Examination of Witnesses (Questions 40-59)
MR NICHOLAS
MACPHERSON, MS
MARY KEEGAN,
MS SAM
BECKETT, MS
MRIDUL BRIVATI
AND MR
JOHN OUGHTON
18 OCTOBER 2006
Q40 Peter Viggers: Then your 2004
PSA target, your annual report, calls for 26 countries to have
received irrevocable debt relief by the end of 2008, likely to
be reached by the end of 2007. Is that sufficiently challenging?
Mr Macpherson: Well, you cannot
win. Well, you can win, actually. I think that is a very good
question and it is a generic question about targets, which is
if you are going to hit them that early why weren't you more ambitious?
We are very keen to inject ambition into targets, which is one
reason why, when occasionally we miss them, I do not regard that
as a massive defeat providing the ambition has stretched us. I
welcome the fact that we are on course to hit it early, but clearly
as we look to the future we need to factor in the ease of hitting
targets into any future regime we may have.
Q41 Peter Viggers: You state you
wish to make progress towards the United Nations' 2015 millennium
development goals. What can you do about that? Are you proposing
to restart the Doha Round—
Mr Macpherson: This is a target
which I think is more on the ambitious side. Progress is being
made against the millennium goals. There have been some very positive
news stories coming out of the income poverty agenda, in Asia
in particular, and a lot of other good examples, for example primary
education in North Africa is going well. Fairly early on we identified
sub-Saharan Africa as a particular challenge and one where Britain
could make a real difference. How have we focused our efforts?
First we made this absolutely the top priority of our presidencies
of the EU and G8 last year. We secured the commitment to $50 billion
extra aid by 2010 at the G7. We now need to ensure that is delivered
and there is no backsliding, and that will require a lot of leadership
by the United Kingdom. But also on the ground, working with the
Department for International Development, we have been really
keen to try and focus some sensible interventions which can make
a real difference against those goals. I would use particularly
the example of education, where both the Chancellor of the Exchequer
and the Secretary of State for Development, Hilary Benn, have
put a large amount of effort in terms of securing predictable
funding for education in Africa over the next 10 years and DFID
is entering into 10 year agreements with key countries. There
was quite a successful meeting in Singapore recently where the
Ghanaian Finance Minister presented progress on what 15 countries
have been doing. There are some positive things going on in Africa
and I think we are now in the sixth year where the African economy
is set to grow faster than the world economy. All that is incredibly
good news, but equally progress is inevitably patchy. There are
some governments which are really grappling with this agenda and
there are other sub-Saharan countries which we are all aware of
from watching the news which have not got a hope at all in hitting
their targets. So we have got to be realistic about what we can
achieve and really put all our effort into areas where we can
make a difference.
Q42 Peter Viggers: The National Audit
Office was a bit sharp last October in saying that there was not
sufficient clarity of definition of responsibility between the
Treasury and DFID. Have you clarified that point?
Mr Macpherson: I think we have
got reasonable clarity. The Treasury is a very small department,
and set to become smaller, and our comparative advantage is on
the financing and funding side and in terms of our role in relation
to key institutions like the IMF. The Department for International
Development is completely responsible for operational delivery
on the ground. The Treasury would not dream of interfering in
a DFID operation in Mozambique, Uganda, or wherever. I think it
is very important that we have a clarity of relationship with
DFID and I think we have got to a place where responsibilities
are clear.
Q43 Mr Gauke: Can I turn to the issue
of productivity growth. You state in the departmental report,
on p.27, that you are on course to meet the objective of raising
the rate of UK productivity growth over the economic cycle. In
doing so, you quote the figure for actual productivity over the
first half of the current economic cycle of 2.59% and compare
it with the whole economic cycle, the previous cycle of 2.04%.
Could you give us some indication as to what the productivity
growth has been in the second half of the economic cycle, i.e.
since 2001?
Mr Macpherson: Yes, I would be
happy to do that. Between the third quarter of 2001 and the end
of 2006 on the basis of our budget projections, which may have
turned out to be a bit on the pessimistic side, productivity growth
is set for that period to be 2.2%, which would imply from the
beginning of the cycle an average of around 2.4%, which compares
with the previous cycle, which in the table is 2.04 but as ever,
just when you think you have got a handle on the figures, you
get revisions in the blue book, and I think the blue book revisions
imply that the previous cycle was actually 1.92 rather than 2.04.
That is the answer.
