Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 380 - 399)



  Q380  Peter Viggers: You have taken something like £40 billion out of the pensions industry, of course.

  Mr Brown: I do not accept that figure at all. I do not think you have any evidence for that figure.

  Q381  Peter Viggers: You are not proposing to take to take some £6.5 billion from the oil industry?

  Mr Brown: This is a completely different figure, if I may say so. The Dividend Tax Credit that you are referring to had a bias against investment. Your Government reduced the Dividend Tax Credit right down to, I think, 10% and we reduced it from 10% to zero. We actually provided compensation for both companies and for all the organisations that were affected by the change, and we reduced Corporation Tax from 33 pence to 30 pence as a result of the change we made. So companies actually had higher profits after tax as a result of the change we made, in which case they were able to fund their pension schemes.

  Q382  Peter Viggers: It worries me that it seems, certainly from questions yesterday, that the Treasury may think that the £6.5 billion to be taken from the oil industry is a kind of free shot. Do you think there is any relationship between taxation on the one hand and petrol prices and investment on the other hand?

  Mr Brown: I am sorry if the Conservative party are going to oppose this change. If you look at what has happened to the oil price, and any sensible person must look at the changes that have taken place over the last few years, when we had the change in the regime in the last Parliament, the oil price was expected by OPEC to be between $22 and $28 a barrel. It had actually risen a bit higher than that. Since then we have had a dramatic change in the oil price, and the oil price has gone up to $70, then to $60, and it is around $55 at the moment. Our assumption next year is in the order of $55. That is in the line of almost all independent forecasters, that the price is going to remain substantially higher. To some extent it is double what the OPEC range was for most of the years of the 1990s and early 21st century. In these situations you have to ask yourself what is the right balance between what is owed to the consumer and what is owed to the producer? If the oil companies have seen a transfer of resources to them in the last three years of something in the order—and this is the OPEC countries and the oil companies—of $1.2 trillion, which is money that consumers used to have that they are now paying in addition to the producers, then you have to ask yourself what is the right balance between consumption and production? Then you have to look, as you do that, at what is likely to happen, as you rightly say, to investment. We put in new exploration incentives for the development of the smaller oil fields in the North Sea, just as we did when we made the change previously. We increased the incentives for new investment in the North Sea to make the fields that we are talking about, the fields that we want to see developed, more attractive for the oil companies to do so.

  Q383  Peter Viggers: Reading the Pre-Budget Report, a great deal is made out of the importance of productivity. In the departmental annual report in July 2005 there was a claim that the UK has risen four places to 11 in the World Economic Forum's Global Competitiveness Report. In fact, if you read the World Economic Forum's Global Competitiveness Report, productivity competitiveness has actually declined from 7th ranking in 1997 to 13th in 2005. Do you think that the Government's burdens on business has had anything to do with that decline in productivity?

  Mr Brown: There are a lot of figures, if I may say so, about productivity. I think during one period of your Government we were something like 26th. The fact of the matter is that we have passed Japan, and we have now passed Germany in terms of our productivity, we are catching up with France, and therefore I do not accept the premise of your question. We are Becoming a more productive economy. There is no year of this government in which productivity has been negative. That was what happened under the previous Conservative Government. Under the Labour Government productivity has been rising every year. The latest estimate for productivity is that in this present cycle it is higher than in the previous cycle.

  Q384  Peter Viggers: It baffles me that in these different areas you seem not to realise the consequence of Treasury activity. I have been pondering this. I think the condition is financial autism, and I fear it is irremediable.

  Mr Brown: I think that is a bit offensive as a term to use to people with the condition of autism, and I would be very careful, if I were you, of using that term.

  Q385  Angela Eagle: I was listening to the tenor of Mr Ruffley's questions about independence and not being able to trust the Treasury to do anything earlier, and I wondered; it struck me that he seemed to have a view of the world in which the Treasury are all in a conspiracy to mislead the public and deceive Parliament. You have been one of the longest-serving Chancellors this country has been lucky enough to have. Has it been your experience that your Treasury colleagues are these venal sorts of persons?

