Select Committee on Treasury Third Report


3 Public Sector Finances

The fiscal balance

The framing of the golden rule

26. On the Treasury's forecasts, fiscal policy tightens going forward and the public finances are "on track to meet the golden rule"[81] (which focuses on the current budget judged across the cycle). The Pre-Budget Report thus confirms that the Treasury expects to see the "cyclically adjusted surplus, which allows underlying or structural trends in the indicators to be seen more clearly by removing the effects of the economic cycle….returning to balance in 2006-07." [82]

27. Given the central role it has acquired in UK fiscal policy discussion in recent years, the Committee was nevertheless surprised to find a degree of uncertainty among experts about exactly how the "golden rule" was calculated. In the Pre-Budget Report 2002, for example, the section on the golden rule states "the projections show that the Government is firmly on track to meet the golden rule. Over the period of this cycle, from 1999-2000 to 2005-06, the current budget is comfortably in surplus, with an accumulated surplus of £46 billion."[83] Similarly in the 2003 Budget Statement it was announced that "we meet our golden rule over the cycle….We will not only achieve a balance but achieve an estimated surplus at £32 billion."[84] The Pre-Budget Report, however, appears to change the emphasis in assessing the golden rule away from the simple summation of cash figures for the current surplus to a summation of the current surplus each year as a percentage of GDP, stating that "the projections show that the Government is on track to meet the golden rule, on the basis of cautious assumptions, with an average annual surplus on the current budget over the whole cycle of around 0.2% of GDP, equivalent to a margin or surplus in this cycle of £14 billion."[85] As both Mr Chote[86] and Mr Walton[87] noted, this apparent change in definition of the golden rule, from the average current surplus over the cycle to the average current surplus expressed as a percentage of GDP over the cycle, effectively takes the surplus over the cycle from £4 billion to £14 billion. Mr Balls contended that "the accusation that we have changed our methodology is just untrue"[88] and the way the golden rule was calculated was clearly referenced in "footnote 8 on page 34"[89] of the 2003 Pre-Budget Report. The Committee accepts that the substance of the golden rule has not changed, but differences in phrasing in recent Treasury documents may have been a source of some confusion. We recommend that the presentation of the Government's progress towards meeting the golden rule should be standardised and be based on the average annual surplus of the current budget as a percentage of GDP.

28. A lack of clarity was also evident in the debate about fiscal policy and how the golden rule applies to the so-called "cautious case". The Pre-Budget Report states that "the average surplus on the current budget in the cautious case is no longer positive, though the government is on track to meet the golden rule."[90] Putting aside the issue of whether the discussion should actually be focussing on "the average surplus on the current budget as a percentage of GDP", our economic experts found this statement confusing.[91] In reality, Treasury officials confirmed to us that "the cautious case has never been part of the framework of meeting the golden rule"[92]. The Chancellor told us that the "cautious case" meant that he had "deliberately over-achieved [the golden rule] in the early phase of [the cycle]. We did that by instituting a cautious case, which was put in to ensure that in the early phase of the cycle, when you did not know the path to output and revenues, you over achieved."[93] The Treasury should make the role of the cautious case in the fiscal planning process through the cycle clearer in the Budget and Pre-Budget Report documentation.

29. There is, in addition, an issue as to whether, in purely economic terms, a small breach of the golden rule is significant. Several of the expert witnesses we questioned suggested that minor breaches were of little economic importance.[94] The way in which the fiscal rules are expressed may need further development given the considerable amount of evidence the Committee has heard in the course of this inquiry about the margin of error around fiscal projections.[95] There is a danger that policy will be excessively influenced by the danger of "very small breaches which are due to very small shocks in the economy which, with the best will in the world, the Chancellor could not actually anticipate very easily."[96] To be certain of meeting the golden rule as currently framed, the Chancellor effectively needs to aim for a current surplus over the cycle even if the intent of the golden rule is simply that Governments should not borrow to fund current spending.

