UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 138-iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

 

 

THE 2004 PRE-BUDGET REPORT

 

 

Thursday 16 December 2004

RT HON GORDON BROWN, MP, MR JON CUNLIFFE,

MR NICHOLAS MACPHERSON, MR JONATHAN STEPHENS,

MR MICHAEL ELLAM and MR DAVE RAMSDEN

Evidence heard in Public Questions 253 - 402

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Treasury Committee

on Thursday 16 December 2004

Members present

Mr John McFall, in the Chair

Mr Nigel Beard

Mr Jim Cousins

Angela Eagle

Mr Michael Fallon

Mr 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 & International Finance, Mr Nicholas Macpherson, Managing Director, Budget & Public Finances, Mr Jonathan Stephens, Managing Director, Public Services, Mr Michael Ellam, Director, Policy & Planning, and Mr Dave Ramsden, Director, Tax & Budget, HM Treasury, examined.

Q253 Chairman: Chancellor, welcome to you and your colleagues this morning. Can you introduce them, please, for the shorthand writer.

Mr Brown: Yes. It is Mr Ramsden, Mr Macpherson, Mr Ellam, Mr Cunliffe and Mr Stephens. I think they have been before the Committee in the course of the last few days when you were doing the preliminary assessment of the Pre‑Budget Report and so we have people representing the tax budget, spending and macroeconomic divisions.

Q254 Chairman: Thank you. Chancellor, your Pre‑Budget Report states quite proudly that UK GDP has now grown for 49 consecutive quarters, a record‑beating performance. This will remind many people of Arsenal's fate when they went 49 games without defeat but then were defeated in the fiftieth game and they are now five points adrift from the top of the league. Is this going to happen to you?

Mr Brown: No, because we are confident about the fiftieth quarter as well. I think you will be able to see the results very soon. We are also confident about the position moving forward, which is that with a low inflation environment we are capable of growing over the course of the next year as well.

Q255 Chairman: What steps are you taking to ensure that the UK economy responds positively to the challenges posed by growing globalisation of the world economy?

Mr Brown: The whole basis of the Pre‑Budget Report, as many of you will have been able to analyse, is not simply to look at the economy as it is this year but to look at all the changes that are taking place, particularly the rise of Asia, but probably as important are the changing technological pressures that are placed upon British industry and British services. Clearly we have moved from a position where 10 per cent of manufactured exports were produced from the developing countries to a position now where 25 per cent of manufactured exports are produced from China, India and Asia, the developing economies. According to all the independent estimates, it will rise over the next 20 years to 50 per cent and that creates an enormous pressure on the advanced industrial economies which have been producing most of the manufactured goods of the world for nearly two centuries. It is therefore incumbent upon us to upgrade, to move into the high value added areas, to move into the technology-led processes and that is why there is so much of an emphasis in this Pre‑Budget Report on science and skills and education, the fact that we are better equipped to be in the vanguard of the new technologies for the future, and, secondly, on enterprise, because so many of the new businesses are going to be small businesses they are creating jobs. On trade, I do point out in the Pre‑Budget Report that only 1 per cent of our exports go to India, only 1 per cent go to China and yet these are two of the fastest growing economies in the world. The emphasis of the Pre‑Budget Report is that in order to face up to these long‑term challenges we have long‑term choices that we have to make as well and that is why there was so much extra investment in education and skills, so much extra weight to our science framework and why I announced a number of small measures for small businesses and for trade.

Q256 Chairman: You recently emphasised your personal commitment to doing more in 2005 to tackle the problem of world poverty. In the PBR you placed this ahead of the UK's agenda for its leadership of the G7 and EU next year. How much support do you think there is still internationally for your proposals and is there any sign of the US in particular taking a more active role? When the Committee went to the United States last year and we spoke to John Taylor at the Treasury we felt that in Capitol Hill there was not much enthusiasm for your IMF proposals.

Mr Brown: I am pleased you have raised this because this afternoon I am going to America to meet the IMF, the World Bank, the United Nations, the American administration and the Chairman of the Federal Reserve, Alan Greenspan. In the course of the meetings over the next few days we will be looking at the handover of the G8 and G7 presidencies from the Americans to Britain, who will be chairing these meetings from the beginning of next year, and we will be discussing not only the agenda for growth in the world economy but also how much progress we can make on three specific areas. The first is on debt relief itself because, as many of you know, while 100 per cent bilateral debt relief was offered, we have still to deal with the issue of multilateral debt relief and in some of the poorest countries 50 per cent of the debts are owed to the World Bank or the IMF or to the African Development Bank. So we have a proposal to unlock up to 100 per cent debt relief from the multilateral institutions. We have put forward our own suggestions about how it might be done by action on IMF gold and by repatriating to the donor countries, that is to Britain and other countries that are donor countries to the World Bank, their share of the World Bank debts on behalf of low income countries. The second issue is the international finance facility. We need a mechanism for financing the scale of investment that is necessary to meet the Millennium development goals. I believe a report is coming out from the United Nations in the next few weeks that will say that the minimum is at least $50 billion extra, but to give everybody a primary school education, for example, costs about $10 billion a year and then there are the health initiatives that have to be met by 2015. Our proposal is to use the decisions that have been made by the richest countries to increase aid, to leverage in additional funds from the international capital markets and to frontload the aid as investment to meet the Millennium development goals. We have had support from about 50 countries for this proposal. Of the G7, France and Italy have offered their support, many of the Scandinavian and European Union members have indicated their support, but obviously we have been working to discuss these matters with our American, Japanese and other colleagues.

Q257 Chairman: In laying out your plans for the UK leadership of the G7 and EU next year no mention is made of any intention to pursue an agenda for change in the institutions that are currently responsible for managing the international economy. David Walton of Goldman Sachs said in his evidence to the Committee that you need reforms in the sense that a lot of what the G7 talks about are usually things well beyond its control, such as oil prices and whether China should revalue, etcetera. The Governor of the Bank in his evidence to us on 30 November stated that he felt it would be an opportunity to start to talk again about a set of issues that have not been talked about for a long time, such as how the international monetary system operates. Are you happy with the current arrangements for global economic policy co‑ordination? If not, what suggestions do you have for that?

Mr Brown: It is because we believe in the need for change that there has been this discussion in the G7 during the course of this year of what is called the strategy review, that is the review of the international institutions, and that will continue into next year under our chairmanship. As a British Government we have put forward proposals to increase the independence of the surveillance work of the International Monetary Fund and to bring some of the allocative procedures of the IMF and the World Bank closer together. There is clearly a need for quite different international arrangements than those in 1945 and for there to be a reassessment of what the World Bank and the IMF does. We think the IMF should have a stronger role in surveillance but that it should be more independent in the way it does it and that you should separate off the decisions about surveillance where the views of independent experts are to be welcomed from the allocative decisions that are made by the IMF. We also believe that more should be done on codes and standards where the international community lays down standards, for example on transparency, which individual countries should follow. I would have thought during the course of the next year, as part of the review of the IMF and the World Bank, which will lead into the discussions at the IMF and the World Bank themselves, these items will be very much at the forefront of the agenda. I think reform of the international institutions is indeed something that will come out of our discussions over the next year.

Q258 Mr Plaskitt: Chancellor, in the Pre‑Budget Report you state that you have the aim of ensuring a higher proportion of people in work than ever before by 2010 and yet we already have the highest participation rate in the OECD. How are you going to drive it even further?

Mr Brown: I think the measures that we put forward in the Pre‑Budget Report can be seen to have been designed to achieve that. It is true that we have got 75 per cent of the economically active in work and that compares with 70 per cent in America and 65 per cent in Germany and France and therefore the 2 million additional jobs that have come about over the last seven years have been extremely welcome. If you look at our measures in the Pre‑Budget Report, first on incapacity benefit, there is a large number of people who may not be able to go back to the jobs they previously had but who want to work either part time or full time. The emphasis should be on their capacity, not their incapacity. The pathway to work pilots, which is a technical name for suggesting how we have given people additional advice, help with rehabilitation and a financial incentive, £40 a week in some cases, £2,000 a year for the first year back at work, have yielded very substantial results in the first pilots that have been done. In the first limited pilots 5,500 people went back into work. We are now extending that to areas covering 900,000 incapacity claimants, that is 30 areas with the highest number of claimants in the country. The £40 a week will be on offer to people and help with rehabilitation and the same financial offer is going to be available to single parents. I think I am right in saying that a quarter of a million single parents are going to be covered by this new offer in that if they are able to go back to work or able to work for the first time we will provide the bridging finance to assure them that they are going to be definitively better off in work and that is going to be worth £40 a week to them as well as a first year allowance for going back to work. We accept that that has got to be combined with childcare, training and advice and the personal advisers of the New Deal are there, but all the evidence is that you actually save money by getting people who are on social security benefits back into work even with these generous incentives to help people do so. These are two examples of how inactivity can be turned into activity and why it is possible to imagine that, even with the high figure of 75 per cent, it will rise over the next few years.

Q259 Mr Plaskitt: What sort of jobs are people going to take up who move off incapacity benefit? Whereabouts in the labour market are they going to make their entry?

Mr Brown: There are 600,000 vacancies in Britain at the moment. I think the interesting thing about the picture of vacancies is that there are vacancies in every region of the country. In the late Eighties when we had a temporary boom the vacancies were concentrated in the south‑east and London. Today the vacancies are in all parts of the country. We have to make it possible for people to take up the vacancies on offer. In some cases people will need skills and in other cases there is a limited amount of training necessary. With the adult skills initiatives we took in the Budget a lot of the training that people can get for the longer term can be done once they are in work by them being involved in the national employer training programme. I have been talking to a number of retail companies over the last few days because some of them have been in to see me about how they see the economy over the course of the next year and many of them are still recruiting, but some are finding it quite difficult to recruit and certainly there are jobs available. For people who are coming off incapacity benefit sometimes it is part‑time work, but the retail sector, for example, is catering for that. The retail sector is also catering for the over‑50s. One of the employers was telling me how he was hiring people over 70. There is hope for us all in the future! There are jobs available at the moment and this is the opportunity, when jobs are available, for people to be encouraged to take them up.

Q260 Mr Plaskitt: You have often spoken about the need to increase the overall skill capacity in the economy. What about increasing the skill capacity at the higher level by, for example, looking at the graduate level of employment where there is also considerable employer demand? That is not going to be filled by people coming off incapacity benefit. How are we going to increase participation at that skill level in the economy?

Mr Brown: You may have noticed the formation of the Graduate Council for Entrepreneurship. That is our attempt to help graduates to start their own businesses and become self‑employed and that is being formed in the new year and I think it will give a boost to people leaving university and make them think of careers in business where they themselves are self‑employed or starting a business. As far as employer recruitment of graduates is concerned, I think you will find a very large number of the work permits that are issued for people coming into this country at the moment are for graduates.

Q261 Mr Plaskitt: You said in a document issued alongside the Pre‑Budget Report that you anticipated migrants coming into the workforce to be more likely to be qualified to degree level than the native born. Do you envisage plugging a gap in high skills in the economy by inward migration rather than by spreading skills in the native workforce?

