Examination of Witnesses (Questions 260-279)
RT HON
GORDON BROWN,
MR JON
CUNLIFFE, MR
NICHOLAS MACPHERSON,
MR JONATHAN
STEPHENS, MR
MICHAEL ELLAM
AND MR
DAVE RAMSDEN
16 DECEMBER 2004
Q260 Mr Plaskitt: So you envisage a continued
role for migrant labour in helping us achieve that growth?
Mr Brown: This is highly qualified
men and women, many of whom have studied at British universities
and colleges, who wish to play their part in the British economy.
I think on all sides of the political spectrum there is a welcome
for the skills that the British economy gains from that.
Q261 Mr Plaskitt: Do you see any conflict
between expanding the level of participation in the workforce
and your objectives on increasing productivity?
Mr Brown: It is well known that
in the first few months of someone's new employment the productivity
that they contribute to the firm is on average lower than for
an established employee and therefore it is true that the gains
in employment have got to be tested as to whether we are also
gaining in productivity. The evidence from last year's productivity
rises and the evidence over the period from 1997 is that productivity
in the British economy is rising. Obviously the measures that
we are putting in are designed to achieve higher productivity
gains for the British economy and we have identified a number
of sectors where we could do a great deal better, but at the same
time I think we should acknowledge that even with higher employment
and therefore a labour force that is rising—and that is
not at the point you often get the greatest productivity gains—productivity
has been rising much faster than in previous years.
Q262 Mr Plaskitt: Finally, do you think
you can continue expanding workforce participation in an ever
tightening situation in the labour market and avoid wage cost
pressures?
Mr Brown: I think the interesting
thing about the new monetary framework since 1997 is that inflationary
pressures in the economy in Britain have worked in two stages.
You have had an initial burst of inflation in the past and the
failure to control that has often led to a second burst of inflation,
which is wage pressure. You will know from your own experience,
as I do, that when people thought inflation would be not 2% in
the next year but 4% or 6% the wage negotiators bid on the basis
of what they thought inflation would be in future years and that
is why we had these two bursts of inflation, the one following
the other, cost pressures, inflationary pressures and then wage
inflation. I think what has been a very interesting feature of
the British economy since 1997 is that particularly in the last
five years the wage pressures that you might have expected to
see from an economy running closer to capacity have not led to
rises in average earnings that would be unacceptable given what
we would think in terms of inflation and productivity. Obviously
you have got to be vigilant and every time we are looking at what
pressures there are in the economy. Even with us being closer
to full employment than at any point for 30 years the wage pressures
that have sometimes actually been seen in other economies in Europe
over these last few years have not been so substantially present
in Britain, but I can assure you that we will be vigilant. You
will know that we have issued regional and local guidelines for
the public sector pay review bodies and it is clearly important
to us that we can manage a situation where we can move to full
employment in conditions of low inflation and that is the best
way of both sustaining growth and sustaining employment in the
longer term.
Q263 John Mann: Chancellor, there are
about 3,500 new jobs currently being created in Bassetlaw and
yet we have only 970 registered unemployed. The last time we had
this problem we imported people from the Durham and Fife coalfields.
What is your advice as to what we should be doing now?
Mr Brown: I am very pleased that
as a result of your tenure as a Member of Parliament the number
of jobs that have been created in your area has risen so fast.
To have 3,500 created in Bassetlaw, in an area that traditionally
has been an area of higher unemployment, and to see the unemployment
rate so low is a very good thing. I think what will happen is
that people will extend their view of what is a travel-to-work
area and there will be people from the surrounding areas that
will consider working in the areas of your constituency where
jobs are being created. I think there is a willingness to see
your travel-to-work areas wider than previously you did and I
think that is really what is going to happen in your area. There
are people who are not registered as looking for jobs who could
be attracted, as I have just said in the previous answer, into
the labour force. Our single parent employment rate particularly
in your area I suspect is only around 50%, whereas in America,
France and Scandinavia it is about 70 to 80%. There are thousands
of lone parents who might be attracted back into the labour force
if the terms on which they could get jobs were right. We have
just mentioned incapacity benefit but can I also mention an area
which worries me and that is ethnic minority employment. It is
clear that unemployment rates amongst the ethnic minorities are
treble those of the British average. It is also clear that for
a large number of ethnic communities the employment rate, which
is 75% of the active working population, is in some cases less
than 50%. There are jobs and opportunities for members of those
communities. One of the things we have asked to be done in the
run up to the Budget is a report that would give us some more
information about how we might be able to help more people from
ethnic minorities to get the jobs. In each of our communities
we know that even though large numbers are in work there are still
people who are not even registered as unemployed and who are economically
inactive.
