Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1-19)

RT HON GORDON BROWN MP, SIR GUS O'DONNELL, MR JON CUNLIFFE, MR NICK MACPHERSON, MR JONATHAN STEPHENS AND MR MICHAEL ELLAM19 JULY 2005

  Q1 Chairman: Chancellor, good morning to you and your team. Welcome to this, the first evidence session of the new Parliament. We have friends old and new for you this morning to question you. Can I congratulate Sir Gus O'Donnell both on his knighthood and elevation to Cabinet Secretary. Welcome, everybody. Chancellor, this is about the G8 and other international issues and a number of the papers that you have given us this morning. Can I start on the international agenda. Sorry, Chancellor, could you introduce your team.

Mr Brown: Thank you very much, Chairman. Can I start by saying how pleased I am to be able to meet this new Committee so early on in the Parliament and to welcome the new Members of the Committee and also congratulate you and Mr Fallon on your re-election as Chairman of the Committee and Chairman of the Sub-Committee. I wanted, if I may, to introduce my team and to make some opening remarks that I think you will find relevant to the discussion today. On my right is Sir Gus O'Donnell, who is Permanent Secretary of the Treasury, of course, but, as you rightly say, will be head of the Home Civil Service from 1 August. On his far right is Nick Macpherson, who is the Managing Director of Public Finances. Next to him is Jon Cunliffe, who is the Managing Director of Macroeconomic Policy and International Finance. To my immediate left is Mike Ellam, the Director of Policy and Planning. To his left is Jonathan Stephens, the Managing Director for Public Spending. If I may give some initial remarks which I think will inform the Committee's discussion. We are submitting to Parliament today the Government's Annual Report on the IMF. It sets out the G8 decision on debt relief agreed at Gleneagles. We appreciate the all-party support for debt relief, aid and trade, as we progress from the G8 at Gleneagles to the UN Special Summit in New York in September and the World Trade talks in Hong Kong in December. On debt: first 18, then 27 and potentially 38 highly indebted countries will benefit from the offer of 100% debt relief on the 55 billion of debts owed to the IMF, World Bank and African Development Bank. We will not support new conditionalities being added to this debt relief. I can confirm that for up to 30 other countries, subject to our assurance that resources will be used for effective poverty reduction, Britain will unilaterally pay its share of World Bank debts, and we invite other countries to join us in doing so. The Communiqué of the G8 states aid for Africa will double by 2010. In pledging to reach 0.7% of income by 2015, European Union countries have stated that they will double aid from 40 billion to 80 billion by 2010. I can tell the Committee that looking forward to the UN Special Summit and beyond we want to work in partnership with African and other countries to prepare, develop and play a part in financing universal free primary school education and the attainment of the Gleneagles Summit's objectives for building health capacity, including as close as possible to universal access to treatment for AIDS sufferers by 2010. Maximising the availability and minimising the costs of vaccines and drugs is a central issue, so a G7 report on advance purchase mechanisms for drugs will be published by the end of the year. Within the next few weeks we expect the go-ahead for the International Finance Facility for Immunisation, and the G8 have agreed a working party on the setting up of the proposed International Finance Facility which would help some countries meet their aid targets and help others move faster in reaching them. On climate change, following the Communiqué I can announce that a major review of the economics of climate change will be undertaken by Sir Nicholas Stern, the head of the Government Economic Service. We will work with the World Bank in an innovative project to institute new funds supported by fresh incentives for energy efficiency and alternative sources of energy for developing countries. In expressing its outrage against the terrorist bombings in London, the G8, and then the European Union Finance Ministers, also discussed counter-terrorism and counter-terrorist finance. I can announce that Britain will give support to do what we can to ensure that across Europe there will be no hiding place for those who finance terrorism. We have an undertaking from the European Union that they will make an offer to other countries who need advice and technical assistance to build up anti-terrorist finance capacity. A group of experts on tackling global terrorism financing set up under our G8 Presidency will report to Finance Ministers in September. Within Britain, assets for 45 accounts have already been frozen and we have established a group across Government to identify and vet further targets. While four years ago just 30,000 reports of suspicious transactions were sent to the NCIS, last year there were 15,000 and, of those relating to terrorist finance, more than 20% either led to a longer term investigation or contributed substantially to an existing one. It is essential that the suspicious transactions regime be both proportionate and effective. The Home Secretary and I have asked Sir Stephen Lander to report by March 2006 on how these investigations of suspicious transactions can be best pursued under the new Serious and Organised Crime Agency. The House is being told separately that we are making available today 20 million from the reserve to the Home Office for the exceptional costs of providing support to victims and for policing and other activities that arise from the attacks in London on 7 July. This will include funds to cover the donation to the London Bombings Relief Charitable Fund which the Home Secretary announced yesterday. Overall spending on counter-terrorism and resilience, which was one billion in the year of September 11, was 1.5 billion last year and will be 2.1 billion by 2007-08; rising substantially, therefore, in the next few years. Chairman, the Committee will also be interested in a further matter on which the Chief Secretary is making a written statement to the House today and I thought I should inform the Committee because it is the first chance I have of doing so. As the Committee will be aware, the start of the next spending period will come ten years after the first Comprehensive Spending Review. To ensure we are equipped to meet the challenges of the next ten years, we are now instituting a second Comprehensive Spending Review to consider from a zero base the next stage of meeting our public service objectives. With this long-termist approach, which rejects the short-termism of the past, a report will be made on these public spending challenges in 2006. The Government will report on the next three-year Spending Review covering 2008-11 in 2007 and will hold departmental allocations to the agreed figures already announced for 2007-08. The Committee also asked the Government to "inform Parliament in a timely fashion of its preliminary analysis that the (economic) cycle has ended" and said that to delay making an announcement, potentially for several months, to the next Budget or Pre-Budget Report, "would not be in the interests of informed public debate". I have no announcement to make about the end of the current cycle, but following the significant historical updating by the Office of National Statistics on 30 June, it is right to update what has been a provisional judgment that the current economic cycle started in 1999-2000. Growth of non-oil gross value added, the relevant measure of output used by the Treasury in assessing the economic cycle, was thought to have grown by 3.4% in 1997, 2.4% in 1998, 1.8% in 1999 and forecast growth of 2.9% in 2000. The ONS now believe that gross value added grew far higher and more substantially by 3.2% in 1997, 3.4% in 1998, 3.1% in 1999 and 4.2% in 2000, significantly faster growth above 3% in every year. With the average figure for growth between 1997 and 2000 previously assessed at 2.6%, but now known to be 3.5%, all the evidence now points to the conclusion that the economic cycle started in 1997-98. I will ask the NAO to audit the end date of the previous cycle as to whether our judgment is reasonable and cautious. We will continue to ask the NAO to audit trend economic growth to check that it remains a reasonable and cautious assumption. Thank you, Chairman.