Mr Brown: No. In the long run and in the medium term we plan that more skilled people will be trained in Britain to take jobs that are available in Britain and that is why there has been a very big expansion in further and higher education over the last few years, that is why it is important that the school staying on rate rises and international maintenance allowances have been introduced, and that is why organisations like Learning Direct, that have got half a million people doing computer and other courses to get higher skills, are very important to what we are doing. In the long term it is an up-skilling of the British economy that is going to be necessary if we are going to meet what your Chairman was describing as the global challenges of the future. There are people with very good skills and if they are given a work permit and able to come into this country they can be of benefit to businesses in this country. The Chairman of the Federal Reserve Board says that 1/2 per cent of additional growth every year comes from people coming into America. I think we have got to acknowledge that it has helped our growth rate as well, not at that level, of course, but the numbers of people getting work permits who are pretty skilled has risen. Then there is a provision that we have been talking about for some months now about how we can help people who study at British universities stay on and work in Britain for a short period.

Q262 Mr Plaskitt: So you envisage a continued role for migrant labour in helping us achieve that growth?

Mr Brown: This is highly qualified men and women, many of whom have studied at British universities and colleges, who wish to play their part in the British economy. I think on all sides of the political spectrum there is a welcome for the skills that the British economy gains from that.

Q263 Mr Plaskitt: Do you see any conflict between expanding the level of participation in the workforce and your objectives on increasing productivity?

Mr Brown: It is well known that in the first few months of someone's new employment the productivity that they contribute to the firm is on average lower than for an established employee and therefore it is true that the gains in employment have got to be tested as to whether we are also gaining in productivity. The evidence from last year's productivity rises and the evidence over the period from 1997 is that productivity in the British economy is rising. Obviously the measures that we are putting in are designed to achieve higher productivity gains for the British economy and we have identified a number of sectors where we could do a great deal better, but at the same time I think we should acknowledge that even with higher employment and therefore a labour force that is rising ‑ and that is not at the point you often get the greatest productivity gains ‑ productivity has been rising much faster than in previous years.

Q264 Mr Plaskitt: Finally, do you think you can continue expanding workforce participation in an ever tightening situation in the labour market and avoid wage cost pressures?

Mr Brown: I think the interesting thing about the new monetary framework since 1997 is that inflationary pressures in the economy in Britain have worked in two stages. You have had an initial burst of inflation in the past and the failure to control that has often led to a second burst of inflation, which is wage pressure. You will know from your own experience, as I do, that when people thought inflation would be not 2 per cent in the next year but 4 per cent or 6 per cent the wage negotiators bid on the basis of what they thought inflation would be in future years and that is why we had these two bursts of inflation, the one following the other, cost pressures, inflationary pressures and then wage inflation. I think what has been a very interesting feature of the British economy since 1997 is that particularly in the last five years the wage pressures that you might have expected to see from an economy running closer to capacity have not led to rises in average earnings that would be unacceptable given what we would think in terms of inflation and productivity. Obviously you have got to be vigilant and every time we are looking at what pressures there are in the economy. Even with us being closer to full employment than at any point for 30 years the wage pressures that have sometimes actually been seen in other economies in Europe over these last few years have not been so substantially present in Britain, but I can assure you that we will be vigilant. You will know that we have issued regional and local guidelines for the public sector pay review bodies and it is clearly important to us that we can manage a situation where we can move to full employment in conditions of low inflation and that is the best way of both sustaining growth and sustaining employment in the longer term.

Q265 John Mann: Chancellor, there are about 3,500 new jobs currently being created in Bassetlaw and yet we have only 970 registered unemployed. The last time we had this problem we imported people from the Durham and Fife coalfields. What is your advice as to what we should be doing now?

Mr Brown: I am very pleased that as a result of your tenure as a Member of Parliament the number of jobs that have been created in your area has risen so fast. To have 3,500 created in Bassetlaw, in an area that traditionally has been an area of higher unemployment, and to see the unemployment rate so low is a very good thing. I think what will happen is that people will extend their view of what is a travel-to-work area and there will be people from the surrounding areas that will consider working in the areas of your constituency where jobs are being created. I think there is a willingness to see your travel-to-work areas wider than previously you did and I think that is really what is going to happen in your area. There are people who are not registered as looking for jobs who could be attracted, as I have just said in the previous answer, into the labour force. Our single parent employment rate particularly in your area I suspect is only around 50 per cent, whereas in America, France and Scandinavia it is about 70 to 80 per cent. There are thousands of lone parents who might be attracted back into the labour force if the terms on which they could get jobs were right. We have just mentioned incapacity benefit but can I also mention an area which worries me and that is ethnic minority employment. It is clear that unemployment rates amongst the ethnic minorities are treble those of the British average. It is also clear that for a large number of ethnic communities the employment rate, which is 75 per cent of the active working population, is in some cases less than 50 per cent. There are jobs and opportunities for members of that community. One of the things we have asked to be done in the run up to the Budget is a report that would give us some more information about how we might be able to help more people from ethnic minorities to get the jobs. In each of our communities we know that even though large numbers are in work there are still people who are not even registered as unemployed and who are economically inactive.

Q266 John Mann: Some of my constituents will want to travel to Mr Skinner's constituency next year which also has had 1,000 new jobs created. All the Government schemes to get people back into work have been outstanding successes with one stark exception and that is progress to work. How many people have gone into full‑time permanent employment through progress to work?

Mr Brown: By progress to work which particular incentive do you mean?

Q267 John Mann: I mean those who are current or former drug addicts.

Mr Brown: This is young offenders, people who have convictions and people who need to have help with rehabilitation from drugs and again it is an area where we are doing further work at the moment. You may also know that there is a White Paper on services for young people who may have these problems coming out in January.

Q268 John Mann: Your Department was very helpful in giving me a very detailed response to a written question I put in about the cost if an average age drug addict remained on incapacity benefit for the next 40 years. If we compute that for the number in my constituency who are drug addicts on benefits then we are talking about over £2 million on your own figures. Can the British economy remain competitive if we keep having this large number of people for the next 40 years who are going to be on benefits and not in work? Secondly, is it not imperative that other government departments give rather more detailed answers in terms of the success of initiatives such as progress to work so that we can monitor whether or not we are seeing a success in returning such people to work?

Mr Brown: You might wish to put questions to the other departments about giving more detail on the work that we do and certainly I am very happy to bring together figures about what is happening across government if that is of help to you. The issue on long‑term youth unemployment, however, is this: 20 years ago there were 350,000 young people who were unemployed and today the figure is less than 5,000, that is an average of eight young people registered long‑term youth unemployed in your constituency. I accept there are people who are drug addicts who are not registered as unemployed and I accept there are a large number of people who fall through the net and more help needs to be available. As they have never been in work a lot of them will never get on to incapacity benefit, but they will be on other benefits and clearly the rehabilitation services for that group of people have got to be better. That is why I think you should look forward to the publication of this White Paper on services for young people which will come out in January.

Q269 John Mann: I hope you will look at this issue because all of my questions are asking how many on incapacity benefit are also on Class A drugs and have a criminal record and I get the response "we do not know" repeatedly both at a local and national level.

Mr Brown: To be on incapacity benefit you must have been working for at least two years, I cannot remember the exact figures, but it does mean that the young people who you are talking about are unlikely to be on incapacity benefit, they will be on some other benefit, if on benefit at all.

Q270 John Mann: I will be carrying out my own research just to clarify the situation.

Mr Brown: We would be very happy to look at any questions you have on these issues to see whether we can identify what more can be done for this particular group of people. We all know there is a group of people in every constituency who have fallen through the net.

Q271 John Mann: Can you comment on the wider question of whether it is sustainable for an economy like Britain to have a significant number of people on benefit in the future when we are competing with economies such as China and India rather than the classic economic model of competing with more advanced capitalist economies?

Mr Brown: The first thing is that a far higher proportion of the population in America in this category are in prison, for example, and that is why their employment rate for the economic active population is less than ours, it is 75 per cent. I think the second thing to note is that there is a group of people who are either offenders with criminal convictions and who find it difficult to get jobs or who are people on drugs. There are a number of programmes that we have been looking at to help this group of people, but I would not want to give the impression that this was a very high proportion of the working population but other groups of people who have fallen through the net. With the TransCo experiment that is taking place in a young offenders' institution in Reading what they do is they offer these young people, while they are still in the offenders' institution, the opportunity to train as gas fitters for jobs that Transco as a company can offer once they leave that institution. That has a phenomenal rate of success, it is 80 per cent and it is now being looked at to see if it can be pushed through to the rest of the country. It may be that in your area it is something that TransCo can be invited to do. That is an example of a project where if you can get to work with the young people while they are in the institutions the re-offending rate goes down very substantially. I think I am right in saying they had an 80 per cent rate of success with the people that they put through the first stages of this programme.

Q272 John Mann: If we look at classical economic theory and particularly monetarist economic theory, some economists would say that it does not matter if we have a pool of people who are unemployed because that will act as a counter‑balance to the possibility of high inflation. Does that brand of economics hold any relevance today, the kind of economics which would say unemployment never matters? From an economics stance, when we are competing ourselves with economies now such as China and India where the notions of unemployment are rather different to the notions of unemployment we have got, should there perhaps be a national debate amongst economists on whether unemployment never matters from an economic stance in today's world economy?

Mr Brown: We would see whether we can get a consensus from a national debate. If you look at what has happened in the last seven years while I have been in the Treasury, the bills for unemployment have fallen by several billions a year. Public expenditure on social security related to unemployment has fallen substantially and that has allowed us to use resources for other things, including health and education. I think the point you are making is a broader one. If we cannot ensure that people have the skills that are necessary for the modern economy then Britain itself will fall behind and if we cannot use the potential of children, young people and then adults by giving them the education that is necessary for them to be highly productive in the economy then we are not only not going to be able to compete with America and the rest of Europe but we will find trouble competing with some of the challenges now coming from China and Asia. There are 5,000 computer scientists produced a year in Britain, but there are 75,000 computer scientists produced every year in India and 50,000 produced in China. There are now two million graduates a year coming out of Chinese and Indian universities. So the premium on skills becomes more of a pressure on the British economy. We will have to continue to upgrade and up-skill and that is why I think the challenge is to make it possible for every potential productive member of the workforce to have the opportunities to get the education that is necessary and that is why for the first time this national employer training programme, which I hope will have all-Party support, brings employers and employees and Government together, but the responsibility on the part of the employee is to take up this offer and there is funding from the Government to make time off possible so that the skills level of that company in which that person works is increased. That is a new relationship which I think is better than the old laissez-faire attitude to training that we have seen in the past and small firms in particular have benefited.

Q273 Mr Walter: I wonder if we could now go on to public finances and look at borrowing. The Governor of the Bank of England was here a couple of weeks ago and he said that your fiscal rules are not "an optional extra" but an integral part of macro‑economic policy. Earlier this week your officials were here and they stressed to us the uncertainties that are involved in forecasting tax revenues. If the revenues are as uncertain as they tell us they are, how certain can you be that your fiscal rules will be met?

Mr Brown: We have been meeting our fiscal rules and we will continue to meet our fiscal rules. It is true to say that the rules that we set ourselves were not met by previous governments in previous economic cycles, so they are challenging and they are tough and they require discipline. If you look at the figures I was able to give in the Pre‑Budget Report then we will be meeting our first rule, which is that the current budget is in balance for this cycle and we were showing in the figures how it would be met in the next cycle and then the second round, which is the sustainable investment rule, in other words that borrowing must be maintained with a prudent level of debt, we are well within the 40 per cent limit that we set ourselves in 1997. The interesting thing I would say about the fiscal rules is that while there is a huge debate in Europe about the future of the Stability and Growth Pact and while under the previous Government every year the test of fiscal discipline changed from we want a balanced budget to we want a balanced budget over the cycle, we are moving towards a balanced budget, all these different rules appeared every year, we have stuck to the same rules since 1997, we have not been diverted from them and we are meeting them.