The fiscal position

30. The Pre-Budget Report indicates that the estimated net borrowing requirement for 2003-04 has risen from £27.3 billion at the time of the Budget to £37.4 billion in the Pre-Budget Report,[97] and for 2004-05 it has risen from £24 billion to £31 billion. In both cases the bulk of the deterioration in the public finances can be traced to a weakening in the current surplus, rather than any changes in net investment. The current surplus for 2003-2004, for example, has deteriorated by £10 billion since the Budget. The Treasury's view nevertheless remains firmly that the public finances remain "on track to meet the golden rule"[98] and the Pre-Budget Report projects that the annual surplus on the current budget will be back in balance by 2006-07.[99]

31. In the 2003 Budget and 2002 Pre-Budget Report documentation the Treasury included a table showing the factors underlying changes in projections of public sector borrowing.[100] These disaggregated the changes into those attributable to the automatic stabilisers, other non-discretionary factors and discretionary measures including policy decisions in the respective PBR and Budget. We were surprised that there was no table contained in the 2003 PBR breaking down the changes in public sector borrowing since the previous forecast between those attributable to the automatic stabilisers, non-discretionary factors and policy decisions. We ask the Treasury to re-introduce such a table in the Budget (and future Budgets and PBRs).

32. When questioned about the £10 billion overshoot in borrowing in 2003-04, Treasury officials suggested "that the difference between our forecast [at the time of the] Budget and what has happened now is in line with the standard error for fiscal forecasting over the last 20 years… and it is within the line of the normal uncertainties".[101] Treasury documentation itself suggests average absolute errors of 1.1% of GDP in deficit forecasts one year ahead and 1.6% two years ahead.[102] On the basis of these error margins, Mr Weale suggested "it is probably fair to say that the Chancellor's own forecast implies that the chance of breaking the golden rule in the current cycle is between one in four and one in five".[103] Professor Spencer, meanwhile suggested that on a slightly more cautious economic view than the Treasury, his view was that in 2005-06 there was "a 50-50 chance of breaching the golden rule, or in the following year, with a much greater probability of violation."[104]

33. It seems reasonable that the margin allowed for error within the Chancellor's fiscal arithmetic should narrow as the cycle progresses. As Mr Chote pointed out to the Committee, "there is no case for overachieving the golden rule ex post unless you are near the debt to GDP ceiling in the sustainable investment rule and you want to create some room for some more investment. So, in that sense, the Chancellor may be taking the view that as we are now four-and-a-half years into the cycle, you do not need quite as much caution at this stage as you would have done when you started out." [105] As Mr Chote went on to point out, however, "the debate is, how much caution do you think is appropriate at any given point in the cycle?" and the view of many of our expert witnesses was that there was now very little room for any further slippage in the fiscal arithmetic.

34. The IMF has expressed similar concerns about the robustness of the Chancellor's fiscal projections to those voiced by the Committee's experts witnesses. After noting that "the PBR sees a turnaround in the public finances even in the absence of policy actions" it concluded that "We see significant risks to [the Treasury's] projections. On unchanged policies we see only a small improvement over the forecast horizon, with the deficit about 1 percentage point of GDP above the government's projections by 2006/07….in this scenario the risk of breaching the golden rule is not trivial."[106]

35. In our report on the last Budget we observed that the margin for error around the Government's fiscal position was narrowing, but the Committee still felt able to conclude with some confidence that "the Chancellor is on course to meet the golden rule during the current cycle."[107] While the extra borrowing envisaged since the time of the last Budget means that there is now less slack, the Government remains on track but will meet the golden rule only if its central forecasts for economic growth, tax revenues, spending, and the likely end of the current cycle are met. The Government will have to remain mindful of the consequences of any further unplanned increases in borrowing arising from any shortfall in planned tax revenues.

