Examination of Witnesses (Questions 240-259)
22 MARCH 2005
RT HON
GORDON BROWN
MP, MR JON
CUNLIFFE, MR
MIKE ELLAM,
MR DAVE
RAMSDEN, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q240 Norman Lamb: But planning for the
next cycle—
Mr Brown: Hold on. The International
Monetary Fund, which you quoted liberally, actually says in its
March 2005 report in its conclusions that, "fiscal and monetary
policy frameworks", that is, in the United Kingdom, "remain
at the forefront of international best practice". The idea
that there is something wrong with our fiscal framework is not
proven either by your question or by the report of the International
Monetary Fund.
Q241 Mr Heathcoat-Amory: Can I take you
back, Chancellor, for a moment to the Stability and Growth Pact
mark II which you severely criticised. You indicated that although
the most severe penalties would not apply to non-eurozone countries
like us, they will apply of course to the eurozone itself. Therefore,
surely this has created a new roadblock to British entry to the
euro?
Mr Brown: It is not in the Treaty
nor is it going to be in any regulation. It is guidance that is
put forward by the Commission and accepted by the Council of Ministers,
but I think, as you will find today when the document is published,
that it is not as rigid in its implementation as you might imagine
because they are looking at factors that have got to be taken
into account even after that medium-term objective is said not
to be met, so there is more flexibility than I think your question
suggests. The important point, however, I wanted to stress to
you as a committee is that because we have this investment programme
that is 2.25% of GDP, I would have had to change our current balance
budget rule ensuring that we had a current surplus in the next
economic cycle if I were to meet the terms of that, and that is
why it seemed to me right that we should be outside the requirement
and that it would be a requirement simply for members of the euro
or the ERM.
Q242 Mr Heathcoat-Amory: The proposals
as published still provide for penalties, so they will apply fiscal
penalties to countries breaking the rule and that is fairly clear
from the public document. These will apply to countries that join
and that would be the position of the United Kingdom, so will
you be adding a sixth economic test to your existing five ones
to get round the misgivings which you have outlined?
Mr Brown: I am rightly advised
that there are no fiscal penalties in relation to the -1%.
Q243 Mr Heathcoat-Amory: I did not say
the 1%. You mentioned the 1%. I am talking about the—
Mr Brown: Are you talking about
the 3% deficit? That has always been the case. It is not changing.
Q244 Mr Heathcoat-Amory: I am talking
about the rules that you criticised earlier on this morning when
you were saying how you could not accept it.
Mr Brown: Yes, but they do not
have fiscal penalties associated with them, as you suggested.
The -1% is a medium-term objective that would lead to the Council
stating an opinion rather than there being fiscal penalties. The
fiscal penalties arise only in respect of the 3% deficit once
the Council, on the recommendation of the Commission, have decided
that this has not been dealt with properly.
Q245 Mr Heathcoat-Amory: So you believe
that the United Kingdom could join the eurozone and then ignore
the guidelines in this matter?
Mr Brown: What I am actually saying
is that the Stability and Growth Pact is an evolving document.
I believe that they have started a process of change this week.
I do not know what the final conclusions of this meeting will
be today and tomorrow because obviously the Heads of Government
will look at this document and may make some changes in it. My
own view is that as the intellectual argument moves in favour
both of our investment ideas and our suggestion that debt be taken
into account as well as the economic cycle, I think that the Stability
and Growth Pact will change in future years.
Q246 Mr Heathcoat-Amory: So let's be
clear, that if the Council do confirm the rules as published in
this paper, it will make no difference to the principal decision
by the Government to join the euro?
Mr Brown: It is not a requirement
for euro entry. There is no change in the requirements of the
Treaty about euro entry, and the requirements in the Treaty are
60% debt levels and a 3% annual deficit. There is no change in
these requirements and there is no new regulation about this -1%
coming. What I wanted to ensure, however, was that our investment
programme that we believe is the right thing for Britain was not
said to be the wrong thing for Britain as a result of that set
of recommendations, but it has no constitutional bearing on our
ability to enter the euro.
Q247 Mr Heathcoat-Amory: But if these
new rules are to have any meaning at all, they must apply to countries
that join and unless you are to completely disregard them, they
must, therefore, affect the decision for Britain to join?
Mr Brown: But there are no fiscal
penalties associated with them, so you are absolutely clear about
that, and my own view is that the Stability and Growth Pact is
an evolving pact and, therefore, it will change in the years to
come.