Q274 Mr Walter: A number of commentators that have been before us have suggested that the chances of you meeting the golden rule may be less than 50 per cent. Do you completely discount that?

Mr Brown: I have just produced figures showing that we are meeting both our rules.

Q275 Mr Walter: When does the cycle end?

Mr Brown: The cycle will end when the output gap is closed.

Q276 Mr Walter: You are making assumptions about when the cycle will end.

Mr Brown: Because it is an economic cycle it depends on the performance of the economy and one does not prejudge what is actually going to happen to the economy over the next few months. We expect the cycle to end next year, but that is not something that we have set in stone because one is not in a position to do so. If, for example, the commentators that you were talking to were to hold to their view that the cycle has now ended then clearly we would have met our fiscal rules and I do not think there would be any dispute about that. What we are giving you is a projection of what the fiscal position will be at the end of the cycle according to where we think the cycle is going to end and we are not only in balance, which is what we are required to be, but in surplus.

Q277 Mr Walter: How long after the end of the cycle will you be able to tell the nation that the golden rule has been met?

Mr Brown: Economic data is coming out every month. In fact, there is probably quite a bit of economic data coming out this morning even as we speak. I think people will see, on the basis of the projections we are making, that we are clearly meeting our fiscal rules.

Q278 Mr Walter: What if we do not?

Mr Brown: That is not going to happen because I have just explained that we are well within our fiscal rules. Can I just say why the situation is rather different from what you might have perceived the situation to be ten, 20 or 30 years ago? The basis on which we do our fiscal figures is a set of cautious assumptions. While we believe the trend growth rate is 23/4 per cent (and that assessment has been audited by the National Audit Office and thought to be reasonable), we calculate our public spending on the basis of the trend growth rate being only 2.5 per cent; in other words, we take a cautious view of trend growth for the public spending projections. That in itself shows the caution that we exercise. Also, our assumptions are tested and audited by the National Audit Office. Under the previous Government what you would have had in a public spending announcement or in a fiscal announcement was "We assume that unemployment will fall by another half a million over the next few years and therefore we will assume a fall in social security costs related to that." We do not do that. We take the estimate that is given by independent commentators of what the unemployment level is going to be. Then privatisation receipts used to be thrown in. We do not say we will definitely get £10 billion of privatisation receipts. Indirect savings as a result of efficiency measures we do not do either. Our VAT assumption about the revenues we can expect from consumer spending has been continuously audited by the National Audit Office and, as you know, it was changed because we wanted it to be more realistic about consumer spending. If you take the key assumptions, privatisation processes, trend growth, claimant unemployment, interest rates, equity prices, VAT and the rest you will find that our assumptions are actually cautious assumptions and it is on that basis that I think the country can have confidence which it did not have before in the fiscal framework.

Q279 Mr Walter: So you are saying that there are no circumstances in which you could envisage that you will not meet the golden rule by the end of this cycle?

Mr Brown: There are no circumstances I see coming before this Committee today that mean I believe we will not meet our fiscal rules.

Q280 Mr Walter: May I go on to the sustainable investment rule which the OECD has been absolutely critical of. In their economic outlook, November 2004, they say that the Government deficit is likely to be above 3 per cent of GDP in 2004 and in the absence of a spontaneous rise in taxes additional action may be required to achieve a decisive and sustainable reduction. How do you respond to that?

Mr Brown: The OECD has been generally positive about the British economy. As far as the budget deficit rising above 3 per cent of GDP is concerned, I think they are referring to the calendar year of 2004. That is not what we believe is happening and we published figures only a few days ago showing that that is not the position. I disagree with them.

Q281 Mr Walter: You simply disagree with them, they are wrong?

Mr Brown: Yes. Again, if I may say so, what people have not really understood about the British economy is that the reason that revenues have been maintained and the reason that our public expenditure position is affordable is that we have had continuous growth over these last seven years and we have had continuing rises in employment. People who were previously being paid social security benefits by the state are now paying taxes to the state as employees and at the same time our public expenditure position has been bolstered by the fact that debt interest payments have fallen quite substantially and unemployment benefits need be less because there are more people in work. The basis for strong public finances is a sound and stable and growing economy and I do think that this is what has been different from the stop‑go policies of previous years. On the OECD, I do not want to be accused of gloating in any way and I am not saying it for this reason, but it is a factual point that in our forecasts for the last five years, between 1999 and 2003, we have been more accurate than the OECD.

Q282 Mr Walter: I want to look forward a little. You have just stated that the fiscal rules that you introduced in 1997 have worked fairly well so far, but do you think there is any reason to review them as the end of this cycle approaches? The suggestion is that rather than having a precise point to target you should be looking at ranges as one looks into the future.

Mr Brown: I do not think, given these effects on fiscal policy decisions about taxation and spending, the idea of ranges commends itself to me. That is something that academic economists can debate. We are continuously looking at how we can improve the fiscal framework. You have to balance off the need for continuity so that people understand that you have a discipline framework that is being held to with the desire for change. If you take the inflation target, we held to the 2.5 per cent even though it was not the internationally comparable measure of inflation for the first years, the target of the previous Government, because we wanted continuity. There was a case, with a new fiscal framework having come in, for sticking with it so that you can give people a certain framework and one that is stable over time. We are happy to look at suggestions that people have for change and we do so all the time and that is something that is part of the whole debate. When we had the debate about the euro we had one full paper in our euro documentation about what a fiscal framework might look like if we joined the euro and therefore we had a debate about what were the respective roles, for example, of an independent fiscal committee like the Monetary Policy Committee and the House of Commons (because the House of Lords should not have a role in this) and the Government and we decided that in all circumstances the important role of the House of Commons in deciding on issues on tax and spending had to be upheld and you could not contract that out to some independent committee, whether it was a European committee or a British committee. Fiscal policy historically has been where Parliament have insisted, and rightly so, that if people are to be subjected to decisions on tax and spending these decisions have to be made by the people who elect them.

Q283 Mr Fallon: Chancellor, I want to turn to your problem with tax receipts. Can you tell us what current receipts were in 2001/02?

Mr Brown: Are you talking about the total receipts?

Q284 Mr Fallon: Yes, current receipts.

Mr Brown: I must say, I do not remember in my head the figures for 2001/02, but I am sure we can help you. Our figures in the Pre‑Budget Report on current and capital receipts start in 2003/04.

Q285 Mr Fallon: Would you take it from me that in 2001/02 it was £388 billion?

Mr Brown: Current receipts?

Q286 Mr Fallon: Yes. It was £388 billion.

Mr Brown: I will get someone to check that.

Q287 Mr Fallon: If you cannot remember that, can you remember what you forecast it at?

Mr Brown: I do not know.

Q288 Mr Fallon: You forecast it at £398 billion, so you were £10 billion out. Do you remember that?

Mr Brown: If I think of 2001, it was at a time when the world economy was turning down very substantially and I think you will find that the American deficit started to move towards 6 per cent and the Japanese deficit started to move towards 7 per cent and we kept our deficit around 3 per cent. I think every economy was affected by the crash in the Stock Exchange and then by the IT collapse and then by the stalling of world trade. I do not really think you are dealing with something that was so out of the ordinary.

Q289 Mr Fallon: Do you recall what the outturn of current receipts was for 2002/03?

Mr Brown: We are in exactly the same position. We are in a world downturn where corporate profitability is being hit and I suspect that what has happened is that corporate tax revenues have fallen.

Q290 Mr Fallon: Despite the world downturn having started, in that year receipts were at £393 billion but you forecast them to be £407 billion, so you were £14 billion out that year.

Mr Brown: If you look at other countries round the world, America, France, Germany, you would find ‑‑‑

Q291 Mr Fallon: They were as bad as you, were they?

Mr Brown: No. I think you would find that the difference between what they projected and what they got was very substantially bigger.

Q292 Mr Fallon: What about last year? Do you recall what the outturn was last year?

Mr Brown: I have got the figures for last year.

Q293 Mr Fallon: It was £418 billion. Do you recall what you forecast it at? It was £428 billion, so you were £9.6 billion out. What was the excuse for last year?

Mr Brown: Because we are talking about a recovery from a world downturn.

Q294 Mr Fallon: So it was not the recession, it was the recovery that you got wrong?

Mr Brown: No. I dispute this, Mr Fallon.

Q295 Mr Fallon: You dispute whether this figure is wrong or you dispute the reasons?

Mr Brown: What happens during a world downturn is that the world changes, the position of companies in particular but also individuals change. I will produce for the Committee what has happened in every other country. If you have a 50 per cent fall in the Stock Exchange and at the same time 30 per cent of your IT industry has run into huge problems as a result of the end of the IT boom and if you have world trade stalling it is bound to have an effect. I would say that our record on forecasting receipts has been better since 1997 than the situation before 1997 and the situation as forecast by other institutions and by other countries and I do not think I need apologise for that at all.

Q296 Mr Fallon: This year you are now forecasting the outturn at £451 billion in the Pre‑Budget Report whereas originally you forecast it at £454 billion, so you are £3.7 billion out this year. So for the last four years you have out by £10 billion, £14 billion, £9 billion and £3.7 billion. Is that not right? You have been wrong four years in a row.

Mr Brown: I do not accept, given everything that has happened to the world economy, that you can expect that every single figure one year to the next is absolutely accurate. What I think you can expect is that where the situation changes it is reflected early in the statistics that we produce. In the Pre‑Budget Report what you see is an explanation for what has happened to the receipts over the last year, an explanation which I think this Committee would find interesting and an explanation which actually shows that we have been more or less accurate on income tax and national insurance and capital gains tax and we have been more or less accurate because the consumer spending has been as we expected it to be on VAT receipts. On corporate tax receipts what has happened is that in the oil sector there is a delayed effect from the rise in the oil price in the revenues coming through to the Government, but we expect that during the next few months and it will be proven when the oil receipts come through to the Government. As far as the rest of the corporate sector is concerned, in the industrial sector it has been as we expected but in the financial sector there has been a shortfall which has now been looked at and I think your Committee has had an examination of this during the course of the last few days. What we have is a system of fiscal discipline that locates any issue early, is able to report it and is able to examine what is at the root of it. I personally think that our record in forecasting receipts, as in forecasting the economy, bears comparison with any other country over the last few years and with any other independent forecaster. We produce in meeting the fiscal rules and in the end of year fiscal report, because there is far more transparency about these issues than ever there was before, a comparison between the forecasting record of the US Congressional Budget Office and the UK Treasury. I would have thought that the economy is going down entirely the wrong road if it feels that there was some deliberate manipulation of statistics or, alternatively, in a world downturn things are not going to change. The question is whether you can identify and report these changes early, as we have done.

Q297 Mr Fallon: You have been boasting earlier this morning about the cautious assumptions you have been making.

Mr Brown: Absolutely.

Q298 Mr Fallon: It does seem rather regrettable that four years in a row you have made mistakes in forecasting tax receipts. If you were running a business you would have been fired by now.

Mr Brown: Not at all. Before the end of this meeting I will tell you what happened to the forecasts that your Government made.

Q299 Chairman: I think we should keep off the politics.

