Examination of Witnesses (Questions 1-19)
MR NICHOLAS
MACPHERSON, MS
MARY KEEGAN,
MS SAM
BECKETT, MS
MRIDUL BRIVATI
AND MR
JOHN OUGHTON
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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