Q248 Mr Heathcoat-Amory: So it is just
a collection of suggestions which you have blatantly ignored?
Mr Brown: No, it will be applied
to the existing members of the euro currently as things stand,
although there will be no fiscal penalties associated with the
new decision.
Q249 Mr Heathcoat-Amory: So it makes
no difference at all to your decision to join?
Mr Brown: There is no constitutional
impediment.
Q250 Mr Heathcoat-Amory: I did not say
"constitutional impediment"; I am talking about your
attitude.
Mr Brown: Our decision about joining
the euro is based on our five tests and these are the five tests
that would be assessed again if we made a decision in a future
Budget that that assessment should take place, and it is these
five tests that would have to be looked at in the context of all
the changes that have taken place in Europe over the years, and
I could not give you a conclusion on the basis of that, but that
would be for that assessment either to recommend or not recommend.
Q251 Mr Heathcoat-Amory: But your five
tests were drawn up more than five years ago before these issues
arose, so why should you not put a sixth test in to take account
of the various misgivings that you have just expressed?
Mr Brown: I think the ability
to converge and to do so on a sustainable basis is actually one
of the major tests that is part of the five-test process. It includes
flexibility of course and it includes employment and what happens
to the financial services, but to have a sustainable convergence
test and to make that a central part of any further review would
include this issue itself.
Q252 Mr Heathcoat-Amory: Well, having
established the sort of optional suggestions, if of no real significance,
can I ask you about what must be a more worrying development in
the European Union which is the undermining of our tax base by
a series of European Court of Justice decisions which are affecting
our tax revenues. We are advised that very, very large sums of
money are potentially at stake here. Do you take that into account
in your projections for next year's revenue which are due to rise,
according to your Budget documents, by over 8%?
Mr Brown: Yes, we take all things
into account. The UK would defend vigorously any challenges to
UK tax law that UK courts refer to the European Court of Justice
and we will take whatever action is necessary to remove uncertainty
produced by ECJ decisions. If you remember, in April 2004, I enacted
a number of changes to the corporation tax laws that protected
the vast majority of businesses from unnecessary compliance costs
in so doing in the wake of that decision of the ECJ in the case
of Langhorst, and that was concerning Germany's rules on
capitalisation. We have taken action and we will continue to look
at this matter very seriously. I think that the figures on corporate
tax revenues stand up on all accounts, and I am quite happy to
debate these with you now.
Q253 Mr Heathcoat-Amory: You mentioned
earlier that you wanted the Stability and Growth Pact to be intergovernmental
and not part of a federal tax policy, but these European Court
decisions are based on Single Market considerations and powers
and are having an effect and they are attacking your ability to
set an autonomous tax policy here. Does that worry you and why
do you not use the opportunity of the drafting of the European
Constitution to revise and restrict those powers?
Mr Brown: Well, we have done what
we can and continue to do what we can to defend the UK tax base
in relation to these judgments. It is legitimate to say that the
Single Market is an objective of all of us and I think it is an
objective of your Party as well and, therefore, people that are
using artificial barriers to prevent the Single Market operating
have got to be dealt with, but where it affects our tax base,
we have been vigorous in defending the UK. I think I say in the
Budget documents very clearly that, "the Government is determined
to defend the corporation tax system robustly against challenges
under European law", and that is on page 125, paragraph 5.111.
Then we list the steps we have taken, showing that the Government
will act where necessary to remove uncertainties created by the
decisions and to ensure that revenues are secured. If I may say
so, this is something that we hold in common with other members
of the European Union who also want to defend their tax base in
relation to these decisions.
Q254 Mr Heathcoat-Amory: Why was the
opportunity not taken to restrict single market powers to removing
barriers to trade, rather than using them to undermine national
tax policy? Why did you not use that opportunity when the European
constitution was negotiated?
Mr Brown: Our point is where the
single market is affected by people creating artificial barriers
there is the right to act in that respect; but we are vigorous
in defending our tax independence in relation to these issues.
Q255 Mr Heathcoat-Amory: Can I ask you
about the overall tax take. There was some confusion between ourselves
and your officials yesterday about the advice we have received
that—leaving aside the North Sea oil revenues which are
distorting historically—the rest of your tax take (including
National Insurance contributions) as a percentage of GDP is heading
for a record. In the words of one of our witnesses, "We are
therefore into uncharted waters". You have made great play
today again about your need to boost international research and
development and attract international investment and capital.
