Examination of Witnesses (Questions 300-319)
RT HON
GORDON BROWN,
MR JON
CUNLIFFE, MR
NICHOLAS MACPHERSON,
MR JONATHAN
STEPHENS, MR
MICHAEL ELLAM
AND MR
DAVE RAMSDEN
16 DECEMBER 2004
Q300 Mr Fallon: That was not the question.
You forecast it at 21% and you are now admitting it is only going
to be 14%.
Mr Brown: I have just explained
what has been happening. The oil sector has seen a delayed response
to the rise in the oil price, but that is money that is coming
in. In the industrial sector there is no difference between our
forecast and what has actually happened. In the financial sector,
even though profitability has been higher in the years that we
are talking about and has been rising and is not out of the ordinary,
there has been an issue about whether, because of investment allowances
or because of another reason, that particular sector has not been
paying as much corporation tax as previously. It is not unreasonable,
given past history, to expect there to be quite a big bounce back
in corporation tax receipts after a world and national downturn.
Q301 Mr Fallon: Given you have been wrong
this year, you are now forecasting an increase next year of some
27% in those same receipts.
Mr Brown: I have just explained
why, because the oil industry is benefiting from a higher oil
price, we have had to adjust the oil price expectation. Now, of
course, it has got a downside for the economy in other respects
because it creates inflationary pressures, but as far as corporation
tax and specifically from the North Sea, these are expected to
grow substantially and I do not think anybody would deny that
that is going to be the case.
Q302 Mr Fallon: Overall in current receipts
you are forecasting next year an increase of 8%. That is the biggest
single rise since you reformed corporation tax in 1997-98.
Mr Brown: Are you talking about
all taxes here?
Q303 Mr Fallon: I am talking about the
current receipts generally. You are forecasting an increase of
8%, but that is the biggest rise since you reformed corporation
tax that we have ever had, it is bigger than the peak of the dotcom
years. If you forecast this wrong 4 years in a row, how can we
be sure you are going to get it right this time?
Mr Brown: You have just given
a figure of a forecast gap of £3 billion, a £3 billion
figure that has just been explained not in terms of things going
wrong in every sector but an issue related to the financial sector
and corporation tax. The £3 billion figure has been explained
precisely for you. The gap that you are talking about between
the original anticipated receipts and the receipts is that £3
billion told in the Pre-Budget Report only a few days ago and
explained in detail now to your Committee and work is being done
on this specific thing. If you look at income tax or you look
at VAT, if you look at North Sea taxes, if you look at the range
of other taxes, we are on forecast for what we expect to be the
revenues.
Q304 Mr Fallon: If you have been wrong
four years running, how can you expect the City to think you are
going to be right next year?
Mr Brown: I do not accept what
you are saying here. What I have done is explain why, in a period
of a world downturn, when the Stock Exchange goes down 50% and
when there is an IT collapse, which is actually what happened,
an IT bubble burst, it is bound to have effects particularly on
the corporate sector. I think the remarkable thing about Britain
is that employment continued to rise, receipts generally continued
to rise and now you are saying that there is a shortfall that
you have identified between the Budget and the Pre-Budget Report
of £3 billion and I have now explained to you why it has
happened. It seems to me a criticism on the basis of receipts
of around £450 billion and the explanation given for this
£3 billion change. I would have thought the Committee should
be satisfied that we have gone into detail in looking at what
has happened in individual sectors and I am now identifying the
problems that have got to be dealt with.
Q305 Mr Fallon: You have been wrong four
years in a row.
Mr Brown: I do not accept this,
Mr Chairman. Our growth projections have been right over these
four years, but we have had to take into account a Stock Exchange
change of about 50% and an IT collapse which happened after the
IT boom.
Q306 Mr Heathcoat-Amory: Chancellor,
just reverting to an earlier exchange about the golden rule and
in particular the definition of the economic cycle over which
it is to be judged, I think you said that the present economic
cycle would end when the output gap is closed, but we know that
the Treasury differ from the Bank of England about the remaining
slack in the economy and therefore presumably there are going
to be differences over when the output gap is closed. Who is going
to decide when the present economic cycle ends? Is it going to
be the Treasury deciding itself that the cycle has closed and
therefore deciding on which basis to judge the golden rule?
