Examination of Witnesses (Questions 200-219)
22 MARCH 2005
RT HON
GORDON BROWN
MP, MR JON
CUNLIFFE, MR
MIKE ELLAM,
MR DAVE
RAMSDEN, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q200 Chairman: Chancellor, I get the
feeling that the prospects of Euro entry are receded rather than
advanced as a result of these new fiscal rules, particularly on
the issues of the lax nature of the rules and the get-out clauses
and the failure to distinguish between the current spending and
investment in calculating deficits. What you are saying here is
that you are very firm on the way the UK Government is going in
terms of investing for the future and that conflicts with the
present rules. If the present rules do not change then the prospects
of euro entry for the UK are proceeding well down the line.
Mr Brown: I would not draw that
conclusion. We are determined to pursue our investment plans.
These investment plans are absolutely vital to Britain's ability
to compete in the future as well as our ability to achieve an
opportunity for all our citizens in education, employment and
by judicious investments in science and infrastructure. I would
stress that the theme of the Budget was investing in our future
and we will continue to make these plans, but it also has got
to be recognised—and I think there may be a misunderstanding—that
the conditions for entry into the European currency are that there
be no excessive deficit and that debt be below 60%. These are
conditions that state that the excessive deficit is above 3% and
the national debt is below 60%. The medium-term objective, which
I did not accept for the United Kingdom and was not accepted for
all non-euro countries that are not in the ERM or in the euro,
is not in the Treaty. The -1% limit will not be stated in the
Treaty or in legislation, it is simply guidance on which surveillance
will be based. So it is not a Treaty requirement, it is not even
in a regulation, it is a guidance which will be used by the Commission
on the basis of which they will do their surveillance of the economy.
It is right to say that our investment plans are going to continue.
It is not right to say that there is a direct link between that
and what happens in relation to the euro. I said on Wednesday
when I put my Budget to the House of Commons that I saw no reason
for there to be a euro assessment this year. It is a question
for the Government as to whether they wish to return to this.
If there were a view in the Treasury that there was a case for
looking at this again then that would be the time at which it
would trigger a euro assessment and that would only be done in
a Budget, but that could not be looked at again this year. I think
the Committee should understand that the conditions for EMU entry
are unchanged by this new decision about the Stability and Growth
Pact. The conditions are set down in the Treaty and they will
not change.
Q201 Chairman: This will result in the
weakening of budgetary discipline and that is something that you
have set your face against. It seems as though entry into the
euro is further down the line if the EU does not accommodate what
you are proposing from the United Kingdom Government.
Mr Brown: We have set down very
clearly what we think are the right fiscal rules for Britain.
I think they are the right fiscal rules for most low debt countries
that are in the position that we are in. They would not be the
right conditions for a high debt country because our second rule
is that your debt has got to be below 40% of national income.
So our two rules are a current surplus or balance over the cycle.
I think for the benefit of the discussion of this Committee later
in the day that is the requirement. It is not to have a margin
of X or Y, it is simply that there be a current balance over the
cycle. The second rule is that investment is permissible as long
as debt is a certain percentage below 40% of national income.
These are our two rules and we believe they are serving us well.
We believe they make sense in a country like ours where there
has been a historic neglect of long-term investment in our economy
and our infrastructure over many, many decades and where that
is to be rectified and therefore the rules that we think are appropriate
for us are different from the rules that other countries think
appropriate to them at this stage. I think in the debate about
the Stability and Growth Pact—and this should not be misunderstood—there
has been a great deal of progress made. There is a recognition
of the importance of investment, there is a recognition that to
look at annual deficits or annual surpluses is not the best way,
you have got to look at them over the cycle in a way that is far
more meaningful for an economic analysis of what is happening
in a particular country and you have to take into account debt
levels. We have made significant advances in that debate. I think
there is a new recognition that these things are important. We
will see what the final outcome of the discussions is today and
tomorrow. I think from our point of view the important thing to
recognise is that we are not bound by any requirement that our
medium-term objective should be a maximum of a deficit of -1%
of GDP. That is not in the Treaty, it is not in the regulations,
it is an indication of what the Commission will use as the test
for their surveillance, but even in these circumstances we are
not bound by that. I think it was important that I stress that
because our investment plans are going to continue and I think
it is right for the whole country that this investment in education
and science and infrastructure continues because it is the one
way, in addition to the enterprise of businesses and the hard
work of people, that we can meet the competitive challenge of
Asia as well as America and the euro area.
