Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)


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.

1   Ev 16 Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2006
Prepared 8 December 2006