Mr Brown: I am never going to be too political. I think in other situations you were talking about £30/£40/£50 billion out in 1992.

Q300 Mr Fallon: Let us turn specifically to corporation tax receipts where you seem to be most wrong.

Mr Brown: Can you suggest in which other area you think we are wrong?

Q301 Mr Fallon: I am coming to other areas. Let us start with non‑North Sea corporation tax receipts. Originally you said these would grow by 20 per cent this year. Now in the PBR you admit they are only going to grow by 14 per cent. How did you get that so wrong?

Mr Brown: When people are coming out of a downturn, as in the late Eighties, the mid‑Nineties and at other times, the rise in receipts has been over 20 per cent. In 1986/87 it was 38.8 per cent, in 1987/88 it was 33.4 per cent and then in 1994/95 it was 30 per cent. If you look particularly at America, the bounce back when there has been a downturn in corporation tax receipts in these years is usually very high indeed.

Q302 Mr Fallon: That was not the question. You forecast it at 21 per cent and you are now admitting it is only going to be 14 per cent.

Mr Brown: I have just explained what has been happening. The oil sector has seen a delayed response to the rise in the oil price, but that is money that is coming in. In the industrial sector there is no difference between our forecast and what has actually happened. In the financial sector, even though profitability has been higher in the years that we are talking about and has been rising and is not out of the ordinary, there has been an issue about whether, because of investment allowances or because of another reason, that particular sector has not been paying as much corporation tax as previously. It is not unreasonable, given past history, to expect there to be quite a big bounce back in corporation tax receipts after a world and national downturn.

Q303 Mr Fallon: Given you have been wrong this year, you are now forecasting an increase next year of some 27 per cent in those same receipts.

Mr Brown: I have just explained why, because the oil industry is benefiting from a higher oil price, we have had to adjust the oil price expectation. Now, of course, it has got a downside for the economy in other respects because it creates inflationary pressures, but as far as corporation tax and specifically from the North Sea, these are expected to grow substantially and I do not think anybody would deny that that is going to be the case.

Q304 Mr Fallon: Overall in current receipts you are forecasting next year an increase of 8 per cent. That is the biggest single rise since you reformed corporation tax in 1997/98.

Mr Brown: Are you talking about all taxes here?

Q305 Mr Fallon: I am talking about the current receipts generally. You are forecasting an increase of 8 per cent, but that is the biggest rise since you reformed corporation tax that we have ever had, it is bigger than the peak of the dotcom years. If you forecast this wrong four years in a row, how can we be sure you are going to get it right this time?

Mr Brown: You have just given a figure of a forecast gap of £3 billion, a £3 billion figure that has just been explained not in terms of things going wrong in every sector but an issue related to the financial sector and corporation tax. The £3 billion figure has been explained precisely for you. The gap that you are talking about between the original anticipated receipts and the receipts is that £3 billion told in the Pre‑Budget Report only a few days ago and explained in detail now to your Committee and work is being done on this specific thing. If you look at income tax or you look at VAT, if you look at North Sea taxes, if you look at the range of other taxes, we are on forecast for what we expect to be the revenues.

Q306 Mr Fallon: If you have been wrong four years running, how can you expect the City to think you are going to be right next year?

Mr Brown: I do not accept what you are saying here. What I have done is explain why, in a period of a world downturn, when the Stock Exchange goes down 50 per cent and when there is an IT collapse, which is actually what happened, an IT bubble burst, it is bound to have effects particularly on the corporate sector. I think the remarkable thing about Britain is that employment continued to rise, receipts generally continued to rise and now you are saying that there is a shortfall that you have identified between the Budget and the Pre‑Budget Report of £3 billion and I have now explained to you why it has happened. It seems to me a criticism on the basis of receipts of £400 billion and the explanation given for this £3 billion change. I would have thought the Committee should be satisfied that we have gone into detail in looking at what has happened in individual sectors and I am now identifying the problems that have got to be dealt with.

Q307 Mr Fallon: You have been wrong four years in a row.

Mr Brown: I do not accept this, Mr Chairman. Our growth projections have been right over these four years, but we have had to take into account a Stock Exchange change of about 50 per cent and an IT collapse which happened after the IT boom.

Q308 Mr Heathcoat-Amory: Chancellor, just reverting to an earlier exchange about the golden rule and in particular the definition of the economic cycle over which it is to be judged, I think you said that the present economic cycle would end when the output gap is closed, but we know that the Treasury differ from the Bank of England about the remaining slack in the economy and therefore presumably there are going to be differences over when the output gap is closed. Who is going to decide when the present economic cycle ends? Is it going to be the Treasury deciding itself that the cycle has closed and therefore deciding on which basis to judge the golden rule?

Mr Brown: When the cycle ends depends on a number of factors that are taken into account. The first is what the trend growth rate of your economy is because that dictates what you feel the output gap is. That is an audited assumption which we have put to the National Audit Office, the 23/4 per cent trend rate of growth and they have given us the view that that is a reasonable assumption. It changes because of demographic changes in future years, but that is a reasonable assumption. As to the question of when the cycle ends, of course fiscal policy and the repercussions for that are not the responsibility of the Bank of England, they are the responsibility of the Government and so we must take responsibility.

Q309 Mr Heathcoat-Amory: Let us be clear, the Treasury will decide when the present economic cycle has ended, will it?

Mr Brown: The information will decide when the economic cycle ends. The judgment has to be made in the end by the people who are responsible for fiscal policy and that is the Treasury. I would have thought, Mr Heathcoat‑Amory, that all your debates about the European Union will have led you to the view that fiscal policy ought to be a matter for national parliaments and national governments.

Q310 Mr Heathcoat-Amory: As you know, I strongly agree with that.

Mr Brown: You would not wish to contract out that decision to some independent or other body. You would accept it was a decision that only Parliaments in a democracy could make.

Q311 Mr Heathcoat-Amory: You subjected other judgments in your document to independent audit and you have boasted about the role of the National Audit Office. Are you willing to put the definition of the economic cycle out to independent audit?

Mr Brown: The trend growth rate which determines whether there is an output gap and when it will end is something that has been audited by the National Audit Office. There is a big distinction between monetary policy and fiscal policy. With monetary policy the Government can set a target of 2 per cent for inflation and it makes sense to ask an independent body to administer that, but fiscal policy is about decisions for taxation and spending. For 500 years it has been regarded as the province of Parliament and Government and something that cannot be contracted out to another body and I would have thought that you of all people would wish to agree with that as someone who does not want the Commission to run fiscal policy in Europe but believes that that also is still a matter for national governments.

Q312 Mr Heathcoat-Amory: I am not talking about the running of fiscal policy, I am talking about the assessment of the output gap on which you are going to self‑assess now the ending of the economic cycle, we have established that.

Mr Brown: For your information and for the Committee's information we have set out clearly in advance for a number of years the criterion on which the economic cycle is judged and all that has been out there for debate, it is completely transparent. There has been a debate amongst academic economists about it. I do not think people have come to a view as to how you judge the cycle. As I have said a few moments ago, the growth rate affects how you see the cycle and that is important to this judgment as well. We have a very transparent system. In the end I put it to you that in a matter that affects whether you tax and spend there is no view in Britain that I have seen expressed before until your own party produced a policy last week that somehow you could contract out that decision and that responsibility to some other body than Parliament and the Government.

Q313 Mr Heathcoat-Amory: Reverting to the issue of tax revenues, we have established that there have been very serious forecasting errors over the last few years and we discussed with your officials on Tuesday some of the reasons for this. We were told that there are big volatilities in tax revenues which are inherent, we have been told about the uncertainties in trying to compute tax revenues and we were told by Mr Cunliffe that this is particularly difficult in the current cycle. Given these problems, how can you say with certainty that the golden rule will be met? You are adamant that your arithmetic is correct as regards the golden rule and yet your officials are conceding not only past forecasting errors but also the inherent difficulty in forecasting future tax revenues.

Mr Brown: Because of all the cautious assumptions that I have just set out for the Committee. The requirement we have is to meet the first fiscal rule, to have a current budget in balance. I have explained to Parliament only in the last few days that we are not just in balance but we are in surplus. The sustainable investment rule is debt below 40 per cent of GDP and again I have given figures to Parliament showing that debt is a maximum of 37 per cent of GDP, so it is substantially lower than the 40 per cent. I have given all the information about how we are not only meeting our rules but are well within the margins that are necessary to meet these rules and the reason we can say this is that we have continuously made cautious assumptions, whether it is on the trend rate of growth as far as public expenditure is concerned of 2.5 per cent or all the other cautious assumptions I have set out. When Mr Fallon asked the question about corporation tax I think I was just too generous to him because the tax gap is £2 billion. The other billion, as I explained in the Budget document, is as a result of the reclassification of NHS trusts, which is something that we have been asked to do as a result of the statistical way that we have got to present public expenditure. So £1.5 billion of the deficit that he is talking about arises from the re‑classification of NHS trusts.

Q314 Mr Heathcoat-Amory: Chancellor, it is future tax revenues on which you are depending in order to meet your golden rule over the cycle and we have established you will decide when it ends. There is written into your Budget arithmetic a very steep increase in tax revenues as a percentage of GDP. It goes up from 35 per cent last year to over 38 per cent in three years' time. How are you going to get that extra tax revenue without putting up tax rates?

Mr Brown: Well, I recall that when your Government left power, the fiscal projections that we inherited had tax as a percentage of GDP going far higher than 38 per cent. Our figure is no higher than was projected by your Government. Now, the reason that we make these projections is on the basis of what we know about the growth of the economy yielding income tax receipts, the growth of wages in the economy obviously making people better off and yielding these receipts, the growth of consumer spending, which will not be as fast a growth as last year, but will continue to be at a high level of growth and, therefore, will yield VAT receipts, so in each of the different areas, as I have said, our projections about revenues have been right. Apart from this one point about corporation tax that we have just been debating, they have been generally right, so there is a growth in receipts as a result of the economic growth of the economy. Can I just correct you on one point. The cycle will end when the information shows that the cycle has ended. It is the information that we look to to see whether the output gap has been closed and the idea that arbitrarily without any evidence someone is going to declare the end of the cycle, it is all based on evidence and on the information we have about the economy, and that is how the decision or the judgment will be made about the end of the cycle.

Q315 Mr Heathcoat-Amory: Yes, and the judgment is entirely in your hands. We have established that.

Mr Brown: The judgment is indeed one that the Treasury has got to make for the reasons I have given you, but based on assumptions that have been audited in some cases by the National Audit Office and where there has been a transparent debate over the years about how we judge the end of the cycle.

Q316 Mr Heathcoat-Amory: Can I just return to this very steep increase in tax as a percentage of gross domestic product which goes up, we are advised, to an all-time high. You are saying you can do this without tax rate increases, but are you worried about the effect on competitiveness? You have made much of your concern for the competitiveness of the British economy in world markets, and I share those concerns, but we are increasing our tax burden very steeply at a time when most of our competitor countries are reducing theirs. We have a table given us from the OECD of revenue statistics. It does not project forward as far as yours, but it does show that our main competitor countries are either holding their tax receipts as a percentage of gross domestic product or indeed cutting them, so how can you reconcile your concern for British competitiveness with the fact that you are imposing additional tax burdens on British industry and the British workforce?