How can you be sure you are going to go on doing that if we are
increasing our tax take at the same time when a number of other
countries, particularly outside the European Union, are reducing
it?
Mr Brown: This does not seem to
me to accord with what has actually happened in practice. There
are years when our tax take, both including the North Sea and
not including the North Sea, has been very high as a percentage
of GDP indeed. These are not the highest years and the years ahead
are not the highest years, as I understand it. I think as far
as our forecasting of corporate tax receipts is concerned, anybody
who has been following what has been happening in the company
sector over the last few months will know that our five largest
oil companies show total global profits increased by just over
40%. They will show that seven of the largest UK retail banks
showed a weighted average global profit of 17%; and show that
a sample of 40 FT 100 non-financial groups had a weighted average
global profit of more than 23%. The idea that our companies that
are paying corporation tax are not profitable, and therefore that
our receipts are not likely to be higher, is completely false.
It is totally in line with both the recovery of the growth of
the economy and the recovery of the growth of profits in the economy
that our Corporation Tax increase is going to be substantial.
I find it difficult, when these figures are examined, to sustain
the thesis some people are trying to put that there will be no
substantial increase in Corporation Tax revenues. It is what happened
in every economic cycle; happened actually in a more acute and
accentuated way in other economic cycles; and it is going to happen
in this economic cycle.
Q256 Mr Fallon: Just looking at C9 on
page 254, you see the total there and you see net taxes and National
Insurance Contributions jumping from 35.6% last year to 38.5%
in five years' time. How many more billions of extra tax is that?
Mr Brown: These are simply the
projections that are made on the basis of the rising level of
growth in the economy, and the rising number of taxpayers as a
result of rising employment. If I may say so, the last Conservative
Government before the Election in 1997 presented almost exactly
the same figures as us, showing almost exactly the same rise in
the percentage take of tax. That is normal for any government
reporting when there is a projection of higher economic growth
and a higher number of taxpayers. If you would like me to read
out the figures for your government they are roughly the same
plateau.
Q257 Mr Fallon: Thank you, but you are
here to answer questions about your Government.
Mr Brown: I am explaining, Mr
Fallon, that it happens under every government.
Q258 Mr Fallon: Under your Government,
how many billions is this?
Mr Brown: If that figure was not
rising it would assume there would be no economic growth. If that
figure was not rising it would assume there was to be higher unemployment.
If that figure was not rising it would assume companies were not
going to be profitable. I think it is a good thing for the British
economy but—because we have extra growth in the economy;
and because we have more people in work; and because we have businesses
that are profitable—that figure (as has happened in every
previous government's projection about future years where they
expect there to be growth) is rising. The projections are exactly
the same as happened under your government—in fact almost
identical when they moved from 36.3% to 38.5%.
Q259 Mr Fallon: You are refusing to tell
me how many billions of extra tax that is. If the economy is slowing
towards a trend growth, how can we be sure that the big increases
you are factoring in, in personal taxes (and I think your total
of Income Tax and National Insurance would go up from 17.1% to
18.7%) will not be delivered by higher rates of tax rather than
higher volumes?
Mr Brown: The reason you can be
sure that these figures are based on the Income Tax rate remaining
the same is that the number of tax payers has actually grown as
a result of employment growing from something like 26 million
to 29.9 million. The reason there is more tax revenue is not that
people are paying a higher rate; the reason is that more people
are in work and, therefore, generating more income. One of the
additional reasons is that there are more people earning higher
salaries as a result of the expansion of the economy. As I said
in my Budget Statement, the numbers of people earning more than
£30,000 have doubled in the last eight years; the numbers
of people earning over £50,000 have doubled, and the numbers
of people earning over £100,000 have doubled. It is hardly
surprising that, on the basis of the same rate of taxation (in
fact the Income Tax rate fell from 23% to 22%—as you probably
know we cut the basic rate of Income Tax) it is still possible
to generate additional revenues because more people are working
and more people are earning more. If I may say so, in future years
because of the recovery of profits more people are earning quite
substantial bonuses, which affect in quite a substantial way the
revenue figures as well. There are at least three factors—more
people earning; more people earning more; and more people earning
bonuses—which explains the rise in Income Tax revenues.
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