Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20-39)


  Q20  Peter Viggers: You did not increase fuel prices and this was criticised by Greenpeace's spokesman, among others, who said: "It just beggars belief. The day before Tony Blair welcomes world leaders to Gleneagles to broker a deal on climate change he shows himself incapable of taking even the most modest and obvious step here at home". Would you comment on that? How is your judgment one of not increasing oil prices?

Mr Brown: Because as a Government we have got to make the right judgment about the balance between meeting the environmental standards that they are talking about and respect for the interests, needs and worries that the motoring public and the freight moving industries of our country have and the challenges that they have got to meet, and I think we have made the right judgment.

  Q21  Peter Viggers: Do you see a contradiction between all the rhetoric of the G8 about the need to combat climate change and your postponing of the rise in petrol duty?

Mr Brown: I think the fact of the matter is that motorists and freight companies are facing the effects of a very large increase in the world oil price. There is a variety of things we can do about it, and we are trying to work with other countries. By the way, there has got to be greater transparency in the oil market because one of the problems is the lack of knowledge about supplies. The refining capacity of the world has got to be looked at again because essentially one of the problems at the moment is the limited amount of refining capacity. The way that OPEC works is unsatisfactory and I do not think in any other area of world economic activity does a cartel exercise so much control and that is something that I think the whole world should speak out about. There are a number of things we can do but at this stage I do not think we have made anything other than the right judgment not to raise fuel taxes.

  Q22  Peter Viggers: Whilst the price of energy is, of course, important in this country, it can be as much as six times as important in less developed countries. What response have you had to the G8's invitation for oil producing countries to contribute to a new trust fund to support poor countries facing commodity price shocks?

Mr Brown: That is a very important question and I do appreciate you asking that. First of all, as far as our invitation to the OPEC countries, to those countries that are benefiting very substantially from the rise in oil prices, that is something that we will pursue through to the annual meetings in October. Remember the fund that we are talking about is a contribution to the IMF debt relief initiative. When the IMF is offering to wipe out the debts of the poorest countries who owe something like ten billions to the IMF, we would like a contribution made by countries who traditionally have not contributed, either through the G8 or through other initiatives that the World Bank and IMF have taken. I think I should also draw your attention to the proposal from the World Bank that I mentioned in my opening remarks. To help developing countries we see the advantages of a dialogue between producers and consumers and between developed and developing countries being something that is a feature of the way we approach climate change issues in the future. The new President of the World Bank, Mr Wolfowitz, has offered to bring forward an initiative that will come at the end of September for a new fund or a new facility of the World Bank that would help developing countries seek alternative sources of energy and help them look at more efficient means of using existing fuel supplies. I think that is a very important initiative which could bear significant results. Clearly it is in the interests of poorer countries to have some help if they are moving to more efficient uses of existing fuel or examining alternative sources of energy. They will not have the resources themselves but some stimulus provided by the international institutions, particularly in the case by the World Bank, could be very, very useful. I think your question about helping developing countries is an important part of it.

  Q23  Peter Viggers: So you would encourage a further initiative like the one in 2001 when the World Bank provided £155 million of additional assistance. You would encourage it, but would you support it?

Mr Brown: I think we would encourage the World Bank to do more but what Mr Wolfowitz is looking at is not just immediate assistance, which did happen in the past, but dealing with the causes of high costs for poorer countries, their failure to develop alternative sources of energy, their inability to do so through inadequate resources and the search for more efficient use of existing fuels. If the international community through the World Bank help with that, I think that is a major advance in dealing with energy needs but also with climate change.

  Q24  Peter Viggers: Thank you. Finally, one question on the Extractive Industries Transparency Initiative. Do you believe that having this in place on a voluntary basis is satisfactory? Do you think it would encourage other countries if companies operating within the United Kingdom had to operate within a mandatory basis on this?

