Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60-79)


18 OCTOBER 2006

  Q60  Mr Love: One of your PSA targets requires you to demonstrate a reduction in the gap between the growth rate of different regions. Can you tell us how you did in the last financial year, 2005-06?

  Mr Macpherson: The data has not been published yet for 2005-06. We have regional data for the first two years of this target period, which is 2003 and 2004. I think we will get data for 2005, I am told, in December. But so far in both those years, 2003 and 2004, all the regions of the UK grew, but it was the underperforming regions which grew the most. So that is positive news. Equally, I am sufficiently realistic to recognise that two years do not make a trend, and particularly with the revival of the financial service industry making further gains may get more difficult in the coming period.

  Q61  Mr Love: Do you think there is a tension between the priority to reduce the gap, which you have talked about, and the overall priority to have the maximum growth rate in the country as a whole? Is there a tension and which is the priority?

  Mr Macpherson: I think there is some tension. Inevitably, having a regional dimension to our growth objectives will raise issues around the allocation of resources between different regions, but for the most part the sorts of interventions which make the big differences—I am thinking particularly of labour market interventions—actually do not give rise to a massive tension. If you can get employment a lot higher in the North-East or Yorkshire and Humberside, I do not think that will necessarily cut across the wider growth objective, indeed it should support it. So I think we have got to be mindful of what the potential trade-offs are and when it comes to Spending Reviews there will inevitably be issues precisely around how you allocate, say, transport funding. But for the most part I think our objectives in these areas are reinforcing, not least because if you take a really long term view I think the success of the British economy hinges upon every region being successful. If you just went for growth in the South-East at any price, that could cause dislocation and unsustainability to such an extent that it would undermine growth as a whole.

  Q62  Mr Love: One of the issues which always comes up when you discuss how we boost the growth rates in the regions is the overall framework set by the European Union, state new growth, structural funding and we know we have had some differences of view about whether they should repatriate structural funding. Tell me what the experience is in comparison with Britain, for example—I do not think Germany is a very good equivalent, but say in France and Italy. Are they more successful at reducing the gaps in their different regions, and if they are not, why not?

  Mr Macpherson: I think we have got a pretty good story to tell. Certainly going back over 10 years we have made progress, in particular around employment and economic activity, and also on the skills agenda, which has made a big difference to economic performance across the regions. It is fair to say that other countries have been perhaps slightly less quick to grasp that fundamental supply-driven agenda, which I think in the long term is going to make more of a difference than, say, traditional demand side interventions of old-style regional aid. So I think we have got a positive story here and it may partly be because of the wider success of the economy that we have been more effective than the French and the Italians, say.

  Q63  Mr Love: You mentioned in response to the first question that almost by implication perhaps the reason why the other regions were catching up in the two years you have quoted may have been more to do with difficulties in the economy, and in London and the South-East you specifically mentioned financial services. It may well be with financial services rebounding that will reverse. There is a whole debate which goes on in this country about whether we apply enough resources to the regions to make a real difference. That is obviously a political decision, but I wonder to what extent there is a frustration in the Treasury that you need more tools in order to be able to really make a difference in reducing those gaps.

  Q64  Mr Macpherson: Just picking up your first point, it is not just that London may have had a slower year, actually the experience of Yorkshire and Humberside, the North-East, was that they had very good years in 2003 and 2004 and if you look at the labour market statistics the gap is really being closed around things like the numbers of people who are sick and disabled and inactive, and so on. In terms of tools, yes, I think there is a whole issue of regional economics and the drivers of regional economic performance. This is something where analysis perhaps is not as well-developed as it should be. Regional policy slightly went out of fashion for quite a long period. When I was at university in the late seventies you could still do your paper on regional economics, but I can remember during my early time in the Treasury this was not something which we spent a lot of time talking about or analysing. So we are in a situation now where we are trying to inject some momentum into this and I think we have made progress. We are going to do a report on the progress we are making against this PSA in the Pre-Budget Report. We are committed to reporting in 2006 and that is when it will be, but I think we still have more learning and analysis to do. I see this very much as a long term programme.

  Q65  Mr Love: This is a comment, not a question, but I do not think any of us would want to go back to the Harold Wilson time of £40,000 for every job saved or created, that sort of regional policy, but I do think there are a lot of complaints which occur in this country because they believe that Italy in particular, in the south, but also France with potentially some of its deprived regions really do have a much more rounded regional policy than we do. But I shall not pursue that. Could I move on to reducing child poverty. To be honest with you, as a London Member, after housing costs it is the only measure which really operates because housing costs really is a very different measure for people who live in London with such high housing rents and costs generally. You narrowly missed the target. I see this from a very positive perspective, that getting as close as we have done is very good, but I wanted to get your view about the reasons behind why we missed that target.

