Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 180-199)

15 JULY 2004


  Q180 Mr Beard: At the time of the Budget translate when we were questioning your officials about the rate at which revenue was coming in and the fact that several commentators had questioned whether revenue could be at that level, the answer was, "We have got good contacts with Inland Revenue and Customs and Excise, and they know the detail and therefore we know what is happening", but at present the taxes are still coming in below what was expected. Are you still confident that the revenues can match the forecast?

  Mr Brown: No; I think that is not strictly right. What has happened in the last few months, and I think I did indicate this in the Budget, is that two things have changed. One is that income tax revenues have started to rise again as a result of bonuses returning in the city. I think it is sometimes forgotten that bonuses are a big source of extra income tax. Last year, that is the year, the two years actually of the world downturn, bonuses were not being paid. Now they are being paid. So there has been an increase in the amount of money coming from income tax as a result of that—not because the wages have changed but because people are getting bonuses and they are paying income tax on that. The second thing that is changing is on the corporate tax side. We have had a debate with this Committee about this before. The Institute of Fiscal Studies published their assumptions about corporate tax, but they are based on an entirely different set of assumptions, because they do not have the actual information about what is happening to companies as the Inland Revenue does. So the Inland Revenue is in a position, looking at the individual companies, without us naming them publicly, looking at the position and is able to do a bottom-up and aggregate of what revenue is both coming in and an estimate of what is likely to happen in future years. Of course, as far as corporate tax revenue, there is a steer more towards the financial sector than in the past because of the changes in the balance between manufacturing and finance. So a lot of things are happening at the grass roots, so to speak, of the corporate sector, and we are therefore in a better position, I think, to know what is the likely projection of revenues for future years. I think we discussed this during the Budget debates when I came to the Committee, but on these two points, income tax revenues as a result of bonuses and corporate tax returns, things are moving and moving forward.

  Q181 Mr Beard: Do you still forecast, for the purposes of assessing performance, the economic cycle will be 2005-06, as you have just mentioned, because the Bank of England and other advisors have suggested it might be foreshortened to end earlier. If it is, does that affect your ability to meet the golden rule in the subsequent cycle?

  Mr Brown: We can give you a note of this, but I would have thought we would have been in a better position. The fact of the matter is we are holding to our forecast as things stand. I shall update it when we come to the Pre-Budget Report. What I can tell you, however, definitively is that we are meeting our fiscal rules and will continue to do so[1]

  Q182 Mr Beard: Yes, but just if it happened, if they were shortened?

  Mr Brown: There could be a lot of debates about it. My instinct—I have not looked at that specific point in detail—is that there will be no problem in meeting our fiscal rule on both projections, both times, before the end of the cycle.

  Q183 Mr Beard: The Institute for Fiscal Studies have noted that during the previous two Spending Reviews you were able to revise spending funds upwards to release resources for items such as the Child Tax Credit and the Child Trust Fund, but there is no margin for error against the golden rule very much. Would you agree the scope for such favourable issues during this period covered by the 2004 Spending Review is very limited?

  Mr Brown: We will meet our fiscal rules, and therefore there is no question of additional spending if we were to go beyond our fiscal rules, and I am not planning for it at all. I ought to say two things about the financial figures that you are getting. The first is our reserve has been severely stretched by the major commitments we have made in Afghanistan and Iraq, and therefore, while our reserve is relatively low compared with historic figures, that is because we are giving departments three-year budgets and to some extent they should be operating their own margin for caution. The scale of expenditure in Iraq and Afghanistan has been in the order of £4.5 billion, and, on top of that, we have had major security requirements to be met that could not have been anticipated clearly enough before 11 September and, therefore, in total, the additional expenditure simply on Iraq, Afghanistan and security is £6.5 billion, and we have had to be able to provide for that. At the same time—can I make this other point, which is the reason why you have drawn attention to the fact about what happened in previous spending rounds—when we calculate unemployment and the costs of unemployment and therefore the costs of benefits, we do so on the basis of the outside advisors giving us their estimate of what should happen; but if people think the figure will be lower, we do not calculate any gain from that into our figures. So, looking forward, let us say unemployment were to fall by 100,000 or 200,000, the gains to the social security budget from there being a lower cost for unemployment is not in our figures at the moment. In previous governments that was done, but it became the subject, I think, of people making unrealistic estimates about jobs. Because we audit our figures and because we want, therefore, to have a margin with no room for improvement—that is necessary—as far as unemployment is concerned we are not counting these gains, that might accrue to us as a result of unemployment being lower over the next period; so there is this additional margin that comes from running a successful economic policy which is not included in our figures at the moment.