Mr Brown: When the cycle ends
depends on a number of factors that are taken into account. The
first is what the trend growth rate of your economy is because
that dictates what you feel the output gap is. That is an audited
assumption which we have put to the National Audit Office, the
2.75% trend rate of growth and they have given us the view that
that is a reasonable assumption. It changes because of demographic
changes in future years, but that is a reasonable assumption.
As to the question of when the cycle ends, of course fiscal policy
and the repercussions for that are not the responsibility of the
Bank of England, they are the responsibility of the Government
and so we must take responsibility.
Q307 Mr Heathcoat-Amory: Let us be clear,
the Treasury will decide when the present economic cycle has ended,
will it?
Mr Brown: The information will
decide when the economic cycle ends. The judgment has to be made
in the end by the people who are responsible for fiscal policy
and that is the Treasury. I would have thought, Mr Heathcoat-Amory,
that all your debates about the European Union will have led you
to the view that fiscal policy ought to be a matter for national
parliaments and national governments.
Q308 Mr Heathcoat-Amory: As you know,
I strongly agree with that.
Mr Brown: You would not wish to
contract out that decision to some independent or other body.
You would accept it was a decision that only Parliaments in a
democracy could make.
Q309 Mr Heathcoat-Amory: You subjected
other judgments in your document to independent audit and you
have boasted about the role of the National Audit Office. Are
you willing to put the definition of the economic cycle out to
independent audit?
Mr Brown: The trend growth rate
which determines whether there is an output gap and when it will
end is something that has been audited by the National Audit Office.
There is a big distinction between monetary policy and fiscal
policy. With monetary policy the Government can set a target of
2% for inflation and it makes sense to ask an independent body
to administer that, but fiscal policy is about decisions for taxation
and spending. For 500 years it has been regarded as the province
of Parliament and Government and something that cannot be contracted
out to another body and I would have thought that you of all people
would wish to agree with that as someone who does not want the
Commission to run fiscal policy in Europe but believes that that
also is still a matter for national governments.
Q310 Mr Heathcoat-Amory: I am not talking
about the running of fiscal policy, I am talking about the assessment
of the output gap on which you are going to self-assess now the
ending of the economic cycle, we have established that.
Mr Brown: For your information
and for the Committee's information we have set out clearly in
advance for a number of years the criterion on which the economic
cycle is judged and all that has been out there for debate, it
is completely transparent. There has been a debate amongst academic
economists about it. I do not think people have come to a view
as to how you judge the cycle. As I have said a few moments ago,
the growth rate affects how you see the cycle and that is important
to this judgment as well. We have a very transparent system. In
the end I put it to you that in a matter that affects whether
you tax and spend there is no view in Britain that I have seen
expressed before until your own party produced a policy last week
that somehow you could contract out that decision and that responsibility
to some other body than Parliament and the Government.
Q311 Mr Heathcoat-Amory: Reverting to
the issue of tax revenues, we have established that there have
been very serious forecasting errors over the last few years and
we discussed with your officials on Tuesday some of the reasons
for this. We were told that there are big volatilities in tax
revenues which are inherent, we have been told about the uncertainties
in trying to compute tax revenues and we were told by Mr Cunliffe
that this is particularly difficult in the current cycle. Given
these problems, how can you say with certainty that the golden
rule will be met? You are adamant that your arithmetic is correct
as regards the golden rule and yet your officials are conceding
not only past forecasting errors but also the inherent difficulty
in forecasting future tax revenues.
Mr Brown: Because of all the cautious
assumptions that I have just set out for the Committee. The requirement
we have is to meet the first fiscal rule, to have a current budget
in balance. I have explained to Parliament only in the last few
days that we are not just in balance but we are in surplus. The
sustainable investment rule is debt below 40% of GDP and again
I have given figures to Parliament showing that debt is a maximum
of 37% of GDP, so it is substantially lower than the 40%. I have
given all the information about how we are not only meeting our
rules but are well within the margins that are necessary to meet
these rules and the reason we can say this is that we have continuously
made cautious assumptions, whether it is on the trend rate of
growth for the public finances forecast of 2.5% or all the other
cautious assumptions I have set out. When Mr Fallon asked the
question about corporation tax I think I was just too generous
to him because the tax gap is £2 billion. The other billion,
as I explained in the Budget document, is as a result of
the reclassification of NHS trusts, which is something that we
have been asked to do as a result of the statistical way that
we have got to present public expenditure. So £1.5 billion
of the deficit that he is talking about arises from the re-classification
of NHS trusts.