36. The sustainable investment rule states that "public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level. Other things being equal, net debt will be maintained below 40 per cent of GDP over the economic cycle."[108] The Treasury's forecasts in the current Pre-Budget Report continue to suggest that the sustainable investment rule will be met by a wide margin.[109] However, the EU recently noted in its Autumn Forecasts that "the ratio of gross debt to GDP….will be close to 40% by the end of 2005."[110] Indeed on a Maastricht basis, not used in assessing the sustainable investment rule, the UK debt/GDP ratio rises to 41.5% by 2008-09 on the current Treasury projections.[111]

37. While the fiscal arithmetic continues to meet the golden rule and the sustainable investment rule on the Treasury's central forecasts, the Treasury's projections also show that on a Maastricht basis the public sector deficit is now expected to reach 3.3% of GDP in 2003-04,[112] breaching the Maastricht limits. The Chancellor told us that the UK's fiscal deficit as a percentage of GDP remains relatively modest by current international standards and, on current projections, falls more rapidly going forward than in many other major economies. He suggested that "fiscal policy [has been] supporting monetary policy during a period when there has been a world downturn and to have a borrowing requirement of 3.4 per cent is perfectly affordable, and indeed our plans are perfectly affordable."[113] The IMF has noted that "the widening of the deficit has played a useful countercyclical role, and public debt remains at a low level."[114] However, the IMF goes on to argue that "a gradual decline in the deficit is now appropriate. This is not only to meet the fiscal rules, but also for broader reasons: strengthening fiscal fundamentals (at present the cyclically adjusted primary balance is in deficit involving, over time, a rising stock of debt): and reducing the burden and risks for monetary policy by limiting the interest rate increases and thus lowering the risk of a hard landing for house prices." The Committee notes that the UK's fiscal position remains comparatively strong internationally and should remain so if it strengthens as planned through economic recovery.

End of year fiscal report

38. The 2003 PBR saw the publication of the second annual End of year fiscal report.[115] The focus of the report is on performance against the fiscal rules and fiscal policy objectives, with an analysis of the forecasts and outturn for the year ahead forecasts published in Budget 2001 and Budget 2002. The differences between the forecasts and the outturn borrowing figures are compared against historic performance. The End of year fiscal report should analyse the Treasury's performance in the preceding two years against its forecasting record separately for receipts, and different portions of expenditure. It should also analyse the forecasting records of previous Pre-Budget Reports.

Tax receipts

39. Tax receipts in 2003-04 are now expected to be £422.8 billion, £5.5 billion weaker (see Table 2) than forecast in the 2003 Budget. This shortfall is expected to occur despite the fact that the economy is forecast to grow by 2.1% in 2003, within the forecast range at the time of Budget 2003 of 2 to 2½%. Net taxes and social security contributions are now expected to account for 35.9% of GDP in 2003-04, compared to a forecast of 36.3% in the 2003 Budget.[116] The Treasury attributes the shortfall in receipts to the fact that "growth in wages and salaries in 2003 has been lower than projected, reducing revenues from income tax and NIC", with these factors partly off-set by higher than projected VAT revenues and a higher than assumed rise in equity prices since the Budget.[117]

Table 2: Changes in current receipts since Budget 2003 (£ billion)
 Estimate

2003-04


2004-05

2005-06

2006-07

2007-08
Effect on receipts of non-discretionary changes in:
Economic deteminants audited by the NAO ½22
of which: Equity price assumption ½1
GDP Components-4-5½ -5½-5-4
of which: Wages and Salaries -3½-4-4 -3½-3
Consumers' expenditure -1 -1
Other-2-101
Total before discretionary changes -5½-4½-4½ -2½
Discretionary changes0 00½ ½
Total change -5½-4-4 -20

