Members present:

Mr John McFall, in the Chair
Mr Nigel Beard
Mr Jim Cousins
Mr Michael Fallon
Mr David Laws
Dr Nick Palmer
Mr James Plaskitt
Mr David Ruffley
Mr Andrew Tyrie


RT HON GORDON BROWN, a Member of the House, Chancellor of the Exchequer, MR ED BALLS, Chief Economic Adviser, MR GUS O'DONNELL, Managing Director, Macro-Economic Policy and International Finance, MR NICHOLAS HOLGATE, Director of Welfare Reform, and MR ALEX GIBBS, Head of Tax Policy, HM Treasury, examined.


  1. 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.
  2. (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.

  3. 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.
  4. (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.

  5. 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?
  6. (Mr Brown) I think you will find that independent forecasters are moving towards our estimates for growth this year. We estimate 2 to 21/2 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 21/2 per cent, and then next year 3 to 31/2 per cent, as being realistic for the economy.

  7. 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?
  8. (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.

  9. 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?
  10. (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.

  11. 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?
  12. (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.

    Mr Plaskitt

  13. 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?
  14. (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.

  15. 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?
  16. (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.

  17. 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?
  18. (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.

  19. ECOFIN have encouraged you to be "alive" to any deterioration in the public finances, how do you react to that?
  20. (Mr Brown) But ECOFIN also, if I read out what was said by ECOFIN, says - I should put it before the Committee, there is so much that it says - it 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 Commission.

  21. 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?
  22. (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 21/2 per cent. When we came into power it was 21/2 per cent or less, we changed that to 21/2 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, but monetary policy was as aggressive, it was forward looking and, because it was operating to a symmetrical inflation target where 21/2 per cent, above 21/2 per cent and below 21/2 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.

    Mr Tyrie

  23. Chancellor, there is definitely an undeniable deterioration in public finance in the year. You are forecasting higher borrowing and that in spite of the fact that of course 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?
  24. (Mr Brown) Can I deal with the first part of your question?

  25. That was not a question, Chancellor. You are welcome to comment on it if you want.
  26. (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.

  27. I was referring to borrowing, Chancellor.
  28. (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.

  29. 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.
  30. (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.

  31. Could I have an answer to the point?
  32. (Mr Brown) Yes. The major guarantees of course given by Government, as you know, are the London Underground, the Channel Tunnel Rail Link, Railtrack in Administration and Network Rail. Our reporting of these I think is more transparent than all other countries that I know of and have looked at and, therefore, our reporting standards in the UK are way ahead of those used by other countries. If we can give you a note on this I am happy to do so.

  33. Rather than just wait for a note, Chancellor, I would like to get some impression, some feel for what you think the scale of these liabilities might be. Do you think they are five billion pounds, ten billion pounds, 20 billion pounds, 40 billion pounds? I noted for example, if you turn to your section on the Private Finance Initiative, PFI, page 229, and if you combine that with the forecast you have of further PFI projects that are likely to come that we are talking here about 44 billion of off balance sheet finance. This is effectively, much of it, public finance, it is finance conducted by the private sector but a contingent liability and, therefore, underwritten by the Government which does not appear in any accounts. I wondered what proportion of that you thought would be prudent to write in as a contingent liability?
  34. (Mr Brown) I do not believe that we are operating a policy that is different from that operated by previous governments.

  35. Maybe we got it wrong, Chancellor, but I am asking you about yours.
  36. (Mr Brown) The question is are we doing something that is unusual or doing something that is a break with tradition. I do not believe that what we are doing is a break with the tradition of previous governments in this regard. As I said, the major guarantees which people will know about are the London Underground, and of course we are setting in place very tough arrangements as regards the role of the private sector in this; the Channel Tunnel Rail Link where deeds of guarantee and the obligations of London & Continental Railways given by Government are available for all to see; Railtrack in Administration and of course we hope that Railtrack will be out of administration soon and we have seen proposals put forward and responded to in that effect. These are the major liabilities. Departmental accounts will in each case detail their own liabilities and contingent liabilities. Departmental contingent liabilities, including guarantees above 100,000, are listed annually in supplementary statements to the Consolidated Fund and the National Audit Fund accounts. So what we do is quite in keeping with what has been done as a practice by previous governments and is completely consistent. Can I say, also, that we publish onward looking, forward looking estimates of the effect on the public accounts and I think we publish estimates right up to 2030.

  37. Could you refer me to the page for that, Chancellor?
  38. (Mr Balls) Annex A, page 145, which was an innovation of this Government which on the basis of cautious assumptions sets out the fiscal position up to 2032 and shows on the basis of cautious assumptions over the next 30 years we meet our fiscal rules.

  39. I have not yet found the annex you are referring to.
  40. (Mr Balls) Page 145.

    (Mr Brown) It is called A, Illustrative Long Term Fiscal Projections.

  41. Oh, yes, I have read that. What we have got here is, it seems to me, you have got the list roughly right, Chancellor, but you have not put a number on it. What we really want to know and I think what the public want to know is by how much is tax or borrowing going to have to rise in future years as a consequence of the emergence of some of these contingent liabilities which the taxpayer will have to pay for? Clearly you cannot give an exact number but you have not written anything at all. You are smiling now, of course I would not expect you to come forward with an exact number but I would expect you to have some feel for what should be written in. Because in the absence of any indication at all the public will be right to conclude that these accounts are not a fair representation of the liabilities of the Government, that they understate the amount by which tax and borrowing will have to rise, is that not correct?
  42. (Mr Brown) Yes. I just read out what the European Commission and Council said about how we dealt with the problems of pensions and they praised us for having a better system of dealing with that than other countries. As far as the individual industries that I have talked about, companies that I have talked about, public sector reporting is subject to the same standards as the private sector and there is close independent scrutiny of what we do in all these areas by a number of bodies, including the National Audit Office, Public Accounts Committee and I think you know yourself, having been an advisor to a previous government, that we are doing exactly what previous governments have done and doing it in a consistent way. I do believe that we are operating in every way according to the rules. You are assuming that a contingent liability becomes automatically a liability, that is not the case.

  43. I am asking you to give a feel for what I should take account of.
  44. (Mr Brown) Equally, just to repeat the answer that I gave to Mr Plaskitt, because it is relevant here, the margin that we have won for ourselves by cutting debt very substantially, far below the 44 per cent that we inherited, to 31 to 32 per cent allows us to say that we can deal with eventualities as they arise. We have cut debt by something in the order of a third. We paid off 37 billion of debt last year and therefore we are in a position to deal with difficulties as they arise but I do emphasise that we are not operating a policy which is in any way different from that pursued by a previous government.

  45. One last question, Chancellor. You did say at the beginning of that answer that you thought that your practice and accounting practices here were consistent with private sector practice. In the light of the Enron scandal, do you not think that with a huge off balance sheet finance taking place there, that is exactly what the Government should avoid? Do you not think that what people are going to conclude is that this looks a bit like Enron economics?
  46. (Mr Brown) Perhaps I should add, the best of public sector reporting and consistent with the best of private sector reporting.

    Chairman: On tax receipts and expenditure, David Ruffley.

    Mr Ruffley

  47. Chancellor, is the tax burden higher this year than the tax burden you inherited in 1997?
  48. (Mr Brown) The tax burden is falling this year and it is falling in the coming year. I am very happy to read out the figures to you. I am just going to get them for you.

  49. Can you read the whole sequence? Next year, the year after, the year after that. I will do it for you. In this year, 2002-03, it is 36.7 per cent, it rises to 37.6 per cent in 2003-04, the year after that it goes up to 38.1 per cent, the year after that it goes up to 38.3 per cent, so the tax burden is rising, is it not?
  50. (Mr Brown) The figures are as read out but you will see in these figures that the tax burden actually falls this year and falls in the coming year and then rises as a result of something that I announced in the House of Commons last week that I think everybody knows about. There is no secret about that, that is a rise in taxation to pay for the development of our public services and to pay for our health services.

  51. It goes up next year, it goes up the year after that and it goes up the year after that and this year that we are in compared with 1996-97 it is higher, is it not?
  52. (Mr Brown) Can I just read out the figures so everybody knows. 2000-01 37.7, falling 2001-02 - that is the year just finished - to 37, falling again this year to next year 36.7, rising for the reason that everybody knows, a rise in National Insurance which I announced to the House of Commons just last week by one per cent to 37.6, and I may say that all these figures up to 2003-04 are lower than the estimate for taxation that we inherited from the previous Conservative Government which was 37.9 per cent by the end of the five year period when they left office.

  53. You inherited a tax burden of 35 per cent.
  54. (Mr Brown) We have managed the public finances and the tax revenues prudently.

  55. You inherited a tax burden of 35 per cent, did you not?
  56. (Mr Brown) Sorry?

  57. You inherited a tax burden of 35 per cent?
  58. (Mr Brown) We inherited figures ---

  59. That is Table C23.
  60. (Mr Brown) The figures that we inherited were a tax burden which was going to rise from 35.8 to 36.2.

  61. Chancellor, I find it extraordinary that you cannot even read things out from your own Red Book.
  62. (Mr Brown) You asked me what were the figures.

  63. It is extraordinary.
  64. (Mr Brown) You asked me, Mr Ruffley, and let me finish this answer. Mr Ruffley asked me to say what was the tax burden we inherited.