Q264 John Mann: Some of my constituents
will want to travel to Mr Skinner's constituency next year which
also has had 1,000 new jobs created. All the Government schemes
to get people back into work have been outstanding successes with
one stark exception and that is progress to work. How many people
have gone into full-time permanent employment through progress
to work?
Mr Brown: By progress to work
which particular incentive do you mean?
Q265 John Mann: I mean those who are
current or former drug addicts.
Mr Brown: This is young offenders,
people who have convictions and people who need to have help with
rehabilitation from drugs and again it is an area where we are
doing further work at the moment. You may also know that there
is a White Paper on services for young people who may have these
problems coming out in January.
Q266 John Mann: Your Department was very
helpful in giving me a very detailed response to a written question
I put in about the cost if an average age drug addict remained
on incapacity benefit for the next 40 years. If we compute that
for the number in my constituency who are drug addicts on benefits
then we are talking about over £2 million on your own figures.
Can the British economy remain competitive if we keep having this
large number of people for the next 40 years who are going to
be on benefits and not in work? Secondly, is it not imperative
that other government departments give rather more detailed answers
in terms of the success of initiatives such as progress to work
so that we can monitor whether or not we are seeing a success
in returning such people to work?
Mr Brown: You might wish to put
questions to the other departments about giving more detail on
the work that we do and certainly I am very happy to bring together
figures about what is happening across government if that is of
help to you. The issue on long-term youth unemployment, however,
is this: 20 years ago there were 350,000 young people who were
unemployed and today the figure is less than 5,000, that is an
average of 8 young people registered long-term youth unemployed
in your constituency. I accept there are people who are drug addicts
who are not registered as unemployed and I accept there are a
large number of people who fall through the net and more help
needs to be available. As they have never been in work a lot of
them will never get on to incapacity benefit, but they will be
on other benefits and clearly the rehabilitation services for
that group of people have got to be better. That is why I think
you should look forward to the publication of this White Paper
on services for young people which will come out in January.
Q267 John Mann: I hope you will look
at this issue because all of my questions are asking how many
on incapacity benefit are also on Class A drugs and have a criminal
record and I get the response "we do not know" repeatedly
both at a local and national level.
Mr Brown: To be on incapacity
benefit you must have been working for at least two years, I cannot
remember the exact figures, but it does mean that the young people
who you are talking about are unlikely to be on incapacity benefit,
they will be on some other benefit, if on benefit at all.
Q268 John Mann: I will be carrying out
my own research just to clarify the situation.
Mr Brown: We would be very happy
to look at any questions you have on these issues to see whether
we can identify what more can be done for this particular group
of people. We all know there is a group of people in every constituency
who have fallen through the net.
Q269 John Mann: Can you comment on the
wider question of whether it is sustainable for an economy like
Britain to have a significant number of people on benefit in the
future when we are competing with economies such as China and
India rather than the classic economic model of competing with
more advanced capitalist economies?
Mr Brown: The first thing is that
a far higher proportion of the population in America in this category
are in prison, for example, and that is why their employment rate
for the economic active population is less than ours, it is 75%.
I think the second thing to note is that there is a group of people
who are either offenders with criminal convictions and who find
it difficult to get jobs, or who are people on drugs. There are
a number of programmes that we have been looking at to help this
group of people, but I would not want to give the impression that
this was a very high proportion of the working population
but other groups of people who have fallen through the net. With
the Transco experiment that is taking place in a young offenders'
institution in Reading what they do is they offer these young
people, while they are still in the offenders' institution, the
opportunity to train as gas fitters for jobs that Transco as a
company can offer once they leave that institution. That has a
phenomenal rate of success, it is 80% and it is now being looked
at to see if it can be pushed through to the rest of the country.