  Mr Brown: I think people will at some point historically—even the Conservative party—recognise that we made the Bank of England independent and therefore devolved control of monetary policy from the Treasury. We have led the way in making competition policy independent of Government. I have now announced that the Office of National Statistics will be independent of Government and we will legislate to that effect. There are many areas of industrial policy we have made independent of Government. I believe that the mistake that was made previously was that politicians put the short-term interests of themselves before the long-term interests of the country. It is because we believe that it is the long-term interests of the country that come first that we actually made the Bank of England independent and made all the other changes, including in competition policy, and now in statistics policy. All the changes we have made were changes that could have been made by Mr Ruffley when he was in the Treasury in the last Conservative Government. None of these changes were made. They resisted Bank of England independence, indeed, voted against it in the House of Commons. There was no independent auditing of assumptions, and that is one of the reasons why fiscal policy went so wrong in the early 1990s, but I am not prepared for a situation which I think would be damaging to the country where somehow you handed over control of fiscal policy, just like we were asked to do with the European Stability Pact, to some independent body that is not responsible directly to Parliament. It is the Government that is responsible to Parliament for fiscal policy. That, I believe, is the test that we have got to meet in relation to budgets and to public expenditure, where we answer to the House of Commons, and I do not see much sense in passing over the major decisions about fiscal policy to some other body when the MPs are expected, through the Government's recommendation, to make these decisions on behalf of the country. It is one of the great principles of our parliamentary democracy that the House of Lords cannot impose taxation on the people, only the House of Commons, and that is why fiscal decisions, which are essentially about tax and spending, have got to be made by Governments responsible to the House of Commons.

  Q386  Angela Eagle: Would you say a bit about your new policies on deregulation which you announced, probably at the CBI conference, but which feature quite heavily in the announcement you made on Monday, and how you see those as contributing to future efficiency gains?

  Mr Brown: Whenever I go to America, the issue for American businessmen is regulation. If you go to Europe, the issue of European businesses is about regulation, and in Britain it is clearly an issue that we have got to deal with properly. That is why we have moved to this idea of risk-based regulation. In the past, the theory was that you would inspect every premise or inspect every procedure or require information and filling in of forms and inspection of every process. That is something that we can easily move away from. With a risk-based approach what you do is you look at where there is a risk, where there is evidence of a risk, and only in these circumstances do you require the full level of information or the full level of form filling or the full level of inspection. That, I think, allows us to have a different approach to regulation for future years, but I think this is a breakthrough that will influence Europe and America as much as it will influence Britain, and I think we are in the lead on risk-based regulation. I pay tribute to Sir David Arculus and Philip Hampton, who have produced reports on how we can make changes both in reducing the numbers of regulations and at the same time in applying the risk-based approach, and I think Britain is entering a period when we can actually make some major changes in the regulatory system, with, I hope, a consensus on this.

  Q387  Angela Eagle: Chancellor, you are quoted as saying a key factor in raising business start-up rates in the UK is getting women to start their own businesses, and in fact on page 55 of the Pre-Budget Report, paragraph 371, there is a section on women and enterprise, which talks about ensuring that all regional development agencies have a strategy for incorporating women-friendly business support into mainstream provision. Would you have a look at the fact that most RDAs are not geared up to understand what women-friendly business provision is, that women generally pay 1% more on average for access to finance than businesses that are not owned by women? They have very many particular requirements when they are entering into entrepreneurship training and support, including childcare. In my own region, the North West Development Agency is reducing the amount of money available for specialist women's provision from £400,000 down to £100,000 a year, which risks the specialist infrastructure which already exists. Could you have a look at the fact that, although we have a very progressive national approach to this, the way it is actually working out regionally because of these biases that exist is actually putting at risk the progress we have made so far?