Source: HM Treasury Pre-Budget Report 2003, page 215

40. Mr Cunliffe explained that while "the growth forecast is on track, the composition of growth has been different from the way it was forecast and in particular growth has happened in less tax rich parts of the economy than we forecast".[118] Deutsche Bank believed that while "receipts growth is expected to undershoot in the current fiscal year, it can not be attributed to disappointing economic growth…but rather the nature of that growth i.e the Treasury has been too optimistic about the level of receipts the economy is able to generate".[119] Mr Chote told us that in "the same way that trains have the wrong sort of snow" there has been "the wrong sort of growth", with average earnings "growing less quickly than expected" being one reason why income tax revenues had been lower than expected.[120] In recent years a decline in receipts as a proportion of GDP has also occurred in other large economies including the US, where tax receipts as a proportion of GDP, having reached 20.8% of GDP in 2000, declined to 17.9% of GDP in 2002 and a projected 16.5% in 2003. Some of this weakness in US revenues reflects the introduction of the 2001 and 2003 tax cuts but other factors represent structural deterioration. The Congressional Budget Office has published some research looking at possible causes of this reduction in tax revenue and why it came as a surprise.[121] Receipts have come in weaker than expected despite growth being on target for the Treasury's forecast. The factors behind this decline in tax receipts may be structural or may be cyclical. The Treasury's projections for tax revenues up to 2008-09 suggest that it does not see the problem as predominantly a structural one. This is contrary to the view of some of our expert witnesses. A shortfall in expected receipts for a given level of GDP is a phenomenon that has also occurred in other countries including the USA, although compared to countries in continental Europe the UK's public finances remain in good shape. In the USA research has been undertaken into why revenues as a percentage of GDP have declined. We recommend strongly that the Treasury undertake similar research in the United Kingdom and publish it as soon as possible.

41. The 2003 PBR forecasts assume that net taxes and social security contributions as a percentage of GDP will rise from 35.9% in 2003-04 to 38.2% in 2008-09, the highest since the early 1980s. The Treasury explains that the increase is largely driven by "normal fiscal drag; the recovery of financial company profits; and strong growth in tax receipts such as VAT refunds which have no overall impact on fiscal aggregates"[122] As Table 3 indicates the main taxes driving the projected rebound in receipts are income tax and corporation tax. Income tax receipts as a share of GDP are expected to rise over the forecast period from 10.7% to 11.6%. Non-North Sea corporation tax receipts as a share of GDP rise from 2.3% to 3.2%.

Table 3: Current receipts as a proportion of GDP
Current Receipts as % of GDP Outturn Estimate
 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Income Tax10.710.7 10.911.111.3 11.511.6
Non-North Sea corporation tax2.5 2.32.73.0 3.13.23.2
Tax Credits-0.3-0.4 -0.3-0.3-0.3 -0.3-0.3
North Sea Revenues0.5 0.40.30.3 0.30.30.2
VAT6.06.2 6.16.16.1 6.16.1
Excise Duties3.63.5 3.53.43.4 3.33.3
Social Security Taxes6.1 6.56.76.7 6.86.86.8
Other6.66.6 6.76.97.0 7.17.2
Net Taxes & Social Security Contributions 35.635.936.7 37.337.738.0 38.2

Source: HM Treasury Pre-Budget Report 2003, page 220

Chart 1: Tax-GDP ratio[123]


Source: HM Treasury Pre-Budget Report 2003, page 221

42. Professor Spencer believed that "the behaviour of taxes on income suggests that the surge in the run up to [2001] was the result of special factors like the stock market boom that are not likely to be repeated". He believed the Treasury's forecast was based on the view that the "tax flows of the millennium represent the norm to which we will soon return".[124] Mr Weale agreed that the Treasury "were treating what seemed at the time a period of great revenue buoyancy as a period of normality to which the economy is expected to return" adding that "even if such trends exist, the projection of them forward is less than prudent."[125] Mr Walton was more optimistic, suggesting that there was some justification for the forecast, in that the depression in the tax ratio over the last year or two had been "partly for some special reasons [some of which] will tend naturally to come back."; but he thought the Treasury was a "bit optimistic" in the medium term profile for the tax ratio.[126] In regard to the risks to the public finance projections the Treasury highlights risks to global and domestic growth, similar to those surrounding their growth forecasts.[127] There is no discussion of risk to receipts as a percentage of GDP or of the extent to which the receipts in 2000 may have been exceptional. We note that the Treasury continues to project a rise in the ratio of tax receipts to GDP over the forecast horizon from 35.9% in 2003-04 to 38.2% in 2008-09. We recommend that the Treasury includes in future Budgets a discussion of the risks underlying this tax forecast. This assessment should be informed by the research we recommend the Treasury carry out at paragraph 40 above. This will be an opportunity for the Treasury to explain in more detail the assumptions on which it makes its tax forecasts.

