Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  Q40  Mr Todd: The gap appears to narrow with the major European economies but not particularly, to be honest, without looking at the individual pieces of data and their relationships to the individual national economy at any one time; one has to look at longer-term trends. One would have to say that progress against the United States is fairly marginal through that period. On a trend basis, it is reasonable with the major European economies, but with an interruption in the period around 1999 through to 2002 and 2003. What do you think we learned from that?

  Mr Macpherson: There is no doubt that the United States economy has been performing very robustly in productivity terms over the last decade. There are indications to suggest that the US has been more adept at, say, benefiting from the rapid changes in IT and realising that in productivity. More generally, individual years here are affected by the cycle, but one thing I would underline, which is important in terms of the comparison, especially with France and Germany, is that the UK has been achieving this performance on productivity at a time when there has been very rapid growth in employment. The British economy has created something like 2.3 million jobs over the last eight years. Traditionally it has been quite difficult to make rapid progress on productivity when employment has been growing fast, and when, inevitably, as we move people off welfare and into work they are more likely to be going into low-skilled jobs.

  Q41  Mr Todd: I agree entirely with your analysis. Would that explain why, if you look at the period from 1998 when you started to set the target for productivity, you see a reversal of fortune for a period in comparison with the European economies? One possible reason for that is that—and you have to look quite closely on the small graph—

  Mr Macpherson: I can see it on Germany and the United States, but with France there has been a period where it is flat, but generally—

  Q42  Mr Todd: Presumably, it would have been the period of largest growth and employment in the UK economy; when new resources being added to firms are not always used as productively as when they first start.

  Mr Macpherson: That could be a factor.

  Q43  Mr Todd: I do not want to put words into your mouth.

  Mr Macpherson: That could be a factor.

  Q44  Damian Green: Can I move to the related subject of competitiveness. In 3.22 of the annual report you make the point that the UK has risen four places to eleventh in the WEF's global competitiveness report. Can I take it then that that report is at least indicating that you take as important the indicator of our competitiveness?

  Mr Macpherson: It is fair to say that it is one of a large number of indicators. Inevitably, with these reports, which seek to put countries in league tables—it is always very nice when you are at the top of them, but when you are drifting you start thinking that perhaps they are all very subjective. It is one of a number of reports that enable you to take stock of where you are.

  Q45  Damian Green: Let us assume that since you put it in the annual report you are reasonably pleased with the measure! That rather surprises me because if you look back from 1997, then what this particular competitiveness report shows is a clear relative decline. We hit the giddy heights of fourth in 1998, slumped to fifteenth in 2003 and went up to eleventh in 2004 and then down again in 2005 and to thirteenth. The only sensible conclusion one can draw is that we are getting less competitive internationally.

  Mr Macpherson: You could draw that conclusion! I would merely highlight that, with this dynamic world out there, everybody is running very hard to stand still, and with the increasing involvement in the world economy of countries like China and India, and with the extraordinary rapid growth that is taking place in those areas, that will inevitably mean that on some measures, for example our share of international trade, even if we are growing rapidly we will be falling back in the tables. Clearly, these things are important and we take note of them. We are always seeking to learn from best practice elsewhere. The one thing I would highlight is that in a lot of these studies it is confirmed that the British labour market is a very dynamic one. The flexibility of it, which has been put in place over a long period of time, stands us in good stead.

  Q46  Damian Green: To nail this down to your own targets, you are required to demonstrate progress in improving competitiveness. You cannot demonstrate that on the basis of this report, which you yourself quoted in the annual report.

  Mr Macpherson: The key measure—and one of your colleagues was asking where were our concrete measures—is about raising the rate of UK productivity growth. On the latest measure, using the less favourable level of output per annum, so far in the cycle, if you take 1997 as the starting point, output per hour has gone up by an average of 2.35% a year. That compares to 2.03% in the previous cycle, which ran from 1986 to 1997. That is a substantive improvement and demonstrates that we are making concrete progress. I am happy for it to be judged on that basis.

  Q47  Damian Green: That is one narrow indicator. It will be interesting to see in future annual reports whether the global competitiveness report still features as the Treasury's preferred measure.

  Mr Macpherson: I do not think it is necessarily a narrow indicator. That looks at output across the whole economy and divides it by the number of hours worked in the economy. That is a very comprehensive measure.