Mr Brown: I think if you read out the figures for the tax burden in other countries, you would be reading out figures of over 40 per cent in Germany and nearly 45 per cent in France, and I think the EU average at the moment is 41 per cent. The figure in Britain at the moment has been 35.8 per cent.

Q317 Mr Heathcoat-Amory: Well, in the trend here both Germany and France, according to these figures, have cut their tax burden ----

Mr Brown: And what is their tax burden now?

Q318 Mr Heathcoat-Amory: ---- from a higher base, but the United States, from a lower tax base, has cut theirs still further, so you are defying the world trend as regards taxation at a time when you are expressing concern about competitiveness.

Mr Brown: No, I do not accept that at all. I think if you look at the figures, and I have got the table here now, the EU 15 average is 40.6 per cent for 2002, the latest figures where we have everyone's actual figures available to us, and at that point the UK was 35.8. The OECD average, even with countries that are lower tax, like Canada and the United States, is 36.3, so we were below the OECD average at the time. You said that we had an all-time high in tax rates; that is completely wrong, completely wrong. Under the last Government, the tax burden went up to 39 per cent. I have repeated to you that when we came into government, the projections, and I will send them to you, that your previous Chancellor brought in projected a tax revenue above 38 per cent of GDP during the period for which he was making a forecast in his Budget Report. The reason why our tax rates are competitive is corporation tax has been reduced from 33 pence to 30 pence and small business tax has been reduced from 23 pence to 19 pence. Under our Government, capital gains tax, which was at 40 per cent for all assets, has been reduced to 10 per cent for long-term assets. Income tax has been reduced from 23 pence to 22 pence and the basic starting rate of income tax is now 10 pence where it used to be 20 pence, and of course VAT on fuel was reduced. All these taxes, corporate tax, small business tax, income tax, capital gains tax and a lower rate of income tax, which you would say were important either to people's incentives or to companies' incentives, the rates have actually been lowered under this Government.

Q319 Mr Heathcoat-Amory: It is the overall burden of taxation that is important and under your own figures there is a steep increase from 35 to 38 per cent. Now, your official conceded on Tuesday that this was a relevant consideration as regards competitiveness. Are you saying that this trend of the increased tax burden against the trend of most of our competitors is irrelevant or relevant, but not important?

Mr Brown: The figures for the early 1980s of the public sector current receipts were 45.8 per cent, 43 per cent, 44 per cent, 44 per cent, so that is a very different picture from the one you are giving. That was the all-time high under the previous Government. As far as we are concerned, the difference between ourselves and America, which is the country which you wish to draw attention to, is essentially this: that our healthcare is paid for in the public sector by taxation and in America it is essentially paid for in the private sector. Once you take that difference into account, the general level of taxation and public expenditure in both countries is not too dissimilar. Of course we have 8 per cent rising to 9 per cent of GDP paid for in the public sector for healthcare, which is the choice of the British people under your Government as well as under our Government, but in America the money that they spend on healthcare is principally spent in the private sector and does not require them to raise tax to do so. The reason that we raised tax for the Health Service, and there was the national insurance tax that we put in specifically for money for healthcare, that, I believe, is a decision which is supported by all sections of the British public. Other than that, as I have just shown you, for tax rates, corporate tax, income tax and for small business taxation, our rates are both competitive and have come down under this Government.

Q320 Mr Mudie: I think I have to ask you, Chancellor, because I gave your officials a rough time which I think was perhaps unfair, but from the Treasury Committee's side of the situation, our integrity is as important as yours and our reputation. For the last four years we have argued with your officials that your revenue figures, your income figures are overstated and every year we have been proved right. Now, it is not that you would expect to be accurate every year, but with the level of inaccuracy, £10 billion, £10 billion, £10 billion, it is not that you do not take into account a change in the world economy or the British economy, but when it is factored in, when four years ago your income went down by ten, but there is no reflection of that in the following three or four years' income figures, and then when the second year the income goes down again by ten, you start thinking, "Well, if you were doing the Budget, you would start adjusting your figures". Now, I see this end-of-year fiscal report, and you do not even admit to making a mistake. A mistake is down as "fiscal forecasting differences". Now, the National Audit Office spell out the parts that are outwith your forecasting abilities, but then there are clear signs in this report that a large majority is just where you were wrong. I will save you from answering because I will just ask you to do one thing. In the Pre-Budget Report 2003, your income for this year was 456 and in the Budget it was down to 454. Today, in the Pre-Budget Report, it is down to 451. Do you stand by the 451? We will remember this when you come before us at Budget time. Do you stand by the 451, and, if I could ask a supplementary, do you stand by the 487 for next year?

Mr Brown: I stand by our commitment to meet our fiscal rules and that is the basis on which any Chancellor is going to come before this Committee. Now, if you take your 456 to 451 figure, oil prices changed dramatically over the course of the last year. I do not think anybody predicted the changes that have actually taken place. The oil price during the period I have been Chancellor has been $10 and it has been $50, and the movements have been speedy when they have actually happened and they affect the revenue position. Equally, if you have a world downturn, the effect on that will be rapid on your fiscal projections.

Q321 Mr Mudie: But your oil should be in favour of your income.

Mr Brown: But the reason that I say to you that you can have faith in what the Treasury is doing is that our commitment to you is that we will take the steps necessary to meet our fiscal rules and that is what we have been doing over the last few years. It would not be very sensible to say that I could predict today what the oil price is going to be definitively in six months' time, but it is sensible for me to say to you that the level of discipline and the caution built into our projections are such that we will meet our fiscal rules.

Q322 Mr Cousins: Chancellor, you have been challenged by my colleagues on the Committee for being £3/£5/£10 billion out on tax receipts, but this Committee had evidence only last week from Mr Whiting of PriceWaterhouse Coopers that in a mere handful of cases brought by big business in the European courts against the British Government, there was £10-20 billion of corporation tax revenues at stake. Now, I do not ask you to comment on those specific figures, that would be quite unwise, but does it not trouble you that we are one, two, three stops on the Underground away from one of the great world centres of tax receipts reduction?

Mr Brown: What I would say about the European Court of Justice is exactly what you said, that we will defend our corporate tax system against legal challenges under EU law, but at the same time you would not expect me to comment on any individual cases. The question I think you have to ask about corporate tax is whether the assumptions that we are making are reasonable assumptions and I think the assumptions are reasonable, that once you come out of a world downturn, then it is reasonable to expect that the bounce back will be quite high. In North Sea oil there is a lag, but you can see from the price change that the profitability of these companies is going to be such that we will get both petroleum revenue taxes and corporation tax. I have explained what has actually happened in the financial sector, so I think you have got to ask yourself whether the assumptions that we are making both about the growth of the economy and about the profitability of our financial and other sectors are reasonable ones, and I think they are.

Q323 Mr Cousins: But 45 per cent of the contribution to our growth rate in 2003, which is one of your great successes and one that, in my view, you are fully entitled to gloat about, should you wish to, was made by government expenditure. Do you not think that a series of legal cases, a great industry devoted to undermining the tax base of the country, is something that ought to cause concern?

Mr Brown: I think we have written to you about the ECJ and the corporate tax cases. You have a Treasury Sub-Committee that has looked at these issues and we have written to you. As far as the contribution to the public sector is concerned, I do not think I would accept the figure that you give me, but it is right to say that at a time when the world economy was in a downturn, the contribution that fiscal policy could make to monetary policy was something to be welcomed, but you will see that the rate of growth of public expenditure in future years is less than it was in these years and you have been given the assumptions, looking forward to 2010, which show that having had a period of very substantial additional investment in our infrastructure, we have got a period where the growth rate of public expenditure will be substantial, but not as high as it has been in the past.

Q324 Chairman: Chancellor, on the tax avoidance elements, the new Tax Avoidance Disclosure Scheme, in an exchange with Mr Whiting, I suggested that creativity is still alive and well in the industry, and he thought that it was still alive, but whether it was as well was another matter. Have the Treasury become as clever as the tax avoidance lawyers and accountants regarding the level of disclosure and are the Treasury policies having a disincentive effect on the tax industry's efforts to devise new schemes?

Mr Brown: Well, I think the new rules that we set out in the Budget about disclosure are working as intended. We have been receiving a number of disclosures, as we expected. We have now of course in the Pre-Budget Report cut back with a number of anti-avoidance measures, some of the schemes that we have discovered, and I think the whole Committee would wish to welcome the fact that we are dealing with some of these issues of tax avoidance.

Q325 Chairman: Yes, but is it having a disincentive effect?

Mr Brown: Well, I hope that the requirement to disclose means that people will not advise their clients to take schemes which clearly, once they are discovered, people will immediately close the loophole on, so I think the accountancy industry were in some cases giving people advice that they should go into a scheme which they had devised or someone else had devised, but they knew perfectly well that that person who went into that scheme would find it was closed off very, very quickly indeed, and I am not sure that that was good accountancy advice that was being given to these clients.

Q326 Chairman: What is the relationship between the new announcement about a general commitment to stop all future tax avoidance schemes on employment rewards and the Tax Avoidance Disclosure Scheme included in the 2004 Finance Act? Why is the disclosure scheme not adequate to achieve what the new announcement is trying to achieve?

Mr Brown: What we are doing is closing down a loophole in remuneration schemes of mechanisms that avoid the payment of national insurance and we have indicated that these would be closed from the date of the Pre-Budget Report, so to have the disclosure is one thing, but to actually close down the loophole is another.

Q327 Chairman: The announcement emphasised that any future legislation to close avoidance schemes down would be, "where necessary from today", ie 2^nd December, but Mr Whiting, in evidence before us, saw a distinction between making such an announcement in respect of a specific avoidance scheme, quite normal and acceptable, and making such a generalised commitment in respect of schemes not yet devised. Is this not retrospective legislation and do you think you can act in this way and stay within the Human Rights Act?

Mr Brown: Well, I think that is, in my view, not an acceptable way of proceeding. If it is accepted that there is a loophole which has got to be closed, whether it is of a specific nature or in a number of different areas, and if it is accepted that that loophole should be closed, then it should be closed immediately. If people are not going to act in a way that allows it to be closed through the Finance Act legislation, we just said that we would insist that it would be from the date of the Pre-Budget Report, and I think that is perfectly reasonable. Once you accept that a scheme is wrong, that as a form of avoidance it is unacceptable, then I think it is reasonable to close it on the day you have announced that you want it to stop. We are confident, I may say, that this does not conflict with the ECHR.

Q328 Chairman: And you do not think that you will be breaching the Human Rights Act?

Mr Brown: Well, I think the basis of the European Convention on Human Rights is that it gives a government the power on behalf of the tax-paying public to raise taxes in a fair and proportionate way.

Q329 Norman Lamb: On to expenditure and overall spending to start with, the PBR suggests that there will be a flatter profile to public spending through 2004/05 than we have traditionally seen. Are you confident that this can be achieved without squeezing departmental activities in the final quarter of the financial year?

Mr Brown: We will be publishing the departmental estimates, as is normal, over the next few months and you will see the exact figures. I think that departmental expenditure continues to rise in a sustained way that has not happened for many decades and I think people should be satisfied that we have maintained our commitments to health, education and all the other key priority public services.

Q330 Norman Lamb: But are you confident that you will avoid a squeeze on departmental activities?

Mr Brown: I think you will find that departments are spending at a rate that is consistent with the promises we have made in our election manifesto. I think you will see the figures in detail when they are published. I do not actually have them at the moment, but you will see them in detail when they are published.

