Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40-59)


  Q40  Damian Green: Before you presumably—

Mr Brown: They will work to their own timescales. The first report of this new Spending Review will be next year and that will look at the long-term trends and challenges. The final allocations for spending a year in advance of the 2008 start date of the round, which will take you to 2011, will be 2007. If I may say so, there is a long-termism built into our whole approach. We have got to look at the long-term trends. People have to have a degree of certainty moving forward about what the nation is doing. Personally, I believe that it is possible to have a shared consensus, perhaps even across all political parties, about what is the right thing to do for Britain to be equipped for the future needs of the country in education, in transport, in infrastructure generally. I think part of the debate of this new spending round is whether we can reach that sort of consensus about whether it is right for an advanced industrial economy like ours facing massive competition in a global economy, particularly from low cost producers where we are going to be increasingly dependent on our educational skills and on our creative talents, and therefore science and technology, and what it is right for us to invest in our future. Perhaps we may never get to that consensus but I think we should seek that.

  Q41  Damian Green: If I can move on to agricultural subsidies. In your UNICEF lecture recently you talked about the "hypocrisy of developed country protectionism". With the CAP in mind, where are we? Is the Government actually tabling detailed reform proposals and are you using the Presidency to advance this? Are we in any sense in negotiation about CAP reform?

Mr Brown: We have said first of all that we hope the World Trade talks will come to a more ambitious settlement about agricultural protectionism and the removal of some of the protectionist measures. For example, in our own election manifesto we said that we would see export subsidies phased out by 2010, ie within five years, and that would be our proposal. To that extent, our proposal is already on the table. I think you should wait for further submissions from the Secretary for Defra on this very matter. There is no doubt we have already put one proposal on the table but it may be that we will be able to discuss more during our Presidency.

  Q42  Damian Green: Do you think it is possible to have any kind of meaningful CAP reform without reopening the subject of the levels of agricultural spending that have been agreed up to 2013?

Mr Brown: I think you have got to say that the 2002 deal—this is controversial in itself—was expressly without prejudice to future financing arrangements, so it was subject to an agreement about the future financing of the European Union, and that is where we are at the moment.

  Q43  Damian Green: I am not sure that takes us a tremendous amount further forward.

Mr Brown: You must look at the Communiqué on that deal when the 2002 deal was talked about. I do not have the actual wording here, I may be able to pass it to the Committee, but it was said to be expressly without prejudice to future financing arrangements.

  Q44  Damian Green: We are probably no further forward then. Do you think there would be any justification for the British rebate if we achieved a decent CAP reform?

Mr Brown: I think you have got to go back to the statements the Prime Minister has made both to the House of Commons and to the European Council on this. We have got a budget of the European Union where even in 2013 more than 40% of that budget is going to subsidise a part of the economy which is only 2% of the economy and employs less than 4% of the workforce. That is a situation that is part of the debate, and bound to be part of the debate, about the future of the European Union. As far as the conditions that we will lay down, I think I refer you back to the statements that he made.

  Q45  Damian Green: Finally, it is clear that all of this will be academic without some equivalent move by the Americans who are at least as guilty as the EU in terms of over-subsidising this particular sector. President Bush has offered to drop his subsidy scheme in exchange for the EU dropping the CAP. Do you think this is a real opportunity or do you think it is just rhetoric around the issues?

Mr Brown: This is a very important question. This is going to be at the heart of the debate moving forward to the WTO talks in December. Agricultural subsidies are around $300 billion. They dwarf the amount of official aid that is provided, five times the amount of official aid, so what is gained in aid is lost particularly to developing country producers by the extent to which we subsidise our own producers to compete against them. If I understand it right, what President Bush was talking about was export subsidies and I think he was offering to abolish US export subsidies. I think he was suggesting that a timetable should be agreed for the abolition of them. That is where the European Union and the Americans will be discussing things over the next few months. It may be the case that an agreement was not reached at Gleneagles, not because there was no will to do so but because it was understood that all of these things will come together in December in Hong Kong. I would not say that there is no will on the part of the European Union to reach such an agreement, I think there are many forces within the European Union who want that sort of agreement, but I think there is a general sense that this agreement will come—if it comes—in December at the WTO talks. I think President Bush's offer and the European Union change in its position over the last few months on this issue give us hope that some agreement can be reached on the basis that you are talking about, but I think it is essentially about export subsidies.

  Q46  Mr Mudie: Chancellor, in your very good annual lecture to UNICEF you said that empowerment can be achieved through health, education and economic development. What practical steps were taken at Gleneagles to expedite economic development? What did you have in mind?