Q202 Chairman: I cannot help thinking
that the EU should change its fiscal rules according to you because
otherwise it will have implications for the wider project. That
is the impression I am getting from what you are saying.
Mr Brown: There are many countries
that are in a similar position to us and let us be clear, those
countries that have joined the European Union recently have massive
infrastructure needs just as Spain, Portugal, Ireland and Greece
previously had huge infrastructure needs. Some of these are going
to be met by regional policy payments to these countries and there
is a transfer of income from the richest countries to the poorest
countries to make possible that infrastructure investment, but
some of it will have to be through investment by these countries
in their infrastructure themselves and that is going to be the
issue in future years. I think this is part of a continuing debate
about the future of the Stability and Growth Pact. What I can
tell you is that the intellectual debate is moving in our direction.
Q203 Mr Beard: Chancellor, with oil over
$50 per barrel for any sustained period, do you see this as possibly
destabilising the world economy?
Mr Brown: In any other decade,
as I said in my Budget, an oil hike of what has effectively been
100% over two years would have caused a surge of inflation in
this country. Let us be clear, oil was down to $10 a barrel at
one stage in our Government's period in office and I think the
latest figures are above $50 today. So this volatility in the
oil price in the Seventies would have been destabilising and in
the Eighties would have been destabilising. The fact that we have
a low inflation environment at the moment and we can cope with
this is a tribute to what has been achieved in monetary policy
over recent years. Yes, it is an issue for us and it affects our
revenues, it affects the costs that consumers are paying for petrol,
but I think we have shown we have been able to cope despite all
these difficulties.
Q204 Mr Beard: On Budget Day the Americans
announced a 5.7% of GNP current account deficit. Are you satisfied
the right mechanisms are in place for remedying these sorts of
imbalances?
Mr Brown: This is a huge debate
about international cooperation to deal with both current account
imbalances and the effects on the exchange rates. I started by
saying that I thought, as I said in the Budget, the differential
growth rates between Europe and America were a problem for both
continents, that if America was growing at twice the rate of Europe
on a sustained basis and therefore the trend growth rate in the
European Union was substantially below that of America then over
time this had quite a large number of repercussions for the world
economy. My own view is that we will not return to the cooperative
arrangements that we had in the 1970s and 1980s, the Louvre and
the Plaza agreements, that seems to me highly unlikely. What I
think each continent can do is recognise its responsibilities
for the maintenance of stability and the continuing of growth
in the world economy and that does require America to look at,
as it said itself it wishes to do, how it can reduce its current
account deficit and its government deficit, but it also requires
Europe to press further on its structural economic reform, which
is an issue at the Council today and tomorrow, and it requires
Japan also to make its financial sector reforms. Increasingly
China will be part of this equation and what happens in China
and in the Asian continent will be vital to the stability and
growth of the world economy. Instead of looking for, as I think
is unlikely, some great international agreements to deal with
currencies, as happened 20 years ago, I think what you have got
to look for is how each continent can accept that the decisions
it makes have a bearing on what happens to world stability and
world growth and make the decisions in such a way that they can
contribute to that stability and increase the level of growth
in the world economy, and I think there is a recognition in each
continent that they have responsibilities in that regard.
Q205 Mr Beard: Business investment has
been recovering, but the recovery seems subdued relative to previous
cycles. The recent corporate reporting season appeared to show
that recovering profits are being paid out in dividends rather
than invested. Why are companies so reluctant to invest?