Q312 Mr Heathcoat-Amory: Chancellor,
it is future tax revenues on which you are depending in order
to meet your golden rule over the cycle and we have established
you will decide when it ends. There is written into your Budget
arithmetic a very steep increase in tax revenues as a percentage
of GDP. It goes up from 35% last year to over 38% in three years'
time. How are you going to get that extra tax revenue without
putting up tax rates?
Mr Brown: Well, I recall that
when your Government left power, the fiscal projections that we
inherited had tax as a percentage of GDP going far higher than
38%. Our figure is no higher than was projected by your Government.
Now, the reason that we make these projections is on the basis
of what we know about the growth of the economy yielding income
tax receipts, the growth of wages in the economy obviously making
people better off and yielding these receipts, the growth of consumer
spending, which will not be as fast a growth as last year, but
will continue to be at a high level of growth and, therefore,
will yield VAT receipts, so in each of the different areas, as
I have said, our projections about revenues have been right. Apart
from this one point about corporation tax that we have just been
debating, they have been generally right, so there is a growth
in receipts as a result of the growth of the economy. Can I just
correct you on one point. The cycle will end when the information
shows that the cycle has ended. It is the information that we
look to to see whether the output gap has been closed and the
idea that arbitrarily without any evidence someone is going to
declare the end of the cycle, it is all based on evidence and
on the information we have about the economy, and that is how
the decision or the judgment will be made about the end of the
cycle.
Q313 Mr Heathcoat-Amory: Yes, and the
judgment is entirely in your hands. We have established that.
Mr Brown: The judgment is indeed
one that the Treasury has got to make for the reasons I have given
you, but based on assumptions that have been audited in some cases
by the National Audit Office and where there has been a transparent
debate over the years about how we judge the end of the cycle.
Q314 Mr Heathcoat-Amory: Can I just return
to this very steep increase in tax as a percentage of gross domestic
product which goes up, we are advised, to an all-time high. You
are saying you can do this without tax rate increases, but are
you worried about the effect on competitiveness? You have made
much of your concern for the competitiveness of the British economy
in world markets, and I share those concerns, but we are increasing
our tax burden very steeply at a time when most of our competitor
countries are reducing theirs. We have a table given us from the
OECD of revenue statistics. It does not project forward as far
as yours, but it does show that our main competitor countries
are either holding their tax receipts as a percentage of gross
domestic product or indeed cutting them, so how can you reconcile
your concern for British competitiveness with the fact that you
are imposing additional tax burdens on British industry and
the British workforce?
Mr Brown: I think if you read
out the figures for the tax burden in other countries, you would
be reading out figures of over 36% in Germany and nearly 45% in
France, and I think the EU average at the moment is 41%. The figure
in Britain at the moment has been 35.8%.
Q315 Mr Heathcoat-Amory: Well, in the
trend here both Germany and France, according to these figures,
have cut their tax burden—
Mr Brown: And what is their tax
burden now?
Q316 Mr Heathcoat-Amory:— from
a higher base, but the United States, from a lower tax base, has
cut theirs still further, so you are defying the world trend as
regards taxation at a time when you are expressing concern about
competitiveness.
Mr Brown: No, I do not accept
that at all. I think if you look at the figures, and I have got
the table here now, the EU 15 average is 40.6% for 2002, the latest
figures where we have everyone's actual figures available to us,
and at that point the UK was 35.8. The OECD average, even with
countries that are lower tax, like Canada and the United States,
is 36.3, so we were below the OECD average at the time. You said
that we had an all-time high in tax rates; that is completely
wrong, completely wrong. Under the last Government, the tax burden
went up to 39%. I have repeated to you that when we came into
government, the projections, and I will send them to you, that
your previous Chancellor brought in projected a tax revenue above
38% of GDP during the period for which he was making a forecast
in his Budget Report. The reason why our tax rates are competitive
is corporation tax has been reduced from 33 pence to 30 pence
and small business tax has been reduced from 23 pence to 19 pence.