Mr Brown: I think the ability to finance new infrastructure, the help for private sector development in countries in Africa, the micro credit initiatives that form part of that, the World Bank initiatives on these very issues just before Gleneagles, they are all very much part of this idea. It may be helpful in the short term to provide support for health and education but if we cannot help these economies develop into prosperous economies in the future, all we are doing is providing temporary aid while a serious situation remains, so what we must do is help those countries—and I think I used the word "empower" those countries—to move to prosperity by investing in infrastructure, by encouraging a vigorous private sector, and by means of micro credit, helping small companies and agricultural co-operatives. I saw quite a few examples of very successful ones when I was in some of the countries in Africa which I think the Chairman is going to visit as well over the next few months.

  Q47  Mr Mudie: Considering that the Millennium Goals were supposed to be implemented by 2015 and you in the same speech pointed out that education will be 2129, child deaths 2115 and poverty 2150 (and these are areas where we have concrete ideas of how to ease it), what confidence can we have in you and your colleagues to deliver economic development?

Mr Brown: That speech was made in advance of the finalisation of the—

  Q48  Mr Mudie: Yes, but most of the aid will go specifically for the first item. You mentioned the private sector. Are there any signs that the private sector is taking economic development in Africa seriously?

Mr Brown: I think there is a huge amount of additional investment now ready to move into some of the countries that we are talking about. What has happened over the last few years, we must not forgot that more countries have become democracies, more countries have got greater economic stability, more countries have got low inflation, more countries have sorted out some of their fiscal problems, more countries having got debt relief and are in a position to move forward, so the position is a lot better than it was five or ten years ago. There are significant exceptions like Zimbabwe but, generally speaking, for developing countries the situation is better. The question then is how do people build on that. You only need to visit one of the countries to know that infrastructure investment is absolutely crucial. If there is no investment in transport or in telecommunications, then the idea that these countries can trade even with each other, far less than with the rest of the world, the idea that trade is going to be possible or easy, even if you got rid of all the tariffs, is really a delusion. There must be a degree of investment in the transport systems, the roads, the railways and the infrastructure. The cost of a phone call from Africa to America is five times the cost of a phone call from a developed country to Africa, simply because the telecommunications infrastructure is not highly developed and therefore the costs have not come down, and that is another issue that is going to be dealt with. These infrastructure developments are absolutely crucial as is the encouragement of private investors to work in Africa. I was in Mozambique and they have got a huge resource in everything from coal, to timber, to tobacco, to sugar. What they need is the means by which they can get the best out of that resource, including processing some of the timber and so on in their own country, and therefore infrastructure investment and help with private investment is going to be very important.

  Q49  Mr Mudie: That was a long answer—

Mr Brown: I am sorry about that.

  Q50  Mr Mudie: No, it was very informative, but the most interesting part and key part was when I asked you what indication there was, and your answer said private sector investment is ready to move in, so it has not moved in. How do you know it is ready to move in, because all the things you have spoken about depend on it coming? You are conceding that it has not come in and you are saying it is ready to come in. Is that no more than a phrase?

Mr Brown: In the modern world it is undoubtedly the case—and you just need to look round the global economy whether it is developing or developed countries—that investment will move to those countries that are in a position to show that they have, firstly and fundamentally, a stable economic environment. It is simply not possible to imagine investment in countries where there is conflict or where there is a history of economic as well as political instability. There is no doubt that very big advances have been made over the last few years. Partly in recognition of this, countries have got their inflation down, they have shown themselves to be more stable, and obviously with the advantage of debt relief they have got their fiscal position in a better position, as well as their monetary position, and that is a base on which they can build. There were a number of private sector forums related to the Africa initiative and the evidence from talking to businesses is that they want to play their part in the development of the economies that we are talking about and are indeed ready to invest, but they will invest on the basis of the economic foundation being a stable economic environment, so with countries which are prepared to show that they are going to make the investments in transport and telecommunications and infrastructure, that is conducive to investment as well.

  Q51  Mr Mudie: Are you and you colleagues taking any initiatives to bring them together with governments and countries in Africa which are ready now for their investment? Are there any initiatives on the table or being prepared?

Mr Brown: When the President of the World Bank Mr Wolfowitz went to Africa, he announced a new initiative on private sector lending. There is the Dillon-Martin Commission that published its report a year or two ago which was adamant about the importance of private sector lending and therefore the incentives that were available for that to happen in countries in Africa. There is an enormous amount of work going on—and I have been talking to people in the last few days—on micro credit which is going to be very important to help small businesses develop.