Mr Brown: I think if I give the
figures for business investment over the last few years people
will understand that there has been a substantial improvement
in business investment. In 1996 the figure was £78 billion
a year and today it is £117 billion a year, so there has
been a substantial improvement in the amount of business investment
in the economy. We believe that the figure for last year is a
5.4% growth rate and we believe we will see a figure of about
4% growth achieved this year. It is perhaps true that business
investment was disappointing in 2003 and 2002, but I think it
is also true that business investment, despite a few ups and downs,
is generally up 5% on last year and we believe it will continue
to grow over the course of the next year. It has actually risen
for seven consecutive quarters, it was 5.5% in 2004, and that
is the fastest rate in six years. I am not complacent. A lot more
needs to be done. We have a number of measures in the Budget to
encourage investment, particularly in areas which have been low
investment areas in the past and I think these are designed to
help increase the growth rate of the British economy.
Q206 Mr Beard: The Budget stressed the
importance of sustaining recent progress on productivity growth.
What are the main measures in the Budget that will contribute
to this?
Mr Brown: We have said before
that one of the many drivers of productivity and growth in the
economy is competition policy and I do believe that Britain has
one of the most open competition policies in the world. I believe
we can see the effect of that in prices. Consumer prices in a
whole series of areas, from electronic goods to clothing, to general
retail prices, have been going down and not up in many, many respects.
It is a worldwide phenomenon, but we are able to benefit in Britain
because we have an open competition policy. Car prices are one
example where prices have come down substantially relative to
previous prices in recent years. Our competition policy is absolutely
essential to that. Our policy for encouraging enterprise is also
important. There are 300,000 more businesses and 100,000 more
people self-employed in the economy since seven or eight years
ago. That is a marked improvement in the rate of entrepreneurship
growth in our economy, particularly in the inner cities and in
some of the areas that have been high unemployment areas in the
past. Our measures to encourage enterprise education in those
schools and in our colleges, the new National Council for Graduate
Entrepreneurship to encourage graduates to start up in business,
what we have done to help spin-off companies from universities
in the last year develop as well, are all important to this. Perhaps
I may just emphasise one other factor in addition to investment
and that is the skills agenda and again I do stress that the theme
of the Budget about investing in Britain's future focused on what
we must do in education. We have already agreed a National Employer
Training Programme. Eighty per cent of the people who are going
to be in work in this economy in 2015 are already in employment
and therefore their skills and the fact that they have to be upgraded
is absolutely essential. The employer training programme with
the pilots training 90,000 people in thousands of different small
and medium size businesses as well as large businesses has been
a great success and to extend the national employer pilots into
a National Employer Training Programme, where you have new responsibilities
for employers, with money provided by Government, time off by
employers, the employee taking the responsibility to upgrade their
skills, is absolutely vital to the productivity of the economy
in the future but so too are the improvements in school and post-school
education that I talked about in the Budget document. If we can
get to a situation where every young person who is a teenager
is having some form of training or another, and that includes
an expansion of apprenticeships which are already now at 320,000,
then we would be better equipped to face the challenges of the
future, and our productivity gap which has narrowed with the United
States and France—as well as the productivity gap with Germany
and Japan which has closed during the course of this Government—shows
that we are making improvements, but obviously no one is complacent
about what any advanced industrial economy needs to do to compete
in the future.
Q207 Mr Beard: The Bank of England has
argued that increasing investment per worker is key to driving
long-term labour productivity, but it also goes on to note what
I just mentioned, that this has slowed in recent quarters. Does
this raise doubts as to whether the present trends in productivity
are sustainable?
Mr Brown: Well, I do not think
so because I have just given you the figures for business investment
and I have also given you the figures for productivity improvements,
but what I would say, in agreement with the Bank of England, is
that labour productivity will be enhanced by the greater investment
we propose in the skills of people. Now, if we double the investment
in pupils at schools, and that is what is happening, if we double
the amount of investment that is put in adults in skills education
and if the standards and the achievement in outturns are as good
as the investment itself, then we will start to do better in an
area where we lamentably fell behind over previous decades under
governments of both parties and where we have got to do far better.
