Examination of Witnesses (Questions 195-199)
22 MARCH 2005
RT HON
GORDON BROWN
MP, MR JON
CUNLIFFE, MR
MIKE ELLAM,
MR DAVE
RAMSDEN, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q195 Chairman: Chancellor, good morning
to you and your officials and welcome to this meeting on the Budget.
Could you introduce your officials for the sake of the shorthand
writer?
Mr Brown: Yes. I think you have
met most of them in the last day or so. On my left are Jon Cunliffe,
the Managing Director of Macroeconomic Policy and International
Finance, Sarah Mullen, Director of Public Spending, and John Kingman,
Director of the Enterprise and Growth Unit. On my right are Mike
Ellam, Director of Policy and Planning and Dave Ramsden, Director
of Tax and Budget.
Q196 Chairman: I know you have just returned
from discussions on the EU Stability Pact in Brussels. We are
just taking time to digest the implications of the new set of
EU fiscal rules. Could you give us your views on that, please?
Mr Brown: I think you will now
be seeing the published document from the ECOFIN Council that
met on Sunday for many hours indeed. It is being discussed by
the European Council today and tomorrow, so there will be no final
decision on it until tomorrow. From everybody's point of view
the problems with the Stability and Growth Pact that are now being
addressed are the failure to take into account the economic cycle
and to be simply an annual requirement on budget surpluses and
deficits, the need to take into account investment, which had
not been properly understood in the original version of the Stability
and Growth Pact, and the need to take into account debt, which
is mentioned in the Maastricht Treaty but was not central to the
Stability and Growth Pact in its initial years with the result
that countries with low debt and high debt were being treated
exactly the same. I think there is a recognition in the new document
of all three of these factors being far more important than originally
recognised by the Stability and Growth Pact. I think the issue
for the United Kingdom is that if the assumption—it is not
going to be in the resolution, nor is it going to be a Treaty
requirement—is that the maximum deficit over an economic
cycle that could be run, current and capital, is -1% then that
makes it difficult for a low debt country to run the investment
programme that is necessary to improve its infrastructure and
there is therefore no incentive on a country to have low debt.
In fact, all the incentives work the other way, countries should
build up their debt so that in the end they can meet the requirement
of -1% or below and that is a problem for us because, if you look
at the Budget figures, our net investment as a percentage of GDP
is rising from what we inherited of about 0.6% or 0.7% of GDP
to 2¼% of GDP and we would have to run a current surplus
of more than 1% over the cycle to meet this new requirement or
indication from the European Union and we are not prepared to
do that. We have a current budget to balance over the cycle and
we have an investment rule that requires us to have a low level
of debt. I think these are sensible rules. I think over time they
will come to be adopted in the European Union as a whole, but
for the meantime I think it is right that the non-euro or ERM
countries are not required to meet that -1% rule. That was the
essential element of the discussions that took place on Sunday.
Britain or any non-euro and non-ERM country will not be bound
by that -1% rule, which is a rule over the economic cycle. There
is a lot of discussion still to take place because there is an
issue about what is taken into account in defining the deficits
on the Stability and Growth Pact and there will be further discussion
with the Heads of Government during the course of today and tomorrow,
but I was determined that our investment plans should not fall
subject to criticism on every occasion from the European Union
because we were not meeting that narrowly defined -1% deficit
requirement.
Q197 Chairman: According to the Commission,
the new Pact's target of a 1% medium term deficit is little more
than a guideline. If that is the case, what disturbs you more,
the lax nature of the rules regarding the get-out clauses and
implications for financial discipline and/or the failure to distinguish
between current investments in the future if you continue the
projects that you mentioned are important for the United Kingdom
such as education and transport?
