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
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 differencesI am thinking
particularly of labour market interventionsactually 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 exampleI 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
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,
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 alsoand this is where the longer term agenda
comes ineducation 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 tensionI am full
of tensions todaybetween 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 prescriptionI 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
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 Treasuryand
the Chairman referred to the number of ways we have re-organised
it over the years at the beginningthere 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
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.
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
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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