  Q184 Mr Plaskitt: Can we look at the pattern of spending for the departments, Total Managed Expenditure. In the first couple of years you were in the Treasury there was hardly any real growth at all in departments as we stuck to inherited spending plans. Then, from about 2000 onwards, departments had to find their accelerators as the real rate of growth in their department, or spending, rose quite strongly. Now you are asking them to find the brake. Do you think they can make that switch?

  Mr Brown: I am sorry. I did not hear that last question?

  Q185 Mr Plaskitt: As I was saying, departments had to find the accelerator on their spending plans as it rose from virtually zero, in real terms, to five and now 6%. Now, looking forward on the Spending Review, you are forecasting rates of growth in total spending to fall to about a third of the current rate. So they are going to have to find the brake now. Do you think departments can make that switch?

  Mr Brown: First of all, you are absolutely right, the first two years people said we would not stick to our spending limits, and we did, and therefore spending did not rise; and that was a point at which we were examining what we could do with the departmental plans that led to the Spending Review of 1998. The second period of our government has been a continuous growth in investment in all the vital public services. We are talking about, since 1998, a decade of investment, right through to 2008, a decade of rise in investment where on average I think you will find that educational expenditure will be going up by 5% a year in real terms, that is after inflation, transport by 5% in real terms, that is after inflation, and, of course, Health Service expenditure, I think, by something in the order of 6%. That is quite different from previous historical examples of what has happened to health or education. I think the average for health over 30 or 40 years was 3%; it is now 6% under our government. It is true that in the second part of this period the rate of growth of public expenditure as a whole has become slower, and that is absolutely right because we wanted to get the rate of growth of spending, after making up this huge under-investment, to a level that we think is sustainable over a period of time. So in the last two years of this spending period the rate of growth of public spending as a whole is something in the order of 2.6%, I think, 2.6 or 2.8, but, because of the savings on debt and unemployment, the rate of the growth of departmental expenditure is 4%—so it is not a third of the growth rate; it is very similar to the growth rate of the last period—and what we are also saying to departments: "If you can get these efficiency savings which we are demanding of you, and we have agreement with the departments on them, then at the front-line, if you can transfer resources from headquarters, so to speak, to the front-line, then, on top of that 4% average that departmental expenditure is growing over the next three years, you can get 2.5% going up to 6% in terms of growth in the amount of money available for front-line services." That is a prize for departments which would allow them to maintain these historically high growth rates for spending on front-line services in health and in education, that is at our schools and our colleges, in transport and, of course, in housing and we are putting in 20,000 new communities support officers. So I would say that the plan was actually freeze for the first two years while we sort out the public finances, then fo 10 years, a decade of rising investment in our public services.

  Q186 Mr Plaskitt: You are saying that assets sales identified by departments are going to help support the levels of spending in the forecast period. Is that correct?

  Mr Brown: I would say to you that I will report on this in the Pre-Budget Report about asset sales. Some of these asset sales would be in addition to what we forecast.

  Q187 Mr Plaskitt: In the 2004 Budget you indicated asset sales would raise £24 billion. This statement raises that figure to £30 billion?

  Mr Brown: That is, in my view, realistic.

  Q188 Mr Plaskitt: Is that spread across all of the years out to 2010, or is the additional £6 billion you have identified front-loaded in the period?

  Mr Brown: That is what I will report on in the Pre-Budget Report, but basically we are getting an assets register—bringing it up-to-date. Obviously there is a great deal of need for greater coordination about the use of assets locally and nationally. It is pretty clear to me that if you are relocating and if at the same time you have got quite big reductions in the staffing of Civil Service posts, then there is scope for buildings and land to be released, and, therefore, that is what the report I will be making in a few months time will tell us.

  Q189 Mr Plaskitt: In the section on local government in the Spending Review you remind us that they are being asked to contribute the £6.45 billion to efficiency gains by 07/08. In the break-down you give in box 11:1 it does not appear to suggest asset sales. Are you expecting local government to contribute to efficiencies for asset sales as well?