Mr Brown: In the long run countries
that are going to compete with Asia, particularly with the growth
rates of China and India are going to have to invest heavily in
science, possibly also in infrastructure and in education and
that will be a necessity in my view. Therefore it does not make
for the best Stability and Growth Pact if there is not a recognition
in a more detailed way of the importance of investment. Equally,
for the purposes of managing the euro it is important that you
have a fiscal policy that is certain and therefore I understand
the need for greater certainty in the way that the fiscal policy
of the euro area works and that is what I think Member States
are trying to move towards, but I would come back to the central
point for the United Kingdom, which is that we have investment
plans and these plans will be debated over the course of this
morning. They involve 2.25% of GDP as our net investment requirement
over the next few years. We have trebled that percentage over
the last few years so that we are investing in our future in a
far more significant way than ever before. If I were to say what
the big beneficiary of the Budget has been, it is education because
of the need to invest in further education but also in education
at primary and secondary school levels with our modernisation
of capital infrastructure and with what we are doing to build
facilities for the under-5s as well. So we now have a programme
for education from three to the age of 18 which is more radical
and more extensive than we have ever seen before and that investment
programme for us is absolutely crucial. I cannot accept any guidance
that would prevent us from going ahead with that investment programme
over the next few years.
Q198 Chairman: As you know, the Treasury
Committee also went to China and we witnessed the double digit
growth taking place there since 1978 and we recognised that the
need for a more competitive economy for the UK and Europe is essential.
With these new fiscal rules being lax, which is how they seem
to me, do you see Europe being fit to challenge China and other
countries competitively and implementing the Lisbon Agenda with
the present set-up?
Mr Brown: The issue for the European
Union is to increase its sustainable rate of growth. The euro
area has grown at about half the rate of America over the last
ten years and there is every indication that in the first years
of this century that pattern of relatively lower growth has continued.
The question then is what is going to make for a higher growth
European Union. We are sure that in the United Kingdom the issue
is investing properly in education, in standards and discipline
as well as in the numbers of teachers and the repair of schools
and colleges, as well as investing in our science, where we have
a ten-year framework, innovation, research and development and
the creative industries and we are determined to continue with
that. If you look at China, they are turning out two million graduates
a year. You will have found that they have 300,000 engineering
and science graduates a year and they have nearly 100,000 computer
science graduates a year. They are producing in numbers terms
men and women who will enable them to compete not just in low
tech industries in the future years but in high-technology, science
based, creative skills based industries. No advanced industrial
country can rest on its laurels and say that China is producing
the low cost manufactured goods and we will produce the high value
added goods. It will be a constant challenge for us to upgrade
and move up a gear through education and investment in science
and innovation so that we are in a position to compete in that
high value added area. There is some evidence from what is happening
to the British economy that in the last few years we have managed,
despite the difficulties that manufacturing has faced, to move
in to some of these high growth, high technology and high value
added areas in science based industries, which have been growing
fastest of all, in creative industries, which are now 8% of our
GDP, financial services industries, and communications industries
that are actually growing very fast. I can give the Committee
figures about the growth rates in these sectors which have been
outstripping the growth in the rest of the economy. There is some
evidence that the British economic performance, where we have
had high growth, is due to our ability to compete in these high
value added areas, but that depends on an investment programme
moving forward and that is why the greatest beneficiary of the
Budget was our investment in education for future years, because
countries that do not make these adjustments will fall behind
and continents would fall behind unless they too make these investments.
That is why I think it is very important for us to stress that
the theme of the Budget was to build by investing for Britain's
future.
Q199 Chairman: Would you agree with the
view that the European Union Stability and Growth Pact has now
officially lost its teeth as a result of these new fiscal rules?
Mr Brown: No, I would not accept
that. It is not a barrier if we meet the five tests of joining
the euro currency. There are other low debt countries in the European
Union and there are high debt countries like Italy and Belgium
that are beyond the Maastricht criteria, at nearly 100%, but low
debt countries like ourselves should not be prevented from investing
in the future if that is the right decision for to us make as
a national government. We are not bound by any fines or penalties
by the European Union anyway, but it is right to stress that we
do not feel that a rule or even a set of measures that would discourage
us from investing properly in our future is something that is
acceptable to us. That is why I was determined on Sunday night
to make sure that the non-euro and non-ERM countries were not
tied in by a notional 1% deficit level over the cycle which took
no account of the fact that we were investing 2¼% of our
GDP and therefore you would have had to run a current surplus
of nearly 1¼%-1½% to enable you to meet what were the
guidelines being set down by the European Union.
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