Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1-19)


18 OCTOBER 2006

  Q1 Chairman: Permanent Secretary, welcome back to the Sub-Committee. Could you introduce your team please, and yourself.

  Mr Macpherson: Certainly. I am Nicholas Macpherson, Permanent Secretary of the Treasury. On my right (your left) is Samantha Beckett, who is Director of Operations at the Treasury. On my left (your right) is Mary Keegan, the Finance Director, Mridul Brivati, who is Director of Public Spending, and John Oughton, who is Chief Executive of the Office of Government Commerce.

  Q2 Chairman: Who is familiar to us. Thank you. You announced last month, Permanent Secretary, another change of management structure at the highest level of the Treasury. How many of these changes have there been in the last four years?

  Mr Macpherson: I cannot tell you the precise number, but there has been a few. Would it be helpful if I very briefly expand on the thinking underlying the latest one?

  Q3  Chairman: Yes, please.

  Mr Macpherson: There are two issues here. First, the fact that the Treasury's resources are going to become increasingly constrained in the coming years and therefore it made sense to me to ensure that at a senior level we were beginning to reduce the number of staff. Secondly, that there are, in my view, genuine synergies between the international side of the Treasury and the financial services side. A lot of financial services regulations are negotiated in Brussels, so there are potential synergies there, but also around the growth and productivity agenda. It seemed to me that a lot of the analysis which informs our view of private sector productivity could also help inform the public service agenda.

  Q4  Chairman: You said that your resources were being constrained, but your running costs, according to this report, jumped 60% from £71 million in 2000-01 to £113 million in 2007-08. You say that is mainly due to the payment on a new building. How much of that is the new building? Page 97 of the Departmental Report, the second line.

  Mr Macpherson: Yes. The best way of understanding the effects of the building is the big shift between 2001-02 and 2002-03. By 2002-03 we have got to £103 million. The building is largely in the numbers. We are now in 2006-07, where you can see our net administration costs are £113 million. That then remains unchanged in 2007-08 and thereafter it will actually be falling because of the settlement announced in the Budget of minus 5% a year in real terms, which translates to minus 2¼% a year in cash terms.

  Q5  Chairman: You are telling everybody else to tighten their belts and there is a 60% increase overall in your running costs. What part of that is the PFI payment on the new building? How much is the payment?

  Ms Keegan: It is about £18 million.

  Q6  Chairman: So why have running costs jumped from £71 to £113? That is not 18.

  Ms Keegan: The other effect over that period is an increase in staff costs, a decision taken at the beginning of the period. May I point out to the Committee, though, that from 2002-03 through to the year you are looking at we have kept the core Treasury net administration costs at a very stable level and are intending to do that going forward.

  Q7  Chairman: But excluding the payment, then the increase is from £89 million to £113 million?

  Mr Macpherson: If you look at the numbers, the out-turn of 2005-06 is £102 million, which is the estimated out-turn—Mary can tell me the final out-turn—but that is little changed from 2003. My predecessors did preside over an expansion of the size of the Treasury round about the turn of the decade, or century, where there was a deliberate decision to increase the size of the Treasury, partly reflecting a period of vacancies, partly reflecting a new, bigger workload, but that period of expansion is most definitely behind us.

  Q8  Chairman: I do not think you can attribute a 60% increase in running costs to vacancies. Let me move on to something else which concerns me. Your ministers have recently announced a step change in your measures to deal with the financing of terrorism, but it appears the assets you have seized are only half a million pounds since 2001. Why is that figure so low?

  Mr Macpherson: The amount of assets frozen is really only one indicator of the effect of these measures. I am reliably informed by people who are close to the anti-terrorism action that disrupting, interrupting the transfer of funds, often involving very small amounts of money, can actually make a huge difference. It is not just the relationship between money and what you can do with the money in terms of getting the wherewithal to commit terrorist acts, it is also about being able to analyse with whom potential terrorists are having financial transactions. So disrupting that process can actually have quite a marked effect. Another way of putting it is that the cost of the 7 July actions last year has been put at something like £5,000 in terms of what it cost the terrorists to get the ingredients for what they were doing, so you are dealing in quite small sums and small sums can make quite a big difference.

  Q9  Chairman: But if half a million seized assets overall in five years is not too low a figure, why did ministers need to announce a step change?

  Mr Macpherson: For the simple reason that I think on any measure the terrorist threat has increased recently and so it is important that we are in a position to do whatever needs to be done to disrupt terrorism. Of course, this is just one element of a whole range of measures which the wider security services are taking at any point in time in terms of fighting terror, but our view is most definitely that this is part of the jigsaw and it can be effective. I would also say that half a million sounds a small number, but it contrasts well with other countries in the G7.

  Q10  Chairman: We are doing better than Italy?