  65. Thirty five.
  66. (Mr Brown) The figures that were in the last Budget before we came to office were a tax burden rising from 35.8 under the Conservatives, if they had continued in office, to 36.2, 36.5, 37.0, 37.5 to 37.9, higher than any figure in the tax burden that I published up to 2003-04. So the Conservative tax burden was higher than what we have done.

  67. Can I read your own figures and those who are interested can look at it on page 237. The actual outturn in the year that Kenneth Clarke left office was 35 per cent.
  68. (Mr Brown) They published figures for the next five years.

  69. Can I move on and ask you of the tax increases you have introduced since coming into office, what proportion of those have been your policy changes?
  70. (Mr Brown) It is impossible to do that because of the changes in the behaviour of the economy, the changes in the labour market, the changes in the international events. What people do know is that the decision we announced last week to raise extra funds for the National Health Service and the public services will mean that National Insurance will rise by one per cent for both employers and employees and that is a decision to raise money for the public services.

  71. Chancellor, I am sure you would not want to mislead the Committee. You have just said that information is not something that is available. Could I direct you to evidence given to this Committee by your very own Director of Budget and Public Finances, Mr Colin Mowl, on 20 November 2000. When he was asked a question "What proportions of the rise in the tax burden would be attributable to decisions taken by this Government?" Mr Mowl replied "I think probably around about half might be due to policy changes". Now if Mr Mowl can calculate that in 2000, why can you not do that?
  72. (Mr Brown) I think, Mr Ruffley, you should give the full picture. Subsequently a note was prepared by the Treasury which was submitted to the Committee which explained the difficulties of making these calculations. The note is called Supplementary Notes from HM Treasury sent to the Treasury Select Committee last year, following the Budget hearing, on the difficulties of disaggregating contributions to changes in the ratio of net taxes and social contributions to GDP. Perhaps I should ask Mr O'Donnell to explain the position.

  73. I know the excuses. The point is you have done it before, you are choosing to discontinue.
  74. (Mr Brown) I think it is only fair, Mr Ruffley, to give a full picture. A note was sent to this Committee, we have had no reply from the Committee on that basis.

    (Mr O'Donnell) I think it is quite clear that it is impossible for us to give reasonable estimates within margins of error on that subject.

  75. Mr Mowl was happy to do it in the past.
  76. (Mr O'Donnell) No. If you read that he said "probable" and there were lots of uncertainties around that and I think that was quite right.


  77. We did discuss this yesterday.
  78. (Mr Brown) The note stands. It is a note from the Treasury to the Select Committee explaining how this process works.

    Mr Ruffley

  79. Could I ask, Chancellor, by how much NHS spending will rise in the years 2006-07 and 2007-08. Those two years together, how much will health spending rise?
  80. (Mr Brown) In my Budget, if someone has got a copy of the Budget.

  81. A number will be quite sufficient there.
  82. (Mr Brown) Yes, but in my Budget I read out the actual figures. I just read them out again. Of course we are dealing with the UK.

  83. How much in cash?
  84. (Mr Brown) Hold on. It goes from 72.1 to 79.3 to 87.2 to 95.9 to 105.6. I think if you look at the change from the beginning of the period to the end of the period, you are talking overall from last year, a 40 billion pound rise. Now the National Insurance rise is something in the order in total of nine to ten billion pounds and it is helping towards paying for 40 billion extra expenditure in the National Health Service but of course other means by which that expenditure is financed is economic growth and the reduction in debt and the reduction in unemployment that we have achieved.

  85. The IFS have calculated, have they not, Chancellor, this is not covered by your tax plans, those two years I have just referred to?
  86. (Mr Brown) That is absolutely untrue. It is in all the plans that we have set out. We have included the extra expenditure on the National Health Service right up to 2007-08. It relates to the borrowing figures that we have given to the House of Commons and to the Committee. The rise is totally covered by the figures that we have given both to the House at the time of the Budget and any subsequent figures that have been provided. The IFS is wrong.

  87. The IFS is wrong. Is that covered by borrowing? What proportion of that is covered by borrowing?
  88. (Mr Brown) The borrowing figures have been announced. The borrowing figures go from 13, 13, 17, 18, it is all published. We have published the figures up to 2007.

  89. Your tax plans go further than three years out?
  90. (Mr Brown) Our spending on the National Health Service is a five year plan.

  91. Do your tax plans go beyond three years?
  92. (Mr Brown) Our spending is covered by the announcements that we made during the course of the Budget. If I just explain. We have a five year health plan where I have given you the figures which lead to 105.6. All that spending is covered in the announcements that I have made.

  93. By tax. So there will not be any tax increases to cover what the IFS think are two years which are not covered by your three year tax plan?
  94. (Mr Brown) I have said to you that the IFS are wrong, that the spending is covered in all the figures that we have produced. If you would accept my explanation of it then that is the position. The IFS have got it wrong.

  95. Can you guarantee then in that case that there will not be any further tax increases to pay for that especially in those two years?
  96. (Mr Brown) No Chancellor talks about these things between Budgets and no Conservative Chancellor ever did. The only person who did do that rather regretted it. What I do say is that the public spending plans that we have set out to 2006, and the Health Service plans to 2008, are covered by all the figures that we have published and therefore covered by the announcements that we have made for taxation and for spending and for borrowing last week and it is wrong for the IFS to make that assumption.

  97. You are denying there is a 7 billion black hole and you are certain you will not have to raise tax to cover health spending in those two years? You are saying that quite clearly?
  98. (Mr Brown) All the figures we have set out for the Health Service are covered in the ---

  99. So you will not have to raise taxes, is that what you are saying?
  100. (Mr Brown) No Chancellor makes announcements between Budgets about what he is going to do. You announce your commitments in your election manifesto about what you are prepared to commit yourself to. As far as the Budgets are concerned, we make our Budget judgments at the appropriate time. If you are asking me about the spending we have committed to, it is covered in the figures we have brought to the House and it is covered to 2007-08, and the whole series of questions you are putting to me is based on a wrong assumption and I am correcting that assumption because it is wrong.

  101. Just answer me, Chancellor, you will have to raise taxes to cover those two years of spending on the Health Service?
  102. (Mr Brown) What I am saying is, because you seem to have misunderstood ----

  103. Do not answer questions I do not ask, can you answer questions I do ask. I am asking you, are tax increases ruled out in order to cover those two years of health spending?
  104. (Mr Brown) I have answered that question three times. I said that no Chancellor makes pre-announcements of Budgets but equally, at the same time, the spending plans we have set out are covered in all the figures we have provided to 2007-08, and when you alleged they were not covered for the last two years and that somehow there was a black hole you were acting on wrong and erroneous information.

  105. And you will not have to raise taxes ----
  106. (Mr Brown) I have corrected that information and I think you should accept that the information on which you based your question, indeed the total assumption on which you based your question, was wrong.

  107. Could I ask you what the under-spend in the Department Health budget was for the year 2000-2001?
  108. (Mr Brown) The under-spend in the Department of Health budget was mainly an allowance set aside for emergencies which might have happened if there was a winter crisis. The under-spend on health 2000-01 was 692 million, 250 of that was planned, was carried forward as a contingency. Under the rules we accept there is end-year flexibility so the money could be spent in the course of the next year. I think you should be pleased there was not a winter crisis which required that reserve to be used to meet that winter crisis and the money could be carried forward for better uses. I think, Mr Ruffley, you are acting under a misunderstanding. The end-year flexibility that we have introduced because we have three year spending plans means you do not need to throw money around at the end of the year otherwise you lose it, you can carry the money over to the next year and use it as you would like to do for better services. It is right for the Health Department to have a reserve to deal with a potential winter crisis, the fact there was not a winter crisis means we should be pleased the money can be used for other things, and therefore the under-spend you are talking about is not a failure on the part of the Health Department, it is allowing them to use these resources for extra purposes.

  109. Are you going to guarantee, now you are putting huge sums of money into the NHS, that there will not be any under-spend in the Department of Health in the future?
  110. (Mr Brown) I think again you have misunderstood my answer.

  111. It is no then.
  112. (Mr Brown) The system is a three year spending allocation, in this case for health five years, with end-year flexibility so that money does not have to be used for an emergency where it would be right for them to carry a reserve, they can carry that money forward to use for other purposes. This is a far more sensible system of financing than has existed in the past. If I may say so, the three year spending system, and now for health five years, has worked far better than the annual round which caused so much consternation in the last few weeks of the year when people tried to spend money probably inefficiently otherwise they would lose that money. So your question again, like your previous set of questions, is based on a wrong presumption.

    Mr Ruffley: It is still an under-spend.

    Chairman: After 12 minutes on that section, we will pass to Mr Fallon.

    Mr Fallon

  113. I want to pick up one question on tax receipts, Chancellor. You cut taxes before the last election, you admitted last Wednesday that tax receipts are now 10 billion lower in this year than you originally forecast, and now you are raising taxes again. Most people, even if they support you on the NHS, still now think you have broken your promise. How are you going to recover your reputation?
  114. (Mr Brown) I have broken no promise. There is no promise we made at the election or we made in our manifesto which has been broken. If you remember, Mr Fallon, it was a feature for probably a week of the campaign that I refused to rule out changes in national insurance, your party accused me of all sorts of things, I still refused to rule out changes in national insurance, we held to our election manifesto that the direct income tax rate would not be raised, that the top rate would not be raised, that we would not extend VAT to essential goods, these were the promises we made and if you look back over the election campaign there was an attempt made for me to rule out changes in national insurance but I refused to do so.

