Oral Evidence

Taken before the Treasury Committee

on Tuesday 22 March 2005

Members present

Mr John McFall, in the Chair

Mr Nigel Beard

Jim Cousins

Angela Eagle

Mr Michael Fallon

David Heathcoat-Amory

Norman Lamb

John Mann

Mr George Mudie

Mr James Plaskitt

Mr Robert Walter


Witnesses: Rt Hon Gordon Brown, a Member of the House, Chancellor of the Exchequer, Mr Jon Cunliffe, Managing Director, Macroeconomic Policy and International Finance, HM Treasury, Mr Mike Ellam, Director, Policy and Planning, Mr Dave Ramsden, Director, Tax and Budget, HM Treasury, Ms Sarah Mullen, Director, Public Spending, and Mr John Kingman, Director, Enterprise and Growth Unit, examined.

Q1 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.

Q2 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 21/4% 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.

Q3 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.

Q4 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.

Q5 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 21/4% of our GDP and therefore you would have had to run a current surplus of nearly 11/4%/11/2% to enable you to meet what were the guidelines being set down by the European Union.

Q6 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.

Q7 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.

Q8 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.

Q9 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.

Q10 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 twenty 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.

Q11 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.

Q12 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.

Q13 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.

Q14 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.

Q15 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.

Q16 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 ----

Q17 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.

Q18 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.

Q19 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.

Q20 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.

Q21 Mr Fallon: But you see the credibility of the problem, Chancellor?

Mr Brown: No, I do not.

Q22 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.

Q23 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.

Q24 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.

Q25 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.

Q26 Norman Lamb: But surely given that it actually gives you an extra 3.4 billion to play with in terms of meeting the golden rule is actually something that we ought to be pursuing and ought to be questioning?

Mr Brown: We would meet the golden rule irrespective of that adjustment and, if I may say so ----

Q27 Norman Lamb: You have not done so with respect to Network Rail. Those two adjustments probably take away the ----

Mr Brown: I am sorry, but you misunderstand us. The Office for National Statistics adjusts upwards and downwards on a relatively frequent number of occasions and there will be downward adjustments as much as there are upward adjustments. If you are telling me that the only two adjustments that have been made in this cycle are both upwards, you are entirely wrong and I would suggest that the Committee, before they impugn the integrity of the Office for National Statistics, look at the facts.

Q28 Norman Lamb: No, we are asking questions quite properly and it would be good if you could release all the papers that relate to this.

Mr Brown: We will release everything that is required under the Freedom of Information Act.

Q29 Norman Lamb: You also talk quite rightly of the importance of independence, so just to follow the question that Michael Fallon asked, would it not, therefore, be sensible to make it a properly independent body rather than an executive agency of the Treasury?

Mr Brown: It is an independent body.

Q30 Norman Lamb: But it is an executive agency of the Treasury.

Mr Brown: Nobody has suggested in this debate, apart from Mr Fallon and perhaps yourself, that the independence of the Office for National Statistics has been compromised. In fact I had quoted - just mentioned by Mr Beard - the statement by Mr Len Cook that his independence had not been undermined. We strengthened the independence of the Office of National Statistics and of course we are anxious that it remains an independent body.

Q31 Norman Lamb: But it is an executive agency of the Treasury.

Mr Brown: If I may say so, either to suggest that because there are conversations between an independent body and the Treasury or because it is funded from public funds that its independence is inevitably compromised is very unfortunate and a totally fallacious statement to make.

Q32 Norman Lamb: So it remains an executive agency of the Treasury?

Mr Brown: It remains independent and will continue to be independent. It is the independent Office for National Statistics and again I think it is an unfortunate allegation that somehow it is not independent.

Q33 Norman Lamb: The key assumptions underlying your fiscal projections are audited by the National Audit Office under a three-year rolling review process. Although it was due, you asked the NAO not to audit your assumption for trend growth. Why did you decide to depart from the normal arrangements and defer this audit?

Mr Brown: I will ask Mike Ellam to deal with that, but as far as trend growth is concerned, you know that trend growth has been upgraded from 2.5% to 2.75%, but what we use for public spending forecasts is 2.5%, so even though trend growth is assumed to be 2.75%, for public finance forecasts we use a far more cautious assumption which I hope people will see is a measure of my caution in these matters.

Q34 Norman Lamb: But why depart from normal practice?

Mr Brown: Well, I think there was another decision about the 2007/08 period, that the trend rate of growth should be downgraded because of demographic changes. I think we have not departed from that.

Q35 Norman Lamb: But that you departed from normal practice is the point I am making. Why is that?

Mr Cunliffe: If I may answer, I do not think it is a departure from normal practice. There has been at least one other occasion on which an audit has been rescheduled simply because of when the information which you need for the audit is best available. I should say that the trend rate of growth has been audited. The 2.75% assumption, which is our central rate, and maybe knock it down by 0.25%, has been audited. What has not been audited is our decision to reduce the trend rate further from 2.75% to 2.5% in 2007/08 which is a decision we took two years ago on demographic grounds mainly to do with changes in the size of the workforce, so what the NAO will be auditing will, therefore, be our decision to reduce it from its current rate going further down. We thought with an on-trend point coming, we think, around the end of 2005 or the beginning of 2006 that it makes sense for the audit to take place so that actually the National Audit Office has two on-trend points and can look at our methodology. It is purely a technical issue, but that is the way it has been done.