  Q52  Mr Mudie: What needs to be agreed at Hong Kong for you to regard the trade talks as a success? Did anything happen at Gleneagles that took practical steps to encourage that success?

Mr Brown: I think the Communiqué showed a determination to reach an agreement. I think people recognised that that agreement was going to be part of the final discussions at the trade talks in December, so I would not read the lack of a timetable for the removal of export subsidies at this stage as being due to an unwillingness to reach an agreement. I think it was just understood that this agreement could come when everybody got together to attend the Doha round at Hong Kong in December. The G8 called on all WTO members "to work with renewed energy to end the Doha negotiations by 2006" and it recognised the importance of a successful outcome. They stated their commitment to eliminate all forms of export subsidies by a credible end date and substantially reduce trade distorting domestic support, so the principles were laid down. They also said, and I think this is important, that they recognised that if you opened up trade, poor countries faced particular problems, and they needed themselves the flexibility to decide and plan and sequence their own trade reform, which I think is a shift in the position of the international community to recognise that these programmes should be country-owned.

  Q53  Mr Todd: Can I turn to the EU Presidency and the tasks that you have got ahead of you. You would probably recognise the phrase "certainly their unemployment is lower than ours but if you take the big elements in society—health policy, the fight against poverty, spending involving the future—you notice that we are much, much better-placed than the English." To what extent do you think there is a consensus on the need for economic reform in Europe?

Mr Brown: I think you are quoting from President Chirac last week when he said that child poverty was higher in Britain than in France, and that is why one of our central objectives as a Government is to tackle child poverty. I had a meeting yesterday with the French Finance Minister, Mr Breton, and I think there is a growing recognition in all parts of Europe that we have got to face up to the challenge of global economic change. The assumption of the European Union for 30 years was that national economic integration would be superseded by European economic integration. In other words, instead of having national companies, you would have European companies, instead of national flows of capital, European flows of capital, instead of national brands, European brands, and all the policies of the European Union that then flowed from that were based on that assumption of economic integration at a European level followed by political and cultural integration. However, what has actually happened is that events have overtaken that model because instead of having European flows of capital replacing national flows of capital you have now got global flows of capital, global brands, global companies. The minute you recognise that is the case, what Europe has got to do to be successful moves it from being the policies of a trade bloc of Europe to the policies of competing in a global economy, and you will need different policies to compete in a global economy than the policies you needed for the era of the trade bloc. In the trade bloc era you could afford to look inwards, break down the barriers within the European Union, and almost forget about the world outside you. In the global era, what matters is whether you are outward looking, whether you can build a trading relationship with the rest of the world, and whether you respond to the challenges to your competitiveness from what is happening particularly in Asia but also from high productivity rates in America. I think people are beginning to see that that is the context within which Europe has no choice but to change. I think the issue now is not whether Europe is going to change to meet these challenges but how quickly. That is what the debate is about.

  Q54  Mr Todd: But there are at least two elements of that. One is a cultural change. In institutional terms, Europe has been founded on the principles you have just laid out of inward-looking integration and protectionism and then the development of a set of policy tools which will bring about what you seek. We have got six months or less to make some progress towards those goals. How do you think we are going to achieve them?

Mr Brown: Tony Blair has announced that the summit that is normally held in October will be a discussion and dialogue about the future of Europe particularly related to the social dimension. We have got a meeting of the European finance ministers in Manchester in September and the theme is how Europe will adjust and equip itself in the global economy. The debate over these next few months is exactly around these issues we are talking about today—how Europe can equip itself for the future, what changes it needs to make, why the old model is no longer relevant for a new situation, how you are going to respond to a situation where 50% of manufacturing exports are now going to come from developing countries where Europe, traditionally the home (with America) of the majority of the world's manufacturing is actually going to have to respond to that Asian challenge by moving up a gear, by becoming more focused on science and technology, more aware that creative skills are going to be the determinant of your prosperity, and what then we are going to do about the policies that are necessary to succeed in this global era. I think that is where the debate is going to move. The question I think we have got to ask is if it is the case that these are the changes that have got to be made, the issue is how quickly we can make them.

  Q55  Mr Todd: We have concentrated quite a lot on the rather bloated and easy target of CAP on which broadly there is a consensus in this country. Is there not a wider debate about what the EU should fund and where its goals should be and how it distributes its budget? On what principles do you think that debate should be founded? I think we all accept that vast spending on agricultural subsidies is both inappropriate and foolish. What do you think they should be spending money on?