  115. Why do most people now think you have broken your promise?
  116. (Mr Brown) You will have to go back and look at what I said. What I said is what I stand by. Any journalist who was covering that election knows that we were under pressure for a week by your party asking us to rule out changes in national insurance, and I refused to do so.

  117. So you were planning it all along, were you not?
  118. (Mr Brown) What I said all the time was that politicians, particularly people who are running treasuries, can make a number of promises which it is right to do but you cannot make promises on every one of 250 reliefs and allowances, and those politicians who have made promises, such as the Conservative Party before the 1992 election when they ruled out everything, live to regret that, because you have got to be able to manage the economy in the way that is best for the economy subject to the promises you have made. I kept all the promises that I made and our party has kept all the promises we made on taxation at the time of the election.

    Mr Fallon: We will come back to this when we turn to national insurance.


  119. On to health spending, Chancellor. Since your announcement of the large increase in funding, there has been quite a bit of discussion as to how this money will be spent. Some say it will be swallowed up with wage demands, some say trust deficits will have to be paid off, others say that liability claims reaching 4 billion may have to be dealt with by the National Health Service. So there is a view it could be going down a black hole. Are you satisfied that the extra money you are giving the NHS can be spent on improving services rather than fuelling excessive wage settlements and paying off accumulated deficits?
  120. (Mr Brown) We had to satisfy ourselves that put into place before money was made available were new standards for audit and accountability, and therefore there is a new system of audit which is independent, a new inspectorate which is independent, a new independent scrutiny of patient complaints which is built into the system, and a duty for both an annual national and local report itemising the link between the money spent and the standards achieved. In addition, we have agreed with the Health Secretary, who has made a speech on this matter today which I would refer the Committee to, about the use of the resources, but there had to be new financial incentives he wanted to introduce for hospital performance, so there were rewards for hospitals that do best; greater freedoms for the foundation hospital proposal, for high performing trusts as well as hospitals; more power and resources are going to the front line into primary care trusts; we are reforming social services care for the elderly; we are increasing patient choice, and all the time we are trying to meet the waiting time targets that I think the Committee is well aware of. So the money is conditional on the modernisation we have agreed, and that will lead to the results that we intend.

    Mr Beard

  121. Chancellor, are you satisfied with the reforms which have been made in the National Health Service since the Pre Budget Report?
  122. (Mr Brown) The announcements which were made came after a great deal of discussion but of course also after the Wanless Report was prepared and published. I think it is very interesting that the Wanless Report has looked at demography, technology and patient expectations, and the driving forces for additional expenditure are the extra costs of new technology, new buildings, new equipment, new drugs and the rising expectations patients have. It is right, for example, that instead of the eight or 12 patient wards, of the new beds now being built in the 60 or so hospitals which have been constructed or planned a third are single rooms in our hospitals, so the standard of care that patients can expect is higher as well. Many of these targets have been agreed between ourselves and the Department of Health. Mr Milburn in his speech today outlined some of the ways he planned to invest in the Health Service, including better IT, including new equipment, including better work on the cancer and heart plans he has developed for improving the service to cancer and heart patients, these are the priorities including social services care which he has outlined.

  123. The Wanless Report in paragraph 5.19 said, "... the Review believes that its projections for UK real terms spending growth of 7.1 to 7.3 per cent a year over the next five years are at the upper end of what could sensibly be spent. Indeed, to be wisely spent, they would represent a very considerable management challenge." How would you reply to that?
  124. (Mr Brown) What Mr Wanless is saying is that there is a point at which extra resources may have caused either inflation in Health Service costs or resources not to be used as efficiently as possible. Our final decision is very similar to that of Mr Wanless but we have taken into account one or two things, including national insurance itself, and therefore we accept that the Health Service can spend the money we have given it efficiently, that it is not itself the extra money which is a driver of inflation on the Health Service costs. Obviously, while we are negotiating new doctors' and consultants' contracts and also the Agenda for Change for nurses and for other staff in the Health Service, I have made it clear today that responsible pay-setting is absolutely crucial to the development of the next years of the Health Service. We plan to hire considerably more nurses, doctors, radiographers and other staff, and responsibility in pay is going to be important to the way all public services develop. I think I emphasised that for all public services when I gave my opening remarks on the manner in which we will approach the public spending review.

  125. Could it be that some of the under-spending in the Health Service in the last two years has been due in part to the National Health Service management being unable to cope with these very swift increases in the funds available to them?
  126. (Mr Brown) I would hope that the way that resources are being used, because there is a longer-term frame for planning, is actually better and more effective than if there had still been the annual cycle. I do not share Mr Ruffley's view about the under-spend being the problem he says it is, because it is right you have a reserve to deal with emergencies, and it is good if you do not have to use it and can use it for other things. In the way that previously the Treasury held the reserve in its entirety, the departments themselves have a reserve as part of the three year plan set aside for contingencies or for developments. Equally, at the same time, if a department is planning to spend over the course of three years then the fact it spends it in April rather than March should not be regarded as a source of great anxiety.

  127. How much has the system of public service agreements enabled you to decide the allocation appropriate to the National Health Service?
  128. (Mr Brown) I think you will find that when Mr Wanless drew up his proposals for the 7 per cent or so rise in the National Health Service expenditure he was very much influenced by the cancer plan and the heart plan and looking at the other specialties where progress was to be made. These are, of course, targets we have set, extra employment, equipment and servicing which needs to be done, and he worked it through six separate specialties to get an idea of the sort of costs which would be involved in meeting the PSA targets, so the public service agreement targets are absolutely essential. Let us emphasise that this is not money thrown at a problem, this is money conditional on modernisation leading to the achievement of targets and results with a built in independent system of audit, inspection and scrutiny, including independent reporting to Parliament with an annual report and reports which are done by every health authority which are called the local prospectuses which are published for each area, so people can see the link between the money which is spent and the service improvements they are getting.

  129. Will the public service agreement system be an adequate way of assuring you and the Treasury that the money allocated is being spent as intended and to best effect?
  130. (Mr Brown) I should say to you that we do not set a target and then just leave things for years. What we do is have a continuous process of stock taking, involving the Prime Minister and others, so that it is important to have an idea, right over the course of the period on a consistent basis, about how well these targets are being achieved. The truth is that waiting times, which are a maximum of 18 months, are now down to 15 months, going down to 12, will go down to nine, then the plan is to get them down to six by 2005, and then to three, so the aim is to stage by stage improve the service to the patients so that waiting times are reduced. The maximum times are these and the average waiting time will come down even lower than that over the course of ---

  131. How frequently during the 12 month period before the automatic statement of aims and expenditure will the Treasury be monitoring these spending programmes during the year?
  132. (Mr Brown) This usually happens every three months. It is a continuous process of dialogue between the departments and the Treasury and indeed the Cabinet Office. There is a process of stock taking that is established now that is working so that you have early warning if there is a problem, but equally, at the same time, you have a committee sitting of Cabinet Ministers, PSX, which looks at the spending plans of the different departments, questions the ministers, that is ministers questioning other ministers on that, and it is of course a process of continuous review which is very important now to the operation of the system. The public has a right to know not only that we have targets so that money is spent well but that we continuously review that, and they also have the right to the independent audit and scrutiny and inspection system that has now been introduced for the first time since the Health Service was created in a systematic way.

    Chairman: We asked your officials yesterday, Chancellor, if you could share that information with us on a regular basis, and we would be pleased to have that.

    Dr Palmer

  133. Chancellor, up to now you have had mostly questions asking how confident you are that the additional spending on health will actually deliver better results and how you are going control that and check it, and you have been responding on that. Can I put the opposite question? In education we have traditionally had the complaint that there are too many reports and too many supervisory bodies that the schools have to respond to and that they are so busy filling out forms that they cannot get on with the job. Are you worried that the health authorities will feel that they have now got three masters, the Health Department, the Independent Audit, and the Treasury?
  134. (Mr Brown) I would not look at it that way. We are a helping hand! As far as health authorities are concerned, the new PCTs, 75 per cent of the money in time will be spent by the PCTs themselves. There is a process, as I said when I made my introductory remarks, which is as true of health as of education and other services: where there are national standards, there is also substantial local devolutionary plan. It is frontline first; getting the money to the front line, giving the people the freedom to make the decisions, having a greater degree of flexibility in a whole series of different areas, and we should think of the Health Service as these legal PCTs are operating with a great deal of independence, negotiating their contracts with the hospitals that are generally in their area and securing higher standards of care. I would not like you to think that this is a centralised system: this is local devolution that is now happening, and I cannot think of a situation since the Health Service was founded where 75 per cent of the money is going direct down to the local areas, and that is what the plan is under this system.

  135. Although I am fairly new in Parliament I have been following politics for thirty years, and I must say I never remember a Chancellor previously taking an interest or making specific commitments on the lengths of waiting lists, for instance.
  136. (Mr Brown) I do not make these commitments. I am just reporting the commitments that have been made by the Department of Health in the 10 Year Plan.

