Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 340 - 359)

THURSDAY 8 DECEMBER 2005

RT HON GORDON BROWN MP, MR JON CUNLIFFE, MR MICHAEL ELLAM, MR DAVE RAMSDEN, MR TONY ORHNIAL AND MS MRIDUL BRIVATI

  Q340  Mr Todd: Sadly, a school burnt down in my constituency only a week ago, so we are going to have to do that.

  Mr Brown: You will have to go to another opening soon when it has been built. The issue is that we have a programme for 20,000 schools in England. Equally, we have a programme that will complete the building of about 120 hospitals and hospital developments round our country, and that is a very considerable programme of capital investment. If I give you the figures that we anticipate, in 1997 total net public sector investment was five billion. It has risen this year to £26 billion, so it is five times what it was. It will rise next year to £29 billion and then in 2008 to £31 billion. That is very considerable public investment in our economy and that allows us not only to more than quadruple the investment on schools and hospitals; it is also allowing us to invest in transport, in infrastructure, roads and so on, particularly around new housing developments, but also, of course, in the Olympics and sport, so there is very considerable capital investment planned for the next few years. I would not like you to get the impression that there is not going to be considerable capital investment. This is a step change from the situation we inherited but we do not need to build the hospitals and schools twice.

  Q341  Mr Todd: And I think all round this table in this consensual world applaud what has been done. I draw your attention to the OECD's comments, that nevertheless the level of investment remains modest compared with many OECD countries and may be inadequate to correct years of neglect. Would you dissent from that?

  Mr Brown: I think there has been a considerable neglect of infrastructure over a long period of time that left us with dilapidated schools, dilapidated hospitals, huge amounts of road investment that needed to be made, a rail network that needed huge amounts of money invested in it, and then sports and what we have to do for the Olympics follows from the neglect of sport over the years, but to have increased net investment from five billion to £26 billion is a very considerable achievement. We are raising the level of investment in the next two years as well. There will obviously be further announcements at a later date.

  Q342  Mr Todd: Do you believe that, bearing in mind the tighter forecasts on public spending which you have indicated in the latter part of the planned period, we will be able to sustain this level of investment at the projected level because it certainly suggests an increase in provision substantially above the norm within that period of spending as a whole?

  Mr Brown: I think the committee should be clear that public investment will continue to rise right throughout the course of this Parliament. The net public investment will be over 2% of GDP. When we came into power it was 0.6% and, of course, if it is more than 2% of GDP it is likely in numerical terms to rise over the course of the next few years. That is to build for our transport needs, for infrastructure around new housing developments, for the Olympics and for the sports developments that are going to take place in our country as well as for hospitals and schools. We are committed to building a modern infrastructure for our country and to renewing the social and economic fabric in areas where it needs to be renewed and we need to make the new investment for the future.

  Q343  Mr Todd: Just to clarify that, is that even to the point of squeezing current expenditure below the growth projected in this period, which you have already qualified as being "our working figures at the moment but we may change them"?

  Mr Brown: What I said on Monday in the House of Commons was that to meet our second fiscal rule—and this is all investment we are talking about—which is to keep debt within 40% we could sustain increased public investment over the course of the years to 2010. I do not think anybody should be under the impression that we will not continue with the programme that is absolutely essential to renew the social and economic infrastructure of this country and build the fabric, and I did give figures in the House of Commons which show that net public investment will rise above £30 billion a year.

  Q344  Mr Todd: That is excellent. In the near term you indicated that you were putting £305 million in 2006-07 and £508 million in 2007-08 into the local government finance settlement funded from existing central programmes. Where has that come from?

  Mr Brown: That comes from general government expenditures where different departments that are involved in local services have made money for the council tax to be kept low.

  Q345  Mr Todd: Can you be more specific in saying where exactly these hands have gone up in saying that they are volunteering this?

  Mr Brown: We did exactly what we did last year and we have done it this time for two years, and it does mean that council tax bills need go no higher than 5%. It could be lower than that in many areas.

  Q346  Mr Todd: I wonder whether we could have a note which summarises the source of the expenditure, because you have indicated that it comes from a variety of different places.

