Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60-79)

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

  Q60  Kerry McCarthy: You have given a figure of £370,000 for the value of suspected terrorist funds that are currently frozen in the UK. Are you confident that that represents a sizable proportion of the funds that might be used to fund terrorist activities, is it the tip of the iceberg, or are you simply not in a position to say?

Mr Brown: The impact of this is more than this £370,000. The figure represents only the funds that were in the pipeline at the time of freezing so the effect will be far broader than £370,000, which sounds a small figure if you are dealing with it globally. The fact that 45 accounts have been frozen is probably more significant. At any point far more money could have been going through these accounts. This was the money that was in the pipeline at the time and we could get hold of.

  Q61  Kerry McCarthy: When you say it is held by "our institutions", do you mean UK institutions or does it include London-based branches of overseas institutions?

Mr Cunliffe: It is all institutions in the UK who are supervised in the United Kingdom.

Mr Brown: Under the suspicious transactions legislation they are obliged to inform us as to whether there are any suspicious transactions, and this is the issue where we have had information about a very high number of potentially suspicious transactions and we have got to look at how we can make this law work at its most effective.

  Q62  Kerry McCarthy: Just one final question, you say in your statement that you would seek to conclude work on the money laundering and payment systems. Is there a timescale?

Mr Brown: Jon, have you got a date for that?

Mr Cunliffe: We wanted to ensure that the European Union brings its money laundering laws in line with the latest recommendations on counter-terrorist financing by the end of the year.

Mr Brown: The Directive has secured political agreement from the Council and Parliament already and is aiming for its adoption in October or November this year, so that brings you up-to-date.

  Q63  Lorely Burt: Chancellor, in your opening statement you were talking about a major review of the economics of climate change and I would like to focus on climate change for a minute, if I may. The Lords' Select Committee on Economic Affairs recently published a report recommending that the Treasury should take a more active role in scrutinising work on the costs and benefits of climate change policy. Is this how you are intending to tackle this? Can you speak a little bit more about the parameters that you use and how you will know how effective that review is going to be?

Mr Brown: I think this is very important. What we recognised at Gleneagles was that we had a report from the Commission for Africa which became the basis of the recommendations to act on debt relief and aid, and what we sensed in the discussion about climate change is there is still a great deal of work to be done on the economics of climate change. That is why Nick Stern, who many of you may know was formerly Head of Research and Economics at the World Bank, has agreed to do this review. He will work with Defra, with the DTI and all other agencies of government to do it, but I have got to be honest I think following the report of the experts just before Gleneagles there is a recognition that there is a gap in our knowledge about the economics of this. Rather than me tell you what the results are, I think we should all agree that this is an important issue that has got to be examined.

  Q64  Lorely Burt: Okay, thank you. Could I just turn now to the Climate Change Levy. The Budget 2005 announced a freeze in the rates of the Climate Change Levy for 2005-06. Would you say this represents a wasted opportunity to increase savings of carbon dioxide emissions?

Mr Brown: I think the evaluation by Cambridge Econometrics, which you may have seen, shows that it is more effective than we expected at reducing carbon dioxide emissions. It is expected to deliver annual savings of 3.5 million tonnes of carbon in 2010. That is well above the original estimates made at the time of the Levy's introduction. The Climate Change Levy has been more successful than we expected. We are meeting our targets for Kyoto in this regard. What we have always got to do is to balance off the advantages that are gained in tackling climate change with the costs that we know industry has to meet. At every Budget you have got to get that balance right. To say it is more effective you may argue then that we should be doing more. My argument is that we have got to always get the balance right between what we are achieving in tackling climate change and what are the costs borne by industry.

  Q65  Lorely Burt: Perhaps when we get the results of the study that is going to be done we will get some sense of proportion as to whether we are doing enough.

Mr Brown: I think so. I think the world is going to enter a new phase on the debate on climate change and the uses of energy. Perhaps I should not over-emphasise it but I think this World Bank initiative has the seeds of being something very big indeed because if we can get developing countries as well as developed countries into the dialogue, and if we have an international institution with the resources to be able to provide the incentives and the support for developing countries to do more, we are at the beginning of achieving things that we have not achieved for the last 20 or 30 years. Even the advances of Kyoto could not achieve what this potentially might be able to achieve, particularly for the years after 2012.