  137. Are you concerned that you will come under pressure in other areas to make statements on the number of troops to be committed in countries overseas?
  138. (Mr Brown) I think I should describe the relationship as we are responsible - indeed, the guardian for everyone - for the nation's money. We have to ensure as we report to you that that money has been as well spent as possible, and therefore it is for us to ensure that there are proper rules about the value for money that is achieved, but it is for the departments to propose how they wish to go ahead and the plan for devolution, the 10 year health plan, was drawn up by the Prime Minister and by the Health Secretary together, and it was published two years ago and is now being implemented by the Health Department.

  139. Would it be fair to say just in conclusion on this that because of the sheer volume of extra commitment this Government is giving to the Health Service, additional scrutiny is particularly important compared with perhaps some departments where spending is not changing so much?
  140. (Mr Brown) It is absolutely true that the independent scrutiny built into the announcement made by the health secretary last Thursday is absolutely crucial. I think people can look to a different system where there has to be an annual independent report prepared by the new auditor for Parliament, so that people can see for themselves the link between the money that is being spent and the results that are being achieved. In addition to that, we have a far greater scrutiny of patient complaints which is now being done independently of the Health Department, and an equally independent inspection which is important to this process.


    Mr Fallon

  141. Coming back to something you said, Chancellor, about taking account of National Insurance in the NHS allocation, Mr Wanless presumably did not know what you were planning on National Insurance. I think you have now said you have taken account of it. What is the figure for the NI increase for the NHS itself?
  142. (Mr Brown) I think we issued a figure some days ago. Was it in the order of 200 million? I cannot remember exactly but we will give you a copy of the figure. It was 200-300 million and that is why, when you look at the figures for employers' National Insurance, the figure is for the public and the private sector.

  143. So that is 200-300 million then he has just got to find from next April because of your decision?
  144. (Mr Brown) : I think people would have found it strange if I exempted National Health Service employees or any public sector employees from a contribution that I am asking the whole country in employment to pay towards the improvement of a National Health Service, and I find it strange that people should argue that somehow the public sector should have been excluded from the National Insurance contribution. I think myself that, if private sector employees are being asked to pay some contribution to the Health Service, so too, in the tradition of National Insurance which has lasted, after all, for fifty years amongst all parties that have been in power, all employees and not just private sector employees should pay the contribution.

  145. I was not actually arguing that; I was only asking you for the figure.
  146. (Mr Brown) I know, but you will know that it has been advocated in recent days by people within your own party.

  147. I want to turn to one other spending line. You announced last Wednesday that, for a typical secondary school, additional payments to be made will rise from 98,000 last year to 114,000 this year, but in the Budget last year you said the payment would be not 92,000 but 115,000 and these payments will be made not just for one year but for every year through to 2004. How is the 114,000 which is 1,000 less, which you have announced this year, additional?
  148. (Mr Brown) I think I might have to send you a note on this because what is the typical school is the issue here. Actually some schools receive far more than that figure in both cases of these figures, and some schools that are smaller receive less. Equally, in the case of primary schools, because of the distribution of numbers in different schools there is quite a range of schools for expenditure, so I will come back to the Committee on this. You will see that for schools with 2000, 1500, 1200, 1000 - whatever the numbers of pupils are - there is a big difference in the rate of payments. So it is the typical figure that I was giving but it may not reflect the same definitions as you are using, but I will send that to the Committee.

  149. I understand that. I am familiar with the thresholds and, indeed, with this area, but I want to be clear whether what you announced last Wednesday is additional. You described it as additional?
  150. (Mr Brown) Additional money, of the order of 100 million extra, was put into this system.

  151. So it is additional per school?
  152. (Mr Brown) It is additional per school, yes.

  153. What do you think the additional burden per school is of National Insurance?
  154. (Mr Brown) National Insurance does not come in until 2003-4.

  155. But your extra money goes through to 2003-4?
  156. (Mr Brown) But most of the expenditure on that is not on additional staff; it is probably on equipment and other facilities that are being developed for the school. Obviously we can look at that matter but I think you will find that most of the additional expenditure is not on employing staff, who are usually employed by the education authority.

  157. But it was you who said that they could use it to employ staff?
  158. (Mr Brown) Indeed, they could.

  159. So the school could be faced next year with an increase in National Insurance of around 5,000, and that would wipe out the additional money you are giving them.
  160. (Mr Brown) Yes, but I have not announced the results for the spending review for education yet at all. I think you will have to be patient.

    Mr Fallon: I see.


  161. On productivity, we have had a submission from the National Institute of Economic and Social Research which stated that the Budget has very few measures specifically tailored to closing the productivity gap with our main competitors, the main exception being of the R&D tax credit which was announced in advance. They go on to say that "Britain continues to lag our main competitors in terms of output per hour worked and also lags the US in terms of underlying total factor productivity." Is that not disappointing for you, given it is one of the major areas?
  162. (Mr Brown) There are a number of measures in the Budget designed to advance the productivity in our country, and they are side by side with the measures we have announced in the last few months, including the independence of the Competition Authority, a new competition policy, including reform of the physical planning laws, including a reform of the work payment system and obviously the work we are doing to improve standards and skilling of the work force. What I did announce additionally, however, in the Budget was the new research and development tax credit which applies to large companies as well as small companies, and if you remember one of the big gaps between ourselves and other continents is that spending on research and development is 1.8 per cent of GDP in Europe as a whole, and it is lower in Britain. It is about 3 per cent in Japan and about 3 per cent in America. So R&D tax credit for small and large firms at a cost of something of the order of 400 million is designed to boost our research and development effort, and I think you will find that it has been widely welcomed by business. Capital gains tax has been reduced to ten pence for two years of holdings in business assets, and that was from 40 pence when we came into power, and I think most people recognise that that is a boost to productivity itself. We also announced a new measure for skills with money to back it up in the Budget so that we can find a better relationship between employers and employees and Government in improving work place skills, and, of course, the measures that the Budget announced for small businesses include reducing the taxation from 20-19, abolishing the ten pence rate and, therefore, it is a zero rate for the first 10,000 in profits, and the performance implication of VAT took away a whole series of what were well-established but unnecessary burdens for business. So the productivity agenda is advanced by a number of measures in the Budget.

    Mr Plaskitt

  163. But productivity in the public sector will not be affected much by many of those business tax changes. Wanless had some very important things to say about productivity in respect of the Health Service in paragraph 5.31 in his report where he takes a central case on productivity in the Health Service, and then looks at what would happen if that productivity performance were to vary, either up or down by 1 percentage point, and it makes a huge difference tracking out over the 20 years of his programme. On the pessimistic scenario you get the health output that we are looking for but it costs 13.1 per cent of GDP; you get the same output, 9.4 per cent of GDP, if productivity rises. How confident are you, therefore, that, laying the tax measures which affect private sector to one side for the moment, you can get a productivity breakthrough into the public sector?
  164. (Mr Brown) This absolutely is the challenge for the National Health Service, and I think you will find that Mr Wanless believes that there are demarcations that can be changed within the Health Service. He identifies jobs that doctors are doing that nurses can do; jobs that nurses are doing that others can do; and a changing relationship between GPs and consultants in the operations that could be done, surgical procedures in GP surgeries, and certainly in day case admissions rather than people who have to stay in hospitals overnight. So the productivity improvements he is looking for will form part of the discussions relating to the contracts for GPs and for consultants and the agenda for change for nursing. I think it is also true to point out that, when he gives these figures for relative growth rates in future years, he is also looking at how public health can improve, so he is looking at how the health of the nation rather than the sickness of the nation can be measured, and whether we can make advances in smoking, in alcohol, in drugs, and in general keep fit and healthy living so that the demands on the healthcare system can be reduced as a result of that. So he has public health very much in his mind as much as productivity improvements, which I agree with you are very much part of the negotiations that Alan Milburn was talking in his speech today about to the Royal College of Nursing.

  165. Will the productivity performance inside the National Health Service be part of your regular monitoring of the progress of this traditional investment?
  166. (Mr Brown) Absolutely. Productivity in the public sector has to improve but it is a shared view within the Health Service itself. It does not need the Treasury or the 10 Year Plan to tell people this is an issue. People know this is an issue, and there is a shared willingness to address these issues within the Health Service itself.

  167. Can I ask one further question on productivity? With the Budget papers you issued the document "Developing Workforce Skills". We have had a little note about that from the National Institute for Economic and Social Research commenting on the pilot schemes that are proposed and suggesting that the cost per employer to the Treasury in support of a two week training scheme will be 1,000 a year.
  168. (Mr Brown) We have set aside some money for this project. It is obviously a limited experiment in terms of the numbers of people involved in the trial, but it is basically to see whether a new relationship can be developed particularly for small businesses, where in return for the employer giving time off the employer may be compensated for the loss of wages and time. It is an attempt to solve this free rider problem that exists in the whole business of training where an employer does not see it as being in his interest to train someone who might eventually be poached by someone else. There has to be a new relationship between the employee through the employee being concerned enough to get the skill, the employer understanding that if he or she does not take action then nobody may be involved in training, and the Government which has a responsibility to bring people together to see if we can solve what is a huge skills gap that has to be addressed. Most of the people who will be in our work force ten years from now are already in that work force.