Mr Brown: That is something you would have to look at if the voluntary initiative failed. The evidence is that the voluntary initiative is succeeding. I have met some of the oil companies in the last few days and they have embraced this initiative. It is part of the transparency that we are talking about which is going to become the most important feature of the way that the international community looks at how it can help developing countries. If it can work for extractive industries I think the next stage would not be to make a voluntary initiative mandatory, the next stage would be to see whether we could operate it in other areas where commercial activity has been subject to criticism for either corrupt practices or for the lack of transparency.

  Q25  Susan Kramer: Just to quickly turn to the new information that we got today. The change in the start date of the economic cycle and the delay in the Comprehensive Spending Review, do you think there will be a perception that the Government is marking its own exam papers? Do you think there is an argument for an independent body to carry out these kinds of reviews?

Mr Brown: No, I do not think that should be the conclusion at all. Clearly a ten year Comprehensive Spending Review starting from a zero base and reports that will come next year and the year after are exercises not in hiding information from the public but in greater transparency. The first thing is that people are going to know more about it and there is going to be a wider debate about long-term challenges and trends in public spending. I do not think people will feel that this is a Government excluding information from them; it is a Government being prepared to discuss things with the public. On the cycle, I said at the end of my statement that I am going to ask the NAO to audit the end date of the previous cycle, so instead of a situation where we have 11 indicators examined by the NAO, which includes the trend growth rate, there will be a twelfth and that is the end date of that economic cycle. That is a step forward in the transparency that you are asking about. When we came into power in 1997—we have got to put this in its historical perspective—there was no independent auditing of any aspect of government fiscal projections or government economic forecasts or individual aspects of economic forecasts, so the Government could choose whatever employment or unemployment figure it sought to base its social security projections on, it could choose whatever figure three years ahead its privatisation proceeds might be and it could choose a percentage for rises in consumer spending that VAT revenues would reach. All of these things are now properly audited and, in fact, we do so not just in a reasonable way but in a very cautious way. In addition, we have asked the NAO to audit the trend growth rate of the economy and we will be going back to the NAO very soon to ask them to do this again. It was the NAO that looked at the demographic features in 2007-08 and gave us their judgment on matters like that. They said that what we were doing was reasonable and cautious. It is quite wrong to suggest that there is not a degree of both transparency and independent auditing at the moment. Take the economic cycle: I just ask you to look at the evidence. The evidence is four years of growth above 3%. On the surface that suggests that we did not go through a complete economic cycle. On four years of growth above the trend rate of growth it is very difficult for people to suggest that in some way having received these new figures, having been asked by this Committee to come to them even before a Pre-Budget Report with any evidence that things are up-to-date, it is very difficult looking at the evidence to contest that. In fact, it is to the credit of Mr Weale at the NIESR and the IFS that they always thought that the cycle started in 1997 and not in 1999. We are putting the date of the end of the previous cycle, implicitly the beginning of the next cycle, to the NAO to audit now and if they do not think that what we are suggesting is reasonable or cautious then they will undoubtedly say so. Your point about the Government being judge and jury is dealt with by us asking the NAO from today to audit the end of the previous cycle. I think people will welcome that advance. Instead of 11 indicators being audited there is a twelfth now which I think the Committee, given what it has previously said, should welcome.

  Q26  Susan Kramer: Just to turn to the issue of debt relief, can you confirm for us, because I think there has been a lot of confusion here, that the G8 commitment to increase aid to 50 billion includes, or is it completely separate from, the numbers for debt relief?

Mr Brown: It includes the numbers for debt relief.

  Q27  Susan Kramer: So the number for debt relief is within the 50 billion?

Mr Brown: It has always been the case that aid—

  Q28  Susan Kramer: I just want to understand.

Mr Brown: The reason it is included is always the figures that are published for aid include debt relief. When Britain publishes its ODA figures they do not exclude debt relief, they include debt relief. That has always been the understanding.

  Q29  Susan Kramer: That was the fear rather than the hope, I think.