  Mr Macpherson: We thought we would hit the target and so when we did not we were a bit surprised, a bit disappointed, but as you say, it contained a lot of ambition. So I would much prefer to miss a target for being too ambitious than to hit one for being hopelessly cautious. I think the key thing here has been the extent of the growth in median income, which is the key benchmark which you are operating against. That has risen by 2.5% a year. You have got to run quite hard to stand still. The other thing I would say is if you are going to make substantial headway on this, income transfers and work incentives matter but also—and this is where the longer term agenda comes in—education and skills will be critical in the long run as to whether we really make progress. So all I would say is that we did not hit it, but we have got to try and get a better understanding of why we did not and try and incorporate that both into policies at Budget time but also in the Spending Review to ensure that the public service agenda is aligned with the tax and benefit agenda.

  Q66  Mr Love: There has been a whole industry of investigations into this area, some of which appear to show that there may well be another tension—I am full of tensions today—between the objective of the Government to make work pay and the consequent decision that you will restrain increases in benefit levels to the rate of inflation. To what extent is that mitigating against you achieving the reduction, because it would appear that the people who are stubbornly still in that category of child poverty are the main workers' households?

  Mr Macpherson: Yes. The issue of work is critical to this agenda. As you say, there is a trade-off. Clearly you want to support all families with children and families with children who are on very low incomes the tax and benefit system should support, but equally you have got to make work pay. So that then puts a premium on tax and benefit measures which make work more attractive, but you have also got to support it with really active interventions in terms of encouraging people to move from welfare to work, which then takes in things like the new deal, and so on. To come back to your point about London, I attended a conference on this only yesterday. There are big issues in relation to London, in particular, as you mentioned, housing, where the Government has moved quite a good way on housing benefit reform but it is just incredibly difficult because, as you say, there are always trade-offs. The more people you bring into the housing benefit system, the bigger effect it has in terms of marginal withdrawal rates, and so on.

  Q67  Mr Love: The interaction between tax credits and housing benefit is very wicked, but it is very difficult to see how you can solve that.

  Mr Macpherson: It is, but you are trying to optimise in a sense against a number of trade-offs. We will keep working on it and keep trying to learn from it, but I would not claim that there is a magic solution.

  Q68  Mr Love: One of the particular areas appears to be lone parents, the particular problems of lone parents. Is there any policy prescription—I suppose in a way I am talking to the wrong person. It is not the Treasury, although you must discuss it in terms of your overall PSA objective. What discussions are you having about how we can address the lone parent?

  Mr Macpherson: We have regular discussions. We work very closely with Work and Pensions, indeed the event I was at yesterday was the co-Treasury and Work and Pensions session on the labour market and in particular issues like London. So we have a continual dialogue. There is the bill, which I think is shortly going to come before Parliament, which I am optimistic will have some positive influences, but again you need to get the incentives right. Equally, everybody needs to be protected, so your room for manoeuvre is limited.

  Q69  Mr Love: Finally, just picking up that point of incentives, the Joseph Rowntree Trust in particular but I think others as well have reached a conclusion that the tax credit regime might not be incentivising people to work longer. How do you respond to that? Have you evaluated some of that?

  Mr Macpherson: We continue to evaluate it. I was working in this area in the late nineties and there was a conscious decision at that time to try and get away from what were very penal rates which affected a relatively small number of people. If you look at the tax and benefit system as a whole, for a given public finance projection the only way you can really reduce marginal rates for some is by raising them a bit for other people and the Government made a perfectly sensible choice to get rid of the penal rates over 70%, which had a massive impact on, say, three-quarters of a million people and we got to the situation where I think we reduced by about half a million the number of people with marginal rates over 70%. But inevitably that tended to suck more people into the tax credit system, which in one sense was good because they are getting more money, so that is good news from their point of view, but inevitably for some people there is an incentive effect. That is not just true at the lower end, that is true across the earnings distribution. There are trade-offs and you have got to try and optimise.

  Q70  John Thurso: Who in the team here today would have ownership of Objective VIII, to protect and improve the environment?

  Mr Macpherson: I think I had better answer the questions on that.

  Q71  John Thurso: Where would you come across somebody in the organisation chart for whom that is their main task within the Treasury?

  Mr Macpherson: That is a good question, because however you organise the Treasury—and the Chairman referred to the number of ways we have re-organised it over the years at the beginning—there will always be some issues which completely cut across what we do. The environment is a classic case in point. We have got a directorate which deals with tax policy, we have one which deals with public spending and regulation, and inevitably that cuts across all of them. The environment is not just the only issue, actually poverty in many ways does too. So what we do is we have a director, Paul Johnson, who is the chief micro-economist, who is the guy who is charged with coordinating in a cross-cutting way our work on the environment. Then we have specific teams. There is one which deals with the taxation of the environment and there is another one which deals with Defra spending and the regulatory arrangements, and that is how we do the work.