  169. If that thousand pound figure turns out to be accurate, and if all of those skilled people in the work force who will benefit from taking up the scheme do so, we are clocking up to an 8 million programme. Is that the scale envisaged?
  170. (Mr Brown) We have set aside a certain amount of money and we have a number of different trials or tests that will be carried out. Some will be more successful than others. We will learn from that and then reach a decision. I think the interesting thing about this is that there is enthusiasm from the CBI for this and from the TUC; it came out of our joint productivity discussions where both were enthusiastic about moving ahead with this, and if there is this goodwill then I believe that the 40 million - not 30 million - that we have set aside for this project would be money that would be well spent because it could give Britain a new way forward where we can catch up with countries like Germany which have already had training systems in place.

    Mr Laws

  171. Chancellor, in some senses your decision to raise National Insurance contributions has been surprisingly successful, not least when we read in the opinion polls that you are now even more popular than the Prime Minister, and I think the most popular Chancellor since Dennis Healey. You do not look very pleased about that!
  172. (Mr Brown) I met Dennis Healey the other night and we were joking about these things.

  173. Could we look at a couple of fundamental issues surrounding your decision to increase National Insurance contributions as opposed to any other tax? One of the criticisms that has been made of the decision in particular to increase employer National Insurance contributions is the effect on jobs. We have just had a submission from the CBI this morning which says "The increase in employers' national insurance is regarded by many businesses as the worst possible kind of tax increase. It affects businesses of all sizes and sectors, but crucially takes no account of their profitability. It penalises employment, and in today's fiercely competitive, low profit environment businesses will be forced to take offsetting action.", and we have been told in a separate submission by the Centre for Economics and Business Research that your decision to increase employer NICs by 1 per cent is going to cost 20,000 jobs - 20,000 fewer jobs will be created. Have you yourself carried out any impact assessment of this increase in employer NICs?
  174. (Mr Brown) No, but I do not believe that will be the result of it. If I can put it to you that 200 million working days were lost due to absence and 861,000 people not working for a year is the equivalent of that. The average cost of absence to the employer is 400 per employee, so the bill for British business of an unhealthy work force is very considerable; some people estimate it as ten billion a year. If I can draw the conclusion from that, if you are devising a health care system of funding for the future, there is hardly any system around the world where employers do not have a rule in contributing to health care. In France it is 60 per week paid by an employer for a typical employee; in America we estimate that the typical employee family pays 100 a week for their insurance policy, and a considerable amount of that under employer contracts is paid by employers, and in Britain, even after the National Insurance change, the average tax contributed in total taxation by the employer is 10.50 a week.

  175. I would not question there might be a beneficial impact on employment and lack of absence from work with a better Health Service; the question is what is the most sensible way of funding it. Are you arguing that your decision to increase National Insurance contributions for employers will have no negative employment effect at all? Is that what your assessment is?
  176. (Mr Brown) I believe the decision is both the right one for health care and can be accommodated within the economy.

  177. Will it have no employment impact?
  178. (Mr Brown) I do not believe it should have a big employment impact at all. In fact, I would have said that, if you look round the world at health care systems and you look at what employers have to pay in other countries, in America the premiums are rising by 13 per cent this year so that is 13 a week extra. The National Insurance change that we are making is nothing like that for the average employee in this country, and therefore I believe it can be accommodated within the budgets that we are talking about.

  179. Could you square that view that you have that the increase in National Insurance contributions will not have an employment effect not only with what outside bodies like the CBI are saying but what the Treasury said in March 2000 after you introduced the climate change levy, because obviously as part of that equation you brought in the climate change levy and you cut the employer National Insurance contributions by a smaller amount than the one per cent you raised them. When you did that you put out a press release from the Treasury which said that "the lower National Insurance contributions will act to promote employment", so two years ago you were telling us that cuts in employer NICs will promote employment, and now you are saying that increases in employer NICs will not cut it. Have you invented some new economic theory?
  180. (Mr Brown) I think you have to look at what has changed over the last few years. It used to be said that National Insurance would price people out of jobs. What we actually did over the last few years is changed the whole basis of the National Insurance system, so that for low paid workers we removed the initial flat rate payment for every worker: we then made the first starting point for payment of National Insurance not 56 but I think it is now 85, and for any worker earning up to 300 a week or so the changes that we made in National Insurance which cut the cost of employing someone set against the rise in National Insurance we are bringing in next year, it is still cheaper to employ that person than it was in 1997.

  181. Chancellor, we understand the changes that have been made in National Insurance contributions but two years ago you argued that a smaller cut than we have just had a rise in employer NICs would promote employment; today you are trying to persuade us that the increase in employer National Insurance contributions will not damage it. It does not really add up, does it?
  182. (Mr Brown) In the economy over the last five years there have been 1.5 million jobs created. My expectation is that with growth in the economy over the next period of time, we are still in a position to create jobs as an economy, and therefore I take a rather different view from you about the employment creating potential of the economy.

  183. That is a different matter, with respect. The question is what effect will this tax change have, not what the employment creating effect of the economy is. That is different?
  184. (Mr Brown) You are making an assertion that the change we are making in National Insurance will lead to higher unemployment, am I right?

  185. I am saying you have an economic policy that does not add up. You said one thing in 2000, that cutting employer NICs will boost employment, and you are now saying that raising them will not have any negative impact? It does not make sense.
  186. (Mr Brown) As far as the climate change levy, we always said when we introduced the climate change levy that there would be no net revenue gain to the Treasury, so we put it back to employers.

  187. And said it would promote employment?
  188. (Mr Brown) Yes, but we put it back to employers.

  189. And did it create employment?
  190. (Mr Brown) What I say to you is - and I do not think you are taking this into account - we reformed the system of National Insurance after 1997 as a result of the Taylor report; these reforms have continued; and the reforms for people who are employed who are employed at less than 200/250 a week meant it was cheaper for an employer to employ that person and, even with the rise in National Insurance that we are bringing in where I think it is right that every employee should make some sort of contribution to the Health Service, it is cheaper for an employer to employ these people than it was in 1997.

  191. I will let other people draw their conclusions from that exchange but to come on to the other issue of fairness that people are concerned about, what people are saying is that you were driven by the promises you made in 1997 and in 2001 in your manifesto not to increase income tax rates and, therefore, you had to change to another tax, employee NICs and employer NICs, which they are arguing have damaging economic effects compared with income tax. We have discussed the employment issue already and I will not go back to that but I am not sure that your theory stands up to much. Let us look at the issue of fairness now: I understand how you tried to address the impact of employee NICs on fairness by effectively abolishing the upper earnings limit but there is still - and I notice you do not challenge that?
  192. (Mr Brown) Sorry - I am about to answer your question. The upper earnings limit remains. I announced the upper earnings limit in the Budget itself.

  193. I think that is the subject of another question.
  194. (Mr Brown) Do you want me to run the figures? It has risen from 30,420 to 30,940. That is the upper earnings limit.

  195. Chancellor, since you insist on raising it, you will be aware very well of what the definition of the upper earnings limit is, and I refer you to Tolley's National Insurance Contributions which is the standard reference: "The upper earnings limit... is the maximum amount of weekly earnings in respect of which [employee]... contributions are payable." It is clearly not the case that that is the maximum because you pay them all the way up the scale, so the upper earnings limit has been abolished ---
  196. (Mr Brown) I think it says "payable for contributory benefits" actually, if I can just clarify that.

  197. Employee contributions.
  198. (Mr Brown) Yes, for contributory benefits.

  199. The definition of which, under Tolley's, is employees, and I am very happy to take the time to argue that out.
  200. Chairman: Could you wrap this up?

    Mr Laws

  201. Let us go on to discuss this issue of fairness. The way you have chosen to impose this tax increase to employee NICs means that wealthy people who are not in employment will get off making a contribution, and you will be aware that examples were cited in the newspapers this weekend of Lord Sainsbury who receives his income not in a way that will cost him in terms of National Insurance contributions.
  202. (Mr Brown) I think you mean that he does not take a salary for being a Government minister, therefore he does not pay National Insurance on something he does not take as a salary.

  203. No. This is referring to his work at Sainsbury's and I will read it to you: "He pays income tax on this money but avoids having to pay National Insurance contributions because he is not an employee of the company". Now, there are many other examples of people who receive their income from sources other than employment, and all of those people will avoid paying this additional charge. Does that really make any sense?
  204. (Mr Brown) We chose National Insurance, as you know; we have excluded pensioners from making a payment because it did not seem to me right that pensioners should pay more when they were older towards the National Health Service if we could avoid it, and therefore the National Insurance route seemed the right route to take. In addition, through National Insurance employers and employees pay some share towards it and, while you may disagree that employers should not pay any contribution, I think, given the nature of health care systems around the world where employers in almost every system pay some contribution to health care costs, it was right to do it in that way. As you also know, historically, since the 1940s, in what has been a very complex system of National Insurance from the Beveridge Report to the original implementation of the National Health Service Act, there has always been a certain element of National Insurance set aside for the National Health Service.

  205. But it is not fair, is it, that somebody who is retired from work and has a large amount of investment income is able to make no additional contribution whereas somebody on low income in work will make a contribution?
  206. (Mr Brown) You are acting as if there are no other taxes levied on anybody. People ---

  207. We are talking about the extra amount for the National Health Service.
  208. (Mr Brown) Yes, but people will pay their other taxes in the normal way --

  209. Of course. Nobody is questioning that.
  210. (Mr Brown) -- and, therefore, they will pay their tax as before. The question, however, was what was the best way of improving the resources available to the public services, and the National Insurance system excludes pensioners but also includes employers and employees.