  Mr Brown: We will do what we can to help the Committee.[1] I can assure you that the departments that are involved in contribution are the departments that contribute for local government services anyway.


  Q347  Mr Todd: Finally, the IMF commented in September, so this was before the report, that they foresaw a need for fiscal consolidation if the golden rule was to be met over the next cycle. Do you have any comment on whether you feel that you have met their expectations, or indeed whether their expectations were wrong in the first place?

  Mr Brown: I set out the cyclically adjusted figures for the years right through to 2010-11, which I think shows that our borrowing as a proportion of GDP goes down to 1.5%. That is the first fiscal rule That is cyclically adjusted net borrowing but our current surplus is here in a note and that rises to £13 billion in 2010-11, so you can see us coming through this cycle which, for obvious reasons, if the growth is lower this year, the cycle will take longer to end but you go through the cycle and then in the next cycle it is likely that we will have substantial surpluses.

  Q348  Mr Todd: So you are pretty confident that the IMF in their next outlook will say—

  Mr Brown: There is a disagreement between the IMF and the British Government, actually, and I think that gradually we are winning this argument. The IMF traditionally has believed in just a straight balanced budget and you do not make any allowances for borrowing for investment. This used to be the policy of the Stability Pact as well and they have started to change the policy. We have always held to the view, and this is particularly relevant to your first set of questions, that if you borrow for investment in transport or infrastructure or the economic and social fabric of your country you are making the right decisions for the long term of your country and therefore there should be two fiscal rules: your current expenditure should be in balance over the cycle but it is possible to have borrowing for investment, as long as you have a sustainable debt ratio, and the debt ratio in our country has gone down from 44% and is now in the mid-thirties. It will rise, of course, because we are borrowing more for the investments I just quoted but it is well within the sustainability rule that we have set.

  Q349  Kerry McCarthy: If we can turn from public investment to business investment, why do you think we are in a situation where corporate profitability is quite high but needs strengthening, where the cost of corporate finance has gone down but yet business investment is growing very slowly?

  Mr Brown: I think we should see this in its context. Perhaps I can say to the committee that in 1997 when we came in business investment was about £87 billion a year. It is now over £110 billion a year and so business investment in cash terms has risen substantially over the last few years. It was expected to rise faster this year but it has risen and it will continue to rise next year. I was at a meeting of the G7, of all the finance ministers round the world, on Saturday and the Americans, the Japanese, the French and the Germans were all talking about this issue. After this huge spurt of business investment in the late 1990s, particularly investment in IT, when there was an IT bubble as people now define it, there was a huge amount of additional business investment taking place and there has been a slower rate of growth of business investment in recent years, partly because a lot of these technological investments were made earlier on. I just say that business investment continues to rise.

  Q350  Kerry McCarthy: That is the main explanation, is it, the fact that the IT bubble has now burst?

  Mr Brown: If you have hit a recession, like America did, America went into recession, then usually the rates of growth as well as the rates of investment out of that recession are faster, but Britain never went into recession and therefore Britain continued to see investment grow, albeit at a slower level than the American rates, so we did not have a recession and we did not therefore have the more dramatic rates of growth out of a recession. Equally, at the same time all round the world, I think as a result of the big investments in IT in the late 1990s, people have been more resistant to big investments in the first years of the 21st century.

  Q351  Kerry McCarthy: So what implications would you say the slow growth in business investment has for the growth of productivity and supply potential?

  Mr Brown: Again, we have to look at what is happening in the British economy. Rates of manufacturing productivity growth have been quite good as a result of the competitive pressures that have been exercised on manufacturing investment. Our productivity in relation to Germany and Japan has moved ahead in recent years. We have been catching up with France, but clearly we have got a long way to go to catch up with America. That is why our measures for enterprise have been very important to what we are planning to do for the future.

  Q352  Kerry McCarthy: Could you elaborate on that in terms of the Pre-Budget Report helping to move this situation along and stimulate business?