  Q72  John Thurso: There is no PSA target for Objective VIII, which is the first sentence of the report on Objective VIII, and indeed there are no performance measures at all. Why not?

  Mr Macpherson: Partly because the Treasury has, by most departments' standards, a lot of targets and we clearly have objectives on the environment and we take that very seriously, which is one reason why Sir Nicholas Stern was asked to carry out the review of climate change. But generally in this area we have taken the view that Defra and the Department for Transport and others should have targets. We should support them in that work, just as they support us in work where we have the target and they do not, say on regional policy.

  Q73  John Thurso: Later on you state, "The Treasury has made significant progress against its environmental objectives, particularly through the development use of fiscal measures where it has a direct lead." How can you make that statement if you have no measure or target?

  Mr Macpherson: Inevitably quite a lot of Treasury activity cannot be covered by a specific target. We have an objective which does cover this area and that is important, but you do not necessarily want to have a target against every objective because we have been trying to move away from having too many targets. Over time we have moved across government as a whole down from about 600 to 110 and that continues to be the direction of travel. I think it is perfectly reasonable to ask, "Okay, so you think you have done stuff on the environment. What have you done?" If I was holding my staff to account, they could then identify what the Treasury has done and actually it has done quite a lot, in particular on the tax agenda in terms of things like—

  Q74  John Thurso: I would concur with that. It was the longest of actions which have been taken. What I am driving at is the result of the actions. One measure which strikes me is the amount of tax raised from so-called green taxes, which some people have estimated has dropped by 3% over the last five years or so. That would indicate to me that those measures are not necessarily having much of an impact, but how would you measure it?

  Mr Macpherson: I would always want to focus on outcomes rather than intermediate measures of how much revenue you get in. If you look at the key outcomes which the Government has been targeting, we have made real progress on greenhouse gas emissions. Carbon we have not made so much progress on. I think those are the outcomes which we need to focus on.

  Q75  John Thurso: Could I just get clarification on that? If you have not made progress on carbon and you have made progress on emissions, does that mean you have done it on methane?

  Mr Macpherson: I could not answer that question, but I am very happy to provide you with a note.[2] I do not know if Ms Brivati would like to. Mridul used to run the team which dealt with DEFRA.

  Ms Brivati: That is right, and it was under that regime that we persuaded the Department of Transport that they really wanted to share EFRA's air quality target, so I am very pleased about that.

  Q76  John Thurso: The point I really am driving at is the green agenda is at the top of everybody's political agenda and it is very much at the top of the Government's political agenda. If we want to achieve things and have real outcomes, how do we either set targets or have methods of measuring which are real and tell us we are achieving, and the Treasury must obviously be very much part of that, and will you consider either having such targets or offering such measures of measurement so that we can actually see what is being achieved?

  Mr Macpherson: We will certainly consider whether we should have a target, and whether or not we have a target we need to have measures and we need to monitor them. This is a very long term agenda but, as I think the Stern Review, which will be published reasonably shortly, will make clear, it is a very urgent agenda and it is one which both nationally and internationally we need to take active steps on.

  Q77  John Thurso: A more immediate problem, perhaps not surprising given the discussion we have just had, are press reports that the FTSE100 companies, some 63%, FTSE350, some 53%, do not actually understand what the Government's message is on climate change for business. What can you do to clarify that message?

  Mr Macpherson: I think the Government has a responsibility to clarify that message and we will be working with Defra and others to ensure it is clarified.

  Q78  John Thurso: Finally, a slightly different subject. The UK presidency for G8 and the EU resulted in no new targets, but if we are in the business of urging immediacy in the domestic agenda, how can we do that when on the international stage there is such a lacklustre approach?

  Mr Macpherson: We have to use our influence. I gave you an example earlier of international debt, where I think we have been very successful in raising this up the agenda, and we are going to have to in the coming period work even harder internationally on this issue.

  Q79  Mr Todd: I want to ask you some questions about financial management and your Objective VII. You gave us a memo in April which reported on the first round of tests of financial management skills around a variety of departments and you identified some significant weaknesses. How widespread is the level of weakness which you identify? There was a particularly sharp remark about financial information which would drive management decision making, for example.

  Ms Keegan: Forgive me, I do not have the document in front of me. I do not think it identifies it as a weakness so much as substantial progress still to be made in certain departments, in terms of the systems feeding their data flows. We gave examples in that document of where considerable work was in hand in terms of improving those systems.

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