Examination of Witnesses (Questions 260-279)
22 MARCH 2005
RT HON
GORDON BROWN
MP, MR JON
CUNLIFFE, MR
MIKE ELLAM,
MR DAVE
RAMSDEN, MS
SARAH MULLEN
AND MR
JOHN KINGMAN
Q260 Mr Fallon: You were careful there
to say that Income Tax rates might stay the same, but not to rule
out an increase in National Insurance rates.
Mr Brown: I am telling you that
the assumptions behind these tables, as you would expect, are
the assumptions of the rates of Income Tax and National Insurance
set in the Budget.
Q261 Mr Fallon: So we can be guaranteed
there will be no rise?
Mr Brown: That is the pattern
of every government when they produce these figures. If you are
asking what rates of taxation is the policy of the Government
for the future that will be set out in our Election Manifesto.
Q262 Mr Fallon: We are not getting a
guarantee that National Insurance will not rise?
Mr Brown: You are going to get
an Election Manifesto soon, and perhaps you will have an Election
Manifesto because there may be an Election this year or next.
Q263 Mr Plaskitt: Chancellor, in the
opening exchanges you mentioned the importance of increasing public
investment; and you have, of course, a plan to raise it to 2¼%
of GDP. The outturn figures we have show that public sector investment
does rise year on year—it is rising as you wished—but
keeps falling short of forecast. Already your figures for 2004-05
have been reduced by £3.4 billion. Why are Departments still
struggling to deliver the projected investments?
Mr Brown: It is true that our
projections for investment and the outturns show that Departments
still have got to go some way in moving up their investment levels.
Equally, if I give you the cash figures for net investment, it
is rising from £10 billion in 2001-02, to £18 billion
in 2004-05, to £26 billion this year coming, in 2005-06.
Whichever way you look at it there has been a doubling of both
the cash in real terms investment that is taking place in the
economy. That is a big change from where we were a few years ago
when it was 0.7%. It is already projected to be 2.1% next year.
Q264 Mr Plaskitt: That is beyond argument,
but I am looking at the slippage that keeps occurring. Given there
have now been several years in which Departments can have confidence
that the macroeconomic backdrop will fund their investment, why
do we nevertheless still appear to have Departments that are sluggish
in actually getting the money out? Are there any particular Departments
that are largely to blame for it?
Mr Brown: Some expenditure, of
course, is expenditure not by the Departments themselves but they
are relying on local authorities or public corporations to do
so. When you devolve decisions to local authorities and public
corporations it is for them to decide when and the speed at which
they make their investments and it cannot be a dictated by central
government. Net investment by local authorities and public corporations
has come in lower than Budget forecasts and PBR estimates. If
I could give you the figures for recent years: 2000-01 Budget
forecast £22.1 billion, outturn £20.4 billion, on the
capital DEL this is; and then £25.3 billion to £24.1
billion. There is a slippage, but it is not as big as happened
in previous times.
Q265 Mr Plaskitt: Does the scale of slippage
that is still there concern you? Have you got plans to make any
changes to give Departments and local authorities even greater
incentives to deliver on the investment plan?
Mr Brown: Ironically, by giving
them greater incentives, they have in a sense achieved the opposite;
because what has actually happened (if I may sum this up) central
government investment is broadly on target; local authorities
and public corporations have seen some slippage; but the reason
local authorities have seen some slippage is because they have
also had permission for asset sales and their asset sales are
used for investment and that has been higher than expected, which
means that the demand on public funds has been lower.
Q266 Mr Plaskitt: Can you just turn to
the issue of public sector pensions. They are being looked at
and reforms are being proposed across the board in most of the
big public sector pension areas. Why is it necessary to do that?
Mr Brown: Why is it necessary
to reform public sector pensions?
Q267 Mr Plaskitt: Yes.
Mr Brown: This is really a matter
that the Pensions Commission and Adair Turner is going to report
on in the next few months—but the general view is that as
people live longer, which is a very good thing, and as we update
actually people's expectations of longer life, then the pension
system will have to adjust accordingly. Of course there has been
for funded pensions problems because of what happened on the Stock
Exchange in previous years, pension holidays by employers. As
far as the public sector is concerned, as with the private sector,
we have got to adjust to people's longevity. I am told that at
every point people's expectations of what is the longevity is
less than the actual outturns; and because the original pension
ages were decided when the average life expectancy was lower than
the pension age, and now the average life expectancy is 15-20
years higher than the pension age, that is why you have got to
look at the cost of these things over time.
Q268 Mr Plaskitt: The reasons are essentially
demographic?
Mr Brown: There are big demographic
changes taking place. There is a rising population of the elderly;
that has got to be funded obviously by some expenditure by the
working population and, therefore, we have got to get the balance
right between the responsibilities that fall on the working population
of the day and our duties and responsibilities to the elderly.
That is essentially what the debate is about. I do think we will
have a clearer idea both of public sector pensions and private
sector pensions when we have the final report of the Turner Commission.
He has already looked at the demographic changes that have taken
place and found that they are far more significant than people
have imagined them to be. What the financial implications of that
are for our long-term planning of pensions is something that he
will want to comment on. Then I think there ought to be quite
a major public debate on these issues.