Mr Brown: If I may say so, the information Mr Cunliffe has given is that there is no benefit to us in meeting the golden rule in the next cycle on this at all because the assumption would be that if we put it back to the NAO, it might be the case that they would say that the trend rate of growth is not, as we suggested, 2.5% in 2007/08, but higher than that, so this is of no benefit to the Government in meeting the fiscal rule in the next cycle at all, so your point, if anything, is one in our favour.

Q36 Norman Lamb: But does not the fact that the Comptroller and Auditor General have to be invited by you to audit Budget assumptions or anything else, even though it is supposed to be subject to a three-yearly review, undermine the credibility of the process?

Mr Brown: No.

Q37 Norman Lamb: We put it to you before that should they not be able to audit what they want to audit?

Mr Brown: Well, it depends about what you see in the future as the right balance between an independent fiscal authority and Parliament itself, and if you wish to transfer responsibilities for fiscal policy to an independent authority ----

Q38 Norman Lamb: No, not responsibility, but the right to audit, which you give them on your chosen areas.

Mr Brown: If I may say so, it is getting the balance right between the independence that is given to the National Audit Office and our responsibilities to Parliament itself. Now, the difference between monetary policy and fiscal policy is that any decision on taxation and spending is, in my view, rightfully made by Parliament itself. This is our issue in relation to the Stability and Growth Pact, that we do not believe that the Stability and Growth Pact should be fiscal federalism, but it should be intergovernmental and it is equally our answer to you in relation to the National Audit Office, that getting the balance right between the independence of the National Audit Office and our responsibilities to Parliament is what I am anxious to achieve. Now, I hesitate to suggest what the National Audit Office would say about liberal fiscal policy if it were put to them, but the question, in my view, in the long run is: what are the legitimate responsibilities of Parliament in relation to tax and spending? I think most members of this Committee ----

Q39 Norman Lamb: I am not suggesting any shift of responsibilities, just the right to audit what you are doing.

Mr Brown: I think most members of this Committee would want to uphold the duty of the Chancellor and the Government and the Treasury, therefore, to report to Parliament on these matters.

Q40 Norman Lamb: We are not suggesting any changes there.

Mr Brown: Well, if you do not want there to be an independent fiscal authority, then there are going to be limits as to the amount of independence that the National Audit Office is offered in this regard.

Q41 Norman Lamb: Can I move on to the issue of reform of fiscal rules. Your response to our report on the PBR tells us that the Government of course keeps the fiscal framework under review to ensure that it remains at the forefront of international best practice. Under that ongoing review process, what aspects of the fiscal framework are you focusing on most closely as candidates for future improvement?

Mr Brown: We look at these things all the time ----

Q42 Norman Lamb: But what are you looking at at the moment?

Mr Brown: ---- and we continue to look at all aspects of these things.

Q43 Norman Lamb: Yes, but is there anything that is the focus of your attention?

Mr Brown: If I had a proposal, I would have brought it to the House of Commons in the Budget. We did discuss all these things, as you know, in relation to membership of the euro and we did look at the framework for fiscal reporting that there would have to be to the House of Commons and, therefore, the fiscal framework that would operate in relation to the euro, but we decided that it was not the right time to make a recommendation about the euro, so there was a lot of thinking done at that particular point in time, but I have no proposals to make to you because, if I had, I would have made them in the Budget last week.

Q44 Norman Lamb: The IMF has said that, "Given that the golden rule is a symmetric current balance, or better, over the cycle and that shocks are inevitable, the Government would need to target a large current surplus if it wanted the probability of meeting the rule to be large". They make the point that, in other words, attempting to drive the risk of breaching the rule close to zero, it is very costly from macroeconomic and inter-generational perspectives. Do you reject that?

Mr Brown: Yes, because you are assuming that we are not meeting the rule. We are meeting the rule and ----

Q45 Norman Lamb: Looking to the next cycle ----

Mr Brown: I think Mr Fallon did say at the beginning of his intervention that we were meeting our fiscal rule. The International Monetary Fund ----

Q46 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.

Q47 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.

Q48 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%.

Q49 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.

Q50 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.

Q51 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.

Q52 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.

Q53 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.

Q54 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.

Q55 Mr Heathcoat-Amory: So it makes no difference at all to your decision to join?

Mr Brown: There is no constitutional impediment.

Q56 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.

Q57 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.

Q58 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.

Q59 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.

Q60 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.

Q61 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.

Q62 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.

Q63 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.

Q64 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%.

Q65 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.

Q66 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.

Q67 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.

Q68 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.

Q69 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 21/4% 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 2004/5 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 2001/2, to 18 billion in 2004/5, to 26 billion this year coming, in 2005/6. 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.

Q70 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.

Q71 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.

Q72 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?

Q73 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.

Q74 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.

Q75 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.

Q76 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.

Q77 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.

Q78 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.

Q79 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.

Q80 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.

Q81 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.

Q82 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!

Q83 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.

Q84 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.

Q85 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.