Q331 Norman Lamb: On investment spending, in recent years you have identified a consistent pattern of government departments and local authorities not being able to deliver the amount of public sector net investment forecasts in the Budget. In the PBR 2003 you expected public sector net investment to grow by 30 per cent in 2004. That was revised down to 17 per cent in the Budget 2004 and by PBR 2004 the forecast growth was just 53/4 per cent, so 30 per cent down to 17 per cent down to 53/4 per cent. What threats to the delivery of modern public services does this sort of slippage pose and how are you actually tackling the problem?

Mr Brown: Well, the figures I have got are the cash public sector net investment rising from £9.9 billion in 2001/02 to 11.3 to 13.7 to 21.7, so whichever way you look at this, this is a very substantial increase in public sector investment.

Q332 Norman Lamb: But do you accept that there is slippage?

Mr Brown: We have always said that the departmental investment plans should be met on time and have accepted that one of the reasons was that in the past departments were so used to a stop-go on investment plans that we have had to get mechanisms in place so that people are assured that if we make a decision to invest, that decision will continue.

Q333 Norman Lamb: But that is not working fully yet, is it? There is still a problem there, is there not?

Mr Brown: It depends what you mean by a problem because the PSNI, which is the net investment, last year, 2003/04, was a 21 per cent rise. Now, that is a very substantial rise whichever way you look at it and I do not think there has been a period in British history, to be honest, outside wartime when the scale of investment on a consistent and sustained basis has been rising so much. I can tell you that for the year 2004/05 to date there is a 13 per cent rise, so these are not insubstantial figures.

Q334 Norman Lamb: No, but still slippage. Can I move on to ----

Mr Brown: Well, 13 per cent in the year to date is high and I think whereas there was slippage in previous years, we are getting to grips with this issue and it is really part of the psychology of departments that they have got to know that the investment is really guaranteed and they can go ahead with it, whereas in the past they always held back on plans, thinking that there might be some stop-go or some cut take place which would prevent them doing things.

Q335 Norman Lamb: Can I move on to the £1 billion announced to help keep the increases in council tax down. The Financial Times reported a "Whitehall fury at Brown demands for budget cuts". What the £1 billion seems to consist of is actually £150 million of new money and then £512 million of government departments reallocating expenditure from central programmes to local authorities. Now, which are those programmes where cuts will occur?

Mr Brown: I think that is based on a misunderstanding. You are talking about services that are run by both central government and local government, so the overall level of spending on that service will be maintained, if not higher, but what has happened is that more money has gone in to support the local social services, more money has gone in to support the local education service ----

Q336 Norman Lamb: Yes, but can I just quote to you from the Pre-Budget Report. You say, "To fund this, departments have reallocated £512 million of existing funding from central programmes to local authorities". Now, can you specify what those are?

Mr Brown: Well, I think we said on the day that the measure that we have taken in relation to the schools we have made public and I will send you detail on it.

Q337 Norman Lamb: Yes, but we are losing the money for child protection and child abuse, are we not?

Mr Brown: No, I do not think that is correct.

Q338 Norman Lamb: The Times reported that Mr Clarke would scrap the grant now given to councils to safeguard children.

Mr Brown: I am quite surprised you are reading it as if it is gospel.

Q339 Norman Lamb: No, I am asking you the question.

Mr Brown: What I am explaining to you is that what actually happens in practice is that the overall level of spending on education or social services or the police service or on the fire service remains as was expected, but this is spending which is now being done by the local authority rather than by the central government department. We announced on the day of the PBR, so we are absolutely clear about that, a reduction in the schools' FSS, and that is the bit of local authority money which is allocated specifically for the schools, by £75 million and that allowed us of course to give local government more money, another £75 million.

Q340 Norman Lamb: You are saying it is the spending, but it seems to be smoke and mirrors. Is this real money?

Mr Brown: The overall level of spending remains and in fact the Treasury gave additional money, so the overall level of spending is higher, but of course the spending is being done by the local authority in this instance.

Q341 Norman Lamb: But can you specify now where the £512 million comes from, what programmes it is that central government departments are reducing because that is what your Pre-Budget Report says?

Mr Brown: We announced on the day a reduction in the schools' FSS. We also said that there were measures ----

Q342 Norman Lamb: Yes, of how much?

Mr Brown: Hold on. We also said that all these figures, once the final work is done, will be in the departmental estimates.

Q343 Norman Lamb: It refers to the past tense, "have reallocated £512 million". It has already been done, so why can you not tell us which programmes?

Mr Brown: Because you are asking about what the final departmental expenditures are going to be and I think you will find that far from there being cuts, as you are implying ----

Q344 Norman Lamb: No, but you made a specific pledge to find this £1 billion. You referred to £512 million in the Pre-Budget Report, so tell us which programmes are being reduced to fund this?

Mr Brown: I am just explaining to you that social services expenditure is probably higher, not lower, but more of it is being done by local authorities and not central government.

Q345 Norman Lamb: But this is a fairly simple question. In your Pre-Budget Report, you have referred to 512 million distinct funding from central programmes. Which are they?

Mr Brown: I have just explained: the reduction in the schools' FSS.

Q346 Norman Lamb: How much?

Mr Brown: I have then explained that these figures will be available when we publish the departmental estimates and you will find that ----

Q347 Norman Lamb: Why can they not be available now? You have already done the work.

Mr Brown: Because you are implying that there is a cut taking place when actually ----

Q348 Norman Lamb: No, I just want the figures.

Mr Brown: But what would the figures suggest?

Q349 Norman Lamb: What the Financial Times suggests is that the work is still ongoing, there is still wrangling going on because the central departments are so furious. There is not a single department, it says, where there has not been fury created over these decisions.

Mr Brown: That is completely wrong and it was an exercise which involved the Cabinet as a whole and was supported by the Cabinet as a whole. There was a reduction in the schools' FSS, then there was the question of the waster(?) targets, then there was the question which has been announced already about the levying of fees and charges for licensing and planning--

Q350 Norman Lamb: Yes, but you are now moving on to the other end of it which is the reduced ring-fencing. I am asking you about the £512 million.

Mr Brown: I am explaining to you that the overall level of public expenditure is as high, if not higher, because of the Treasury contribution that was already announced. What has happened is that some local authority expenditure is higher as a result of the reallocation from central government, but the service as a whole, social services and education as a whole are getting more money.

Q351 Norman Lamb: It seems to be that this £1 billion has no substance at all. Can you provide us with a list of the reduced ring-fencing that you refer to? This is a third of a billion that we are talking about. Where is this and if what we are talking about is allowing councils not to spend this money, we are talking about local cuts, are we not?

Mr Brown: Yes, Defra have announced that whilst the Government is committed to a 25 per cent recycling target overall, we will not be setting even higher targets for local authorities already exceeding the total. DfES have put money that was inside the schools' FSS and instead allocated it to general spending, and the DCMS ----

Q352 Norman Lamb: So it is money not going to schools.

Mr Brown: I have adjusted licensing fee levels to allow local authorities to raise more from licensing fees.

Q353 Norman Lamb: So the fees will go up instead of the council tax?

Mr Brown: It is possible that the fee for a planning application may go up as a result of this, but I do not think anybody around this table would think that that was unacceptable.

Q354 Norman Lamb: Can you send us a note specifying these amounts so that we can see the breakdown?

Mr Brown: What the Department will be sent is the departmental allocations when they are published.

Q355 Mr Fallon: What I do not understand about this reallocation of £1 billion is that we had the Comprehensive Spending Round back in July, so how is it that just five months later you have discovered all these immediate pressures that you did not spot in July, which is supposed to be the long-term framework for the next three years? How did you get into this mess?

Mr Brown: Well, actually I think this is based on a complete misunderstanding because basically the framework for public expenditure for the year 2005/06 was not really the issue that was in the Spending Round, but it was 2006-08, so, roughly speaking, the figures for 2005/06 remain the same and the Spending Round was announcing figures for 2006-08. What we have been dealing with in the council tax is the pressures that exist in 2004/05 and 2005/06 which were really outside the scope of the major work of the Spending Review. Now, I think it is reasonable to say that when you identify pressures that you perhaps had not anticipated some years before, you take action to deal with them. I would have thought, from the reaction of local council leaders, that they do understand that we have understood that they have a difficulty and we have helped them to keep the council taxes substantially below the 5.9 per cent average it was last year. Again, and I am surprised about this, I would have thought there would be all-Party support for us helping local authorities make sure that the council tax could rise at a lower level than in previous years. Now, as I said, the departmental spending will be announced in the departmental allocations which will be published very soon and I think you will see that, far from there being cuts in spending, the departments are spending to course, and of course they have their end-of-year flexibility carried over from previous years which they able to use.

Q356 Norman Lamb: What about the £100 payment to pensioners?

Mr Brown: The payment to pensioners, because we expect council tax rises to be lower this year than last year, indeed substantially lower than last year ----

Q357 Norman Lamb: They are still higher though.

Mr Brown: Well, if you will allow me to finish, we have allocated £50 for each pensioner household ----

Q358 Norman Lamb: Instead of £100?

Mr Brown: ---- for each pensioner household, and that is for the over-70s and for the over-80s.

Q359 Norman Lamb: So it is all the discount on the larger bills.

Mr Brown: Again I would have thought that Mr Lamb would have welcomed that, given that we will have two things achieved by this. One is that we will have lower rises than last year and, secondly, where pensioners have had to pay more, they will get what is a commensurate amount on average and then it is £50 extra.

Q360 Mr Cousins: One of my colleagues has brought to your attention something from a newspaper called The Times. Could I bring you a bit of good news from a very important newspaper, The Newcastle Evening Chronicle, which tells us that the controlling Liberal Democrat group on the Council consider your settlement to be so good that the council tax increase they are projecting next year will only be 2 per cent, so there is a Christmas present from Newcastle.

Mr Brown: I am grateful. Perhaps you could aid the process of the flow of information by sending it also to Mr Lamb!

Q361 Norman Lamb: It is not the case in Norfolk, I can tell you!

Mr Brown: It is quite clear that Liberal councils around the country have got no common policies!

Q362 Mr Cousins: I wonder if I could ask you whether the excellent innovation you have made of making lump-sum payments in the winter to pensioners that are free of all considerations of tax and benefit withdrawal, whether the £100 extra this year that has just now been paid could be continued at that rate next year bearing in mind the increases in water rates which of course are now in the pipeline and the increases in gas and electricity prices? It has been a wonderful innovation that brings many millions of pensioners a good Christmas and it seems important to continue to build it up.

Mr Brown: I think our decision to give the £50 next year is something that people will generally welcome in recognition that whilst the council tax will not rise in the same way it did in previous years, we are helping to meet some of the costs of the council tax for pensioner households who have generally fixed incomes and, therefore, a higher proportion of their income is paid in the council tax. I think we should bear in mind also that we have the winter allowance, we have the free television licence and for the group who are affected by the gas, water and electricity bills that you are talking about, the pension credit is something that I think has over time been able to increase the income of the poorest group of pensioners, those most affected by £40 a week.

Q363 Mr Walter: This reallocation, Chancellor, can you confirm that part of that has been the cancellation of capital spending programmes by church schools and that money has been reallocated by the Department for Education into the general pot as part of your £1 billion?

Mr Brown: No, I do not think so.

Q364 Mr Walter: Can you check that and write to me?

Mr Brown: I am very happy to write to you, but I think the capital budgets in schools have been rising quite steadily.