  Mr Brown: I think the numbers of women and the proportions of new businesses started by women is a huge issue that we want to give some priority to. Again, if you look at America, which has a far faster rate of business creation than almost any other advanced industrial economy, the numbers of women, the proportion of women starting businesses is in the order of 50%, not 10%, 20% or 30%, as it is in some other countries. Whenever I have been at a business conference to look at business creation in the States, the large numbers of women who are there is something that is striking in comparison with business conferences in other countries. In Britain we have this Women's Enterprise Task Force, which is looking for the next three years at how we can increase the rates of business creation amongst women in the economy. There are key enterprise developments in the North West, which you are referring to, where female entrepreneurship rates have actually doubled in the last two years. So things are moving, but there is a lot more to be done. I remember being at one of the business conferences and one of the young, successful businesswomen who were there said that before she started her business, she had been uncertain about whether to join an accountancy firm or start her own business, and she had asked one of the leading entrepreneurs in Britain, who I will not name, whether she should go to the accountancy firm or start her own business. He had advised her to go to the accountancy firm and not start a business. The accountancy firm went bankrupt and her business, which she had actually then already decided to start, has been very successful. Sometimes even the best of us when looking at entrepreneurship are not giving the best advice to dynamic young female business people who can actually make a huge difference.

  Q388  Angela Eagle: Chancellor, I could not agree more, and in fact, the impressive figures in the North West have partially been delivered by an infrastructure that I think is currently under threat because of the North West Development Agency's lack of understanding about the specialist nature of this support. I wonder whether you would consider whether we actually still need a national women's enterprise programme which can ensure that in this specialist but vital area we do not have to go backwards before we can go forwards again.

  Mr Brown: I am very happy to look at what you are suggesting. My notes here say, when I asked about this, that the rate of female entrepreneurship has doubled in the North West in the last two years, and that is a great success, but it builds on the success in the North East, where female entrepreneurship doubled in the previous two years. So in both these regions things are moving, and therefore anything that we can do to help that forward rather than impede it is something that I would like to look at. If you would like to ether have a meeting with me or with Alan Johnson, the Trade & Industry secretary, we can talk about these things.

  Angela Eagle: Thank you very much.

  Q389  Ms Keeble: Chancellor, the PBR projections assume that current public spending will grow at 1.9% a year from 2008-11. Is it reasonable to assume that that is the overall envelope that will underpin the forthcoming Comprehensive Spending Review?

  Mr Brown: I think when you see the first report on the Public Expenditure Review we will bring out next year and when you see the final report of the Public Spending Review the full figures will be announced. These have been our working assumptions for a number of years, but these are not necessarily the final figures.

  Q390  Ms Keeble: Looking within that, the IFS estimates are that, given its commitments on aid, NHS and education, that public spending outside those areas would have to go up no more than 0.8%. In fact, your own figures are more robust than that because they show that if you take health-related spending and education, between now and 2011 other areas of spending actually reduce slightly as a percentage of GDP. How do you manage to sustain public services and what sort of choices will you be making within that very tight framework?

  Mr Brown: We have initially a review on the efficiency and value for money issues that can be addressed in the Comprehensive Spending Review. That review includes a zero-based review of our asset base, what the Government owns and what the Government may decide to sell off. We have a target of £30 billion of asset sales by 2010. That is something that we will be looking at as to whether we can increase that. So there are a lot of decisions still to be made on the road to the final decisions about the Spending Review and I would not presume the figures that you are suggesting.

  Q391  Ms Keeble: But the zero-based approach, if you assume big blocks of spending, which are in a sense demand-led, certainly pensions would be and that is one of the biggest areas, and also age-related health spending, that leaves you with quite tight areas for looking at your zero-based budgeting. I would ask again, what kind of priorities are you going to be looking at?

  Mr Brown: I think you are presuming the conclusions of the first part of our review, which is the study we are doing about both government assets and the zero-based review to see things that Government might do less of in the future. So the first stage of the review will be published next summer, and I think you might be in a better position to look at what resources may be available to be allocated to the other services then. I do not think you would expect me to come along to the Committee today and announce our spending plans for 2008. After all, we have a review that is taking place in 2006-07 and then a set of decisions to make between 2007 and 2008, and then we will make our final decisions.

  Q392  Ms Keeble: You have talked today also about capital spending, and obviously the very substantial capital spending on schools and hospitals is very welcome. However, there are two areas, one which the OECD says we have under-performed on, which is transport, and the other, which the Barker review picks up on, which is housing. Both of those are potentially enormous areas for capital spending. How, again, do you fit that into a very tight spending round?

