Examination of Witnesses (Questions 340
THURSDAY 8 DECEMBER 2005
MP, MR JON
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
Mr Brown: What I said on Monday
in the House of Commons was that to meet our second fiscal ruleand
this is all investment we are talking aboutwhich 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
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
Mr Brown: We will do what we can
to help the Committee.
I can assure you that the departments that are involved in contribution
are the departments that contribute for local government services
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
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
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
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
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