  Q66  Lorely Burt: Okay, just talking about the Levy itself, experts have noted that the Levy is "anything but a carbon tax. It is an energy tax and the tax rate does not vary directly with the carbon content of fuels. It is not applicable to transport or households and it offers electricity generators no incentives to switch between low and high carbon fuels." How do you tackle those criticisms?

Mr Brown: This was, if I may say so, the debate that took place at the time of the introduction of the Climate Change Levy as to what we actually did and what some people wanted, which was simply a carbon tax. We do provide money for the Carbon Trust as a result of revenues that are coming to us. I may say that there is some quite exciting work that has been done. I mentioned in the Budget in 2005 incentives for carbon capture and storage. As you know, there are quite a number of companies wanting to move on this front. There is a project for this new technology to be investigated and to be developed in I think the North of Scotland, and we are now considering how we might support financially the development of the carbon capture and storage as well as the potential for other new economic incentives. I think we will be able to make further announcements on that matter. We are not ignoring this issue of carbon.

  Q67  Lorely Burt: But would you not think that perhaps the Levy would be more effective if we did discriminate between fuels with a carbon content?

Mr Brown: As I say, that was the debate that was taking place at the time of the introduction of the Climate Change Levy, and I think I am trying to emphasise to you in relation to carbon some of our initiatives are more path-breaking in terms of how we develop new research into the use of carbon or the storage or reduction of carbon. I hope to be able to say more in the Pre -Budget Report or the Budget on this.

  Q68  Mr Love: Chancellor, commenting on the agreements reached both at Brussels and at Gleneagles, at the weekend The Economist commented: "The EU's targets mean that giving to foreigners [their words] will be the fastest growing item of public spending in several Member States at a time when all of the European members of the G8 are nursing big budget deficits." What is your sense of the sustainability of the promises that have been made?

Mr Brown: I think you have got to put it in its proper context. We are talking at most of countries that are raising the amount of money they are spending of not more than 0.7% of their GDP. While economists talk about huge rises of expenditure, there are rises of expenditure but you are raising expenditure from in some cases 0.3% of GDP to 0.5% of GDP. These are not (in relation to the whole national income of these countries) as big as the economists imply. The question then is whether it is in the enlightened self-interest of European countries to contribute towards development aid. There is no doubt that the next stage of the development of the world economy after China's phenomenal growth and India's phenomenal growth will depend on these developing countries moving forward at a faster rate. It would be in Europe's interest to be in partnership with them in doing so.

  Q69  Mr Love: Can I lead you on to the write-off, so-called, of multi-lateral debt. I understand that this is part of current negotiations that are on-going. Can you just reassure us that that write-off will not prejudice the future capacity of both the World Bank and IMF to deliver in the future?

Mr Brown: I am glad you asked this question and it is similar to the question Miss Kramer asked about what the World Bank was doing and what was the true additionality. In the case of the IMF, the use of the IMF internal reserves is not, in my view, an issue of principle. If the IMF has additional internal reserves that it can use towards this purpose then I think it is important that we release these first. But we have a fall-back position where individual shareholders are going to contribute so that the money can be provided. I do not see a situation myself where the poorest countries are discriminated against because of the arrangements that we have agreed in relation to IMF. The bigger problem of course arises in relation to the World Bank where we have got to be absolutely sure that the money is additional. If you look at the Communiqué from the finance ministers, it is not just mentioned but emphasised repeatedly that it is additional finance that we are talking about, not just in this IDA round but in future IDA rounds, and clearly the world community is going to monitor whether these additional funds are being provided, and the test will be whether poor countries are in a position to get some relief not only from their debts but from their poverty.

  Q70  Mr Love: Can I just comment, and again it is taking up something that Susan Kramer said earlier on, there has been the release of this document from the Belgian official Willy Kierkens which comments that rather than giving full, unequivocal and unconditional debt relief, countries would receive grants, et cetera, et cetera. Can you reassure us that that sort of conditionality will not prevail?