    Dr Palmer

  211. In today's forecast by the European Commission, they are predicting that unemployment will rise very slightly in the current year by 0.2 per cent but interestingly, after the National Insurance rise comes in, it will not rise further. In fact, they are saying they are expecting a tighter labour market in 2003. You have not specifically been asked about unemployment so far. Does this correspond roughly with your assessment of a likely trend?
  212. (Mr Brown) We never make forecasts about what is going to happen to unemployment and I am not going to start this practice now, but I think the record is that the European Commission probably predicted that unemployment would rise last year and it did not. Unemployment has continued to fall. I think this is something to do with the operation not just of the general economy but of the welfare to work programme which is getting more people back into work who might otherwise not have jobs, and I do think that the changes we made in the Budget including making work pay with the new employment tax credit are responsible for a large number of people who might otherwise not work, particularly the over 50s, choosing that it is worthwhile to come back into the labour force.

  213. In the same report, the European Commission is predicting UK growth of 2 per cent which is 0.3 higher than their previous report a few months ago. Do you feel this reflects a general pattern of expectation that the current financial year is going to be stronger than previously anticipated?
  214. (Mr Brown) Yes. I think what is happening is that the European Union had a lower forecast than us at the time of the Pre-Budget Report. Their forecast has risen from November to April from 1.7 to 2: equally they are now predicting that 2003 will see 3 per cent growth, so they are coming quite close to our own forecast. The independent average is moving up all the time as well and that is a reflection of the world position where the American economy is looking stronger than it used to, world trade may recover more quickly than people expect, and therefore I think that the optimism of our forecasts at the end of last year are being borne out by independent and other forecasters coming towards us.

    Mr Fallon

  215. Chancellor, you referred to a claim earlier that you had not broken any election promises. I do not know if you watched a programme during the election called "Powerhouse" where I appeared with Mrs Hewitt on 29 May and she said, and I do remember it vividly because I was sitting beside her, "We have no plans at all to raise that ceiling to the National Insurance contribution. It is not going to happen". Did you watch that?
  216. (Mr Brown) I did not although I gather it is my brother that edits the programme!

  217. He has not edited out that quote!
  218. (Mr Brown) Mrs Hewitt has subsequently, I think, given a whole series of interviews saying that she holds to the election manifesto that we put forward.

  219. She did not on that occasion.
  220. (Mr Brown) She holds to the election manifesto put forward. She said that in an interview only a few days ago.

  221. Let us take your own words last week. You said, "Save for this one per cent contribution, the ceiling remains in place". How can it remain in place if you have added one per cent?
  222. (Mr Brown) Because the ceiling is there for the 10 per cent that people pay and I have just given you the figures for the new ceiling as a result of the changes that you do during the course of every year. It is rising from 30,420 to 30,940 and I gave that figure in my Budget statement so that it was absolutely clear what we were doing.

  223. But you also said, "save for this one per cent contribution". How can you have a ceiling if there is then one per cent on top of it? How can you describe that as a ceiling? That is sophistry, is it not?
  224. (Mr Brown) You have to go back to the Wanless Report and the decisions we had to make about the right levels of public spending for future years. When we received this information about what was necessary for the Health Service and public services for future years we had to make a decision on what was the fairest way of doing this. Actually, the Beveridge Report said that, when you were looking at health care - I think it was the Beveridge Report; it was in the 1940s - you spread the contributions expected as widely as possible, and it seemed to me when looking at this issue that it was right that employers made some contribution, but not the whole contribution obviously because it is only a part of the contribution; it was right that we asked something from the self-employed as well because they benefit from the Health Service; and it was right that we had something from the employees. It would seem to me in this instance, when we were raising money for the public service and particularly for the Health Service, that the one per cent should go right up the income scale but, as far as National Insurance for the 10 per cent is concerned, the ceiling is as I read it out to you - just over 30,000.

  225. I am not challenging the policy; it is your pretence that nothing has changed. The ceiling is in place and you put one per cent on top of the ceiling.
  226. (Mr Brown) The one per cent is right across the board because that is a fair way of making provision for public services for future years.

  227. So it is on top of the ceiling?
  228. (Mr Brown) The ceiling does remain for the ten per cent and I think everybody now understands that pretty clearly.

  229. Chancellor, are you aware of figures I have just received from the Inland Revenue showing that when you started you had 2,080,000 people paying top rate tax and that taking your Budget into account next year, 2003-4, for the first time ever in this country, you will have 3,070,000 paying top rate tax - an increase of 50 per cent in five years. Are you aware of those figures?
  230. (Mr Brown) These are estimates, of course, because we do not know how the economy is going to perform. The reason why people are earning more and are, therefore, within the top rate bracket is as a result of the success of the economy. They are earning more and, therefore, they are falling within that bracket. I think you will find that we have not frozen the allowance for the top rate; we have frozen the personal allowance for a year but that has a very small effect indeed on the numbers of people.

  231. But a million people have now been dragged into the higher tax rate band by your Government.
  232. (Mr Brown) I think you could look at it another way: that there are a million people earning far higher wages and salaries as a result of the success of themselves and the success of the economy.

  233. But three million people are now going to be clobbered by your National Insurance increase?
  234. (Mr Brown) I would not put it that way at all. A one per cent rise in National Insurance across the board seems to me the fairest way of dealing with the provision of the public services for future years, and it is well understood by people that the Health Service is available to all. A one per cent additional contribution to the public services of this country is something that I think people will understand, and in time I think people will support.

    Mr Cousins

  235. I am a sort of sorbet between the courses, Chancellor! I wonder if you could just tell me what percentage of the working population potentially will be covered by the tax credits as they will be in April 2003?
  236. (Mr Brown) April 2003 is the introduction of the working tax credit and the introduction of the child tax credit. What we are doing is splitting the working families tax credit into two, one for the work tax credit and one for the children's tax credit. As far as the work tax credit is concerned, we are including single persons and couples without children, and I will give you the exact figures as I find my notes for that. As far as the children's tax credit is concerned, as I said in the Budget it goes right up the income scale to 58,000. In fact, in the case of a family where the first child is under one it could go up to 66,000, so it covers most of the families of this country - and rightly so.

  237. I would be happy to accept more detail in another form later but, even on the basis of what you have said just there, it is clear, is it not, that by April 2003 most of the working population covering up to the very highest levels of income in some cases will potentially be able to receive income related tax credits.
  238. (Mr Brown) It is probably 86 per cent of households with children who will benefit from the child tax credit but you have to have children in your household to benefit from the children tax credit; it is not available to everybody. I think people understand that the tax credit is essentially the Inland Revenue paying money rather than receiving money in these cases. The amount of money that the typical family will receive for the first child is 27.50 including child benefit, and that will be paid directly to the mother.

  239. Now, there are two points, are there not, that need to be made about this considerable extension of income related tax credits right through the income ranges: the first is that the take-up of, for example, the working families tax credit is, in fact, rather poor. It is poorer even than the minimum income guarantee for pensioners?
  240. (Mr Brown) I do not accept that the take-up is poor. What has happened is there are probably about 450,000 more families receiving in work support through the working families tax credit than under family credit so, as far as a successful make-work-pay measure that has made it rewarding for people to be in work, 1.3 million families are now benefiting from the working families tax credit. I think it has served its purpose to send a signal to people that work pays more than benefits; that it is worth your while going into work; that there is a minimum family income, in this case about 240 a week and nearly 11,000 available to you if you take up work, and therefore I think it has been well targeted and has served its purpose, and I think the new measure will be even better.

  241. How many people do you think there are who could claim the working families tax credit but do not?
  242. (Mr Brown) I think you will find that at the lower end of incomes, the vast majority of people are claiming. Where you have the tapering off and there is less gain to people from claiming it is obviously less but, as far as the lower income group of people whom we had to attract back into work and show that work paid, the vast majority of people are receiving what they are due and claiming it.

  243. Does not the success of the tax credit package as a whole really depend upon the substantial take-up of the tax credits, and if they are to cover way more than the working half of the population and be carried right up the income scale potentially, is not there a grave danger that they will be substantially underclaimed?
  244. (Mr Brown) 85 per cent of those eligible to receive children's tax credit through PAYE have had their codes adjusted already, and then the self-employed and those who are on self-assessment will apply in the normal way when they send in their 2001-2 tax return, so there is a very big coverage of the children's tax credit; people do know about it and, of course, as we move to the new child tax credit there will be more information available to people because the benefits are considerably more for many families and they will want to take it up. Obviously you want to have one hundred per cent take-up if that is possible but equally over a year, and it has only been in for a year, the 85 per cent we have already achieved and the self-assessment and the self-employed forms will come in, where people will get their children's tax credit forms paid to them.