Q86 Mr Cousins: Chancellor, this issue of tax avoidance has already been referred to earlier by Mr Heathcoat-Amory. Do you think that fairness is put at risk when so much of our national energies are put into financial engineering, the introduction of tax avoidance schemes and the use of offshoring and tax havens to dodge tax?

Mr Brown: Clearly it is a problem, or we would not have to act against it. We introduced new disclosure rules which have been successful. Where a scheme has been planned by accountants, they have a duty to inform us of that process. The reason we did that, we did not want clients being advised that a scheme was legitimate and would continue in existence and that the Inland Revenue would never take any action against it. We thought it was right for the customer to be advised quickly as to whether a scheme being promoted would have a chance of continuing. This has been relatively successful. It enables early targeted action to be taken. It reveals those using avoidance schemes, so that they can be challenged. It informs risk assessment of avoidance activity. So it achieves a number of different objectives. We have now extended the disclosure regime in the Budget to Stamp Duty Land Tax on commercial property (which has been an area we have been worried about), and to two more listed VAT schemes and an additional VAT hallmark. The Stamp Duty Land Tax rules will take effect from 1 July; and the new rules for VAT disclosure will take effect after Royal Assent. The disclosure requirements have become a very important part of how we deal with continued tax avoidance.

Q87 Mr Cousins: That suggests, Chancellor, that you are operating with the idea not necessarily of trying to draw a hard and fast permanent line between what is to be regarded as avoidance and what is not to be regarded as avoidance, but rather more responding to the ingenuity of contemporary financial engineering?

Mr Brown: I think financial institutions will always be ingenious. I think people will devise new schemes to benefit their clients. Why we have a disclosure rule is because we think it is a more responsible way of acting, to disclose that that scheme is in existence so that the Revenue is in a position to say whether they believe it is a legitimate scheme, or a scheme that they wish to act on immediately. Certainly this requirement to disclose, which is not popular but I think has now been accepted as the right way forward, means that we can act quickly where there is an avoidance scheme that may in the end mislead their clients as to whether they will be able to get tax relief on a particular item, or a particular activity.

Q88 Mr Cousins: Continuing with the issue of fairness - the Government has been successful in reducing the tax burdens on the least well off, particularly those that earn, and of course many low income earners now are on negative tax rates. Do you think this can be sustained without major reforms to Housing Benefit, and possibly the introduction of some kind of housing allowance to support low income earner occupation?

Mr Brown: These are big issues. We published on the day of the Budget our document on tax credits which suggests that the Housing Benefit may be one of the areas where further reform could be made. Basically the tax system has moved from being (as we inherited it) a 20p rate to a 40p rate; from 40p at the top to potentially -200% at the lower end. That means that the tax authorities, instead of receiving money from certain people, are actually paying money out to people. It also means, because of our generous system of Child Tax Credits, that someone with an income of around 22,000, if they are a family with two children, will have all their Income Tax liabilities wiped out by the payments of Child Tax Credits and Child Benefit to them. We have effectively created a system of taxation which is fairer to people who work, fairer to families with children and, because of what we have done in ISAs, fairer to people who save. That is what tax credits enable you to do.

Q89 Mr Cousins: Do you not agree - and this issue is flagged up very clearly in the document to which you have referred - 30% of housing tenure is renting; and in addition to that there are a number of low income owner/occupiers, and it is going to be very difficult to continue the Government's strive to fairness without extending major reforms and assistance through the Housing Benefit system?

Mr Brown: I think there are questions here. First of all, I think we have got to do more to help people afford to buy their first home, as well as help people who are tenants.

Q90 Mr Cousins: But you may have to support them after they have bought it?

Mr Brown: The issue is whether the payments they have to make for their mortgages are payments they can, in the end, afford to make. That can be done in a number of different ways. It is a possibility that we can move further and faster on, what I suggested in the Budget last week, shared equity schemes. Instead of the home owner owning 100% of the equity of the house, they share that with the government and the mortgage lender themselves. There are some pilot schemes being looked at for 70% ownership and shared equity with the government and Council of Mortgage Lenders of up to 30%. That is another way of helping people afford to buy their homes. At various stages over the first few years either they can re-purchase the rest of the equity, or wait until they then buy their next home. There are a number of different ways. I accept that the reforms we are making in Housing Benefit already are designed to help people get into work. There is structural reform of Housing Benefit with the flat rate Pathfinders for tenants in the private rented sector. There are administrative improvements to help calculate better the Housing Benefit requirements people have. Obviously we want to move towards a greater simplification of Housing Benefit - not least to encourage labour mobility, as well as for fairness.

Q91 Mr Cousins: I am sorry to press you on that, but you referred to shared equity, does not the idea of shared equity clearly point to the fact that we are going to have to have a system of housing cost support that may be tenure-neutral; that is not limited simply to those who rent but is also capable of being extended to low income owner/occupiers?

Mr Brown: This is obviously an issue. There is help for people in work through the work credit whether they have got children or not; so tax credits already help people who are single people or couples who do not have children; they are not simply a means of helping people with children. The future of Housing Benefit is obviously affected by this as well. That is why in our tax credit document we say we want to look further at the future of Housing Benefit. In principle what you suggest, equity between renting and owning in some form of Housing Benefit, is something that could be discussed; but I was suggesting to you there are other ways by which we can help people buy their first home.