  Q2  Chairman: Thank you, Chancellor. In your report, Evidence of the UK Economic Cycle, I note you say: "It is a positive response to the view expressed by the Treasury Committee that the Treasury should not confine publication of material relating to its assessment of the cycle to the Pre-Budget and Budget Reports". I think that is a good start for the new Parliament and I hope we continue those sorts of measures.

Mr Brown: I will be happy to answer any questions you have got.

  Q3  Chairman: On the issue of terrorist financing, you mentioned NCIS. Certainly in the last few years there have been representations made to me and other Members of the Committee by the financial institutions that when reports are made to NCIS there is little feedback and there seems to be a lack of co-ordination throughout Government on this issue. I hope Sir Stephen Lander takes those issues on board and we get more coherence throughout Government Departments on issues such as that. That is certainly a view that has been expressed by the banks and the financial institutions, Chancellor. I wonder if you could consider that.

Mr Brown: Perhaps I should say on that, Chairman, that if there were 150,000 suspicious transaction reports submitted in the last year and 20% at least of these have been proven to be of some use, you are talking about 30,000 that have been of some use and that is a very substantial figure. What we want to do is to look at how in future we can have a better system for dealing with this. This is what Stephen Lander will look at and I will pass your views on to him as well.

  Q4  Chairman: Thank you very much. You mentioned the UN Millennium Declaration Review Summit, which is obviously a very important landmark on the debt issue. What message will you be taking to that Summit and what outcomes do you hope to achieve there?

