Select Committee on Treasury Minutes of Evidence


Memorandum submitted by HM Treasury

  Follow up information requested following the evidence session on 18 October 2006.

MEASURING PRODUCTIVITY GROWTH

  The Committee asked how the Treasury assesses its performance against the 2004 Spending Review PSA target 4[3], to raise the rate of UK productivity growth.[4]

  It is difficult to isolate the Treasury's contribution to productivity growth in the UK. There are a number of factors that influence productivity growth which are beyond the scope of the Treasury or wider government. Productivity growth is heavily driven by the business cycle: it is generally pro-cyclical, growing more rapidly when activity is strengthening relative to trend, and more slowly when activity is weakening . In order to assess progress on productivity, therefore, it is necessary to strip away any cyclical distortions by measuring it over the economic cycle rather than looking at year-on-year or quarter-on-quarter productivity statistics. The Treasury therefore uses estimates of trend productivity growth (published in the PBR and the Budget) to assess long-term changes in performance.

  Productivity growth can also be measured over the half cycle as this covers a period between two on-trend points and where output is both above and below trend. This provides a good indication of whether the Government is on course to meet its target.

  Since 1997 the Treasury has implemented a series of policies and reforms aimed at raising UK productivity growth. These are outlined in the Budget 2006 publication "Productivity in the UK 6: Progress and New Evidence."

  Indicators benchmarking the UK's performance against major industrial comparators, which have been published since 1999, were revised following consultation in 2004. The new indicators are more focused, allow easier benchmarking of progress against the US, Germany and France, and are published annually by HM Treasury and the DTI.[5] A complete list of the revised indicators can be found in this publication, among others it includes indicators on business and government investment as a share of GDP and indicators relating to research and development expenditure, patenting and high level skills in engineering and technology.

  At the centre of the Government's efforts is the Five Drivers Framework. This framework identifies five main drivers of productivity growth, along with more detailed indicators to assess the Government's performance:

    1.  Competition

    2.  Innovation (including technological progress)

    3.  Investment (physical capital)

    4.  Skills (human capital)

    5.  Enterprise

GREENHOUSE GAS EMISSIONS

  The Committee asked about the UK's progress in reducing greenhouse gas emissions. The UK is on course to exceed and almost double its Kyoto commitment to reduce greenhouse gas emissions by 12.5% by 2008-12 from 1990 levels, and is one of only a small number of countries predicted to meet its targets.[6]

  Annual greenhouse gas emissions have fallen by about 14.6% between 1990 and 2004. Carbon dioxide emissions were 161.4 Mega tonnes of Carbon (MtC) in 1990 and fell by about 5.6% between 1990 and 2004.[7] Carbon dioxide contributed around 77% of the UK's total emissions in 1990. After carbon dioxide, methane contributes the most to emissions, and it accounted for 12% of the UK's total greenhouse gas emissions in 1990. The major sources were landfill waste, agriculture, natural gas distribution and coal mining. Annual emissions fell by around 50% below 1990 levels in 2004, with emissions from all main sources falling. Emissions of nitrous oxide were 9% of the UK's total greenhouse gas emissions in 1990. The main sources were agricultural soils and industrial processes. Emissions from this source have now been reduced significantly due to the introduction of abatement technology in 1998. Emissions from fluorinated or industrial gases are small in absolute terms, and accounted for 2.4% of UK total greenhouse gas emissions in 1995.[8] Use of hydrofluorocarbons (HFCs) has fallen by 42.8% between 1995 and 2004.

  As the Stern Review on the economics of climate change shows, climate change is an economic as well as an environmental issue. The Review concludes that the costs of acting are significant but manageable if pursued internationally. All nations need to work together towards the goal of moving towards a low carbon global economy. The review sets out three key areas of action: pricing carbon in the economy, increasing the role of technology and investment in low carbon technologies, and introducing measures now to encourage this shift towards a low carbon economy, including measures to improve energy efficiency.

  The Government has sought to improve energy efficiency, including through the introduction of fiscal measures. In particular, the Climate Change Levy has improved energy efficiency in the business sector and—combined with the associated Climate Change Agreements—has delivered emissions savings of over 28 million tonnes of carbon to date. In the household sector, the Government has introduced reduced VAT rates for energy-saving materials, and launched the Landlords Energy Saving Allowance to correct particular market failures in the private rented sector. In the transport sector, the Government has introduced the Company Car Tax, carried out significant reforms to Vehicle Excise Duty (VED), and used duty differentials to encourage the development of environmentally-friendly fuels.

  The Government has also acted to improve energy efficiency through the Energy Efficiency Commitment, the introduction of more stringent building regulations and the Code for Sustainable Homes, and through organisations such as the Carbon Trust and the Energy Saving Trust which provides information and advice to both businesses and consumers. The Pre-Budget Report in 2005 announced a further £35 million for the Carbon Trust to improve the energy efficiency of small and medium-sized businesses.

  As the Stern Review says, the introduction of a carbon price will be key in reducing emissions, to ensure that the costs of climate change are factored into all economic decisions. The UK was the first country to introduce national carbon emissions trading, and has been a strong supporter of the EU Emissions Trading Scheme, the world's largest emission trading scheme which places a cap of 48% on all carbon dioxide emissions in the UK. In June 2006 the Government announced that the UK share of the EU ETS cap for phase 2, which is to run from 2008-12, will be set at business as usual minus 8 MtC. The Government is continuing to work to ensure that the EU ETS becomes the centre of a global carbon market. On 30 October 2006 the Chancellor, the Environment Secretary and the Trade and Industry Secretary published the Government's vision for the future of the European scheme[9].

November 2006







3   SR02004 PSA target 4 states that the Treasury will demonstrate further progress by 2008 on the Government's long-term objective of raising the rate of UK productivity growth over the economic cycle, improving competitiveness and narrowing the gap with our major industrial competitors. This is a joint target with the Department for Trade and Industry. Back

4   Q 59, Ev 9 Back

5   Further details are available in UK productivity and Competitiveness Indicators, DTI, 2006 available at www.dti.gov.uk/competitiveness Back

6   Q 75, Ev 11-12 Back

7   Source: Climate Change Programme, March 2006. Back

8   1995 is the UK's base year for fluorinated gases. Back

9   Available on the HM Treasury website at http://www.hm-treasury.gov.uk/media/98D/4B/environment_emissionstrading301006.pdf

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