Q92 Mr Cousins: I wonder if I could also ask you about the additional support for Council Tax payments. Half of the people over 65 pay tax, and there are clearly enormous attractions in offering support for Council Tax that is tax-free, through the Council Tax Support System and through the Winter Heating Allowance because they are tax-free and means test-free. The decision not to pay the 200 to people receiving 100% Council Tax Benefit as I understand it, and please correct me if I may wrong - but my understanding is that people on 100% Council Tax Benefit will not get the 200, they may get the 50 when they are over 70 - would it not have greatly assisted the Government's drive to help pensioners on low incomes if the 200 could have been extended to people who are in receipt of 100% Council Tax Benefit?

Mr Brown: I think what you are suggesting is that we should give a Council Tax refund to people who are not paying Council Tax, and I think that is a difficult proposition. What we are saying is, where a household in which there is a pensioner over 65 is paying Council Tax we will help; but where no Council Tax is being paid it is difficult to justify a Council Tax refund.

Q93 Mr Cousins: Yet as I understand it, and please correct me if I am wrong, if somebody were to be on almost 100% Council Tax Benefit and was perhaps paying the very minimum Council Tax contribution, which is a matter of pence a week, they would still be entitled to the 200 support. I think in terms of equity the difference between these two groups of people is so small in terms of income it might have been fairer to extend the support to everyone?

Mr Brown: I think what you are suggesting is that there be another 200 payment to every pensioner household.

Q94 Mr Cousins: Quite a promising idea.

Mr Brown: There is actually already a 200 payment to every pensioner household in the Winter Allowance, and it is 300 for the over-80s; and in fact for the over-70s it is an additional 50 this year as well. You have 200, 250 and 300. I think that is the better way of dealing with the problem which, as you rightly say, may exist as an issue. I do say that if you have a Council Tax refund it should be for people paying Council Tax.

Q95 John Mann: When Langold School was first built the pupils celebrated by banging dustbin lids and singing praises of a parliamentary candidate, and it was sufficiently long ago that the candidate's father's name was Ramsay MacDonald. An eight or nine year-old child in that village today goes to the same school. Next to them is a brand new Sure Start and their older brothers and sisters will be going next year to a brand new secondary school. In terms of allocating money for new primary schools, is it your intention that areas that have disproportionately well benefited in the last seven years, such as mine, should now continue to disproportionately benefit well or should there be a reverse? In other words, should we be looking at the investment pattern over the last seven years or over the last 70 years in determining where the priorities are?

Mr Brown: It is where there is need, and where there is a need for either rebuilding or renewal of a primary school that should be done. The whole point of this programme is to upgrade every primary school and every secondary school in the country to make them 21st century centres of excellence for learning. There are thousands of primary schools that will come inside this programme. I think I said there will be an average of about 17 primary schools per constituency - that is how big this programme is over time. Where there is a primary school that is in need of that renovation as you are suggesting (there is one in your constituency) I would have thought the Department of Education would make it part of that programme. There are many primary schools 100 years old; many schools are in buildings that are very old; some of them have been completely modernised and are good buildings themselves, and the equipment and infrastructure inside is good enough for the future; some of the buildings are so old they perhaps need to be rebuilt in their entirety; but that is the point of setting aside so much money in this programme. We could only do this because we have a commitment to invest more in future years. It could not be done by any government that wished to cut public expenditure or cut public investment. It is only possible, therefore, because the investment plans are set down, in this case, until 2010 for primary schools.

Q96 John Mann: There is a pressure from the suburbs where schools were built in the 1960s and 70s that they again should be top of the priority list rather than historic Victorian and Edwardian age schools. Do you foresee that there should be performance indicators for LEAs to ensure that they do not unduly bow to that pressure from the suburbs?

Mr Brown: I know you are speaking for the whole country here! I think what is important is that schools that are in need of renovation get that renovation quicker than they would otherwise have done but for the Budget announcement last week. I am told that the upgrading will cover at least 50% of primary schools in England. That means a very large proportion of schools both in the suburbs, as you describe them, and in traditional industrial areas will benefit from this programme. You are talking about thousands of schools being part of this. I think the Secretary for Education rightly described this - and I said education was a priority of this Budget, education investment for the future. This is the biggest renewal programme since Victorian times for the schools of our country.

Q97 John Mann: Those nine year-olds at Langold School have got parents in my constituency who are in work. We have only 970 not in work but we have 3,000 new jobs being created. In terms of addressing this new problem of labour shortage, do you think that the JobCentre Plus rollout is going to go fast enough to meet the demands for New Labour of returning more people in more ways to the labour market?

Mr Brown: I think there is a skills shortage in the country, and I think we have got to address this by helping unemployed people get skills, helping people in work getting better skills and helping young people be better qualified for the work that becomes available. In each of these three areas there are programmes of action. They are not all being done through the JobCentres; they are being done through Adult Education; Further Education; and, in some cases, through the Trades Union Learning Programme that they have adopted themselves. There are a lot of different centres of initiative for giving people the skills which are needed, but I think skills are the issue for the future.

Q98 John Mann: Who benefits most from this Budget: (a) a coalminer who has contributed to the Mineworkers' Pension Scheme for 40 years or (b) one who opted out and spent his money on gambling and alcohol?