Mr Brown: I think it would be a major departure if the ODA figures were published without including the amounts that are paid in debt relief, that has been the traditional practice. Jon, could you say something about that?

Mr Cunliffe: This is the definition used by the Development Assistance Committee of the OECD, so it is the standard definition that includes debt relief within ODA.

  Q30  Susan Kramer: You spoke very eloquently and I am sure we would all support the importance of transparency, but if I could pick up a little bit on conditionality. Chancellor, do I understand you correctly or am I wrong that for every dollar of debt cancelled, in effect there will be a reduction in the IDA flow to that particular country? It would then be in a position to apply for new IDA grants but conditionality would apply to those grants. Is that not the sort of concern that people have, that in effect conditionality would come in through the back door because of that process?

Mr Brown: There are three different forms of debt relief: bilateral debt relief, IMF debt relief and World Bank debt relief and African Development Bank. You are specifically talking about this third—

  Q31  Susan Kramer: African Development Bank.

Mr Brown: There were two separate proposals, one was for servicing the debt and one was for a write-off of debt. Eventually the world community chose to write-off their debt and then to compensate the countries through IDA allocations. Perhaps Jon can say more about the detail of how that is going to work. It is being discussed in detail in Washington at the moment.

Mr Cunliffe: For the HIPC countries who receive debt relief, they receive that debt relief—

  Q32  Susan Kramer: These are the initial 18?

Mr Cunliffe: The 18 and then it will go to the 38. They receive that debt relief without conditionality, it is irreversible, it reduces the debt on their balance sheets and they then have the certainty going forward that the debt service payments they would have had to have made to IDA and to the African Development Fund will no longer need to be made. So they get that certainty at the point of debt relief. In order to ensure that IDA and the African Development Fund were not then operating with less finances than they would otherwise have because these flows from these developing countries would no longer be coming back, the G8 countries agreed to replace dollar for dollar the lost flows. Those flows would then be allocated to the poorest countries through the normal IDA mechanism, which is a performance based lending mechanism. IDA's grants are loans. The debt relief given to the poor countries is irreversible and it is not subject to any additional conditionality.

Mr Brown: This is true moving forward as well. It is not a commitment simply to top up for the next two or three years, it is a commitment to provide the additionality right through. The second thing is that the UK's contributions affect not just the 38 countries but up to 70 countries where we are unilaterally providing our share of servicing of the world debt. That is additional to what is happening. I should just say, thirdly, that while there is a debate about the technical details of this, and it has still got to be concluded, generally speaking the proposals that we agreed have been welcomed by the HIPC countries.

  Q33  Susan Kramer: Could you just give us an update on what has happened to the UK's proposals to part fund the debt write-off by revaluing IMF gold reserves? Is that off the table now or is that potentially back on the table?

Mr Brown: That proposal was never off the table. What happened was the IMF was able to give us information that they had additional funds that they could release for wiping out the debt of the poorest countries that did not require there to be gold sales. In other words, the IMF has a series of accounts, they had additional funds that were available and on top of that there was an agreement that the individual shareholders of the IMF would provide additional resources and, as Peter asked, the oil producing countries giving some donations or help or grants as well. At the moment the funding of the IMF debt relief is possible without gold sales but if it were to be the case that it could not be done unless there were gold sales we would certainly put it back on the agenda.

  Q34  Susan Kramer: Certainly the public at large is very concerned, obviously, about where additional money that is freed up by debt relief goes. What kinds of assurances and structures do you see in place to make sure it goes to education, health, the other kinds of key projects?