Under our Government, capital gains tax, which was at 40% for
all assets, has been reduced to 10% for long-term assets. Income
tax has been reduced from 23 pence to 22 pence and the basic starting
rate of income tax is now 10 pence where it used to be 20 pence,
and of course VAT on fuel was reduced. All these taxes, corporate
tax, small business tax, income tax, capital gains tax and a lower
rate of income tax, which you would say were important either
to people's incentives or to companies' incentives, the rates
have actually been lowered under this Government.
Q317 Mr Heathcoat-Amory: It is the overall
burden of taxation that is important and under your own figures
there is a steep increase from 35 to 38%. Now, your official conceded
on Tuesday that this was a relevant consideration as regards competitiveness.
Are you saying that this trend of the increased tax burden against
the trend of most of our competitors is irrelevant or relevant,
but not important?
Mr Brown: The figures for the
early 1980s of the public sector current receipts were 45.8%,
45%, 44%, 44%, so that is a very different picture from the one
you are giving. That was the all-time high under the previous
Government. As far as we are concerned, the difference between
ourselves and America, which is the country which you wish to
draw attention to, is essentially this: that our healthcare is
paid for in the public sector by taxation and in America it is
essentially paid for in the private sector. Once you take that
difference into account, the general level of taxation and public
expenditure in both countries is not too dissimilar. Of course
we have 8% rising to 9% of GDP paid for in the public sector for
healthcare, which is the choice of the British people under your
Government as well as under our Government, but in America the
money that they spend on healthcare is principally spent in the
private sector and does not require them to raise tax to do so.
We raised tax for the Health Service, and there was the national
insurance tax that we put in specifically for money for healthcare,
that, I believe, is a decision which is supported by all sections
of the British public. Other than that, as I have just shown you,
for tax rates, corporate tax, income tax and for small business
taxation, our rates are both competitive and have come down under
this Government.
Q318 Mr Mudie: I think I have to ask
you, Chancellor, because I gave your officials a rough time which
I think was perhaps unfair, but from the Treasury Committee's
side of the situation, our integrity is as important as yours
and our reputation. For the last four years we have argued with
your officials that your revenue figures, your income figures
are overstated and every year we have been proved right. Now,
it is not that you would expect to be accurate every year,
but with the level of inaccuracy, £10 billion, £10 billion,
£10 billion, it is not that you do not take into account
a change in the world economy or the British economy, but when
it is factored in, when 4 years ago your income went down by 10,
but there is no reflection of that in the following 3 or 4 years'
income figures, and then when the second year the income goes
down again by 10, you start thinking, "Well, if you were
doing the Budget, you would start adjusting your figures".
Now, I see this End of Year fiscal report, and you do not even
admit to making a mistake. A mistake is down as "fiscal forecasting
differences". Now, the National Audit Office spell out the
parts that are outwith your forecasting abilities, but then there
are clear signs in this report that a large majority is just where
you were wrong. I will save you from answering because I will
just ask you to do one thing. In the Pre-Budget Report 2003, your
income for this year was 456 and in the Budget it was down to
454. Today, in the Pre-Budget Report, it is down to 451. Do you
stand by the 451? We will remember this when you come before us
at Budget time. Do you stand by the 451, and, if I could ask a
supplementary, do you stand by the 487 for next year?
Mr Brown: I stand by our commitment
to meet our fiscal rules and that is the basis on which any Chancellor
is going to come before this Committee. Now, if you take your
456 to 451 figure, oil prices changed dramatically over the course
of the last year. I do not think anybody predicted the changes
that have actually taken place. The oil price during the period
I have been Chancellor has been $10 and it has been $50, and the
movements have been speedy when they have actually happened and
they affect the revenue position. Equally, if you have a world
downturn, the effect on that will be rapid on your fiscal projections.
Q319 Mr Mudie: But your oil should be
in favour of your income.
Mr Brown: But the reason that
I say to you that you can have faith in what the Treasury is doing
is that our commitment to you is that we will take the steps necessary
to meet our fiscal rules and that is what we have been doing over
the last few years. It would not be very sensible to say that
I could predict today what the oil price is going to be definitively
in 6 months' time, but it is sensible for me to say to you that
the level of discipline and the caution built into our projections
are such that we will meet our fiscal rules.
|