Mr Brown: I think pensioners benefit from this Budget, and people who have worked hard all their lives and had lower pensions than some others benefit from the pension credit - which is the first time we have been able to reward the savings and the hard work of people who have built up a small occupational pension but not a large one, and have some savings but not huge amounts of savings. The pension credit is a benefit to those people who have worked hard. As far as the beneficiaries of this Budget are concerned, hard-working families generally benefit from this Budget, as well as pensioners, and I think the investment we are making in education and science for the future is to the benefit of everybody in the economy.

Q99 John Mann: Finally, someone suggests (and in my view rightly) that we have got an historical legacy of debt owing to Commonwealth countries. When do you anticipate on current trends, with the current Budget and the trends built in it in terms of debt write-off, that we will have written-off the debt as a country of all Commonwealth countries?

Mr Brown: Bilateral debts - the debts that are owed by these countries to us, that is the highly indebted poor countries - they are already taken care of as a result of our 100% bilateral debt relief. The question that is most worrying at the moment is, even if you have 100% bilateral debt write-off, there are still two areas where debt is still incurred by these poor countries and yet they are unable to pay it: the first is a small group of countries that did not do the 100% write-off - and that includes Libya and Eastern European countries, and I think that can now be dealt with over the next few months; and the second is the debts owed to the IMF, the World Bank and the African Development Bank themselves. That means, unless something is done about that, the write-off of debt or the reduction of debt in the poorest countries, we are only taking care of half the debt; because of bilateral debt write-off we have still got half the debt that remains because of what they owe to the World Bank and the IMF. That is why we put forward these ambitious proposals that, first of all, unilaterally Britain will pay its share of the World Bank debts. Therefore we have signed agreements and are signing agreements with about 20 countries which are eligible for this debt relief that we will pay our share of the international debts as well as the bilateral debts. Then we want the rest of the international community to follow and we want a scheme for dealing with IMF debts (and there are about $8-10m of IMF debts) which need to be dealt with by some revaluation or use of IMF gold. Then the second area is debts owed to the World Bank and African Development Bank, and we want the world community, the richest countries, to share responsibility for either writing off these debts or, as we propose, servicing these debts so the debts are no longer debts paid by the poorest countries - they are paid by the richest countries on behalf of the poorest countries over a period of years. I think we are making progress with the international community but we have to persuade a number of countries that this is the right thing to do now. I would like to see this year as being the year in which we brought to an end the historic embarrassment and deep tragedy of unpayable debts owed by poor countries that weigh them down and make it impossible for them to invest properly in their health and education systems for the future.

Q100 Angela Eagle: Chancellor, has seeing the American nominee for the job at the World Bank made you more pessimistic or more optimistic that you will be able to achieve your goals for this year's G8 and EU chairmanship with respect to international development?

Mr Brown: I think the decision about what happens on debt and development is a matter for the countries ourselves. It is a matter for us and the G7, then for the members of the IMF and the World Bank; but it is essentially a matter for the individual shareholders and for us, Britain, and members of the G7. I think that is where the burden lies for making the changes. It is our responsibility to make these changes.

Q101 Angela Eagle: One of the puzzles about the Budget figures for some commentators has been what they perceive to be happening in the labour market. There are various views as to how tight the labour market is at the moment and surprise in some quarters that there is no obvious sign of wage inflation. What is your interpretation of what is happening in the labour market? How confident are you that you can reach the goal you set in the Red Book of increasing the number of people of working age in employment by another 5%?

Mr Brown: I think this is very important. Obviously there is a skills issue in the labour market we have got to address, because if we do not have the skills that are necessary for the future there will be inflationary pressures arising from that. I believe we are starting to address in a long-term way the need for skills. I think what has been fascinating about the independence of the Bank of England is that whereas, before the Bank of England was independent, wage bargainers and people looking at what their wage levels should be in future years always assumed that inflation would be far higher the next year than it was in the previous year and built their assumptions in wage bargaining around the idea that if inflation was 2% this year it would be 4% next year and, therefore, we should bargain on the basis of 5% or 6% as opposed to 4%, that has changed. I think people now know, and it did take some time, that the inflation target will be met and, therefore, if you are looking at what your real terms rise in your standard of living is likely to be it is based on a 2% inflation target and not on an expectation that, even though the target is 2%, the actual level of inflation next year will be 4%, 5% or 6%. That is quite a big change in the way people approach the issue of wages. Even in 1997, with the inflation target of 21/2%, or less under the previous government - and you might argue that when we made it a symmetrical target of 21/2% we did not have the further (less than) -21/2% being an objective - people's inflation expectations were 4% for the next year and people thought that the inflation target would not be met. It is because of the independence of the Bank of England and the new monetary regime that people think the inflation target will be met and therefore wage bargainers I think understand that you are bargaining on the basis of a 2% inflation rate and not a likely inflation rate of 4%. I think that is what has made the difference. Could it therefore be possible that within a low inflation environment we can get more people into work and meet our objectives? In the Budget there are a number of measures agreed with the Department of Work and Pensions, some of them initiated by Alan Johnson, the Secretary of State, in recent weeks: one to help single parents get into work. There has been a 40% increase in the numbers of single parents who are working since 1997; so the percentage of single parents in work has risen from 45% to about 55%, and that is a big change. The next changes ought to bring it from 55% to 60% and then to 70%, to the same level of some of our competitor countries. We have introduced a Back to Work Allowance that happens in a number of areas in this country. We have got a special programme for helping single parents back to work in cities where big companies who want to recruit people are helping them back into work. Of course we have tried to make the childcare arrangements better for them. Gradually we will see this increase in the single parent employment rate becoming pronounced. I think that is a big change since 1997. Equally, the arrangements for Incapacity Benefit claimants to get back into work: we want to avoid any discouragement for them going back into work by saying that if it does not work out if they get a job we will help them back onto Incapacity Benefit. I think that will be an incentive for people to try work. Equally, there is a disability and tax credit that makes it more advantageous for people to have a job. Then, dealing with the long-term unemployed, there are a number of measures in the Budget particularly for ethnic minority areas, which I think are quite significant; and in those areas where unemployment has not come down as fast as in other areas we are trying our best to try to move that process forward and there are more incentives available for people as well as, in some cases, more responsibilities.

