treasury to additional expenditure we need to know of all
departments whether spending is a priority, whether there is a
clear strategy for reform to deliver value for money, and the
track record of increase resources leading to improved results.
Working with managers, staff and consumers we will match money
with modernisation and we will build strong public services on
the foundation of economic stability.
287. Thank you very much. At the time of the
PBR statement in the House you stated that you remained cautiously
optimistic about the prospects for the British economy. Is that
still your position or are you now more certain given that the
expected growth in 2003 is above trend and that in particular,
in receiving evidence from our experts, has elicited some surprise?
(Mr Brown) I think you will find that independent
forecasters are moving towards our estimates for growth this year.
We estimate 2 to 2Ö per cent. I see that the European Commission,
who have criticised our spending plans unfortunately, have said
that they expect growth in Britain this year to be at 2 per cent.
Independent forecasters are moving towards us on this. I was at
the meeting of G7 and the International Monetary Fund at the weekend
and it is clear that America has been able to revise upwards its
forecast, that G7 growth will be faster than people thought at
the time of November, that while Japan is still in recession,
and will continue to be in recession, both the European Union
and America will grow over the course of this year. I see the
forecasts we made in November being sustained by the evidence
that has come since then. I also see our own forecasts of 2 to
2Ö per cent, and then next year 3 to 3Ö per cent, as
being realistic for the economy.
288. Some commentators have mentioned that the
Budget has done little to constrain consumer spending and it will
be left to the MPC to sort that out. Would directing more of the
tax measures at consumers have a greater effect on slowing consumer
spending and thereby helping balance the economy?
(Mr Brown) It was clear that last year world trade
grew by nothing, in fact there was no growth in world trade at
all, compared with 13 per cent the year before. What was necessary
to achieve growth in the British economy was, first of all, consumer
spending and, secondly, the public investment that we had put
into the economy. That is one of the main reasons why we managed
2.2 per cent growth last year. It is also clear that many people
have been worried this year that the growth would slow and therefore
people would be worried if we raised taxes this year, which we
have not done, as you know. As for next year, we are confident
that as world trade grows, as our exports start to come back in
a way that reflects the growth in world trade, that the economy
is capable of producing more balanced growth and that will mean
higher levels of business investment will be taking place and
that will also mean that manufacturing output which has started
to grow will grow during the course of that period of time. Although
there are uncertainties in the world economy, particularly the
volatility that comes from the price of oil and the questions
about the durability of the US economy, I believe that we will
have more balanced growth over the course of the next year.
289. Are you concerned by the contrasting fortunes
of the manufacturing and service centres in terms of profitability
and growth? Is the task of addressing such imbalances primarily
for fiscal or monetary policy?
(Mr Brown) The figures that I gave in my Budget statement
show that manufacturing was badly hit in every part of the world
last year. What effectively happened, and I think it is worth
noting this, was a problem that developed in the American IT and
electronics sector which showed itself in a rapid fall in the
value of their companies, but particularly a rapid fall in production,
spread right across Europe and Japan and Asia. Although there
were falls in the British manufacturing sector as a result of
that last year that were quite significant, there were even greater
falls in output in America, in other parts of Europe, in Japan,
in East Asia. What is happening this year is that manufacturing
output is starting to recover. Last year, in fact, there was considerable
productivity growth in manufacturing in a number of sectors, from
chemicals to food and tobacco, outside the electronics sector
and I am confident that the same productivity growth that we saw
the year before last in manufacturing can be repeated as we move
forward into higher growth in the world economy. It is true to
say that the shock in the information technology sector caused,
for example, semiconductor production in Britain to be cut by
45 per cent, computer production came down very significantly,
mobile telephone production came down by more than 60 per cent
and that was reflected in the fall in manufacturing. It was a
phenomenon that was happening, in some cases more seriously, in
other parts of the world.
290. At yesterday's evidence session Mr O'Donnell
said that the Treasury still sought a stable and competitive pound
over the medium term and that sterling has been stable. Has sterling
been competitive against the euro and the dollar? Do you think
that the current level of sterling against the euro is sustainable
in the long-term?
(Mr Brown) As you know, we are dealing with two different
events. Sterling has fallen against the dollar but the weakness
of the euro is such that sterling has risen against the euro.