Mr Brown: I think you are right, there are two issues here. One is what should the countries of the European Union be investing in, and whether it is right that so much investment is going towards protecting or sheltering or subsidising sectors that employ very small numbers of people now and are responsible for a small share of the output, and whether the investments in science and skills and infrastructure that are essential for a strong competitive base in the future are your priorities. However, that leads to a second question as to whether these investments should be made at a European level or through subsidiarity at a national level and I think that is part of the debate about the budget. We have already said that although we think investment in science and research and education and training are the right things to do for European countries, that there is no case for additional competences in these areas being given to the European Union, to the Commission itself, unless there is very good reason because of mobility of labour across the European Union and having to encourage that, or because of cross-border gains through co-operation, such as in science and technology.

  Q56  Mr Todd: But there is even a basis for questioning some of the competences that are already in place in some of those areas. 15 years ago in business I participated in various EU programmes which I must admit I could not see an enormous intellectual basis for.

Mr Brown: You can always return the money!

  Q57  Mr Todd: I am long gone from there! However, I would have thought there is a basis for strong scepticism as to whether anything more than enabling capabilities in R&D are appropriately carried out at a European institutional level as opposed to a national government level.

Mr Brown: I would dispute that in this sense: where Europe can co-operate together and where the advantages of cross-border co-operation are real—such as in some of the science projects that the European Union has entered into together, such as in cross-border transport and infrastructure projects or even, as we found a few minutes ago when discussing the European initiative on international aid and debt—proved not just the case for the European Union but the leadership of the European Union across the world, so I would not dismiss this level of co-operation across borders as being irrelevant in the modern world. I think the more it can be done on the environment, for example, or on energy issues, or on science issues, the better, but there is a question about how the payment of that should be organised.

  Q58  Kerry McCarthy: If we can move on to terrorist financing. You say in today's ministerial statements that a group of financial experts has developed a programme of reforms to ensure that we identify and isolate terrorist funds on a global basis and you are going to ask that group to report to the meeting that you have mentioned of finance ministers in Manchester in September. Can you give any indication of what sort of measures they are looking at and what they will be presenting there?

Mr Brown: Some of the measures which people promised to freeze terrorist assets have not been as successful as they should be. What we are looking at is whether we need better mechanisms both in national states and across the European Union so that we are in a position to identify and then to freeze assets. The examination of terrorist financing is almost the modern equivalent of the work that was done on code-breaking during the Second World War because it is at a very sophisticated level of asset tracking. I remember seeing the work that was done to trace the assets of the 11 September bombers in the United States and they were eventually traced back to one set of bank accounts. If that information had been known in advance it could have had a profound effect on the way people looked at what happened then. This more sophisticated method is sometimes forensic accounting to track terrorist assets. We have got to learn from what each country is doing and there has got to be greater international co-operation in the exchange of information. However, what we are really worried about now is if you can get 25 members of the European Union to act and to do the same things to track terrorist assets, outside the European Union you have got countries that are allowing themselves to become havens for the laundering of money, then you are only as strong as your weakest link, and therefore we want to provide funds to help those countries which have done very little to get the capacity to do what we can do in the United Kingdom and other countries. These are the measures we are looking at.

  Q59  Kerry McCarthy: That slightly pre-empts my next question. You talk about this offer of help and improved technical assistance. That is obviously conditional upon countries choosing to take up that offer of assistance. What ideas do you have for those countries that are not playing the game?

Mr Brown: Some of them have implemented legislation but have not got the resources to do the surveillance work and to do the tracking of assets. I think we in Britain will be helping 13 countries in this area but the European Union is making an offer to a far wider range of countries. So it may be sometimes helping them write the laws, it may be providing the financial systems, and it may be providing, if you like, the detective work and support that is necessary to do this. When we signed the Presidency Plan for Action on Terrorist Finance we had five points to it. I will just remind you of them: promoting efforts in other countries to freeze terrorist assets effectively; making it compulsory for wire transfers of money to be accompanied by information about the identity of the sender; updating the EU money-laundering rules to meet international standards (this is following the work of the Financial Action Task Force internationally); completing the European Commission-sponsored review of the structures of tackling terrorist finance (and that review will report in December and will lead us into the Austrian Presidency); and a Code of Conduct to prevent the use of charities by terrorists, which is an important issue as well.

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