It may be that in your area it is something that Transco can be
invited to do. That is an example of a project where if you can
get to work with the young people while they are in the institutions
the re-offending rate goes down very substantially. I think I
am right in saying they had an 80% rate of success with the people
that they put through the first stages of this programme.
Q270 John Mann: If we look at classical
economic theory and particularly monetarist economic theory, some
economists would say that it does not matter if we have a pool
of people who are unemployed because that will act as a counter-balance
to the possibility of high inflation. Does that brand of economics
hold any relevance today, the kind of economics which would say
unemployment never matters? From an economics stance, when we
are competing ourselves with economies now such as China
and India where the notions of unemployment are rather different
to the notions of unemployment we have got, should there perhaps
be a national debate amongst economists on whether unemployment
never matters from an economic stance in today's world economy?
Mr Brown: We would see whether
we can get a consensus from a national debate. If you look at
what has happened in the last seven years while I have been in
the Treasury, the bills for unemployment have fallen by several
billions a year. Public expenditure on social security related
to unemployment has fallen substantially and that has allowed
us to use resources for other things, including health and education.
I think the point you are making is a broader one. If we cannot
ensure that people have the skills that are necessary for the
modern economy then Britain itself will fall behind and if we
cannot use the potential of children, young people and then adults
by giving them the education that is necessary for them to be
highly productive in the economy then we are not only not going
to be able to compete with America and the rest of Europe but
we will find trouble competing with some of the challenges now
coming from China and Asia. There are 5,000 computer scientists
produced a year in Britain, but there are 75,000 computer scientists
produced every year in India and 50,000 produced in China. There
are now two million graduates a year coming out of Chinese and
Indian universities. So the premium on skills becomes more of
a pressure on the British economy. We will have to continue to
upgrade and up-skill and that is why I think the challenge is
to make it possible for every potential productive member of the
workforce to have the opportunities to get the education that
is necessary and that is why for the first time this national
employer training programme, which I hope will have all-Party
support, brings employers, employees and Government together,
but the responsibility on the part of the employee is to take
up this offer and there is funding from the Government to make
time off possible so that the skills level of that company in
which that person works is increased. That is a new relationship
which I think is better than the old laissez-faire attitude
to training that we have seen in the past and small firms in particular
have benefited.
Q271 Mr Walter: I wonder if we could
now go on to public finances and look at borrowing. The Governor
of the Bank of England was here a couple of weeks ago and he said
that your fiscal rules are not "an optional extra" but
an integral part of macro-economic policy. Earlier this week your
officials were here and they stressed to us the uncertainties
that are involved in forecasting tax revenues. If the revenues
are as uncertain as they tell us they are, how certain can you
be that your fiscal rules will be met?
Mr Brown: We have been meeting
our fiscal rules and we will continue to meet our fiscal rules.
It is true to say that the rules that we set ourselves were not
met by previous governments in previous economic cycles, so they
are challenging and they are tough and they require discipline.
If you look at the figures I was able to give in the Pre-Budget
Report then we will be meeting our first rule, which is that the
current budget is in balance for this cycle and we were showing
in the figures how it would be met in the next cycle and then
the second rule, which is the sustainable investment rule, in
other words that borrowing must be maintained with a prudent level
of debt, we are well within the 40% limit that we set ourselves
in 1997. The interesting thing I would say about the fiscal rules
is that while there is a huge debate in Europe about the future
of the Stability and Growth Pact and while under the previous
Government every year the test of fiscal discipline changed from
`we want a balanced budget' to `we want a balanced budget over
the cycle', we are moving towards a balanced budget, all these
different rules appeared every year, we have stuck to the same
rules since 1997, we have not been diverted from them and we are
meeting them.
Q272 Mr Walter: A number of commentators
that have been before us have suggested that the chances of you
meeting the golden rule may be less than 50%. Do you completely
discount that?
Mr Brown: I have just produced
figures showing that we are meeting both our rules.
Q273 Mr Walter: When does the cycle end?
Mr Brown: The cycle will end when
the output gap is closed.
Q274 Mr Walter: You are making assumptions
about when the cycle will end.