We are really dealing with a set of events that has been dominated
by the weakness of the euro over recent years. We do want a stable
and competitive pound. We do believe that the weakness of the
euro is a factor that will change over time but, of course, we
have seen a number of events, particularly in the American economy,
over the last year, including the tragedy of 11 September, the
fall in the information technology sector, the changes in equity
prices that started from the States, and that has not made much
impact on the relationship between the dollar and the euro.
Chairman: Fine. I will ask James Plaskitt
to address a few questions to you on public sector finances.
291. Thank you. Chancellor, in the last Parliament
there were significant gains for public finances from lower levels
of debt interest payment and from flatter Social Security spending.
In this Parliament do you think those gains are likely to plateau?
Is there less to be had from those areas than before?
(Mr Brown) Clearly if you reduce the amounts of money
you are spending on employment it gets more difficult to continue
to reduce the money as unemployment falls considerably. Given
that we have now lower unemployment than America, lower unemployment
than Japan and, of course, lower unemployment than the rest of
Europe taken together, then we have made considerable savings
in cutting unemployment and the scope for further savings is there
but it is not going to be as fast as it was for the first period
of time. If I give you a figure, I think it is that the unemployment
bill per se was about eight billion, it has been cut to
nearly four billion, we believe that there are savings in the
future and we announced a number of measures tightening up the
Welfare to Work programme, including 20 pilot areas around the
country where people will be offered a job but will be forced
to take that job and we have offered a programme of mandatory
work interviews for long-term unemployed in other areas. We are
hopeful of getting more of the long-term unemployed back to work
and that will bring considerable savings but, of course, the big
savings came with the very considerable increase in employment
by one and a half million in the last five years. As far as debt
is concerned, we have cut debt from about £30 billion for
debt interest a year to about £22 billion and we think that
will go down to £21 billion, so there are savings of one
billion or so during the course of this year. Again, we have reduced
debt to the lowest level of the major economies, it is 31-32 per
cent over the course of the next few years, and that is far lower
than America, it is far lower than Japan, it is far lower than
most of the other European countries. Therefore we have made considerable
savings, about £7 billion a year, which has been money we
have been able to invest in health and education. Clearly while
you can maintain these savings in most cases, you do not have
enormous scope for huge additional sums of money coming, although
that would be desirable if it could be achieved.
292. Is that one of the reasons, therefore,
why if we look at the five year projection for the public sector
net borrowing figures we find a total of £72 billion of projected
borrowing over that period? Does that mean that there is a lot
less leeway if the economy slows?
(Mr Brown) No because we have been very cautious in
our assumptions and we have maintained the cautiousness of our
assumptions about the gains from employment, about VAT revenues
that come from every additional piece of consumer spending, about
revenues from sales, about direct savings from the measures to
cut down on avoidance and to improve the recovery of revenues
for the public sector. In all these areas we have maintained all
the caution. There were some people, including one or two of the
institutes, who said that having shown that caution worked in
the last Parliament we did not need the same margins of caution
in this Parliament. I have rejected that advice and we still have
considerable margins of caution. The two rules that we have got
to meet will be met comfortably. The first is a surplus on the
current balance and these surpluses are in Table C1 at 3, 7, 9,
7, 9, so that is a considerable leeway that is allowed on the
current balance. As far as debt as a proportion of GDP, which
is our sustainable investment rule, what you can afford to borrow
for necessary public investment, again the debt ratio is stable
at 31 per cent. The rule that we set was that it should be below
40 per cent. We have made considerable savings on debt interest
but we are able to keep the debt rate stable at 30/31 per cent.
Both our rules are met. They are met on the cautious case and
they are met having based our assessment on cautious assumptions.
I think that when people look at the figures they will say that
we have left a great deal of room for manoeuvre.
293. One test for those figures is whether they
comply with the Stability and Growth Pact of the Amsterdam Treaty.
Are you satisfied that they do?
(Mr Brown) The prudent interpretation of the Stability
and Growth Pact that was not taken by the European Commission
but was taken by the European Council You may remember
the debates that we got into in this Committee before about the
extent to which the Stability and Growth Pact values, for example,
the debt sustainability of our policies, values a recognition
that there are changes during an economic cycle, and values also
the importance of public investment. The prudent interpretation
of the Stability and Growth Pact which was taken by the European
Council I hope will continue to be taken by the European Commission
in future. Although we have had debates with the European Commission
which seem to continue today with the Annual Report of the Commission,
I believe a prudent and sensible interpretation of the Stability
and Growth Pact would find us working within it.