Q365 Mr Walter: This is church schools.

Mr Brown: It is capital investment you are talking about?

Q366 Mr Walter: I am talking about capital spending in church schools. There is one group of primary schools in my constituency which are losing £3.8 million next year as part of this reallocation.

Mr Brown: I shall bring this to the attention, I was going to say, of the Education Secretary, the new Education Secretary and see whether she would be able to write to you about this matter.

Q367 Chairman: On the council tax aspect, Chancellor, you mentioned the reaction of council leaders, acknowledging that they have a difficulty and you are helping them. I note that the figure for Scotland in terms of the Barnett allocation is £12.675 million they will be receiving, but the First Minister is on record as saying that none of this will go for council tax relief. I come from a very poor authority, like your own, and in fact I was talking to your council leader only last week, and we have pressures in my area. I have got one of the poorest communities in Scotland with 33 per cent of people in poverty and high levels of council tax, just as high as any in Scotland. For example, the average bill for Band D is £904 in 1996 and it has risen to £1,089 in 2004. That is an increase of 28 per cent, Chancellor. The councils in Scotland are under as much pressure as the councils in England, so should there not be a bit of equity here in the money that you have given to the poor councils like my own or your own?

Mr Brown: The Devolution Settlement makes it clear that the funding body at a governmental level for local authorities in Scotland is the Scottish Executive and it is for them to make the decisions. In fact, under the Barnett Formula, they were allocated not just £121/2 million as a result of the measures that we had in the Pre-Budget Report, but very considerably more because they got their share of the childcare allocations and they got their share of other allocations, and I can give you the exact figure, but it is their discretion ----

Q368 Chairman: I understand, Chancellor, but in the Pre-Budget Report you focused on council tax relief and, as a consequence of that, Scotland getting £121/2 million, do you not think it is fair and people will not understand if it is not used to help council taxpayers?

Mr Brown: Scotland is getting substantially more than that as a result of the Barnett allocation of all the expenditures that happen as a result of the Pre-Budget Report. It is for them then to decide what to do, but at a UK level and including Scotland, the £50 is being paid to Scottish pensioner households as well as the rest of the UK.

Q369 Chairman: What would you say to your council leader then who comes to see you, as my council leaders come to see me, and says, "Wait a minute! You stood up in the House of Commons and announced this and there's nothing coming to the local level"? Do you not think there is an unfairness there?

Mr Brown: I made it clear that I was announcing this for England, but I was announcing the pensioner allocation of an additional £50 for the whole of the United Kingdom and I said that there would be separate allocations made for Scotland and Wales.

Q370 Chairman: I think to many of us, particularly council taxpayers, that will strike as extremely unfair.

Mr Brown: The Scottish Parliament has a very large budget as a result of the rise in public expenditure generally and it is for them to allocate that to local authorities.

Q371 Angela Eagle: I am not sure I want to talk about equity and the Barnett Formula as I think that is probably something for another time. Chancellor, there are some who would argue that given the current state of the economy now, there is room for very large cuts in public expenditure and tax cuts on top. Do you agree with them?

Mr Brown: I think it would be a terrible mistake to make cuts in public expenditure at this stage. For the first time we are seeing sustained increases that are building up the capacity of our education and health systems in particular, but also tackling the problems of transport and policing, and to move from a situation where we are seeing these sustained improvements in capacity and to return to the old stop-go where you cut and cut at the wrong time would be a terrible mistake for the delivery of public services in this country.

Q372 Angela Eagle: So no room for tax cuts?

Mr Brown: The decision about tax cuts is one that I make at every Budget time according to our election manifesto commitments. I have just explained that we have cut the basic rate of income tax and we have cut the rate of corporate tax and we have introduced the 10p lower rate of income tax. If I look at the spending plans, moving forward, and if you are committed, as I gather some people are, to a balanced budget and, therefore, to £35 billion of cuts in public expenditure to get there, if you also have £15 billion additional public spending commitments that you have announced for a series of different measures, then you would have to find £50 billion in public spending cuts to get to your balanced budget, and £50 billion of public spending cuts, given that the whole of the Civil Service only costs £15 billion, means that you could sack every civil servant and you would still have to find £35 billion of public spending cuts, so it is very savage and severe indeed.

Q373 Angela Eagle: I remember when I first went into the Department of the Environment, Transport and the Regions, as it was then, and we were starting to look at issues of sustainability and I was shocked to be told by the civil servants there that they did not think that poverty existed in the UK. You have made poverty and the alleviation of poverty one of your main themes both abroad and at home and you gave us some insight into your agenda for poverty abroad earlier in reply to some questions from the Chairman, but could you say a little bit about your approach to poverty at home, particularly child poverty and pensioner poverty, and how you see us meeting targets to end that? Also can you say whether you think that this is about economic efficiency and productivity or is it just greater social justice?

Mr Brown: I do not think the economy is going to be successful in the long term if it does not deal with the problems of child poverty and does not ensure that every child has the best possible start in life, so it is for reasons of economic success and social justice that you tackle child poverty. We will meet our first target, which is to cut child poverty by 25 per cent, and then our second target, which is certainly very challenging, is to cut child poverty by 50 per cent by 2010 on the road to tackling it and eradicating it in a generation, so we have set down already some of the measures that we are going to take from 2004 so that we meet our target by 2010. Part of the work of the Childcare Review was to show how more money could go to early-years' learning, for nursery schools and for SureStart and for the various programmes that support the care and educational development of children at an early age. As far as pensioner poverty is concerned, we have taken the first million pensioners out of poverty and I think that some pensioners with the pension credit are better off than they have ever been as a result of these measures, but clearly we have got to continue to look at how we can help pensioners who have got low incomes partly as a result of small occupational pensions in the past, partly because of widowhood and partly because of low savings, and it is quite important for this generation of pensioners that we take the action through the pension credit that is necessary to get them out of poverty.

Q374 Angela Eagle: I remember when I first came into the House and listened to Budgets from the Opposition benches and childcare was never mentioned. Again you have made childcare one of the features of the PBR statements that you have made, but also Budgets and this particular statement contains a big ten-year strategy for childcare. Can you tell us whether again this is a social justice economic opportunity issue or is it to make the labour market more effective?

Mr Brown: Well, I think it is two things. Firstly, it is so that every child can realise their potential and that has got economic as well as social benefits and, secondly, it is the flexibility of the labour market you are talking about so that mothers and fathers have got more effective choices available to them if they have to work or if they want to for some period of time, particularly mothers outside the labour force while the child is very young. The purpose of the ten-year strategy was to make sure that every child had the best start in life and that is why the measures I have mentioned are important, but also to help parents make choices so that they can balance work and family life. I think people will be interested in the extension of maternity pay and maternity time off, equally, the transferability between fathers and mothers of some of that time off and then the greater flexibility that companies may look at so that people might be able to spend in the early years of their children's lives more time with the family by having more flexible working hours. Then the second part of that is, where childcare is required, to introduce children centres, to make the childcare tax credit work to help mothers and fathers have effective choices so that they can actually draw on childcare, and of course we have had a number of other measures about the regulation of the childcare market as well so that we open up opportunities that perhaps were not there before in different areas of the country.

Q375 Angela Eagle: There are many, many expansions going on in childcare, but there were some problems with the supply and quality of childcare, particularly often occurring in those areas where there are lots of lone parents and it is harder for them to access reasonable and affordable childcare. Are you happy that we are doing enough on the supply side with the extension of these services much more nationally to ensure that women can happily leave their children and know they are getting a high-quality early education?

Mr Brown: That is the issue now, that people want both the supply of childcare places, which has not been available, and the quality to give them the assurance that when they are working or away from their children that their children are properly taken care of. One issue is extending nursery education hours, which is what we have offered to do, to raise it to 15 hours, and the second is the out-of-school care both before and after school hours with the extended schools so that people have got the satisfaction, and less anxiety, knowing that their children are within the school precincts. Then there is the question of children centres which would be safe, reliable, high-quality centres where particularly the people that you have been mentioning, lone parents, could feel that their children were being introduced to other children and they were getting all the support that they as lone parents needed from the SureStart centres. So in each of these areas we are trying to move forward with an expansion of the supply of childcare.

Q376 Angela Eagle: I am quite interested to note the beginning of something which I think is the creation of wealth benefit rather than an income benefit, which is the child trust funds which will be receiving their first payments early next year, but also some initial work that the Treasury did in piloting Savings Gateways which assist people who have not been able to save because of their very low incomes in the past. Do you see this kind of approach to what I call "wealth benefits" rather than income benefits as a useful thing and do you see it being extended in the future perhaps to other areas?

Mr Brown: I think that poverty is not simply the absence of income; it is the absence of having security through having no wealth, no savings, no assets. A wealth-owning democracy is to the benefit of everyone and, therefore, the child trust fund is helping every child get into savings at an early age and building up a trust fund, so no matter what your background is, you have at 18 some money that you can build from. That is why we have announced the 250 and 500 from this year and then we have got a consultative document on another payment made to seven-year-olds. With the Savings Gateway, it has been very interesting to look at the research on that as that is matching the savings of low-income people with the Government being prepared to make a contribution, essentially a tax credit, to encourage people to save. That has been working very well and in the areas it has been piloted it has been successful and that is why we are trying to extend it now and we were able to announce in the Pre-Budget Report that these Savings Gateways, as they are called, are going to be extended, and extended both to new income groups as well as into new areas, so I think the seeds of something quite big in a savings culture in this country for people who are on low incomes are very important for our future.

Q377 Mr Beard: Chancellor, as you note in the Pre-Budget Report there has been good progress by departments since the Spending Review in delivering efficiency savings. Given the need to achieve these savings, if the departments' PSA targets are to be met, what role do you envisage the Treasury playing in ensuring that the efficiency savings are actually delivered?

Mr Brown: Well, it is the departments who are now accountable for the efficiency gains. They are setting out their plans of course and they are making some progress already. Gershon and his successor at the OGC continue to monitor these things. I did say in the Pre-Budget Report that we had achieved £2 billion of savings in procurement and then there was £⅓ billion saved in NHS drugs procurement and, on target, we had the reduction of the first 9,000 Civil Service posts. The figures are available obviously for individual departments on this, but it is for departments themselves now to show that they are making these efficiency savings. They will of course be monitored, and we are working with them, but it is a matter for them to show what they are doing.

Q378 Mr Beard: When we took evidence from you on the Spending Review in July, six months ago, you told us that the efficiency technical notes setting out how the efficiency savings were going to be achieved and measured had not been published because they were to be scrutinised by the National Audit Office and the Audit Commission first. You also noted that this Committee, quite rightly, would support you in seeking that independent advice.

Mr Brown: Yes, what are called the "ETNs", the efficiency technical notes, are now published.

Q379 Mr Beard: Yes, I have got them here.

Mr Brown: Good. They were published at the end of October and I think that is progress. Now, some departments have lengthy notes and some have shorter notes. Sometimes that is a measure of how far they have previously got on their efficiency programme and in some areas it is because it is complex and they are now working with the National Audit Office in many cases to look at the system that they are using.

Q380 Mr Beard: Chancellor, could you say what the role is of the National Audit Office because, as I say, the last time they were going to be submitted to the National Audit Office and that was why they were not available, and the Financial Secretary in a written answer recently said that although these had been looked at by the National Audit Office, they had not been signed off. Mr Stephens after Tuesday's session kindly sent a note which says, "We are discussing with the National Audit Office and the Audit Commission how they can be involved in the future process for new efficiency technical notes in a way that will add greatest value", so what is envisaged as the National Audit Office's and the Audit Commission's role in all of this?