Q269 Mr Plaskitt: The problem is the
discussions between the employers and employees in the public
sector pension schemes are taking place right now?
Mr Brown: I think you will find
with the announcement at the weekend that further discussions
are going to take place, and that will allow some of the information
already provided by the Turner Commission interim report and what
he might say later to be part of the equation. There is recognition
that this new information should be part of the discussion.
Q270 Mr Plaskitt: You have said that
a big driver in it is demographics. When we had Mr O'Donnell before
us a few months ago he put it to me that the reason why the public
sector pension reforms were being examined at that time was that
it was part of the efficiency measures the Government was trying
to deliver?
Mr Brown: I do not think these
two statements are incompatible. The efficiency the Government
has got to achieve is in the light of our knowledge of what is
happening to the likely end cost because of demographic changes.
Q271 Mr Plaskitt: The statement, which
we looked at in relation to the teachers' pension scheme, where
the efficiency technical notes say that "the benefit is a
reduction in the long-term cost of the scheme", should we
interpret that as an efficiency measure or a response to demographic
measures?
Mr Brown: I think it is both.
I have the papers on the teachers' scheme in front of me and they
merely explain that the new final salary scheme for new entrants
would come in 2006 but only apply to existing staff in 2013, but
that is something which has never been discussed.
Q272 Mr Plaskitt: The note does say that
the objective is long-term reduction in the long-term cost of
the scheme, does it not?
Mr Brown: I think costs are probably
set against what the likely costs are as a result of the demographic
changes.
Q273 Mr Plaskitt: Can we just get some
clarification on the total liability of the unfunded public sector
pension schemes. What is the Treasury's view as to what that number
is?
Mr Brown: In the House of Commons'
Library in February this year, in response to a Parliamentary
Question, we said that £425 billion is the most recent public
figure we have for public sector pensions liabilities; but we
do not regularly publish these figures. What really matters for
the public finances, of course, is the amount that has to be paid
out each year for public sector pensions; and this figure was
published alongside the PBR in the Long-term public finances report
and is currently 1.5% of GDP and in 50 years from now it is expected
to rise to 2.2% of GDP. Our current estimate of the total liabilities
for April 2004 is around the figure put in the House of Commons'
Library.
Q274 Mr Plaskitt: If the changes that
were being proposed and are now being looked at again, as you
have just said, are in the end not made what impact would that
have on the liabilities and on the cost of meeting the pensions
bill?
Mr Brown: Again, this debate will
continue as a result of the Turner Report, but we have got to
meet strict Budget guidelines; we must meet our golden rule; therefore,
over the economic cycle we must be able to run a balance or a
surplus. What we pay out as pension liabilities has got to be
taken into account when we look at how we meet our golden rule
and how we meet our fiscal rules in the future. There should be
no expectation that we are going to loosen our disciplines.
Q275 Mr Walter: Chancellor, I just wanted
to probe you a little bit on that. You were going to go ahead
with these pension reforms and then the first division civil servants,
the permanent secretaries and ambassadors, voted for industrial
action and you are back to renegotiate. I do want to push on overall
liability and Watson Wyatt, a very respected firm of consulting
actuaries, have estimated that the liability is £690 billion,
which is considerably more than the outstanding national debt.
Do you think their figure is wide of the mark?
Mr Brown: Yes.
Q276 Mr Walter: Let us assume that these
negotiations mean that the existing scheme continues—which
is obviously the desire of Mr Cunliffe (and I do not mean to personalise
it) and his friends in the first division association—then
that means those Departments— You are asking him whether
he voted for industrial action!
Mr Brown: He is explaining that
he is working tomorrow, and next Sunday as well!
Q277 Mr Walter: Does that mean those
Departments which have built in their efficiency savings based
on these savings in pension liabilities will now have to revisit
their Efficiency Review?
Mr Brown: No, because we made
no change in our estimate. There is considerable discussion about
the future of pensions. The Turner Commission is looking at these
matters. These demographic factors have got to be taken into account.
If the debate needs to incorporate these judgments and these new
pieces of information then all to the good, because we need a
debate that is mature and sensible about the long-term future
of pensions in our country. I am not proposing that we relax our
fiscal rules, and there will be no proposal that we relax our
fiscal rules. Therefore, when I say that the most recent figure
is in the order of £425 billion, it is not the £690
billion that the firm you have quoted, Watson Wyatt, has said
and I do not accept it.
Q278 Mr Walter: The point is if the negotiations
are such that the pension scheme does not change then you are
going to have to find those savings somewhere else?
Mr Brown: I am sorry, I do not
understand.
Q279 Mr Walter: You are assuming that
the negotiations, therefore, will lead to what you have already
proposed and that the unions will back off?
Mr Brown: What I am assuming is
that we will meet our fiscal rules and we will take whatever action
is necessary to meet our fiscal rules. I am giving you the figures
for the public sector liabilities both in terms of the overall
assessment of around £425 billion and that will obviously
change from time to time depending both on employees and the age
profile of the public sector; but, equally, as far as our costs
are concerned we do not imagine that they will rise above 2.2%
of GDP in 50 years' time.
Mr Walter: So the savings will have to
be found somewhere else.
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