294. ECOFIN have encouraged you to be "alive"
to any deterioration in the public finances, how do you react
(Mr Brown) But ECOFIN also, if I read out what was
said by ECOFIN, saysI should put it before the Committee,
there is so much that it saysit acknowledges that we are
well within our current balance, it acknowledges that we have
dealt with the problem of debt, it acknowledges the structural
reforms that we are taking, it talks about a low and falling debt
to GDP ratio, we are in a good position to beat the consequences
of ageing populations and welcomes that the public finances are
sustainable on current policies. That was the view of the European
Council. It was a view that overturned the view of the European
295. Finally, can I ask you about the letter
you have written to the Governor of the Bank of England in which
you re-establish the symmetrical inflation target of 2.5 per cent
which you described in your Budget speech as desirable because
it was pro stability and pro growth. Can I take it from that that
you will not wish to see an asymmetrical inflation target pegged
at a lower rate?
(Mr Brown) There are different definitions, of course,
for the symmetrical inflation target. For example, members of
the European Central Bank, sometimes some members say that they
have a symmetrical inflation target themselves but our symmetrical
inflation target is 2Ö per cent. When we came into power
it was 2Ö per cent or less, we changed that to 2Ö per
cent and I think the results of doing that are shown in the proactive
and forward looking policy which was adopted by the Bank of England
during the course of last year. There were seven interest rate
cuts in Britain, I think there were nine in the United States
of America, monetary policy was as aggressive, it was forward
looking and, because it was operating to a symmetrical inflation
target where 2Ö per cent, above 2Ö per cent and below
2Ö per cent are both regarded as unacceptable, then it was
able to deal with the problems which arose from the downturn in
the world economy. I think most people would now say that the
symmetrical inflation target which is pro growth as well as pro
stability in its effect is something which has been good for Britain.
But there is an academic debate about what a symmetrical inflation
target is and there is obviously a debate about the targeting
of inflation right around the world.
296. Chancellor, there is definitely an undeniable
deterioration in public finances. You are forecasting higher borrowing
and that in spite of the fact that you have increased the growth
forecast and then taken a slightly more cautious growth assumption
which is what enables you to say that you are being cautious.
I would like to ask you about this Government's contingent liabilities
and your estimate of what you think might be in the bottom line
but not in the accounts. Do you have a view on the scale of the
Government's contingent liabilities?
(Mr Brown) Can I deal with the first part of your
297. That was not a question, Chancellor. You
are welcome to comment on it if you want.
(Mr Brown) Can I comment on it? There is a tightening
of fiscal stance over the course of the next period of time, not
a loosening. As far as the public finances generally are concerned,
I think the rules we have set are being met and the debt to GDP
ratio is as tight as it was in previous forecasts, around 31 to
32 per cent.
298. I was referring to borrowing, Chancellor.
(Mr Brown) Yes, but that is one way of looking at
the economy. Another way of looking at the economy is whether
we are meeting credibly our fiscal rules. The two fiscal rules
we have set are whether we have a current balance, and indeed
we have a surplus on all the years that are mentioned, and whether
we are meeting our debt to GDP ratio and we are comfortably at
31 to 32 per cent. I think that fiscal policy, a lot is to do
with whether you can meet the rules that you set. The problems
that previous governments have got in to were having rules that
they never met and then resetting the rules and losing credibility
as a result of it.
299. There are many interesting questions that
could be asked about the fiscal rules but I did not ask you about
the fiscal rules, Chancellor, I asked you about the scale of contingent
(Mr Brown) You did comment on it.
(Mr Balls) If I could just add a bit of clarification
on that point. Last year, 2001-02, our level of debt to the economy
as a percentage of GDP was lower in the Budget than we said at
the time of the Pre Budget Report. It is lower this year, it is
lower next year, the year after, the year after that. In 2006-07,
it is the same level. Actually, the overall way to measure the
stability of the public finances is the level of debt, the level
of debt was actually lower last year, this year and to 2006-07,
just to correct the point.