  Mr Brown: I was able to announce last Friday when we did our Enterprise Conference a major step forward in investment in science in this country which will add to the productivity of the economy. An agreement has been signed between the pharmaceutical companies, the National Health Service and our universities, including the Medical Research Council, to invest substantially more in the pharmaceutical industries and therefore in the research base of pharmaceutical industries in this country. As a result of that deal we anticipate half a billion new investment followed by another half billion later, and that is a major commitment to this country in a high productivity industry, the medical and biomedical industry, that has been made by some of the biggest companies in the world. Britain is becoming one of the premier locations for medical research for the future, particularly the testing of new drugs, and at the same time, of course, we are making big headway with more investment, public and private, in stem cell research. That is an example of areas in high productivity sectors where new investment is coming to this country and where we hope to be world leaders in the years to come.

  Q353  Kerry McCarthy: Do you think the need to fund pension fund deficits is a possible factor? Is that inhibiting business?

  Mr Brown: The general evidence is that while firms did not invest sufficiently in their pension funds in the late nineties funds are being put into pension funds now but it has not been a major inhibitor of investment.

  Q354  Kerry McCarthy: What sort of assessment has been done to enable you to make that judgment?

  Mr Brown: All the evidence is that firms recognise that they have responsibilities to build up their pension funds. If anything, what happened in the late nineties was that in a period of rising growth when pension funds looked sufficiently funded big firms did not invest and then the fall in the stock markets round the world meant that pension funds were worth less than they expected. However, there is no huge amount of evidence suggesting that business investment has been affected by the pension fund deficits. There is a chapter in the Pre-Budget Report, Annex A, paragraph A-92, which says that despite evidence that companies have continued to devote resources to funding pension deficits there are no clear grounds for supposing that this has exercised much material constraint on investment. I am just making the point that I think we agreed on, that round the world the increase in business investment has not been as fast as people expected, partly because the investment made in IT in the late nineties was very substantial indeed.

  Q355  Kerry McCarthy: Can I move on to talk about exports? There has been an expansion in world trade, yet the UK export performance has been described by the Bank of England as somewhat disappointing in recent years.

  Mr Brown: What has happened this year is what we talked about at the beginning when I had a number of questions about the British growth rate. The European area is our biggest export market. More than 50% of our exports go to that area. If growth in these areas, particularly in Germany and the Netherlands, is lower then they are taking fewer imports, particularly if it is domestic demand being affected, from our country and our exports are reduced. I have seen the figures that show that there has been a reduction in the growth rates of British exports to Europe and therefore they are below our projections. I have also seen figures that show that consumer demand was zero in Italy, grew by only 0.6% in Germany this year, and was zero also in the Netherlands, as I understand it, and that if three of our biggest export areas are not growing at all in terms of their domestic demand then they are not accepting imports to the same degree as before and therefore our exports are bound to be affected. Exports are lower than expected and exports are also lower than expected to the United States.

  Q356  Kerry McCarthy: Would you say the strength of sterling was a factor?

  Mr Brown: I do not think that that is such a major factor as it may have been in previous years. If I can just give you the figure, we had thought that the share of that growth of our exports would be 2.1% to the euro area.

  Q357  Kerry McCarthy: Do you accept that sterling is still over-valued?

  Mr Brown: Sterling is always a factor but I have never commented on the value of the exchange rate and I do not think people would expect me to do so on a day-to-day basis.

  Q358  Mr Fallon: Chancellor, can we turn to the public finances? When we took evidence on the PBR in November 2000 your then Chief Economic Adviser said to us, "Our policy is to have central forecasts based upon cautious assumptions. Our assumptions are cautious so that should always mean that the outturns are better than our projections". In each of the five subsequent budgets on both current receipts and surplus on current budget, in fact, your outturns have been worse than your projections. Why are you so bad at forecasting public finances?

  Mr Brown: I think on average since 1997 we have been in surplus on our forecasting.

  Q359  Mr Fallon: Your first three years were fine, but you have been wrong in each of the last five years after telling us that the assumptions are cautious.

  Mr Brown: I think, Mr Fallon, that overall we come out as being more cautious rather than less cautious. If you look at what happened in previous cycles, under your Government you were 6% out in one year.


1   See supplementary memorandum dated 12 January 2006. Back


 
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