Examination of Witnesses (Questions 40
WEDNESDAY 16 NOVEMBER 2005
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
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 thatand
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
Q43 Mr Todd: I do not want to put
words into your mouth.
Mr Macpherson: That could be a
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 tablesit
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
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
Mr Macpherson: The key measureand
one of your colleagues was asking where were our concrete measuresis
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 youwithout going on at tedious
lengtha 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
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
Q57 Jim Cousins: Can I put the point
to you in another way? In July of this year
Mr Stephens: Could I also draw
attentionthere is a definition of this in the technical
note, paragraph 8.15 to paragraph 8.17, which makes it clear that
the report willas Nick says, it is inclusive of 2006.
Q58 Jim Cousins: In the report you sent
out on regional funding allocationsand this again is to
the English regions, and it is England that we are talking aboutyou
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
documentI will certainly want to put that
3 The technical notes are available on HM Treasury's
Website, www.hm-treasury.gov.uk Back