Q102 Angela Eagle: How important do you think the New Deal is in achieving some of the supply-side changes in the labour market?

Mr Brown: I think the New Deal will be recognised in history as being the most successful employment programme that this country has had, partly because we have put upfront money through the Windfall Tax to create the New Deal and, therefore, it was properly financed from the beginning; but partly because people have responded to the mixture of rights and obligations that were linked in the New Deal itself. Youth unemployment has gone down 75%; long-term unemployment has gone down by about 75% as well; and I have just given you the figures for single parent employment, which is very encouraging and ought to be built upon in the future years. What in my view would be the worst possible decision in employment policy would be to abolish the New Deal at this stage. Here you have new challenges ahead to get the population skilled for the future, as well as to get people who have fallen through the net into work, particularly those unemployed, young people without qualifications, and adults without qualifications, to get them both the skills and the employment opportunities that are needed. Guidance in these cases through advice, counselling and training and, in some cases, through Child Tax Credits is important as well. That is why a programme which has helped 1.2 million people into work, including half a million young people and 200,000 unemployed adults ought to be continued. I do caution the political parties that wish to abolish it against doing that. What that would mean is that there would be more unemployment, more social security costs and, in the end, instead of it saving money it would cost money to abolish the New Deal.

Q103 Angela Eagle: On another area where there is some disagreement amongst political parties about whether it should survive, could you say something about what you believe the significance of the second state pension will be to challenging pensioner poverty?

Mr Brown: It does help challenge pensioner poverty, and I could provide you with a note on the effects of it which the Committee might benefit from. The important thing to recognise is that in this debate about the future of pensions that the Turner Commission is reporting on very, very soon, the position particularly of women with interrupted earnings in the labour market, and yet a need for themselves to have some satisfactory arrangements in retirement, is something we have got to take very seriously indeed.

Q104 Mr Walter: Chancellor, if I can deal with your section of the Budget document "Meeting the Productivity Challenge", the main thrust of your Budget initiatives to meet the productivity challenge is tackling the burden of regulation on business. Section 3.19 'Leading regulatory reform' says, "The Government believes that inefficient regulation can impose significant burden on business and has pursued a programme of reforms". If I can just pick out some of that, there are three subsections on that. "Ensuring that regulation is used only where necessary and that it is not gold plated if it originates in EU law"; and, "Pursuing an agenda of regulatory reform in Europe because around half of all significant new regulations affecting UK businesses originate in the EU". The House of Commons' Library has just done some analysis of EU-derived regulations and in the five years to April 2004 shows that the proportion of these regulations flowing from Brussels averaged only 9% a year. By a simple deduction 91% must have come from your Government and the 50% figure is wildly erroneous?

Mr Brown: I think I said "major new regulations" or regulations that had an impact on companies. I think my Budget speech said "major new regulations".

Q105 Mr Walter: Your colleague, Mr Denis MacShane, the Minister for Europe said that of these 9%, which the House of Commons identified, many of these EU dictated rules were agricultural or quite technical. I do not think that is quite the same definition as "major new regulations". In fact he debunked the 50% figure, or the "around a half" which you have got in your document in this morning's Financial Times, by saying, "It's typical of the tendency of anti-European politicians to tell more myths and fantasy about Europe than you can find in Harry Potter or The Da Vinci Code". Do I sense a major split here between the Foreign Office and the Treasury?

Mr Brown: Not at all. In fact the measures on the gold plating of regulations are ones that are introduced in a document by the Foreign Secretary on Budget Day showing the cooperation between the Foreign Office and the Treasury in dealing with these issues. What I said was, about half of all significant regulations affecting UK businesses originate in EU law. I think it is rather strange that you are putting this point to me in this way, given that it is your party that has done most to identify some of the regulations that have been causing problems for British business: for example, your pressure on the Working Time Directive and on the Agency Workers' Directive. I find it quite difficult to understand where your questioning actually takes you. Are you telling me there is no significant EU legislation that has affected British employers' costs?

Q106 Mr Walter: No, I am not telling you, but Mr Denis MacShane appears to be telling you that in the report of his comments in this morning's Financial Times.