Mr Brown: As you know, the UN Special Summit is to deal with the reform of the Security Council as well as with the meeting of Millennium Development targets. As you have already seen, a lot of the debate running up to the Security Council meeting is about the composition of the Security Council in future. I do believe, however, that the Secretary-General with the report that he presented on the Millennium Development Goals is intent on making further progress on all the issues that were discussed at Gleneagles. I hope by that time, in advance of the IMF and World Bank meetings at the end of September, we will have full agreement from all the shareholders of the IMF and the World Bank about the debt relief package that we have been discussing over the last few months. It was approved in detail by the G8 at Gleneagles and it is now being discussed by the IMF Executive Board and by the World Bank Board. I am confident that there is goodwill about resolving these issues. I think when we get to the UN Special Summit and the World Bank and IMF meetings the debt relief issue, which has been a burden on the countries and an unsolved problem for really 20 years, may be an issue that we can bring to a successful conclusion, at least in the case of these 38 countries. Our offer to give another 30 countries debt relief is very important, in my view, and I hope that other countries will follow us. On aid, the issue is the delivery of the promises that have been made and, if possible, speeding up the promises. That is why our International Finance Facility proposal, which will be discussed in September, is very important to that. I hope when we get to the IMF and World Bank meetings we will also have agreement that to meet the Millennium Development targets on primary education for all, which I mentioned in my opening remarks, and the reductions in infant and maternal mortality, there will be a new impetus given to the fast track initiative of the World Bank on education and we will be able to report progress on advance purchase initiatives on health.

  Q5  Chairman: Thank you for that. One aspect of the debate that concerns me a little bit is the expectation that this issue of debt, aid and trade, can be solved pretty quickly. What are you doing to, in a sense, dampen the expectations, to indicate to people that this is a long, arduous and tortuous road? I am scheduled shortly to go out to Ghana to look at the Poverty Reduction Strategy of that country. I know progress has been made but I am assured before I go that there is a long road ahead on this. How can we ensure that we keep the confidence of the public whilst making the slow progress that is inevitable on issues such as this?

Mr Brown: I think it is very important to explain to people that the target of universal primary education, which is one of the Millennium Development Goals, would not be met under existing rates of progress in Sub-Saharan Africa for 100 years. While we have enormous progress in countries like Tanzania where they will have 100% primary education involvement by next year, in Uganda where educational involvement has trebled, and in Kenya where I think it is true to say one million children turned up for school out of the blue almost the minute that they announced primary education was free, there are many countries that are still way behind the target for 2015 who need exceptionally increased resources. They will be part of this new fast track initiative that has been agreed by the World Bank where, in addition to countries that have already been chosen for the initiative, another 20 countries will be added and I hope we can agree that further money will be put into this fund both by individual countries and by some of the international organisations. There is an impetus needed to the fast track initiative and the complacency that people may be tempted to have after Gleneagles is dented by this one fact, that it would take 100 years to meet the Millennium Development objective.

Chairman: Chancellor, thank you.

  Q6  Mr Fallon: Chancellor, thank you for your kind words at the beginning. Turning to your Economic Statement, would you confirm that eight years after the event by moving the start of the cycle forward by two years, that helps your figures by around 10 million?

Mr Brown: You are talking about the Golden Rule actually. I would update that at the time of the Pre-Budget Report. As you know, the cycle has not ended.

  Q7  Mr Fallon: By moving the start of the cycle forward by about two years you are giving yourself the advantage of around ten million, is that right?

Mr Brown: We would meet the Golden Rule irrespective. This is an exercise that was required of us in the Treasury because the statement about the cycle was always a provisional one. Sir Gus O'Donnell was before the Committee and he was emphasising when this was discussed last by the Committee that this was a provisional judgment. In fact, many of the academic experts outside this Committee and outside the House—the Independent Institute of Fiscal Studies, Mr Weale of the NIESR—have said that their view was probably that the cycle had started in 1997 and not 1999. The most recent historical data is something that you as a Committee might want to look at, but it is absolutely clear when you look at it that instead of us going through a cycle from 1997-99, the growth rate in each of these years was above 3%. On a superficial glance that would make you want to reconsider it. On the detailed work that is contained in this document, we are giving historical accuracy to what other people have suggested was something that we should look at. Now what had been a provisional judgment turns out to be one where the cycle started in 1997. As far as its affect on the Golden Rule, on the fiscal position, that is a matter for the Pre-Budget Report.

