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 organisationeven one as big as the UK Governmentreally
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
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
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
caseand there is no evidence as far as I am concerned to
suggest that it isit 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
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
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
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,
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
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
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
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
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 billionof
that orderit 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.