Q208 Mr Beard: The IMF described the
possibility of a sharper-than-expected drop in house prices as
"perhaps the greatest near-term risk to the outlook"
for the United Kingdom economy. Do you agree with that view?
Mr Brown: That is not our forecast.
We have said there would be a moderation in the growth of house
prices. We said that last year, we have said it this year and
we continue to say that, and I think that is what people are actually
seeing. I think the IMF, having looked at this some months ago,
may wish to come back and see that the picture is as we have described
it where there has been a moderation in house price growth, but
there has not either been a rapid escalation of house prices,
nor has there been a rapid fall.
Q209 Mr Beard: The Treasury and the MPC
are still taking differing views of the amount of spare capacity
that there is in the economy, with monetary policy being tightened
since 2003 and fiscal policy running a sizeable cyclically adjusted
budget deficit. Does that not imply that the two are pulling in
opposite directions?
Mr Brown: No. I think the Bank
and the Government are coming closer together in their analysis
of what is happening to the output gap and the economy.
Q210 Mr Fallon: Chancellor, the analysis
by this Committee suggests that you will probably meet the golden
rule with around £6 billion to spare, but £3.4 billion
of roads' maintenance was conveniently reclassified as investment
just six weeks before the end of the year. Are you aware that
whilst your officials told us that the Treasury was not involved
in that decision, the Chairman of the Statistics Commission in
a report supplied to this Committee lists the meetings involved,
including, "August 2004—issues regarding Highways Agency
accounting for roads discussed further at a public service data
group meeting on the basis of an HMT paper".
Mr Brown: I disagree entirely
with the presumption of your questions. There was no interference
by the Treasury. This is entirely a matter for the statistics
authorities. They are totally independent in the matter. They
revise—
Q211 Mr Fallon: This meeting was on the
basis of an HMT paper.
Mr Brown: They revise the statistics
from time to time, as they did again on Friday. It is a matter
entirely for their independence and what you are doing by making
these comments is impugning the independence of the Office for
National Statistics and I think that is both unfair and is something
that this Committee has hesitated to do in the past and I would
caution you against doing so.
Q212 Mr Fallon: But this report from
the Statistical Commission says that this issue was discussed
on the basis of a Treasury paper.
Mr Brown: Obviously independence
does not mean that people never talk to each other. Independence
of the Bank of England does not mean that the Treasury does not
have conversations with the Bank of England. It is a ridiculous
proposition, Mr Fallon, to suggest that because the independence
of the Office for National Statistics is clear and obvious that
they should never talk to anybody. What the Statistics Commission
has concluded despite all the points that you are trying to make
to me is this, in the second last paragraph of the letter, and
this must be regarded as the conclusion of their inquiry into
this: "On the basis of the papers available to us, we see
no evidence of any inappropriate involvement of Treasury ministers
or policy officials". Now, it is up to you to say whether
you accept whether the Statistics Commission, which you are quoting,
is accurate in the way it presents its conclusion. It says, "On
the basis of the papers available to us, we see no evidence of
any inappropriate involvement of Treasury ministers or policy
officials", and I can stress to you that at no point was
I or any Treasury minister ever involved in this.
Q213 Mr Fallon: Do you also recall in
March last year that £3.14 billion of Network Rail grants
were reclassified as capital?
Mr Brown: I just pointed out to
you that the ONS are independent and they can make a judgment
on these matters, as they have done on certain occasions in other
directions, and we have to accept their results. Now, either you
accept what the Statistics Commission has said, that there is
no evidence of any inappropriate involvement of Treasury ministers,
and accept that the independence of the Office for National Statistics
is upheld by the decisions and the announcements as made by the
head of the Office, or you will have to talk to them rather than
me about these matters because I was not involved in any of these
decisions at any time.
Q214 Mr Fallon: Do you recall a Guardian
leader on 21 February that said, "If he only meets the rule
because of changes that the Treasury helped to make, then his
much-cherished credibility will be severely dented"?