Income tax

43. Income tax receipts expected in 2003-04 have been reduced by £3.3 billion relative to the forecast in Budget 2003. Income tax receipts have now been weaker than forecast in the last three Budgets. This had followed a period where income tax receipts had been consistently higher than forecast since 1997. Back in Budget 2001, the Treasury put forward a number of possible reasons for this overshoot, including changes in the earnings distribution with "above average increases at higher earnings levels" and "the introduction of self-assessment" having a delayed effect of increasing PAYE payments; it stated that "other things being equal, the unexpected increase in income tax receipts is unlikely to be unwound in the future" and the 2001 forecasts carried these increases forward.[128] Since 2001, income tax levels have been consistently below those projected by the Treasury. HSBC have noted that these shortfalls have occurred "despite the continued fall in unemployment"[129] relative to the consensus forecast. Also, as shown in the End of year fiscal report, only a small part of these shortfalls can be attributed to slower growth in overall wages and salaries.[130]

44. The Treasury is now expecting an increase in income tax receipts of £6.2 billion in 2003-04 followed by an increase of £9.5 billion (around 8%) in 2004-05. Professor Spencer told us that "even if earnings growth does move back to the sort of 4/4.5 per cent range which would begin to pose problems for the Monetary Policy Committee, and even if there were a favourable shift in the earnings distribution, it is still very hard to see 8 per cent growth in income tax".[131] The Treasury told us that of the increase "around two-thirds come from average earnings growth at its long-run average [growth] of wages and salaries. We expect some to come from recovery in the financial sector company profits linked to bonuses. Some of that will come from higher interest rates leading to higher tax on interest income. Finally there is fiscal drag…in the equation".[132] Mr Lewis told us that the single biggest driver of the increase in the overall effective rate of income tax was "the assumption [the Treasury] makes about the return of income growth of higher rate tax paying individuals, particularly through things like city bonuses, which were a big feature of the late 1990s and were associated with the growth in financial company profits".[133]

45. Mr Chote noted that the "effective higher rate threshold (i.e. the basic rate limit plus the personal allowance) has fallen from 161 percent of average earnings in 1996-97 to 143 percent in 2003-04, which has seen the number of higher rate taxpayers rise from 2.1 million to 3.3 million. If we were to assume that earnings rose by 2 percent a year on top of inflation (slightly less than the trend rate of increase in productivity), then the effective higher rate threshold would drop to 129 percent of average earnings over the next five years. This would increase the number of people paying higher rate income tax to around 4.2 million by 2008-09". The Chancellor told us that people "should be cautious about years ahead which depend on a whole series of assumptions, including about average earnings that were certainly not true last year and are certainly not true this year"[134] and that "the reasons that income tax will rise are not simply fiscal drag; they depend on what is likely to happen to bonuses; they depend on the number of people likely to be in work; they depend on the interest that is paid and the tax receipts from the interest that is paid".[135]

46. Since the projection forward of an improved relationship between income tax receipts and GDP in 2001, receipts have consistently come in under the Treasury's forecast. We note that the Treasury's projections of income tax receipts, which rise as a share of GDP, imply increasing numbers of people paying income tax at the higher rate. We would welcome more information on the proportion of salaries paid in annual bonuses and how the Treasury is forecasting them going forward. To improve our understanding of the 2004-05 forecasts we ask the Treasury to publish the components of the forecast in greater detail differentiating between PAYE, self-assessment, bonus payments and income at standard and higher rates.

