Select Committee on Treasury Minutes of Evidence


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.


 
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