Mr Brown: What I did want to be clear of in my opening remarks is that the British position is that the conditionalities already exist, there is no need for further conditionalities. This is a matter of debate. Clearly to get a debt package agreed it is not sufficient, nor should it be, that simply the G7 or the G8 agree it. It has got to be agreed by all the shareholders of the World Bank and the IMF. In fact, constitutionally it has got to have an 85% vote of the IMF and the World Bank.

Sir Gus O'Donnell: The IMF.

Mr Brown: The IMF needs to be an 85% vote, so it is important that it is seen to be the vote of the widest possible group of shareholders. I am confident that we will have these discussions and make some progress and certainly the British position remains that we do not need additional conditionalities to those we have already got.

  Q71  Mr Love: Can I take you on to the issue that was raised earlier where you commented that the IMF needs to be involved in—I think your words—independent surveillance of the world economy and in talking about Africa when there was a problem making sure that that does not become a crisis. You yourself however have been very critical of the IMF's monitoring of the UK economy, particularly about public finances. Could you say a little more about the type of surveillance. Would it be focused particularly on third world countries? How do you see that surveillance regime operating in the third world economies?

Mr Brown: If you look at their reports on Britain and then you look at their reports on Europe or other countries, I think sometimes they are far more critical of other countries. The question really for the future is whether you can establish a system of independent surveillance that has credibility and authority so that it genuinely influences both the way countries perform and the way markets are educated about how countries are doing. We have set up an independent evaluation office for the IMF to look at how well it does its work. That has been an important advance, but there is a case for a surveillance unit that is more independent of the political process. You may remember that history shows that when the IMF was set up there was a choice made between having a political committee as it was called or what was Keynes's proposal, which was to have it something more akin to an independent central bank. I think the functions that the IMF now has to perform looking forward for the future of the world economy are more those of surveillance and therefore ensuring transparency. Thus you need a greater degree of independence to be able to do that. That is why we have put forward this specific proposal. Countries will have to take the rough with the smooth if the IMF criticises them but I think the more important thing is to establish that we have a properly independent system of surveillance, and we do not actually have that fully in place at the moment.

  Q72  Mr Love: If I could take the example—

Mr Brown: By the way, I should add just for the record in summing up the Executive Board commended the UK authorities for their skillful macro-economic management and flexibility in responding to economic change.

  Q73  Mr Love: I am sure this Committee would echo those sentiments!

Mr Brown: Unanimously, I hope!

  Q74  Mr Love: Can I move on to the issue of sanctions in those circumstances. It is really commenting in a sense on your comments on Africa where you were saying we must make sure that a problem does not turn into a crisis. Yet surely the situation would undoubtedly occur where countries were relatively open when things were going well and transparency would be palpable and then when a problem occurs that is when they start to be less transparent. How do you ensure that they maintain transparency? What sanctions regime would be available to the IMF or others to ensure that we did have the openness and transparency that is necessary when problems occur?

Mr Brown: I think that is where the IMF and World Bank can be at their best. If they are reporting situations where there is a deterioration in honesty about the use of resources, and if the world responded to that, then countries would find it very difficult to go to the international market or to find the investors in situations where they were not doing the right things. I think this whole debate is moving forward. I think I said in that UNICEF speech that George Mudie referred to that we used to think the way forward for developing countries was strong leadership through modernising, almost authoritarian, figures who would really push forward reforms, but I am afraid that has ended for some countries in the situation like Mugabe in Zimbabwe and his rule. Now people recognise that instead of putting your faith in one individual or one group of individuals you have really got to create a system where there is proper transparency and accountability. That looking forward would be the best, both in tackling corruption and in making sure you get value for money for the spending on aid, as was raised earlier. For people to see where the money is going, clearly you need proper systems of both accountability and openness in reporting what has actually happened to the money.

Sir Gus O'Donnell: Could I just add that in the path-breaking work that Amartya Sen did, the thing that he identified as the most important for countries in avoiding famines and droughts was openness and transparency through a free press rather more than any of the things you might have thought of in a technical sense.