Tax forecasting

47. In the light of the change between economic growth and revenues in the current year we asked the Treasury whether they would consider publishing more information on their tax forecasting process. Mr Cunliffe told us that "models are not, if you like, mechanical machines where you put something in at one end and it comes out the other. They are a lot more complex than that." But he told us that the Treasury "would be very happy to explain how we model particular taxes".[136] The End of year fiscal report reviews the outturn receipts with forecasts in previous budgets but the focus is on "retrospective analysis" which, as the Treasury states, "is important as it can highlight shortcomings of particular forecasting methods, and suggest ways in which the forecasting performance can be improved" as well as "helping to ensure transparency".[137] To improve transparency and aid the Committee and other outside observers to understand the forecasts for tax revenue, we recommend that the Treasury should publish details of how the receipts from the major taxes are forecast, including wherever possible the model used and all the economic determinants that feed into the model.

Public expenditure

48. The Treasury's spending plans continue to call for total managed expenditure[138] to rise more rapidly than the broader economy. After an increase of 7.3% in 2002-03, current plans forecast a rise in expenditure of 9.8% in 2003-04, followed by a reduction in the growth rate to 5.8% in 2004-05. Total managed expenditure in 2003-04 is now forecast to be £460.2 billion, some £4.5 billion more than expected at the time of the Budget. This increase mainly reflects the carrying forward of £2.5 billion of the special reserve used to meet the costs of conflict in Iraq and the UK's other international obligations.[139]

49. Annually managed expenditure is now forecast to be £2.1 billion higher than in the 2003 Budget. Mr Chote told us that the main contributory factors were "higher than expected take-up of the child and working tax credits, higher expected debt interest payments, higher social security benefit spending…and accounting adjustments". He also noted that "the AME margin - the contingency reserve within annually managed expenditure has now been reduced to £0.3 billion in 2003-04 and to zero in the following two years".[140] We note that this is the lowest the AME margin has been set since the 1998 Comprehensive Spending Review[141] (although there still remains a reserve in the three year limits for Departmental spending). Although Mr Stephens for the Treasury told us that the AME margin "had been drawn down. In that sense it is fulfilling its purpose",[142] we note that it is unusual to provide no margin at all for annual managed expenditure in future years. An explanation should be given as to why it is envisaged that, in contrast to previous practice, no AME margin is provided for the next two financial years.

The division between current spending and investment spending

50. It is important in assessing the public finances that government expenditure is correctly allocated between current spending and capital spending. On 12 December the Rail Regulator published his 2003 review of access charges payable by train operators to Network Rail for the five years beginning 1 April 2004. The Regulator reported that "Ten days [before the publication of the access charges review] the DfT and the SRA made a joint submission to the Regulator in which they explained that for accounting reasons it would be desirable for the SRA in future to increase the amount of money that it pays in grant to Network Rail, allowing access charges to be set at a lower level". These accounting reasons were explained in a footnote as "Specifically the fact that, although higher access charges would be used to support capital expenditure by Network Rail, an increase in franchise support would be classified as current expenditure and the Government's rules prohibit borrowing to cover expenditure over the economic cycle."[143] The Regulator considered it "regrettable that such fundamental issues should be raised at such a late stage in the review" given the "considerable efforts" he had made "to establish the SRA's financial position, in accordance with his statutory duties".[144]

51. Mr Stephens, Director of Public Spending at the Treasury, told us that the allocation of spending was "determined according to national accounts principles and decided ultimately by the ONS" and that "there are switches that go on, on a regular basis that reflects changes in the substance, in the nature of the spend or changes in the view that professional statisticians take of that spend".[145] Mr Stephens told us that what the Regulator had set required "a substantial increase in capital expenditure by Network Rail" and that it was "clearly desirable that the accounting form should follow the substance [of the expenditure]".[146] The Chancellor told us that there was "a dialogue between the Regulator and other bodies" but that "decisions about the funding of Network Rail are a matter for the Regulator".[147] We note the Regulator's concern at officials' late intervention. It is essential that the allocation of public spending between capital and current expenditure is carried out in a way that reflects the substance of the spending. Government funded increases in capital expenditure on the railways must be correctly treated. We request that the Treasury provides further information and transparency in regard to the classification of current and capital spending.