Mr Brown: The Treasury did not
make these changes and I think again that the presumption of your
question is wrong. I think the Committee should think twice about
going down this road because these are essentially questions for
the Office for National Statistics and the Statistics Commission
rather than questions for me. Perhaps I may also add that when
we are discussing the golden rule and the current balance, I did
stress at the beginning of our discussions when we were engaged
in a debate about the Stability and Growth Pact that the rule
that we set ourselves was a current balance over the economic
cycle. It was not a surplus of X or Y or Z and it did not have
to be in high figures or in low figures; it was simply a rule
that we had to have a current balance over the economic cycle.
Now, why did we set that rule? Because we were aware that the
indiscipline of previous governments had meant that the equivalent
margin in the last economic cycle under the Government of which
you were a member, Mr Fallon, was a minus figure and the minus
figure was £200 billion. That was the margin, a -2% deficit
on average over the cycle, a £200 billion deficit. Now, that
is the sort of indiscipline that we were seeking to avoid and
I think when you see that we are achieving a current balance and
more with some margin to spare, that is the proper contrast to
make between this economic cycle and cycles under your Government.
Q215 Mr Fallon: But you see the credibility
of the problem, Chancellor?
Mr Brown: No, I do not.
Q216 Mr Fallon: If the rule is met by
£6 billion after £6.5 billion of convenient reclassification
by a national statistician that you appoint, an ONS that you fund,
then the golden rule has been bent completely out of shape.
Mr Brown: Well, I think this is
an allegation that you are making about the independence of the
Office for National Statistics which I think will be resented
by the statisticians themselves. Equally, the Office for National
Statistics reclassifies both ways. Sometimes they reclassify upwards
and sometimes they reclassify downwards and it is wrong to say
that the only reclassifications have been in favour of the margin
on the golden rule. What you are doing, Mr Fallon, and I think
it is an unfortunate thing for this Committee to get engaged in
without having talked in detail to the Statistics Commission or
the Office for National Statistics, is impugning the integrity
of the Office for National Statistics and I think that is an unfortunate
development in this Committee and I would ask you to think twice
about it. I say to you that there was no interference in the Office
for National Statistics or in the Statistics Commission. The Statistics
Commission has made its judgment which I hope you and the Committee
will accept and I think these matters are matters for independent
statistics authorities and there is no Treasury interference and
certainly no ministerial interference.
Q217 Mr Fallon: Would it not be more
believable if these bodies were independent? You fund the ONS
and it reports to you. It is your department.
Mr Brown: We fund the Institute
of Fiscal Studies and we give them grants, but it does not mean
that they report in favour of everything we do. We fund large
numbers of charities in this country and I assert their independence.
If I may say so, government funds the Opposition Party and we
do not interfere with your independence either to ask me questions
or, alternatively, to criticise us.
Q218 Mr Fallon: But the Office for National
Statistics is a public body which reports to you.
Mr Brown: Public funding goes
to the Conservative Party!
Chairman: Chancellor, Len Cook does appear
before our Committee. In fact he is one of our best pals. He described
himself as one of the most abused civil servants after George
Mudie had served a critical analysis of him, so he comes before
us regularly and we engage in very lively, constructive and amiable
conversation with him.
Mr Mudie: He is going back to Australia
this year!
Mr Beard: He also said before the Committee
that he had never experienced any political interference in anything
they had done.
Q219 Norman Lamb: Just to clear all this
up, presumably you would be prepared to release the papers under
the Freedom of Information Act relating to the discussions with
the Office for National Statistics? This is not policy development.
Mr Brown: Well, we will comply
with the Freedom of Information Act, but I do say that the Statistics
Commission has reported in a letter of 15 March that, "On
the basis of the papers available to us, we see no evidence of
any inappropriate involvement of Treasury ministers or policy
officials", and I think the attempt to make this an issue
when we of course are bound by the Freedom of Information Act
is unfortunate because it is not an issue about the role of the
Treasury, but it is an issue about the independence of the Office
for National Statistics.
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