Mr Brown: Well, this is an evolving process, as obviously has become clear from your discussion on Tuesday. The National Audit Office and indeed the Audit Commission, they examined the draft efficiency technical notes against agreed criteria, the clarity of the savings, the measurement methods, the data quality, the service continuity and the readability of the documents, and they provided advice to departments in September. The departments then published their ETNs at the end of October and, as departments refine these because this is an evolving process, as I have said, the NAO and the Audit Commission will be asked to provide further advice. Now, many of the measures used in these notes are already subject to quality assurance processes, such as internal and financial audit, so the National Audit Office will be involved in this evolving process as it moves forward.

Q381 Mr Beard: You have mentioned already that the quality and the detail of these documents varies quite considerably and it does. The one from the Home Office is three pages and more or less a transcript of the Gershon Report, and the one from the DfES is 55 pages and covers as much detail as white boards. Who is trying to bring about some comparability between these and stimulate the departments to move rather further in being more explicit about what is going on?

Mr Brown: I think now that they are drawing on the advice of the National Audit Office and the Audit Commission, this is going to help the process, but it is in the end, and this is why I stressed this at the beginning, for departments to decide how best to set out their ETNs. In some cases, differences are justified because the measurement of certain efficiency measures is complicated, in some areas it requires a lot more explanation and in other areas it is more simple. The ETNs were designed to set out the information and data which will underpin how progress can be measured. Now, I think we agree on this, that the ETNs published in October cannot be the last word and they are in a sense the first word in this, and we are working with the NAO to see how to return to some of the difficult measurement issues in the future, which some ETNs actually refer to explicitly, like the data sources of social care and children's services which are being developed at the moment, so I think, as I said, it is an evolving process. We hear what you say as well as what has been said by the National Audit Office and this will develop with the co-operation of the National Audit Office, but it is primarily the departments that decide how best to move this forward because they have got to take responsibility for this.

Q382 Mr Beard: There have been comments on the Gershon savings to the effect that they are sort of fairy gold, they are heard about, but no one sees them. Would it not help if there was a statement in either of the Pre-Budget Reports or the Budget saying what the progress was towards achieving the £20 billion?

Mr Brown: Well, I thought that I had included some information even after a few months about how progress is being made in jobs, in procurement and in some other areas. I am told that £2 billion has been saved in procurement and then the use of e-options has made quite a difference. I also know that the MoD is on track to deliver £400 million in savings through improved defence logistics, the Department for Transport £140 million on the Highway Agency measures that they have announced, and a better use of IT in the Home Office. The workforce numbers lead us to announce that nearly 10,000 jobs by the end of the year have already been reduced since the Gershon Report was announced in April, so we are on track to get the numbers between now and 2008 that we talked about, but I am very happy to say that we will provide more updated information in the Budget.

Q383 Mr Beard: But the Gershon criteria are very clear and they were set out in the Gershon Report, but there are three particular cases: the MoD, for instance, reducing two submarines as part of the Gershon exercise; the Department for Transport including fines for infringements covering driving hours for HGVs and PSVs; and then the Department for Education and Skills is bringing in raising the retirement age for teachers. None of those things appears to be within the criteria of the Gershon Report which were to do with inputs and getting similar things out for lesser inputs. These seem to be more policy matters.

Mr Brown: I think I can answer specifically some of these points. The plan to reduce the submarines is part of a wider package of measures to achieve the genuine efficiencies that you are talking about. As far as the fees by the Department for Transport are concerned, it is responsible for collecting vehicle excise duty, as you know, but it is now known that 4.5 per cent of VED was not being collected and, therefore, it is an efficiency saving to get that money collected. I will write to you separately on the Department for Education and Skills, but I do say to you, and this is why the departments are now responsible, that the savings have been built into the Spending Round allocations so that if these savings are not achieved, then the departments will have to find another way of maintaining the services or not be able to maintain all the services that they agreed to in the 2006 Spending Round. We have built the savings into the figures for the Spending Round, so we believe that even with a lower rate of spending growth as a result of the decisions made in the Spending Round, with the efficiency savings the actual rate of growth of expenditure on front-line services would be as high as in the previous round, so departments are not only responsible and accountable, but if they can get these efficiency savings, they will be held to account because it will affect the delivery of other services.

Q384 Mr Beard: I appreciate that. It would answer the question if those savings were made more explicit, as you have suggested, in the Pre-Budget Report.

Mr Brown: Well, we will keep, in the Budget process, people in touch with what is happening, but of course individual departments are available to answer questions on what they are actually doing if you were to put them down.

Q385 Mr Cousins: I have a question about this teachers' pension scheme. It is not just a point of detail; it is a point of principle. One of the component features of the changes in the teachers' pension scheme is to raise the build-up rate of entitlement to pension from 80ths to 60ths. Now, the effect of that of course is to make people who are in teaching for shorter periods build up a bigger entitlement to pension. Regardless of its merits or demerits, do you think that is a legitimate thing to include in efficiency savings?

Mr Brown: I do not know the detail of this. This is not a matter essentially for me or the Treasury.

Q386 Mr Cousins: But you will have to take a view about whether it is properly an efficiency saving.

Mr Brown: No, that is not for me to take a view on it. That is for the Department to work out how it is going to move forward to achieve its efficiency savings, but, as you know, there is a wider debate about pensions taking place and if people are working in one job for less years, but working at a high standard of achievement, can you make sure that the retirement provision is adequate. These are issues that the Turner Commission is looking at.

Q387 Mr Mudie: I have three quick questions really. I was delighted to hear your remarks about the Savings Gateway which I think is an excellent scheme, but the result of the pilots is supposed to report in February this coming year. That was applicable to the poorest households. Now, you have made a suggestion which is included in the Report that you are going to start another pilot to wider groups. Now, I am looking with anxious eyes to see if this first pilot is successful, and you have indicated that you think it will be, and you used the words "going well" and "very successful". I was looking forward to my poorest constituents taking part in a national scheme after February at an appropriate time Budget-wise, but you are now suggesting another pilot for a wider group. Is there room for taking a decision, where this will help the lowest-income households, say, for taking a decision to run with that nationally?

Mr Brown: Our experience of a number of pilots we have done is that we extend them from one area to another before we make a final decision to go nationwide. The participants either receiving out of work qualifying benefits or individual earnings below £11,000 were in the first pilot. It was piloted in Tower Hamlets, Cambridgeshire, Cumbria, Gordon and Hull.

Q388 Mr Mudie: It has been very successful.

Mr Brown: The interim evaluation says mostly it has been new saving and sustainable saving, in other words it continues. The full evaluation comes in February 2005.

Q389 Mr Mudie: Chancellor, the question is will you give some thought if the final report in two months' time confirms your view it was very successful not to run with another pilot, a wider pilot that keeps it to a minority but to consider extending it?

Mr Brown: I am saying, if I may put it this way, there is a middle way to this, like the national employer training pilots which started in a number of local areas, then were extended to a third of the country and have now been extended nationwide. It is possible to widen the pilots before you make a final decision that you can afford to go nationwide or it is right to go nationwide.

Q390 Mr Mudie: I would be happy if you widen this pilot but you are suggesting a different pilot scheme starting.

Mr Brown: What we are testing are alternative match rates not just 50:50, we are looking at it as how it would affect a wider range of income groups and, therefore, there will be a larger set of pilots.

Q391 Mr Mudie: Now on affordable credits, one proposal you have got in your document that has caused distress to all the bodies dealing with constituents with problems getting affordable credit, is a proposal to allow lenders to apply for a deduction from benefit. I just really want to say can there be some fresh thinking on this because you are poor in your own benefit and to be put on a list as a condition for extending affordable credit is not acceptable out in the country.

Mr Brown: There are two views on this but I do say what we are doing on financial inclusion is wider than what you are referring to.

Q392 Mr Mudie: I know.

Mr Brown: There is £120 million over three years. It is to help citizen advice bureaux, it is to help other possible lenders from the charity and community sector, it is perhaps to extend the community investment tax relief which helps these agencies like credit unions.

Q393 Mr Mudie: All wonderful things. You are a wonderful Chancellor but are you willing to listen because there is quite an upset over this proposal?

Mr Brown: We are willing to listen, obviously.

Q394 Mr Mudie: Well done!

Mr Brown: For claimants it suits them that this should happen because it gives a continuity to the commitments they have to make.

Q395 Mr Mudie: I am sorry because I know you have got questions so I am racing with these. I am not trying to cut you off because they are all very good measures. Two measures which are wonderful: social fund reforms, when somebody borrows it is 15 per cent repayment, you are suggesting cutting it to 12 per cent which is a very good first step, and then the capital limit for benefit which you are raising from £3,000 to £6,000 which will affect a tremendous number of people throughout the country. The trouble is both reforms you are suggesting from the year 2006. If they are as good as they are, why are you not suggesting doing them sooner?

Mr Brown: Because of the changes we are making in a whole series of areas affecting that department it is right that we do it with the proper procedures so that it is implemented in a way that the resources are there to do so. I think it is to give the department time to adjust to this change and make provision for it.

Q396 Mr Mudie: Chancellor, to adjust to repayment from 15 to 12 takes five minutes on a computer.

Mr Brown: No, as you said yourself, there will be a wider group of prospective claimants for these benefits.

Q397 Mr Mudie: That is the second one, not the first one.

Mr Brown: You have to have the resources for that second one. You have to have the resources to enable you to do it.

Q398 Mr Mudie: I am delighted with the fact that you have appointed, as Mr Holgate told me on Tuesday, the Chairman of the task force on basic bank accounts. I am surprised where he comes from. He has not been one of the people who has been regularly at this Committee on financial inclusion et cetera, but that is your choice. When is he going to be joined? When are you going to set this up? It does not seem a major thing to set up, it is important. Can you make sure he is joined by people from areas that have expressed an interest in less well off people?

Mr Brown: Yes. The membership of the group will be drawn from the financial services sector. It will include the voluntary sector and the community sector and people who have an expertise in academic university and colleges on these issues as well. It will be a widely drawn task force. This will be published shortly. I know Mr Pomeroy has been highly recommended to us.

Q399 Mr Mudie: By whom?

Mr Brown: He is the former Chairman of the National Lottery Commission.

Mr Mudie: There you are, it might make sense to somebody.

Q400 Chairman: Chancellor, lastly, you mentioned with the Treasury that those excluded from mainstream credit could be faced with "...a lack of low cost options, a lack of transparency, pressure to take on more debt ..." et cetera.

Mr Brown: Yes.

Q401 Chairman: You said, also, you would be encouraging the third sector. What discussions have taken place with potential providers of increased "third sector" areas on affordable credit, for example credit unions? Does the potential capacity exist to support the kind of expansion you have in mind? What targets do you have in mind?

Mr Brown: That is right. We want to extend the institutions which are offering affordable credit. I think the best thing to say to you is I will write to you about the specifics of that but there is £120 million provided for this financial inclusion credit.

Q402 Chairman: Thank you for your appearance this morning, Chancellor, and particularly your officials. I think it is a record that none of them has opened their mouth this morning. Thank you for coming.

Mr Brown: Thank you very much. Happy Christmas!