Measuring real government output

52. A principal concern for the Government is the extent to which increases in spending are feeding through into increased provision and quality of services combined with value for money, rather than higher costs. Budget 2002 announced significant increases in public spending and the Treasury notes that "The composition of this growth between increases in real output and prices has important implications for evaluating the Government's drive to improve public services".[148] The Treasury also notes that "in the second and third quarters of 2003, nominal government consumption was up about 11¾ per cent on a year earlier, split into measured real growth of just around 4 per cent and an increase in the implied deflator of 7½ per cent - well in excess of input cost inflation."[149] Mr Cunliffe told us there was a real issue about "the measurement of outputs in the public sector; about capturing quality increases in outputs, about capturing the full range of outputs and about capturing investment in future capability" and that the 7.5% measure of public sector inflation "falls out of a measurement that we do not think is accurate".[150] To investigate these problems Sir Tony Atkinson had been asked by the National Statistician to undertake a review of the future development of measures of government output, productivity and associated price indices so as to advance methodologies.[151]

53. The IMF recently noted that "current plans involve sharp increases, [in expenditure] with associated risk of inefficiencies". They welcomed the initiative to "improve the measurement of output in public services" but noted that "continuing increases in indicators of public sector costs, particularly in areas such as transportation, where measurement problems are less significant, would be a cause for concern as they could indicate supply bottlenecks".[152] Mr Walton, referring to some work carried out by Goldman Sachs on public expenditure, told us that some of the increases in costs were "catch up; in particular wage costs were held down very substantially in the period from the mid 1980s through to the mid 1990s, and that at some point had to be unsustainable" but "what there has been, as far as we can tell from the data, is a big increase in non-wage costs". He added that the review was "very welcome".[153]

54. The Chancellor told us that "the existing indicators which have been used for many years do not reflect properly the quality improvements which are taking place. If a fall in class sizes reduces productivity, by definition that is a problem because the quality of teaching is undoubtedly higher".[154] The Chief Economic Adviser added that "if you take all of the improvements in school buildings in the last six or seven years, all those new buildings do not count as output either because it does not affect the number of pupils who are in the schools. The fact that schools are better equipped, they have got facilities, are safe to be in and clean, that does not count at the moment in the way in which output is measured"[155] This Committee attaches the highest possible emphasis to ensuring that any increases in public expenditure are delivered efficiently and result in improved outcomes, rather than in cost inflation. The current measure of government output does not adequately reflect improvements in quality and is therefore a bad measure of public sector productivity. It is absurd that a reduction in class sizes, for example, should count merely as an increase in cost and a reduction in productivity, with no account taken of any improvements in the quality of education. We welcome the Atkinson review of measures of government output, productivity and associated price indices. We note that the preliminary findings of the review are to be published by July 2004, in time to inform the 2004 Spending Review.

55. Goldman Sachs recently noted that "if real public sector output is in reality much higher than official data imply, this would also mean that aggregate GDP growth has been higher and closer to trend than the Treasury believes".[156] Mr Cunliffe told us that the "real output" for the increase in government spending was being under-estimated and to the extent that "real outputs are higher, that would affect the growth in the economy".[157] In the light of the review of the measurement of government output, the Treasury should assess the extent to which any under-estimation of the real rate of growth of public sector output could affect estimates of GDP growth and the output gap.


