Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 63-79)

14 JULY 2004


  Q63 Chairman: Good morning to you and your team. Could you introduce them, please?

  Mr Macpherson: Certainly. I am Nicholas Macpherson. I am Managing Director of Public Services Directorate in the Treasury. On my right is Jonathan Stephens who is Director of Public Spending, and on my left is Chris Martin who is Head of General Expenditure Policy.

  Q64 Chairman: I will start off with PSA targets. The number of PSA targets has fallen from over 250 to 110 to increase focus on the Government's highest priorities. Can an organisation—even one as big as the UK Government—really have 110 "highest" or "key" priorities?

  Mr Macpherson: I think it can. A lot of the evidence around successful organisations, whether in the pubic or private sector, is that the optimal number of targets or objectives is usually around 6/7, that sort of number. If you look across departments as a whole, that is broadly the average. I recognise some departments have slightly more than that (for example, the Department for Education and Skills), but if you look at how those individual targets translate into particular sectors (for example, schools, further education, higher education), the average per public service in that sense is actually quite low.

  Q65 Mr Beard: The spending review has taken place at a time of increased public sector deficits. Are these spending commitments fully consistent with the fiscal rules? How much margin for error against the golden rule does the Treasury have if things turn out worse than expected?

  Mr Macpherson: I think the main point here is that the spending review is not a "fiscal event" to use the jargon. The fiscal forecast was set out in the budget back in March. That set out expenditure ceilings. The plans announced on Monday are consistent with those ceilings, so the fiscal situation is completely unchanged and the margin in relation to the golden rule is the same as at budget time.

  Q66 Mr Beard: At budget time there was a question about whether the revenues coming in would match up to expectations. When we asked these questions of you and your colleagues, at the time of the budget the answer was, "Well, we have special information from the Inland Revenue/Customs & Excise which makes our forecast reliable". Are they still reliable, because they do not seem to be coming in quite as fast as the Treasury anticipated?

  Mr Macpherson: We will be making a new fiscal forecast in the pre-budget report, which will be in November. It would be tempting to comment on the fiscal situation month by month, but, as I say, the fiscal projections remain unchanged from the budget and we remain confident in them.

  Q67 Mr Beard: Has your estimate of when you expect the current economic cycle to end changed?

  Mr Macpherson: No, because this is not a fiscal event, so we would not be getting into that sort of discussion at this point. But if there is a view that the cycle has somehow changed, that would be reflected in future PBRs and budgets.

  Q68 Mr Beard: There are various authoritative views that the gap between potential and the present situation is not as big as was previously anticipated.

  Mr Macpherson: If that were the case—and there is no evidence as far as I am concerned to suggest that it is—it will be reflected in future forecasts.

  Q69 Mr Beard: How do the projected rises in departmental expenditure and annually managed expenditure compare with previous spending reviews?

  Mr Macpherson: The annual managed expenditure forecast, which we set out for the first time in a bottom-up way, is certainly consistent with the budget forecast and I think broadly consistent with projections in previous spending reviews. I cannot remember the precise figure. Is it 1.75% annually managed expenditure?

  Mr Martin: A little over: in this spending review 1.9% period.

  Mr Macpherson: 1.9% is very much in line with growth in recent years. On the growth in the spending review period itself, clearly, as the Chancellor announced in previous budgets and PBRs, growth in public spending on services was always going to decelerate beyond 05/06, as growth in current expenditure as a whole came back into line with broadly the growth of activity in the economy as a whole at around 2.5%. Clearly, the growth in spending is now at a lower rate than it was in SR/02, at least for 06/07 and 07/08, but it is growing at a stable and affordable pace.

  Mr Martin: It is probably worth adding that growth in spending across the spending review period as a whole is broadly in line with that in the first spending review under this Government, the Comprehensive Spending Review in 1998, which was around 3.5%. So there was a period in SR 2000 and SR 2002 where the growth rate picked up to around about 5% and it has now gone back to that growth rate of the first spending review.

  Q70 Mr Beard: Even after recent revisions, the government consumption deflator has been above 6% for the past two years. To what extent does that indicate continued measurement difficulties or inefficient use of resources?

  Mr Macpherson: I think there are serious measurement difficulties. The deflator, in a sense, is a residual here between an estimate of expenditure and output. I think we have discussed in the past there are serious problems around measuring government output. In the old days, you just measured government output in terms of the number of people employed in the public sector and that inevitably resulted in output growing broadly in line with expenditure. There was a move in the late nineties to try to get a better measure of output, which I think was definitely the right thing to do. In trying to do that, the ONS was clearly ahead of most of its equivalent organisations around the world. The challenge is trying to find a measure which is robust. I have mentioned to this Committee in the past that you do get these quite curious effects in the statistics. If you get more teachers and reduced class sizes, that—

  Q71 Mr Beard: We have heard that story several times over.

  Mr Macpherson: Sorry.

  Q72 Chairman: Give us brief answers, please.

  Mr Macpherson: I will.

  Q73 Mr Beard: The Atkinson review was supposed to deal with these questions. Why has that not been published alongside the spending review?

  Mr Macpherson: It will be published. I think the interim report of the Atkinson review will be published next week.

  Q74 Mr Beard: Would it not have been more sensible to have it now?

  Mr Macpherson: Obviously we all want it as soon as we can get it. It is an independent review. I think the interim report is next week and then there will be a final report either at the end of this year or the beginning of next.

  Q75 Mr Beard: Why has a copy of the Atkinson review not been shown to the Statistics Commission, which after all is "the body set up to advise on the quality, quality assurance and priority setting for official statistics"? Why was that not done before going ahead with the revisions to public sector healthcare output, for instance, at the beginning of July?

  Mr Macpherson: The Atkinson review was commissioned by Len Cook, who is the independent national statistician. In that sense he is answerable for this independent review. The Atkinson review is not answerable to the Treasury

  Q76 Mr Beard: You just made reference to £30 billion from asset sales in the period to 2010. Could you tell us what those are?

  Mr Macpherson: This is a long-term objective to 2010. It is £30 billion over seven years. If the past is any guide to the future, where asset sales have been around £4 billion to £5 billion a year, most of those asset sales have been from local authorities, but a reasonable sum, I think £1.5 billion or so per year, has been from central government. So I would expect it to be spread right the way across the public sector.

  Q77 Mr Beard: How does that figure of £30 billion for that period compare with existing plans for asset sales?

  Mr Macpherson: I think it is stretching but achievable. Clearly, current rates of sales are around £5 billion to £6 billion, so, in that sense, it implies much the same sort of trend, but inevitably the more assets you have sold off the fewer there are each year which are available to sell. But actually in terms of the overall public sector asset base, which I think is something like £650 billion—of that order—it is a relatively small percentage.

  Q78 Mr Beard: Is it a substantial jump we are talking about or is it previous plans being lumped together?

  Mr Macpherson: I think it is an ambitious objective. We clearly know—

  Q79 Chairman: It is the same figure as in the budget 2004.

  Mr Macpherson: It is broadly the same. In the past, we have not made a long-term projection of asset sales, it tends to be just over the budget period. So we are clearly very confident about this year, next year. As you get further out, it clearly does become more stretching, but our judgment, looking at the size of the asset base, looking at history, suggests that it is achievable.

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