  Q8  Mr Fallon: But the redefinition of the cycle does help you meet the Golden Rule, not make it more difficult.

Mr Brown: My view is it would meet the Golden Rule anyway. Maybe Sir Gus wants to explain the historical revision and why it is significant and why it is in the form of this paper today.

Sir Gus O'Donnell: If you remember, when I came before you in 2002—quite a long time ago now—basically I explained that we were making a provisional judgment of 1999 as the start date, but I said then the ONS was capable of changing the GVA figures quite substantially and I said: "When that happens, we will have to go back and revise when we think cycles were". I actually warned the Committee very clearly that if there were changes to the GVA numbers we would revise our position. At that time, Martin Weale was arguing that 1997 might well be the start date and I said that was quite possibly true because what happened was we had this growth period and it had slowed a little, got towards trend, but now on the GVA numbers that the ONS have produced we know that it did not slow very much, it never went decisively through tend, so it has basically been one long upswing since 1997.

  Q9  Mr Fallon: On your other decision to postpone the Spending Review, how will you dispel the suspicion that bad figures take longer to add up?

Mr Brown: It is nothing to do with that. This was exactly what we did in 1997. We decided in 1997 that we needed a long-term Comprehensive Spending Review to look from a zero base at both the trends in public spending and the challenges. Ten years on, because the next Review would start in 2008, it is the right time to do exactly the same again. I would have thought the whole Committee would applaud the idea of a zero-based review and look at the challenges ahead. I have got to say, in looking at the challenges ahead, and I would have thought this is subject to cross-party agreement, if you take what is happening to the British economy and British society, the demographic trends are a very substantial rise, 250% actually, in the population of over-85s between now and 2030, and a 50% rise in the numbers of 65 year-olds between now and 2030, so a very substantial demographic shift has got to be taken into account in future spending rounds. The other thing I think we have got to look at is the effect of competition from Asia and whether our priorities for investment are right. As a result of that previous Comprehensive Spending Review, we raised spending from 0.8% of GDP on investment to 2.2% now, so we have trebled the share of GDP going to net public sector investment. Again, in my view at this point it is important to look at whether the investment that we are making in infrastructure or science, where it is capital investment, is at the right level or whether, facing the trends and the changes that are resulting from competition from Asia, we either have to do more or less. That is a big question that a long-term review has got to address. I would have thought there should be no difference between the parties on this need to look long-term, to take a ten year perspective. If you take research and development and innovation, we are spending 1.8% of our GDP as European nations on R&D but Japan is spending 3% and America is spending more than us as well. Again, it is a good question, looking forward ten years ahead, what sort of Government expenditures alongside the private sector are going to be necessary because in a world where global production is moving we are going to be tested on whether we have the value added, we have the knowledge-based industries, so that is an issue for a future spending round as well. I do not think there is any doubt that these long-term trends have got to be looked at. You need to do it in the way that we did in 1997-98 with a Comprehensive Spending Review and that is the background to our decisions. As far as confirming the allocations for 2007-08, that is exactly what we did in 2004-05.

  Q10  Mr Fallon: Thank you. Turning to the IFF, which of the major EU countries have actually signed up to the IFF?

Mr Brown: Of the four members of the G7, France and Italy have indicated their support for it. There is a group of France, Britain and Italy who have been supportive of moving ahead on the International Finance Facility out of the four members of the G7. We have still to persuade Germany to sign up to this in detail. We are discussing this with the rest of our European Union colleagues but our first discussion was to be in the G7 and then our discussion was to take place beyond the G7. I may say that the International Finance Facility for Immunisation, which is the pilot project, which is the project that if we front-loaded four billion of expenditure on vaccines could save five million lives between now and 2015 according to all the reports that have been done on this, including by the Gates Foundation, has got the support of a large number of countries both inside and outside the G7. It includes countries as far spread as China, South Africa and Brazil who are supporting this IFF, Canada is supporting it, and many of the European countries. It is a joint partnership with the Gates Foundation. The level of support for an International Finance Facility as reflected in the one on immunisation is very wide indeed.