81   Pre-Budget Report 2003, para B7, p 202 Back

82   Pre-Budget Report 2003, para B7, p 202 Back

83   Pre-Budget Report 2002, Cm 5664, para B7, p 182 Back

84   HC Deb, 9 April 2003, col 284  Back

85   Pre-Budget Report 2003, para B7, p 202, Back

86   Ev 63-64 Back

87   Q 26 Back

88   Q 295 Back

89   Q 295 Back

90   Pre-Budget Report 2003, para 2.74, p 39 Back

91   Q 35ff. Back

92   Q 257 Back

93   Q 295 Back

94   Q 93 Back

95   see para 32 below Back

96   Q 40 Back

97   Pre-Budget Report 2003, Table B2, p 204 Back

98   Pre-Budget Report 2003, para B7, p 202 Back

99   Pre-Budget Report 2003, Table B2, p 204 Back

100   See Budget 2003, Table 2.3 p 28, and Pre-Budget Report 2002, Cm 5664, Table 2.4, p 25 Back

101   Q 93 Back

102   HM Treasury End of year fiscal report, December 2003, Tables 2.6 and 2.7 and Charts 2.4 and 2.5  Back

103   Ev 74 (para 9Back

104   Ev 72 Back

105   Q 38 Back

106   IMF, United Kingdom - 2003 Article IV Consultation, 18 December 2003 Back

107   Seventh Report of Session 2003-03, The 2003 Budget, HC 652-1, para 49 Back

108   Pre-Budget Report 2002, Cm 5564, para 2.7, p 15 Back

109   Pre-Budget Report 2003, Table 1.1, p 4 Back

110   European Commission Autumn Forecasts Back

111   Pre-Budget Report 2003, Table B1, p 202 Back

112   Pre-Budget Report 2003, Table 2,6, p 33 Back

113   Q 266 Back

114   IMF, United Kingdom - 2003 Article IV Consultation, 18 December 2003 Back

115   HM Treasury December 2003 Back

116   Pre-Budget Report 2003, p 221 Back

117   Equity prices have risen by around 20%; the NAO-audited assumption at the time of the 2003 Budget was that they would only rise in line with money GDP Back

118   Q 93 Back

119   Deutsche Bank, Focus Europe, 8 December 2003 Back

120   Q 57 Back

121   For example, see Congressional Budget Office revenue and tax policy briefs, Where Did the Revenues Go?, and Revenue projections and the stock market, www.cbo.gov Back

122   Pre-Budget Report 2003, para B59, p 220 Back

123   Net taxes and social security contributions as defined in Table 3 Back

124   Ev 70 Back

125   Ev 74 (para 13) Back

126   Q 3 Back

127   For risks surrounding the public finance projections, see Pre-Budget Report 2003 paras B21-B23; and for risks surrounding economic projections, see paras A16-A18 Back

128   Budget 2001 paragraphs C37-C41 Back

129   HSBC, World Economic Watch, 5 December 2003 Back

130   HM Treasury, End of year fiscal report, December 2003 pages 21-23 (para 3.10 and tables 3.2-3.3) Back

131   Q 63 Back

132   Q 126 Back

133   Q 135 Back

134   Q 323 Back

135   Q 321 Back

136   Qq 153-156 Back

137   End of year fiscal report, HM Treasury December 2003, pp 1-4, p 30 Back

138   Total Managed Expenditure (TME) is the sum of Annually Managed Expenditure (AME - mostly social security payments and debt interest payments) and Departmental Expenditure Limits (DELs - the spending limits for departments agreed under the periodic Spending Reviews). Back

139   Pre-Budget Report 2003, para 2.57, p 32 Back

140   Ev 63 and Ev 64 Back

141   Figures for the previous AME margins are shown in Table 2.4 page 29 of the 2003 IFS Green Budget Back

142   Q 172 Back

143   Rail Regulator, Access Charges Review 2003: Final conclusions para 18 Back

144   Rail Regulator, Access Charges Review 2003: Final conclusions para 19 Back

145   Q 177 Back

146   Q 180 Back

147   Qq 296-297  Back

148   Budget 2003, p 184 Back

149   Pre-Budget Report 2003, Box A4, p 184 Back

150   Q 157 Back

151   Pre-Budget Report 2003, Box A4, p 184 Back

152   IMF, United Kingdom-2003 Article IV Consultation, 18 December 2003 Back

153   Q 73 Back

154   Q 343 Back

155   Q 345 Back

156   Goldman Sachs, European Weekly Analyst, 12 December 2003 Back

157   Q 161 Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2004
Prepared 21 January 2004