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:
2. Innovation (including technological progress)
3. Investment (physical capital)
4. Skills (human capital)
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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