Q44 Mr Gauke: Would you say that
the presentation of the 2.59 figure is not comparing like with
like—we have this issue when we are looking at the Budget—and
that certainly the 2.59 figure, which is what you have quoted
in your report, is, frankly, somewhat misleading if we are doing
a comparison of economic cycle with economic cycle?
Mr Macpherson: I think that is
a good point, but methodologically when looking at productivity,
I am told by experts, it makes sense to look at discrete parts
of the cycle. If the cycle is not complete, if you want to get
a proper fix on what has been going on, you want to look at the
first half of the cycle, i.e. the bit before output went through
trend. We have been very open about the rate of growth over this
cycle. I think it has averaged so far 2.9% and as I have just
told you, I think consistent with that productivity has grown
around 2.4%. But that will not be totally clear until the cycle
is complete.
Q45 Mr Gauke: I can understand the
methodological argument for looking at different parts of the
cycle, but the way this has been presented I have to say seems
somewhat contentious, and we certainly had criticism of that in
evidence given to us after the Budget by Bridget Rosewell. She
was certainly very critical of that. This is not produced by politicians
for political purposes. I just find the use of that figure somewhat
surprising.
Mr Macpherson: I am happy to continue
to look at how we present it, but until the cycle is complete
it is quite dangerous to put a hard figure on productivity.
Q46 Mr Gauke: I agree, and that is
precisely what the Treasury is doing because the Treasury is placing
a hard figure on it.
Mr Macpherson: I have given you
a figure to try and help answer your question, which unambiguously
is higher than the productivity growth in the last cycle, but
the table only tells you so much. We have also got a chart which
compares productivity performance with France, Germany and the
US and actually since this report was published, I think a couple
of weeks ago, we got some new information on productivity which
shows that we have narrowed the gap on output per person and even
done quite well on output per hour. So we are making progress,
but it is fair to say that the fastest progress was round about
the turn of the decade and progress latterly, perhaps reflecting
where we are in the cycle, has been slightly less rapid.
Q47 Mr Gauke: It has slowed?
Mr Macpherson: It has slowed,
but we are still making progress. In the case of output per hour,
interestingly, helped by the French overnight revising down by
10%—I am sorry, I cannot remember which way round it is,
but the net effect of what the French have done is that their
output per hour is 10% less than we had always been told it was.
Q48 Mr Gauke: Just to clarify, you
mentioned that the recent figures have said we are doing better
on productivity, growth—output per worker—and we are
even doing quite well on output per hour?
Mr Macpherson: Yes.
Q49 Mr Gauke: Are you saying we are
closing the gap on output per hour?
Mr Macpherson: Yes, we are closing
the gap.
Q50 Mr Gauke: With America?
Mr Macpherson: With America, looking
at my figures on the output per hour, if you go back to the mid-1990s
the Americans had output per hour 22% higher than the UK and we
are now down to 17%.
Q51 Mr Gauke: But as you were saying
earlier, there was a lot of progress in the early part of that
year. Certainly 2004 appears to be a bad year.
Mr Macpherson: Yes.
Q52 Mr Gauke: From what we have seen
from the ONS in statistics which came out earlier this month,
as far as I can understand them, 2005 has not been substantially
better. It is slowing down, that is the trend?
Mr Macpherson: Or the Americans
have accelerated. We gained against the Germans last year. I would
not claim that any of these numbers are hugely statistically significant
in terms of any one year, but in terms of output per hour we were
in 2004 15% behind the Germans and we are now 13%; in the case
of the United States we were 15% behind in 2004 and that rose
to 17% in 2005. So when we go back and look at this over a long
timeframe, I do not think 2005 was hugely significant.
Q53 Mr Gauke: But recent form is
not as good as the early part of this decade?
Mr Macpherson: Recent form has
not been as good as the early part of the decade, but actually
history suggests that you have points in cycles where you really
gain on this front. It is not just your cycle, it is the other
country's cycle, which is one reason why it is quite important
to look at the average over a reasonable time period. Otherwise
I could make some points about how we have done brilliantly and
you could probably make a point about how we have done uselessly
and it is actually only in looking at averages over reasonably
long periods that you begin to get the answer.
Q54 Mr Gauke: Could I just briefly
move on to a different aspect of the raising trend, the growth
section? Specifically, if I could just ask about the City. You
mentioned earlier financial services regulation and how increasingly
that is a Brussels issue with more and more of our regulations
emanating in Brussels. There is, you will be aware, a fair degree
of concern about the implications of MiFID on a cost benefit analysis.
