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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