Mr Brown: Because it is an economic
cycle it depends on the performance of the economy and one does
not prejudge what is actually going to happen to the economy over
the next few months. We expect the cycle to end next year, but
that is not something that we have set in stone because one is
not in a position to do so. If, for example, the commentators
that you were talking to were to hold to their view that the cycle
has now ended then clearly we would have met our fiscal rules
and I do not think there would be any dispute about that. What
we are giving you is a projection of what the fiscal position
will be at the end of the cycle according to where we think the
cycle is going to end and we are not only in balance, which is
what we are required to be, but in surplus.
Q275 Mr Walter: How long after the end
of the cycle will you be able to tell the nation that the golden
rule has been met?
Mr Brown: Economic data is coming
out every month. In fact, there is probably quite a bit of economic
data coming out this morning even as we speak. I think people
will see, on the basis of the projections we are making, that
we are clearly meeting our fiscal rules.
Q276 Mr Walter: What if we do not?
Mr Brown: That is not going to
happen because I have just explained that we are well within our
fiscal rules. Can I just say why the situation is rather different
from what you might have perceived the situation to be 10, 20
or 30 years ago? The basis on which we do our fiscal figures is
a set of cautious assumptions. While we believe the trend growth
rate is 2.75% (and that assessment has been audited by the National
Audit Office and thought to be reasonable), we calculate our public
spending on the basis of the trend growth rate being only 2.5%;
in other words, we take a cautious view of trend growth for the
public spending projections. That in itself shows the caution
that we exercise. Also, our assumptions are tested and audited
by the National Audit Office. Under the previous Government what
you would have had in a public spending announcement or in a fiscal
announcement was "We assume that unemployment will fall by
another half a million over the next few years and therefore we
will assume a fall in social security costs related to that."
We do not do that. We take the estimate that is given by independent
commentators of what the unemployment level is going to be.
Then privatisation receipts used to be thrown in. We do not say
we will definitely get £10 billion of privatisation receipts.
Indirect savings as a result of efficiency measures we do not
do either. Our VAT assumption about the revenues we can expect
from consumer spending has been continuously audited by the National
Audit Office and, as you know, it was changed because we wanted
it to be more realistic about consumer spending. If you take the
key assumptions, privatisation processes, trend growth, claimant
unemployment, interest rates, equity prices, VAT and the rest
you will find that our assumptions are actually cautious assumptions
and it is on that basis that I think the country can have confidence
which it did not have before in the fiscal framework.
Q277 Mr Walter: So you are saying that
there are no circumstances in which you could envisage that you
will not meet the golden rule by the end of this cycle?
Mr Brown: There are no circumstances
I see coming before this Committee today that mean I believe we
will not meet our fiscal rules.
Q278 Mr Walter: May I go on to the sustainable
investment rule which the OECD has been absolutely critical of.
In their economic outlook, November 2004, they say that the Government
deficit is likely to be above 3% of GDP in 2004 and in the absence
of a spontaneous rise in taxes additional action may be required
to achieve a decisive and sustainable reduction. How do you respond
to that?
Mr Brown: The OECD has been generally
positive about the British economy. As far as the budget deficit
rising above 3% of GDP is concerned, I think they are referring
to the calendar year of 2004. That is not what we believe is happening
and we published figures only a few days ago showing that that
is not the position. I disagree with them.
Q279 Mr Walter: You simply disagree with
them, they are wrong?
Mr Brown: Yes. Again, if I may
say so, what people have not really understood about the British
economy is that the reason that revenues have been maintained
and the reason that our public expenditure position is affordable
is that we have had continuous growth over these last seven years
and we have had continuing rises in employment. People who were
previously being paid social security benefits by the state are
now paying taxes to the state as employees and at the same time
our public expenditure position has been bolstered by the fact
that debt interest payments have fallen quite substantially and
unemployment benefits need be less because there are more people
in work. The basis for strong public finances is a sound and stable
and growing economy and I do think that this is what has been
different from the stop-go policies of previous years. On the
OECD, I do not want to be accused of gloating in any way and I
am not saying it for this reason, but it is a factual point that
in our forecasts for the last 5 years, between 1999 and 2003,
we have been more accurate than the OECD.
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