Mr Brown: I have not actually seen his comments in the Financial Times and I do not always believe what I read in every newspaper. I think the distinction is between significant new regulations and new regulations. I do not think anybody would dispute that the issues of contention in recent years have been the costs associated with vague and significant regulatory changes that have come from the European Union.

Q107 Mr Walter: So you will be asking Mr MacShane to clarify his comments?

Mr Brown: No, I will not be asking Mr MacShane to clarify his thoughts. What I am saying is, when I said in the Budget that significant new regulations had come from the European Union I think that is an indisputable fact and you would probably agree with it.

Q108 Mr Mudie: Chancellor, I think one of the brightest things you did was this golden rule, because it seems to have hypnotised people about the Budget. They spend more time looking at the golden rule than anything else. Stamp Duty in inner-cities, why have you abolished it when we are looking to regenerate inner-cities?

Mr Brown: We have introduced a new scheme, the Local Enterprise Growth Initiative, for areas where there is business-led regeneration taking place in a city like yours. The commercial Stamp Duty relief was for a limited period; it was always for a limited period; it was going to end in a year from now but I thought, looking at the evidence available to me, that all we would have is a batch of schemes simply to get the tax benefit at the end of the period; and it would be a better use of taxpayers' money to encourage communities such as yours to come forward with proposals for business-led regeneration that we could finance directly from public funds. There is a very significant amount of public funds going to go into areas such as those covered by the Enterprise Communities that were benefiting from the Stamp Duty Relief - about 500 million over four years.

Q109 Mr Mudie: I notice you saved 340 million a year by abolishing the Stamp Duty tax - that would add up to nearly a billion pounds?

Mr Brown: No, it was only to continue for one more year, so it would only have been 340 million perhaps.

Q110 Mr Mudie: Is there going to be a gap between the Stamp Duty finishing and your new scheme? Does it need legislation?

Mr Brown: Yes, there will be a gap; but, remember, all the other incentives that are available in these sorts of areas - including the Premises Renewal Grant, including the Clearance of Land Relief - these are all still available. What people will be able to plan now is for a business-led regeneration or a community-led regeneration scheme where public money is available once the plans are drawn up. Obviously the plans have got to be drawn up so it will take some time but this will be in place in the coming year.

Q111 Mr Mudie: I was interested in your conversation with Mr Cousins about housing benefit and the aim to get people across into their own homes. The Mixed Communities Scheme that you have extended cheerfully to my patch - does that bring money with it?

Mr Brown: I think the point of the Mixed Communities Scheme is to enable more people to buy their own houses at an affordable cost and to create a greater mix in what were previously estates where there was 100% council house-owned tenancy. I think the evidence from what has been tried in other countries is good and the willingness and the enthusiasm for people buying homes in the areas is strong.

Q112 Mr Mudie: Chancellor, one of the things I have noticed in that area is that people are sitting on equity in their council house that is not in a good state, and the Government is going to spend a lot of money on housing decency, but they cannot take that equity into a new home. Is there no way that we can devise a scheme that would allow council tenants to take their equity in their present home but move it across to home ownership?

Mr Brown: Council tenants who have not bought their house but are simply ----

Q113 Mr Mudie: They are sitting on the equity if they trigger off a right-to-buy.

Mr Brown: Yes, so you would make them the theoretical purchaser but not the actual purchaser ----

Q114 Mr Mudie: They probably would have to purchase it on the same day as they bought the new home, but is there some way of freeing up the equity that is in a home that you are going to spend a lot of money on bringing up to decency standards and moving them into home ownership with a bit of equity?

Mr Brown: Because the modernisation of these estates, both improving the council house stock and getting more owner-occupiers into the area, is part of the project, I would be very interested to see your proposals on this. We shall look at them. I am sure John Prescott, the Minister for Housing, will be interested. If you could write to us ----

Q115 Mr Mudie: I have never found them interested. You are showing more interest than they ever have, which is usual, really.

Mr Brown: I think you will find he is very interested. It is his proposal for the Mixed Communities.

Q116 Mr Mudie: I cannot get you to take Saving Gateways seriously. We have got this report that was not in the Budget bundle, although it is in the book and Dominic has had to use great powers to find it, and it says this: "Compared with the national eligible population, the Saving Gateway attracted disproportionate numbers of women, lone parents and tenants of housing associations and local authorities. It also seems to have attracted minority ethnic groups, such as Bangladeshi people, who ordinarily have low levels of saving account holders." Now, more forests have been flattened to give paper to produce reports on how to get lone parents, tenants of local authorities and ethnic minority groups, Bangladeshis, saving, and you have a scheme which has got all the boxes ticked, attracts all the groups, yet you will not extend it nationwide; you are going to have another 18 months of piloting other income groups. What other income groups are you particularly interested in? We have done our best to get these groups saving, we find a way of getting them saving and you are putting off extending it nationally.

Mr Brown: We did a one-for-one, which is a-pound-for-a-pound, and it was successful; it can double savings, obviously, amongst low-income groups and is encouraging new saving amongst the groups that you mentioned, who historically have not been big savers. The new pilots are actually important as well because we are extending it to a wider range of income groups ----

Q117 Mr Mudie: I accept that, Chancellor. I have touched all the groups that you are instinctively sympathetic about and, also, professionally you are interested in because these are not groups who normally save. You have now successfully found a scheme which persuades them to save. Why do we not just get ahead with that and if you want to do another pilot scheme on other income groups --- Let me just put it to you: I notice the ISA decision is going to cost 280 million additional in the Red Book - 280 million on ISAs. Probably most of the people in this room have got ISAs. Bangladeshis do not have them, and you have discovered a way to get Bangladeshis to save. Why do we not extend that?