I think most people think we come worse out of it. How satisfied
are you with the performance of the Treasury in defending Britain's
interest, the City's interest in the various stages of the Lamfalussy
process?
Mr Macpherson: I am satisfied
that the Treasury is promoting the UK financial services industry's
interests in negotiations. MiFID gets a different write up depending
upon who you speak to, but I think it has represented a real step
forward in terms of the EU's approach to regulation and its implementation
will provide a real opportunity to British financial services
in terms of our competitiveness in Europe and our ability to gain
market share. Of course, you are absolutely right, we have got
to pay pretty close attention to all of this because it is critical
to our economic success, but the financial service industry continues
to thrive. The City has had a very good few years. A lot of firms
are making a lot of money and we are very grateful for the tax
which they pay, and in particular the tax which their employees
pay. So this matters. We need to get the regulation right. If
the UK was not being so successful—it is often best to look
at the outcomes, and the success of the financial services industry
at present suggests that the regulatory regime is conducive to
further growth, but we have got to keep our eye on this and really
get stuck in where directives are being negotiated and when they
come to be implemented.
Q55 Mr Gauke: If I may put to you
a concern which certainly I have raised with me, which is that
the Treasury people dealing with this are very able but that they
are inexperienced and the numbers are insufficient, given what
a huge project MIFID is and everything which flows from that.
Would you recognise that criticism at all?
Mr Macpherson: I have heard it
from time to time, but I would not recognise it in that I have
confidence in our people who work in this area. It is an area
where we have quite a lot of expertise and at a working level
we have been quite good at retaining that expertise, so I think
we are very influential in the European Union on regulation. We
have an increasing number of allies. We have been helped also
by having a Commissioner who is sympathetic to a risk-based approach
to regulation. So I am reasonably optimistic.
Q56 John McFall: The MIFID connect
project in the City, they are working well on that together and
they have informed me that the Treasury is working closely with
you, with MIFID connect. Are you aware of that?
Mr Macpherson: Good. Yes. The
Treasury has put a lot of effort in recent years into engaging
further with the City and only this morning the Chancellor was
hosting a key meeting on this, and it really matters. You are
right to raise it and you are right to hold us to account. I think
we are doing okay, but equally we want to ensure that we approach
this with a view to continuous improvement.
Q57 Mr Gauke: Could I just ask one
final question, which is broadening out the issue of European
regulation. You stated in the report that the Treasury placed
regulatory performance into the UK's presidency of the EU and
you also said significant challenges will remain if the EU and
its Member States have appropriate regulatory environments, which
I thoroughly agree with. In the light of opinion polls this week
showing more and more CEOs are concerned about the burden of European
regulation, what prospect do you think you have of achieving those
objectives?
Mr Macpherson: I think our presidency
was successful in raising this up the agenda and the President
of the Commission was in London earlier this week. The debate
has shifted significantly in Europe. I recognise that opinion
polls may suggest a degree of scepticism about whether this is
really translating on the ground, but going back all the way to
that Lisbon European Council, I think the original Members of
the European Union have realised that if you are going to compete
in an increasingly integrated world economy you have got to have
sensible regulation, otherwise you simply will not be able to
create the jobs and the wealth to keep people living to the high
standard in some of those countries they have become used to.
I think there has also been a benefit from the expansion of the
European Union. Obviously the expansion raises challenges in a
number of different areas, but in this area in terms of promoting
free trade and an open approach it has been very useful.
Q58 Chairman: Just on productivity
growth, how do you measure the performance of the Treasury itself
in raising productivity rather than the improvements which may
be driven by just a growing economy?
Mr Macpherson: It is very difficult,
is the answer, to be totally open with you. These are very big
issues, some of which reflect hundreds of years of history. If
you get lucky and productivity happens to rise in any particular
year closing the gap by a huge amount, I cannot honestly tell
you what the Treasury's unique contribution to that will be, but
I think over a number of years we can begin to recognise by getting
a better analytical understanding of productivity the sort of
policy changes where the Treasury has made a difference. But it
is difficult.
Q59 Chairman: I ask because it was
your own report on performance information, curiously titled "Choosing
the Right Fabric," which said that ideally a measure
of a department's performance should give an indication of how
much the change should be attributed to the department itself.
Perhaps you could supply a note on that?[1]
Mr Macpherson: I would be very
happy to supply a note.
Chairman: We will move on.
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