  Q11  Mr Fallon: Okay. Finally from me, the Gleneagles' work programme includes work on an air ticket tax. Can you clarify the UK's position on this? Would this be hypothecating the revenue from our existing Air Passenger Duty or would it be increasing it?

Mr Brown: No, it would be hypothecating revenue from the existing—

  Q12  Mr Fallon: So it would not increase our Air Passenger Duty?

Mr Brown: The issue for other countries is quite different because they do not have an air ticket levy.

  Q13  Mr Fallon: We would not increase ours?

Mr Brown: That is not the plan. The plan is to hypothecate existing revenue for the International Finance Facility but it would be dependent on an agreement to the International Finance Facility going ahead.

  Q14  Angela Eagle: The US has been very sceptical about how the IFF proposals would fit into their budgetary constraints. Is it possible that the IFF could proceed without US involvement? Do you feel that you are at the stage where that might be happening and, if so, when?

Mr Brown: The great advantage of the International Finance Facility is that it allows countries to front-load their commitments to aid. It is not too dissimilar from other mechanisms that have been used in the past and it is certainly a bold initiative. The American view is that their budgeting is on an annual basis and it cannot be on a multi-annual basis. We wanted to wait until the G8 discussions were completed to decide how we should proceed. It is clear that there is a group of countries who wish to move forward and a group of countries who feel it is difficult for them to move forward and that is what we are now discussing. The G8 actually agreed to a working party of all its members to look at these issues and that working party will report. There seems to be very little difficulty on the technical feasibility of it. There is an issue about its scoring for public spending purposes which is being discussed at the moment by the European statistical authorities. I am in no doubt that if we are to meet the European target of doubling aid by 2010 we will need this International Finance Facility for the contributions that other countries are making and it would enable us, as Britain, to speed up our contributions and make them more effective in the short run.

  Q15  Angela Eagle: The idea of front-loading is good to get things going and, particularly where so many lives are at risk, it makes a great deal of sense. Do you worry that if there is a success in front-loading there might then be a shortfall later on in the medium-term with people's aid?

Mr Brown: No. I can't see that is an issue. First of all, we are committed as the major objective to meeting the Millennium Development Goals by 2015. If we cannot front-load money between now and 2015 our major objective of meeting the Millennium Development Goals will not be achieved and, therefore, it makes absolute sense to front-load your finance to do so. As far as what happens after 2015, it seems to me obvious that there are many additional countries who will become donors. In the last few years, countries have moved from being recipients to being donors. Russia is a classic case where it is now a donor in ODA. There are other countries in the next few years who will become donors. I have got no doubt that the ability to finance Overseas Development Aid after 2015 is safeguarded both by that and by the announcements that we have made that we will not let our contributions to the IFF affect our ability to give aid in the future.

  Q16  Angela Eagle: In terms of the more specific IFF for Immunisation, you have been able already to announce that the UK, France and Sweden can go ahead and provide this £4 billion in partnership with the Gates Foundation, et cetera. Could you say a bit more about how you see that proceeding. Do you think that it is the first example almost of approaching an international hypothecated tax or agreement that might actually form a model in the 21st Century for dealing with transfers across the globe in order to assist those countries that have particularly fallen behind?

Mr Brown: I think the innovative things that are happening are, first of all, the International Finance Facility for Immunisation, which we hope will get the go-ahead in the next few days actually. The second thing that is happening which is innovative, which has cross-country co-operation, is the discussion about advance purchase mechanisms for vaccinations or for other forms of healthcare, drugs and treatments. If you look at it this way: if in countries like Mozambique, Tanzania or Kenya, some of the countries I visited a few months ago, suffering from high numbers of people with malaria needing either a vaccine or treatment, a vaccine becomes available they are not able to afford it, but if there is an international purchase agreement to guarantee the purchase of a certain amount of drugs in advance then not only will the development of that drug happen but we will be in a position at the end of it to see the price of that drug come down. That is why the work that is now being done on advance purchase mechanisms, like the IFF, is revolutionary in my view and it means that the international community can finance the development of drugs in partnership with the pharmaceutical companies but by the methods by which it finances the development of these drugs it can get the price down. By guaranteeing a market for these drugs for countries that otherwise could not afford them, many lives will be saved as a result. As far as the International Finance Facility for Vaccination, that is unrelated to the air ticket levy, it is not going to be financed by that means, it is going to be financed directly by contributions.