Mr Brown: This has been a pilot amongst 1500 people. The next pilot is going to be bigger and it is going to not only go to a wider range of income groups but it is also going to test one-for-two-pounds - in other words, we provide a pound for every two pounds that is saved. It is going to test the effect of an initial endowment that was provided and it is going to test whether we can get other community financial bodies involved.

Q118 Mr Mudie: I do not fall out with any of that.

Mr Brown: All these things should be done.

Q119 Mr Mudie: Why?

Mr Brown: Because, basically, the groups that do not save are not only the lowest income groups but low-income groups. The groups that do not save - we have only piloted some of these groups.

Q120 Mr Mudie: Chancellor, you have produced booklets yourself - in fact, there is a whole library - about financial inclusion, and we have failed to get them to save and you have devised a method which gets them to save. Is it just too expensive? Is that the problem?

Mr Brown: No, the issue is being absolutely sure that we have got a scheme that is going to work ----

Q121 Mr Mudie: Bristol have got a whole booklet ----

Mr Brown: Bristol, amongst 1500 participants, and that is a good pilot that has been successful, is a-pound-for-a-pound. It is true that a-pound-for-a-pound over the longer term would be expensive amongst a wider range of income groups, and so we are testing a-pound-for-two-pounds, and a-pound-for-five-pounds and we are going to test this in six areas, 20,000 accounts. We will not only, of course, test the alternative rates and contribution limits but, as I said, the initial endowment is an idea, and using a wider range of bodies to be involved. We are going to do it in Cambridgeshire, Cumbria, North Lancashire, East Yorkshire, South Yorkshire, Manchester and East London.

Q122 Mr Mudie: North Yorkshire is left out again.

Mr Brown: I think you were just telling me you are included as part of the Mixed Communities Initiative.

Q123 Mr Mudie: You totally turned us down in terms of the plea we made to you on allowing lenders to raid people's benefit for repayment. Some of the welfare groups raised it with us and pleaded with you not to do it, and we pleaded with you not to do it, and you have proved to be the Iron Chancellor again - prudent to the last. Are there no last-minute thoughts on this matter?

Mr Brown: I shall take your representations and look at this matter again, and we will write to the Committee.

Mr Mudie: Thank you very much, Chancellor.

Chairman: Thank you, Chancellor. Do any colleagues have any wash-up questions?

Q124 Mr Fallon: Yes. This is your last appearance before the Committee, Chancellor, which is possible. Looking back over the decisions you have taken over the last eight years, which do you most regret getting wrong?

Mr Brown: I do not agree with the assumption behind your question, yet again.

Q125 Mr Fallon: Have you got anything wrong over the last eight years?

Mr Brown: The assumption that you are giving me a vote of thanks. Obviously, the issue for us and the British economy, clearly - to be serious, and there should be all-party agreement on this - is that we have got to be properly equipped and prepared for the future. Our productivity levels have got to be higher, therefore, as a result of greater enterprise, greater investment in education, greater investment in science, and competition policy working effectively. That is what I would like to see moving faster over the next few years.

Q126 Chairman: On that competitive challenge, Chancellor, during our recent inquiry focused on China, we heard that China is now the third-largest investor in the world in R&D, well ahead of the United Kingdom. The Budget has been criticised for failing to do more to encourage training or commercial R&D. What underpins the success of the other developed countries in delivering a better record of spending on R&D?

Mr Brown: I think we are catching up after being pretty much at a low level for quite a long period of time, and the ten-year science framework is designed to help us catch up in these areas. As far as the exploitation of commercial R&D is concerned, there are issues about the definition of what qualifies as R&D for the R&D Tax Credit - Mr Kingman is here - but we continue to look at these issues, including what classifies as training in research and development as well. I do not know whether you want to say something on that?

Mr Kingman: We made a commitment in the Budget to consult further on the R&D Tax Credit, both on ways of encouraging take-up and, also, whether we are actually hitting the right target companies in terms of the fast-growing and medium-sized R&D companies. We also did make an important announcement in the Budget on stem cells and bringing together participants in stem cell research, which is a really important, strategic opportunity for the UK.

Mr Brown: I do believe we recognise that we have got to do better in future years. When I saw the stem cell research, for example, that was being done in China it did make me more convinced that we have got to move ahead in these new areas where there are considerable medical advances to be made to the benefit of the population as a whole, but there are greater commercial advantages for Britain moving forward in this area as well. We will continue to do more on these issues of research and development, aware, as I said earlier, that China is not a low-cost manufacturer competing against us; it is also, in addition to being a low-cost manufacturer, increasingly a high-tech competitor as well.

Q127 Chairman: Thank you, Chancellor. On the issue of productivity challenge, which is very important, and maybe on a lighter note, are you quite happy with the productivity output of your officials this morning, since they have come along here?

Mr Brown: I think you worked them even harder yesterday, and I gather they are all working tomorrow.

Chairman: Thank you very much.