  Q48  Damian Green: So we should look at that more than this report—

  Mr Macpherson: What we are trying to do in this report is give you—without going on at tedious length—a flavour of how we are progressing. We obviously want to be judged by the key measures that we set out in our technical note, and in this case that is the performance of productivity as a whole; but we also want to give you information relating to particular components of what we are about; and the competitiveness report is one.

  Q49  Damian Green: The Chancellor told us in July that he was delaying the next Spending Review. Can you give some more details about the procedures for carrying out the long-term Spending Review?

  Mr Macpherson: I would be very happy to do so. Jonathan, who is leading this process, is probably best placed to do so.

  Mr Stephens: The Chancellor in his announcement set out the reasons for setting 2007 as the end-point of the Spending Review. He also set out a number of the particular long-term challenges that he was looking to assess; their impact on delivery of public services in the UK, and their impact on public spending. Those long-term challenges include the demographic challenge, the challenge of globalisation, the challenge of climate change, global uncertainty and technology. In addition, he also set out that this will be a comprehensive Spending Review, which will take a zero-based approach to departmental budgets.

  Q50  Damian Green: When I spoke of the procedure, what are we going to get? Are we going to get a series of departmental reports on the challenges; or is everything going to come out as one single Treasury report on spending challenges? We were promised a report in 2006 on the spending challenging: what form does that report take, and when can we expect to see it?

  Mr Stephens: At this stage I cannot say more than that there will be an interim report and it will be published in the course of 2006. It will address long-term challenges. We are looking to do this work in conjunction with departments, and building on a lot of existing work, not least for example on globalisation. When it comes to final decisions on Spending Review spending allocations, they will be set out in the usual way, we anticipate, in 2007.

  Q51  Damian Green: Can you say when in 2006 we can expect to see this? Will it come out with the Budget?

  Mr Stephens: No further decisions have been taken yet. Mid 2006, I would say would be a fair point.

  Q52  Jim Cousins: Can I bring you back to the other productivity target, which relates to England. The PSA target 6 refers to closing the gap in growth rates between the English regions. There is a commitment to report progress against the measures of convergence by 2006. When are you going to report? There is not much of 2005 left, you see!

  Mr Macpherson: This is very true!

  Q53  Chairman: So what is the answer?

  Mr Macpherson: I think 2006 is inclusive for these purposes.

  Q54  Jim Cousins: It says that you will report progress against these measures by 2006.

  Mr Macpherson: Yes.

  Mr Stephens: We will be reporting progress in the 2006 departmental report.

  Q55  Jim Cousins: But it says "by 2006". It does not say "in" 2006.

  Mr Stephens: We will be reporting progress in the 2006 departmental report.

  Q56  Susan Kramer: That means in 2007?

  Mr Stephens: No, 2006. We are currently discussing the 2005 departmental report, which was published in June, so the 2006 departmental report will be published in 2006.

  Q57  Jim Cousins: Can I put the point to you in another way? In July of this year—

  Mr Stephens: Could I also draw attention—there is a definition of this in the technical note, paragraph 8.15 to paragraph 8.17, which makes it clear that the report will—as Nick says, it is inclusive of 2006.[3]

  Q58 Jim Cousins: In the report you sent out on regional funding allocations—and this again is to the English regions, and it is England that we are talking about—you outlined expenditure targets on economic development, housing, transport and skills, in July 2005. There is no mention of PSA target no 6 and the need to close the persistent gap in growth between the English regions in that document. Why is it not mentioned?

  Mr Macpherson: I do not have the document in front of me, but the regions, both the RDAs and the Government offices which work within them, are extremely aware of this target. We have the machinery at inter-departmental level, where we meet regularly the Treasury, DTI and ODPM, to ensure we are making progress.

  Q59  Jim Cousins: Mr Macpherson, come on! This is politics, not playing games and playing games with words and text; this is something that you published in July of this year, setting out regional funding allocations, and no mention was made of the need to achieve that PSA target no 6. Is that not a significant omission?

  Mr Macpherson: I think it is always important to contextualise targets and if we produced another document—I will certainly want to put that—

3   The technical notes are available on HM Treasury's Website, Back

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