  245. Do you not think these schemes are becoming a little over complex?
  246. (Mr Brown) I think if you were to look at the tax code irrespective of what has happened to the integration of tax and benefits, you would say it was incredibly complicated and it is so in every country around the world. I do not think there is any great difference between ourselves and America or other countries in relation to that. Then if you look at the benefit system it is also because it has to target benefits properly. The integration of tax and benefits means that we end the situation where many people were, on the one hand, paying tax and, on the other hand, claiming benefit at the same time. Not only have we made the poverty and unemployment traps less; we have also avoided this duplication of claiming from the benefit system on the one hand while paying tax on the other, and I believe that we are getting to a better system, so it is actually in the end less complex.

  247. What percentage of the pensioner population do you think will either be entitled to the guarantee element of pension credit or the savings element of pension credit?
  248. (Mr Brown) We reckon more than five million pensioners will be entitled to pension credit; roughly a half. If you are a pensioner couple with income of less than 200 a week you will get something from the pension credit, and if you are a single pensioner with income of less than 135 a week you will get something, so for those people with modest occupational pensions and for those with limited savings but some savings, who in every other system that has been devised would be penalised because they could not get any of the benefits that were available, we are making their savings go further and we are rewarding them for having saved through occupational pensions. The average gain is something between 6 and 8 a week so from next year many pensioners who feel, rightly, that the system penalised them when they did save and they did have occupational pensions will be properly rewarded, but we have avoided the two difficulties of having a means-tested benefit for the very poor; we have a benefit that goes up the income scale now; and equally we have avoided what I think would have been a huge additional expense of simply, on a flat rate basis, raising everybody's pensions by more than what we are doing where you would not be targeting the resources to those groups of pensioners who are very much in need of a boost to their savings and a boost to their occupational pensions.

  249. So on day 1 of pension credit more than half of the pension population is covered. If pension credit increases in line with earnings, which is the undertaking that the Government has given, pension credit will rapidly become the first universal income-tested benefit?
  250. (Mr Brown) It depends what you mean by "universal". It is certainly not means-tested in the old sense because capital is not being tested --

  251. Income-tested.
  252. (Mr Brown) It is income that matters. Someone becoming a pensioner will be able to phone up, give the details of their retirement pension and their occupational pension and their savings, and get assessed immediately from the time they retire for a period of years, and only have to report the serious income change that is taking place.

    Mr Tyrie

  253. Raising a couple of points on tax credits, clearly, Chancellor, you are extremely well informed about it and you have taken a great personal interest in tax credits. I would like to ask you about the classification of these tax credits in the accounts. If you could take a look at box C2 on page 216, which I am sure you know well and which has been an issue of great contention, this is the issue of whether tax credit should be scored as public expenditure, as the ONS favour, or, as you have done up to now, as negative tax thereby reducing the tax burden. I note that you have made a change to move the treatment of these in line with the OECD whereby you will treat tax credits as negative taxation "to the extent that credits are less than or equal to the tax liability of the household". Could you give me a rough estimate of the proportion which is attributable of total tax credits to that category, and the proportion which will, therefore, be treated as public spending?
  254. (Mr Brown) I may have to send you a detailed note on some of these points. The OECD new classification is the one we have accepted. I think it is a victory for us that we did say this should happen internationally and we have had repeated exchanges in this Committee on this, and now the OECD has agreed to this change which will apply to all countries. In fact, as a result of that, it adds around 0.5 percentage points to the tax GDP ratio largely because around only 12 per cent of WFTC actually scores as negative tax under the new system. So we have accepted this new definition.

  255. Sorry, was the answer you are giving me there 12 per cent? You began the answer by saying you did not know the answer.
  256. (Mr Brown) Well, I will send you a note but these are the details I have here with me. Around 0.5 percentage points is added to the tax GDP ratio as a result of that, largely because only around 12 per cent of WFTC actually scores as negative tax under the new system. We have accepted the OECD view of this and will publish our figures according to that in future, and that means that of course only income that is received by people who are tax payers is accounted for on this.

  257. Have you got the way you worked these figures out, Chancellor, because otherwise would it not be impossible to draw up the chart on the following table on page 219, where chart C3 gives the tax to GDP ratio and, although it is extremely difficult to work it out, if you read the footnotes carefully it says in the footnote to that chart that the net taxes and contributions are defined in table C10, and if you go to C10 it says "Footnote 3" and refers you back to box C2, so we arrive back at the reclassification which we were talking about a moment ago. So you do already have these numbers available in the Treasury?
  258. (Mr Brown) I have just given you the numbers that I have.

  259. You have given me a percentage for the current year but this is a ---
  260. (Mr Brown) I do not think there is any secret about this.

  261. Would you give us the figures?
  262. (Mr Brown) We are following the OECD classifications and you can see what is included. I will send you a note on what we have.

  263. I wonder whether you might have considered publishing the ONS figures alongside these to give more solidity to your tax burden ratio?
  264. (Mr Brown) We are following the OECD classification - surely that is the best way of moving forward - and now that there is an internationally agreed definition and we have accepted that part of the working families tax credit cannot be included as a tax credit --

  265. Chancellor, is that not repetition of the same point?
  266. (Mr Brown) -- Surely that is the best way forward?

  267. I put it to you that if you had published the ONS figures you would have found that the tax burden has risen from 35.2 per cent of GDP to 38 per cent of GDP, and that that 38 per cent of GDP would be the highest level of the tax burden since 1984-5 over about 17 years, and I put it to you that might have something to do with the reason why you decided you did not want to publish ONS figures?
  268. (Mr Brown) I do not accept that. We have, as I said, adopted classification changes from the OECD that add around 0.5 percentage points to the tax GDP ratio. I did not need to do that - we could have held to the old definition that we had been using - but I thought it right to move towards the internationally agreed practice that we had played a part in creating. I have given you the figures which show that 12 per cent of WFTC only scores as negative tax under the new system, and I do remember these debates have gone on between governments on quite a regular basis because the last Government included, for example, mortgage tax relief as a tax cut and there was a debate about that when, of course, some people were getting the benefit of it and were not taxpayers.

    Mr Cousins

  269. Chancellor, I am forming a new organisation, Socialists for International Bankers - and you cannot get much more new Labour than that! What is the present tax take from the taxation of foreign company UK branches?
  270. (Mr Brown) I do not have a figure for that. What we are adopting is a rule that is adopted in most of the other major economies where there is the proper allocation of capital when calculating the tax liability. It is true that a number of overseas institutions operating in Britain, because of the way capital is attributed, were not paying a tax at all and, therefore, it was right to take action to follow what is essentially international practice by America, Germany, France and other countries.

  271. This Committee is receiving a lot of representations from international financial organisations on this point. It is very difficult to relate the increases in tax take which are protected from this measure, which are 350 million in year 2003-4 and 650 million when it really gets going in 2004-5, and what that really means unless you know the base from which you start. Can you give us some idea of what the present tax take from foreign company UK branches is?
  272. (Mr Brown) The position is that there were rules being applied in this country which were different from those being applied in other countries. One of the results of what we are doing is that companies that were paying tax in their home country will pay less tax in their home country and some of that tax here, and they may not lose a great deal of money as a result of that because it is simply a transfer from the tax they are paying in their home country to tax that is being paid here. But it was wrong, and if I give the Committee a figure they will understand: 9 out of 10 of the top foreign branches were ending up paying no tax at all.

  273. If it is the case, then, that this additional 650 million you are projecting starts from a base of almost nothing, which is the implication of that last remark you made, then this is a very considerable imposition on this particular category of business?
  274. (Mr Brown) I think you misunderstood me. This is creating a level playing field, the playing field that exists in other countries, and one of the effects of the decision will be that some of the tax paid in the home country will not be paid there but paid to us, and it is creating that level playing field with the result that we who have not benefited from revenue when perhaps we should have in the past will now get some of the revenue that might otherwise go to another tax authority.

  275. Chancellor, the Government is just now introducing also in the Budget a very complex change on the taxation of derivatives and exchange contracts?
  276. (Mr Brown) That is one that is being discussed with the industry --

  277. Absolutely. Although the tax take is considerable and meaningful it is regarded as having been a model of consultation which has got a broad consensus from the industry, even though the tax take is, in fact, quite considerable, whereas when it comes to the taxation of overseas branches people are saying there is an enormous additional tax take on the basis of no consultation at all.
  278. (Mr Brown) Mr Cousins, I should say to you that there has been wide discussion in the international community about the rules applying to capital; that we are adopting a system that is operated in America, France and Germany, and one of the officials will correct me if I am wrong in saying that many countries operate the same system, and one of the effects of it will be that some of the tax paid to the home authority is now paid to us because of the allocation of capital and the deductions for interest on capital being different in future, and it is about creating a level playing field that I think people should welcome once people see the full details of what we are proposing.

  279. What concerns me is that you cannot give us a figure for the base from which we start, except it is clearly very small --
  280. (Mr Brown) I have given you the figure, because you have pressed me, that 9 out of 10 of the top foreign branches are not paying tax.

  281. We can draw an implication from that but we do not have the base figure. Mr Gibbs yesterday tried out on us the remarkable idea that because the OECD had published a pamphlet about this that was consulting the relevant enterprises, and the assertion has been made both yesterday and today that there is an off-setting tax benefit in other tax regimes, but can you produce some indication of the figures involved in this? Are you sure this is not compromising the City of London's role as a major financial centre?
  282. (Mr Brown) I would not do anything that would compromise the City of London's role as a major financial centre, and I think you will find, for example, when we pressed the European Commission not to impose a withholding tax that would affect bonds in the London market that we have been vigorous in upholding the interests of the City of London. What we are talking about here is a recognised problem where there is no level playing field and where other countries operate a system that allows them to receive revenue - revenue that we have been unable to receive because of the treatment of capital in the United Kingdom. We are creating that level playing field now and I think when most people look at this measure they will see it to be fair and reasonable. Of course people will want to raise questions about it but when people look at the details I think they will come to the conclusion that we made the right decision.