  Mr Brown: Local government will be selling their assets as before. I do not think at the moment we are including any additional amount of money than previously for these assets sales, but again that is something I can report on in the autumn. I just make this point that there is always the allegation when we talk about these assets about playing fields, school playing fields. It is not part of our plans to sell off school playing fields.

  Q190 Mr Plaskitt: No, but in box 11:1 when you break down where the £6.45 billion is going to come from, you say 40% of the savings were delivered through schools?

  Mr Brown: Yes, but that is not asset sales here; these are efficiency savings in effectively the current budget of local authorities.

  Q191 Mr Plaskitt: And 10% through policing. That is not asset sales?

  Mr Brown: No.

  Q192 Mr Plaskitt: 35% through procurement?

  Mr Brown: No, I would distinguish between the announcement I made about the efficiency savings we are expecting to have from local government, on which the financial settlement is based, and the announcement about asset sales, which is assuming nothing in addition to what we are doing, and I want to report on that in the Pre-Budget Report. It is our objective to get the £30 billion of asset sales, and we will get it, in my view, and I will report on the detail of that in the Pre-Budget Report. I was really giving a pre-view to what we will do later in the year.

  Q193 Mr Plaskitt: I am trying to understand whether we are in a situation where you have got central government departments expected to find asset sales to contribute to this, but local government is not expected to find them?

  Mr Brown: Local government is doing the normal thing of selling off surplus assets, but, as far as the efficiency savings are concerned, that is not about the sale of assets, that is about getting greater efficiency in the use of money, the reduction of staff where you have, for example, new technology making back office services far less expensive, the co-ordination of back offices between different local authority areas by them merging their operations—and there are a number of examples in the savings in this box 11:1 that I would draw the Committee's attention to. It may not be peak-time viewing if you had to listen to this.

  Q194 Mr Plaskitt: It is going to be important for local governments up and down the country, though, who will be at the sharp end of finding these. Finally, can I ask you what process does the Treasury expect each government department to be going through in order to identify its asset sales year on year, and to what extent are they reporting to you on a regular basis?

  Mr Brown: The update of the register is the chance for the departments to get a proper assessment of what they have got, what is needed and what is not needed. This is a regular process of consultation. I think we have got investment agreements with the departments about the use of resources, and, again, I can give you more detail in the Pre-Budget Report, but it is generally what we have been doing but we are stepping up the objective; in other words we want to achieve more asset sales over the next period of time, principally land and buildings.

  Q195 Mr Plaskitt: If departments fail to come up with those, what happens?

  Mr Brown: That is what the debate between now and the pre-Budget report will be about. When we publish the departmental investment strategies, which do exist, we will be able to tell you what assets the departments are planning to look at and dispose of.

  Q196 Mr Walter: Briefly where did the £30 billion figure come from?

  Mr Brown: It is setting an ambitious objective. It is perfectly achievable, because if I read out the figures for individual years, which I just had a few minutes ago, we have got here the figures and this is why it is achievable: 1997-08 £4.1, 1998 £4.1, 1999 £4.6, 2000 £4.6, 2001 £4.3, 2002 £6.1, 2003-04 £6.0, and in total, therefore, in the seven years of our government, £33.8 billion, and that has included a number of specific sales; but equally it is mainly about property, land, assets, and so on and so forth, and therefore £30 billion sales for the years to the years to 2010 does not seem to me to be unreasonable; in fact quite a lot is already in the figures for different departments.

  Q197 Mr Walter: But departments have been under pressure to find these assets to sell throughout that period?

  Mr Brown: I think it is right they should be under pressure to sell.

  Q198 Mr Walter: I am not disagreeing with that, but you are assuming that there are yet more assets that are available to be sold?

  Mr Brown: If I tell you that the official estimate of the overall asset-base on which we are working is £612 billion, then a £6 billion a year average asset sale, if it were that (or £30 billion over the period 2010), which is just a little less, is about 1% of assets a year. That does not seem to be unreasonable at all given a £612 billion asset-base, and so the idea that I am making departments do something we should not be doing is ridiculous. It is perfectly proper and right for us to be asking departments to continuously look at whether the asset that they have is really necessary.

  Q199 Mr Walter: So over 100 years we will have sold the entire stock of government assets?

  Mr Brown: If that were to be your ambition, it may end up with us selling the very building that we are in at the moment, and probably you would not want to go for that.

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