  Q17  Angela Eagle: Finally, you have talked about the meeting in New York and looking at the future shape and reform of the Bretton Woods institutions. Do you think that some of the innovative agreements that are going on cross-country have lessons for how we might be able to reform the Bretton Woods institutions to make them fit for the 21st Century rather than a reflection, as they are at the moment, of the situation that existed after the Second World War?

Mr Brown: We have put forward quite detailed proposals for the reform of the IMF and the World Bank. We believe in contrast to what the purpose of the IMF seemed to be after the Second World War as dealing with balance of payments problems of individual countries in a fairly sheltered international economy, the main role of the IMF in future is to ensure that there is proper transparency in the operation of the world economy. Individual countries by codes and standards are encouraged through the surveillance of the IMF to be transparent in the way they operate their fiscal, monetary and other policies. I believe that the IMF should have a stronger independence for that surveillance function for the future. I believe that if you look at Africa, but also Asia, where there have been financial crises that have never been identified in advance over the last few years where simply the publication of information and a requirement to do so would have prevented a problem becoming a crisis, the case for the IMF reforming itself is very strong. I think some of the allocation functions of the IMF and the World Bank could then be brought together. If you are looking ahead, clearly the world is so different from what it was 50 years ago. It is a global open economy where before it was sheltered and protected, but the problems that countries have to deal with I think require greater transparency in the future. Anybody looking at corruption in Africa, far less looking at fiscal failures, knows that transparency and the incentive to transparency that an international institution could provide would be one central means by which some of their problems could be addressed.

  Q18  Chairman: Chancellor, can I ask you, on the IMF we have the report, A Stronger Global Economy, from HMT and in that you mention: "The UK will support the strengthening of country ownership as the IMF reviews its conditionality and also seek closer collaboration between IMF and World Bank, particularly implementing the new joint debt sustainability framework". What do you mean by "strengthening of country ownership"? The debate on poverty reduction strategies and others is that there is an imposition from outwith, particularly demands for privatisation, for example, and some of these countries when you visit them say, "We cannot have a hope of getting up to standard on trade when we have got these impositions put on us". There is this dichotomy between what the World Bank and IMF are saying they are going to do and what the reality on the ground is. What do you mean by that?

Mr Brown: First of all, I think there are some misunderstandings about what happened. For example, I know that the Tanzanian water programme is one that is regarded as an example of the World Bank, the IMF or international institutions forcing upon the Tanzanian Government a course of action it did not want to take. In actual fact, I have heard President Mkapa explaining that it was their decision and their wish to organise the supply of water in that particular way. We must be sure when people talk about the conditionality sometimes they exaggerate the extent to which the IMF and World Bank have done it. Generally, our view is that conditionality to donors is less important than what should be happening and that is accountability of these countries to their own people. The issue is transparency. It comes back to the point that Angela Eagle raised with me on the future reform of the international institutions. We should have mechanisms in place that encourage rich and poor countries alike, non-discriminatory between rich and poor, to be transparent in their dealings. That is the key conditionality that we are talking about. It has happened in our policy towards aid, we have removed a lot of the old conditionality and certainly the tying of aid, and gradually I think it is going to happen in the way the international institutions work as well. I see a change in the environment here where instead of ever-increasing conditionality and accountability of poor countries to the donors, what people are saying is, "Let's have transparency between you and your own people" and that would be the key test of whether the policy is acceptable.

  Q19  Peter Viggers: Switching to oil prices, in your Budget you said: "the risks to the global outlook of higher oil prices have diminished". What do you think of that judgment now?

Mr Brown: As you know, I think I have always said in every Budget that oil prices are volatile. That is the judgment I would make generally and that has been the consistent view of the Treasury. We have had oil prices at $10 during this period of government and we have had oil prices at $60. I do not think any government has seen such a huge shift in oil prices. In any other decade a doubling of oil prices would have brought inflationary pressures into the world economy, particularly into an economy like ours, that would have made it very difficult for a government to overcome them. I think it is a remarkable feature of the last year or two that even when oil prices have doubled, inflation in the world economy, particularly inflation in the British economy, has been kept low.


 
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