Mr Brown: What has been remarkable in recent weeks is the statements that have been made by the individual countries that are going to be the recipients of debt relief. When I was in Tanzania, President Mkapa made a statement about the money going directly to education and to health. When I went to Mozambique, we signed an agreement with Mozambique and they said that the money would go to education, health and the infrastructure needs of the country. There is no doubt that one by one the individual countries are announcing themselves where that debt relief will actually be spent. This increased emphasis on transparency means it is very difficult for these countries now to get away with buying presidential planes or having new buildings or siphoning off the money for military expenditure. There is a new spotlight, a new searchlight, partly from the NGOs and the churches and the faith groups, partly from the civil societies in their own countries on where this money is going. I think the announcements that have been made by the individual countries give us reason to hope that the surveillance that we are talking about, which ought to be stepped up over the next few years, will allow the international community to know where that money has gone. The pressure will be on the developing countries themselves to show that the money has gone to education and health.

  Q35  Susan Kramer: Lastly, you said that the UK itself would focus on the needs of 70 countries and expand beyond the 38. What prospects do you see of a broader range of countries, the broader group essentially, to bring that full 70 into the picture? What sort of timetable?

Mr Brown: You are absolutely right, it is a very important issue. The world community moves in stages and it does take time to move from one proposal to another. This is definitely going to be on the table as a British proposal to other countries. Canada has already indicated that they would do likewise, so that is progress. I think the more people see that the HIPC countries are one group of countries, that it would be unfair, for example, for money to go to HIPC countries but not to be available to countries which have got relatively lower debts but still got major needs, is a very important issue for us. We are determined to highlight the problems of these additional 30 countries in the next period.

  Q36  Chairman: Chancellor, I looked at Zambia's debt last year and of their total debt I think private debt was 9%. What measures would you take to ensure that there is no unilateral ratcheting up of this private debt and we do not get into the situation that you are describing whereby the money that is going for aid here has been well used but there is a bolthole where all that good could come to nothing?

Mr Brown: The aim of debt relief is not that countries can never borrow again. We must be clear about this. It is important that countries can clear their historic debts so that they have got economic stability, they are in a fiscal position that is sound. It is not an attempt to prevent them ever borrowing any money again, it is an attempt to get rid of unpayable debts and to put these countries into a position where anything they do is sustainable. On the private sector debts, Jon, do you want to say anything?

Mr Cunliffe: I think all of these countries will have an ongoing relationship with the World Bank, with the African Development Bank, the bilateral donors, possibly with the IMF, and there are tests about debt sustainability, how much they can bear. In that ongoing relationship the donors will actually make it clear that for some countries it will not be possible, it is ill-advised for them simply to replace the debt that has been written off from the IMF and the World Bank with private sector debt. For those countries where there is a debt sustainability issue, I think in their agreement with the World Bank and the African Development Bank there will be some agreements about the amount of extra debt they can take on and where they can take it on because for some countries, having made them sustainable by writing off all their debts, it would not be sensible for them simply to use that headroom immediately. Transparency is part of that.

  Q37  Chairman: That could be a bolthole if the World Bank and the African Union do not get it right.

Mr Cunliffe: Debt sustainability going forward is a key part of the framework.

  Q38  Damian Green: Can I ask a question about the spending announcement. You have already got long-term reviews going on in some of the big expensive areas, on pensions, on transport and on skills training, so is the new review going to review the existing reviews or is it going to take them, or are they going to be scrapped? How do they fit in?

Mr Brown: The new review is to bring together a spending announcement for 2008-11, so you have got to take into account what has been said by the existing reviews and you have got to look at other long-term trends. I mentioned this whole issue of investment in our infrastructure and I think it is a common call between all of us that we under-invested as a nation under both governments for 30 or 40 years. We have transport needs, we have education needs, we have health needs and general infrastructure needs as well. The question for us is whether the figure that we decided on ten years ago, that you increase public investment from 0.8% to 2.2 %, is now the right figure or should be less or might have to be more. I think we will have to look at what is happening around the world, at the effect of competition on the British economy and what is affordable. If you like, a review on transport and a review on skills will come together in an assessment of what is the right level of investment for the economy looking forward to the next ten years.

  Q39  Damian Green: Will they still be published separately?

Mr Brown: They will be published separately.

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