  Mr Macpherson: We have not got a figure for Italy, but we are definitely doing better than Germany, France and Canada. That is of interest, but it is not a very powerful point because, as I said at the beginning, I do not think the extent of the asset freeze is necessarily a very useful performance indicator.

  Q11  Chairman: In 2002 you froze the assets of the radical cleric Abu Hamza. It then turns out that two years later, in October 2004, he was able to purchase a house costing £220,000. How did that happen?

  Mr Macpherson: The critical issue here is that Abu Hamza did not purchase the house. What happened was that Abu Hamza transferred a flat to his son before he was finally arrested in 2004 and it was his son who then sold the property in W6 and in October bought another property in Greenford in the name of a third party.

  Q12  Chairman: How can he transfer an asset such as a flat after you have frozen his assets?

  Mr Macpherson: Because the original order, which I think goes back to 2001, only affects funds. Had he sold the property and then transferred the funds, he would have been caught by the then terrorism order. One of the reasons for the announcement last week by the Economic Secretary was to ensure that a transfer of assets would be caught by the order. So in that sense it would address the example you give, although clearly you cannot apply these things retrospectively. Having said all that, the authorities were aware of this transaction. They talked to the police about it and the police took the view at the time that you would not be able to prevent this from happening under the relevant order. At least the Legal Services Commission now is pursuing the potential assets tied up with it. Obviously that process is not complete and I would not want to comment on the outcome.

  Q13  Chairman: It seems extraordinary that the combined brains of the Treasury did not realise that the registration of frozen assets would not have included freezing property. Why did you leave such a loophole?

  Mr Macpherson: The relevant terrorism order was done, I think, under the auspices of the existing United Nations' arrangements for freezing assets, which we have been seeking to apply and at that point it did not take property into account. It is fair to say, though, that so long as the assets were tied up with property no funds were being released from that asset. The original arrangements were designed to focus purely on whether money was actually moving between parties and so long as it was tied up in a bit of real estate that was not going to happen.

  Q14  Chairman: Do you think it is acceptable that somebody whose assets are frozen should be able to buy and sell property?

  Mr Macpherson: I would not want to get too involved in commenting on individual cases. What I do think is important is that we continue to keep these pieces of legislation under review and that we act when we think that is sensible. So I think the announcement last week is an important step forward.

  Q15  Chairman: You think it will close off the loophole?

  Mr Macpherson: I think it will certainly deal with that particular problem, but you are dealing with quite complex operations and my guess is that we will continue to learn as we go along.

  Chairman: I suggest to you it was a fairly obvious loophole.

  Q16  Mr Newmark: The sustainable investment rule sets a ceiling for debt of 40% of GDP (I will define "debt" for the time being as on balance sheet debt) over the economic cycle. With public sector debt currently at 36.7% of GDP, and expected to level off at 38.4% in the long term, how restrictive has this target proven to be?

  Mr Macpherson: I think it is restrictive in that the original target was set at a time when unexpectedly the Government was running big surpluses in the late 1990s. So debt did come down to really quite a low level, in the low 30s% of GDP. It has been rising latterly. There is still headroom under the rule. Our last projection had it stabilising at 38.4%. So I think it is now constraining investment, which is one reason why, if you look at our plans at the time of the Budget, you have net investment stabilising at 2.25% of GDP.

  Q17  Mr Newmark: Are there any particular projects you are aware of which have actually been cancelled because of this, or is it that the pipeline of decisions is slow?

  Mr Macpherson: I think it is the pipeline of decisions. The current planning regime allows you to take these decisions reasonably far out. 2010-11 is still some way away. Inevitably resources are always rationed and capital spend is rationed. That is the nature of life, but I do not think it is constraining public spending planning unduly.

  Q18  Mr Newmark: I am just curious, is that because of the ability of the Government to use off-balance sheet financing, and does the fact that there is now almost a trillion pounds of debt off-balance sheet give you cause for concern at all?

  Mr Macpherson: I do not recognise your trillion pounds.

  Q19  Mr Newmark: There has been a number of articles. Watson & Wyatt have done one, and Capital Economics. There is a lot of information out there saying between PFI and public sector pay liabilities it is—

  Mr Macpherson: It is quite a popular pastime now in the media and elsewhere to identify particular issues and then capitalise them to get some very large number, but a lot of liabilities fall at the time they fall and the Government raises revenue to pay for them at that time. I think there is a serious point which you are making, which is around finance leases and last month the ONS took a decision to add £4.95 billion to the level of net debt to reflect those leases. Actually, that is a good thing. It is a reflection of the massive improvements in financial management across government, the fact that resource accounting is now beginning to pick up on balance sheet assets. That is fine and as it should be, and we will publish a new net debt projection in the pre-Budget report and I am confident that we will continue to stick to the fiscal rules.

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