  283. Do you accept that this is on the most internationally mobile part of the operations of the City of London?
  284. (Mr Brown) I accept that we are creating a level playing field and I think that is the important thing: that this is only doing something that is done in other countries, and the City of London and Britain remains, and will remain, a very attractive location for companies and we are determined that it continue to be so, and we will fight very hard for the interests of the City of London. But it is my duty to create a level playing field where that is necessary for both the attainment of a fair revenue and for the continued operation of the businesses.

    Dr Palmer

  285. Rounding up on my side, I am delighted to see the prospect of the oil fraud strategy raising 550 million by 2004-5 transferred from the criminal community and possibly the petrol price protest community to the general public, but I am informed that the new euromarker, Solvent Yellow 124, could be easier to launder than the present gas oil marker. I recognise that it is a slightly technical question but are you confident that this improvement can be achieved?
  286. (Mr Brown) It is designed to make it easier to detect vehicles using rebated fuel purchase for illicit use on the UK's roads, so I could not agree with your assessment of what is behind this change. It is intended and designed to make it easier to detect vehicles using the fuel that has been rebated. Our estimate is that mainland diesel fraud has accounted for 4 per cent of the market. If we had not taken action that would have doubled over the course of the next four or five years, and we estimate that the strategy will reduce the market share to 2 per cent and that is the basis on which we are planning.

    Dr Palmer: I am delighted. I am just querying whether it will be achieved.


    Mr Laws

  287. Chancellor, in 1997 you introduced this new tax relief for the British film industry with a certain amount of fanfare. Now we discover in evidence from Mr Gibbs yesterday that this is being very seriously abused and it appears that programmes such as Coronation Street and Emmerdale, Ground Force and They Think It's All Over are taking advantage of your tax relief to subsidise down the cost of television programmes. Is that true?
  288. (Mr Brown) As you know, there is a problem here and that is because of the definition of what is a film. As you know, the film incentive was supported and introduced because we wanted to encourage new British films and we wanted to make sure that those people who were producing these films had sufficient capital to move to the next film while still waiting for the success of their previous film. It was a very successful relief; indeed in a way it has almost been too successful. However, it is wrong to say that this film tax relief was intended for television productions. I do not think anybody would classify Coronation Street as a new British film. It is a continuing serial that has been going for 30 or 40 years and therefore it was never intended that a television serial would benefit from this tax relief, nor do I think you would want it to do so.

  289. We know you cherish your popularity a great deal but it seems to be going a bit too far to subsidise programmes such as this, even if unintended. Could you not reasonably have been expected in the Treasury, with all the very bright and brilliant people that you have, not to allow this to get out of control? The cost of it has gone up from the 15 million that you first projected to 360 million in the year that we are looking at now. All these people have done, we understand, is that producers of shows such as Coronation Street have certified their individual episodes as separate films. With people like Mr Gibbs and Mr O'Donnell and others, surely the Treasury could come up with a more competent way of managing a tax relief than this?
  290. (Mr Brown) I think you would agree first of all that it has been very successful in stimulating new British films. Secondly, where a loophole develops you want to take action, and we are taking action, and there is a lot of concern and opposition to us taking action but it is the right thing to do. This was never intended to subsidise TV films and we are going to close that loophole now.

  291. How long have TV film producers been using the loophole?
  292. (Mr Brown) The TV films were not initially, according to the information I have, using this, but they came to see that it was possible to change their affairs in a particular way to allow them to do so. We are now closing the loophole.

  293. Are you having an investigation inside the Treasury as to the lessons that can be learned from this?
  294. (Mr Brown) We are always learning lessons. We will continue to learn lessons and we are taking action at the earliest opportunity, having detected the problem.

  295. Can I ask you a last question on this? We have had a bit of a laugh at the programmes such as Coronation Street and so forth getting this tax relief, but actually it is quite serious because you could be using this money for some of your other more socially worthwhile projects, including the tax credits. Is not one of the biggest criticisms that has been made of you as Chancellor that, amongst some of the flattering things that have occasionally been said about some other aspects of your management, you have complicated and continue to complicate the tax system in a way that opens up precisely these loopholes? We have got numerous other examples of this in the Budget. We have got this special relief for the breweries and goodness knows what else. Is this not precisely the kind of error and muddle that you end up in if you do what you are doing to the tax system?
  296. (Mr Brown) Hold on. What Mr Laws is asking me to do in supporting the closing of this loophole is introduce more complex legislation.

  297. No.
  298. (Mr Brown) Every time a loophole develops, to close it you require -----

  299. I am asking you to cut it down.
  300. (Mr Brown) Are you against the film incentive in the first place?

  301. Yes.
  302. (Mr Brown) You want it abolished?

  303. And the breweries relief.
  304. (Mr Brown) You never wanted a brewery incentive?

    Mr Laws: No.


  305. I think there will be a division in this Committee, Chancellor.
  306. (Mr Brown) I would just say that the film incentive did achieve its purpose of stimulating and helping the British film industry develop, but now that we have seen that there is a loophole which has developed it is wise to close that loophole.

    Mr Laws

  307. A massive amount wasted though.
  308. (Mr Brown) It seems to me that you are making an argument against the R&D tax credit.

  309. Yes.
  310. (Mr Brown) And you are making an argument against the measure, for example, of 100 per cent corporation tax relief allowances for investment.

  311. I would rather have the Lawsonian approach where you can have less of these breaks and lower rates, in particular for people on low incomes.
  312. (Mr Brown) I think you will find, for example, that the CBI, who pressed very hard for the investment allowances to be made available, as did other business organisations, will find what you are proposing less acceptable than you think. I think you will find that the capital gains tax cuts we made, while trying to prevent avoidance which would mean people declaring their income as capital, are a means by which we are stimulating entrepreneurship in this country, and I have to disagree with you therefore on the way that the tax system should develop. Where there is a loophole it is inevitably requiring a regulation or legislation or some statutory action to deal with that loophole and it is right for us to deal with these loopholes.

  313. We will leave it to the future to find out whether that is right or not.
  314. (Mr Brown) One of the programmes that is said to be getting this relief is They Think It's All Over.


  315. We did discuss yesterday, Chancellor, that it was suggested that there would be some less than wholesome family programmes that were getting it so, given that it is a family show here, we would like that loophole to be closed.
  316. (Mr Brown) Yes. Thank you very much.

    Mr Ruffley

  317. Chancellor, you said that health spending for 2007-08 was covered. Could you point to the part of the Red Book where that is demonstrated?
  318. (Mr Brown) Yes. The figures are covered to 2006-07 in the published documents, but by tradition we will publish the 2007-08 borrowing requirement at the time of the November pre-Budget Report.

  319. So can you point to that document?
  320. (Mr Brown) We will publish it at the time of the pre-Budget Report.

  321. So you have not got it covered, have you?
  322. (Mr Brown) No. We publish long term tables as well.

    (Mr Balls) It is covered in two places. One is in Annex C where we set it out. I think the difficulty with the IFS the other day was that they had not noticed this set of assumptions.

  323. What page are we on?

(Mr Balls) It is on page 210, paragraph C22, where we say that "firm overall spending plans for the 2002 Spending Review from 2003-04 to 2005-06 are set out in Chapter 6", and "prior to spending plans being set in the 2004 Spending Review, the fiscal projections assume DEL growth after 2005-06 of 2.5 per cent in real terms, in line with the assumption on economic growth used for the public finances, supplemented by an addition to allow for the 5 year health settlement of the difference between planned health growth and health's long term average growth, 3.6 per cent. This delivers DEL growth of 3.8 per cent in 2006-07." In our numbers up to 2006 we have made an explicit assumption above the numbers we had in the pre-Budget Report to allow for the health addition in 2006-07, and then obviously that trend and that number continues to 2007-08 too. In addition to that, in Annex A, the "Illustrative long-term fiscal projections", which is page 145 onwards, we show on the basis of cautious assumptions our fiscal projections up to 2032 and those projections show nearly all our fiscal assumptions up to 2032 and that includes explicitly in the numbers which you have here the allocations for 2007-08 so, while it is true to say that it is not in the pre-Budget Report or formally in the Code in producing the numbers for 2007-08, that number and subsequent years is included in the long term projections in that chapter, so clearly the assumptions are included in the numbers for 2006-07, and it is included in Annex A, so it is all fully covered and that is why the IFS was wrong in the statement it made.

(Mr Brown) I think the IFS will be in a position, I hope, to correct their misinterpretation of these figures. I am gratified by the Committee's interest in going right up to 2007-08.

Mr Ruffley: We will be watching. And you will be the Chancellor.

Chairman: Chancellor, you did mention that you would provide a note to us on a number of issues. We are making our report on Monday and it would be helpful if as soon as possible you could get that information across. Can I thank you and your colleagues today and yesterday for coming and answering our questions so extensively.