Mr Brown: What Sen did was compare India 20 or 30 years ago with China 20 or 30 years ago and where India had famine and drought, it was reported, people knew about it and something could be done about it, it was a catalyst for action, but where it was hidden and obscured from both the international community and the population, nothing was ever done, and so he was putting the case for both democracy and transparent and accountable systems being the means by which that democracy was pushed forward.

  Q75  Mr Love: Can I turn to the reform of international institutions to which the Government is committed. First of all, just a quick comment, you are meant to bring forward a report on the IMF, perhaps you can tell us where that is at in relation to this year, and then about the sort of reforms that you foresee for both the Bretton Woods institutions?

Mr Brown: Yes the IMF is doing a strategic review and that is to report when?

Mr Cunliffe: By the annual meetings in October

Mr Brown: By the annual meetings, which is September. That was discussed in the G7 meetings and had been discussed at previous G7 meetings. Our proposals and work for the IMF is contained in this report which was circulated last night.

Chairman: We have all got it.

  Q76  Mr Love: My apologies, I have not got it.

Mr Brown: It was published today and is available in the Vote Office but we sent you each a copy last night.

  Q77  Mr Love: Thank you very much. Can I finally focus more on these voice issues about seats on the board, about capacity-building for executive directors, about more transparency. We are talking a lot about transparency in the decisions the IMF and World Bank make. Is the Government sympathetic to those and what prospects are there for achieving one or all of them in the future?

Mr Brown: I know this Committee has done some work on the IMF and on the international institutions in the past and I would encourage you to do more and to listen to the voices that are coming from around the world about the need for reform. To be quite honest, the world community has faced so many policy problems over the last few years that the idea of structural reforms within the IMF itself has been seen to be less important than grappling with the effects of the Asian crisis and September 11 and then the oil crisis that we found. There is no doubt that we need to do more about improving the capacity of the developing countries to participate in the IMF, and that is why there is more help being given to staff the offices of these countries. As far as representation on the IMF monetary and finance committee, the chairman of the development committee has now been added to the group of people there, so normally it would be an additional African voice. It is an additional voice in the case of Trevor Manuel, the Finance Minister from South Africa, but there is a longer term debate about the representation of both the IMF and the World Bank Development Committee, and we will contribute to that debate. I think we have got to recognise that the voices of Africa in particular have got to be heard more.

Chairman: A few colleagues have a number of other questions they wanted to ask. Peter?

  Q78  Peter Viggers: While looking at international institutions what are the club rules of the Group of Eight (which started in 1975 of course as the Group of Six to which Canada and Russia were added)? Are there club rules? Are they democracy and free trade? Why those eight?

Mr Brown: If I may correct this in one sense. The finance ministers meet as G7 and on only one occasion in the year do we meet as G8, and that is in preparation for the G8 Summit. Finance ministers meet as central bank governors and finance ministers. Russia is normally in attendance for most of the meeting. This year and last year before our meetings we normally have a session with China, India, Brazil and South Africa. On some occasions we have had a separate meeting with China on its own. Far from this being a rules-based organisations—and you are asking for the membership rule book—it is actually a very flexible organisation which allows for different countries to play a part in some of the discussions at various times. As far as finance ministers and central bank governors are concerned, for most of the time it is meeting as G7 with the addition of Russia for many of the sessions.

  Q79  Peter Viggers: As far as G8 is concerned, would it not look more credible if India and China were included, and has the UK taken an initiative on those lines?

Mr Brown: The initiative, to be honest, that we took was some time ago in inviting China, India, Brazil and South Africa to participate in parts of our meetings. That, if I may say so, has been very successful because they have important contributions to make about the emerging markets of the developing countries and these have been very productive sessions. I think when you start from the history of the G7 and the G8, it was originally the G5, and then Canada was added by America and Italy was added by Europe, and it has evolved in not as structured a way as people might imagine. It is far more flexible in the way it operates but China and India have a voice at these discussions that we have with the Group of Four.


 
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