  Mr Brown: Make no mistake about it, and I think it should be clear to the Committee, public investment is going to increase. We are committed to the increase of public investment. Our second fiscal rule can be met continuously with an increase in public investment. I have given you figures showing that public investment, which was £5 billion in 1997, and was £18 billion in 2004-05, £26 billion in 2005-06, will rise about £30 billion in future years, and that is a major increase in public investment that is still to take place in this country. The reason we want to make that investment, as I think right across the country, in constituency after constituency, people recognise, is that there is a great deal of work to be done in transport and infrastructure: we have work to be done for the Olympics and for sport, we have economic regeneration that we wish to take place in areas where change is itself taking place, and we have to complete our programme of investment in hospitals and schools. So we are in a position fiscally and in a position because this is the right thing to do to increase the levels of public investment in the economy. I would not like the Committee to go away with the misunderstanding that we are not doing that. We are increasing public investment in the economy, because it is absolutely necessary for the health of constituencies and regions in this country that we do not make the mistake of past years, which is to neglect investment in the long-term infrastructure and services of this country for the future.

  Q393  Ms Keeble: Given that it is likely to be a tight spending round, and I think all the figures have set that out very clearly, what then happens to public services which people have obviously grown accustomed to if you have some external pressure, for example, a slowdown in growth or some policy commitment that would require the proceeds of growth to be shared with tax cuts as well as with public spending?

  Mr Brown: Let me put it this way: we plan to renovate 12,000 more primary and secondary schools. That is a programme that we have set in motion. That is a programme that will continue and that is possible within the strict fiscal discipline that I have set. We will be prudent and we will be cautious and we will maintain that fiscal discipline that has been a hallmark of this Government over the last few years. We have met our fiscal rules and continue to meet our fiscal rules. It is because our second rule is designed to borrow for investment as long as you have a sustainable debt ratio that we are able to increase public investment in the economy in future years. The decisions about the level of spending for services, in other words, the current expenditure on services, are decisions that we will make in the Spending Review, and we will make them within our fiscal rules, and we will make them by exercising the tough fiscal discipline that I am determined to continue for this economy, but that has not precluded us increasing our investment in our infrastructure and social and economic fabric, and that investment will continue. The disagreement will be over the next few years between those of us who have two fiscal rules, where we wish to achieve a balance of current expenditure and have a sustainable debt level, and those who want to add a third fiscal rule, which would be an annual requirement, as I understand it, that growth in the economy has to be higher than the growth rate of public expenditure. I was just pointing out on Monday that if that rule were applied this year, that would mean a £12 billion cut in public expenditure, and it would require next year a £17 billion cut in public expenditure, and that would mean that we would not be able to afford the investment in public services that is taking place. Whatever you call it, sharing the proceeds of growth or whatever you call it, in terms of the fiscal rule, an annual rule, which is very similar to the European Stability Pact, by the way, that prevents you actually being able to invest in your public services, particularly in a year like this, is, in my view, damaging for our infrastructure but it is also damaging for the quality of public services in the economy and can be damaging for the economy itself.

  Q394  Ms Keeble: Turning to the Turner report, your Pre-Budget Report noted that the proposals cost about £14 billion in 2020 compared with your own plans. I want to ask you specifically about the citizen's pension proposals. Can you say, given the pressures already on age-related spending and around pension spending, what is your view specifically around the proposals for the citizen's pension and the affordability of that?

  Mr Brown: That is an issue that we have not got to discuss as a result of the recommendations of the Turner report, and I am not going to do anything other than encourage that discussion on the citizen's pension and on women's pensions in particular to continue. I know and I understand that for many years women have had a difficult time where they have not been able to build up contributions or they have had interrupted periods of earnings. It has deprived them of getting the full pension that large numbers of women, as you know—and the figure are very big indeed—do not have, but obviously, every proposal has to be looked at in terms of its affordability, and I think I would be failing in my duty as the Chancellor if I did not point out that there are financial implications of that, implications for our fiscal position of the costs of some of the measures that are included in the report.

  Q395  Ms Keeble: Can I just say that in addition the issue of pensioner poverty, particularly for women pensioners, as a result of the way the State Pension operates currently, there is also the issue of financial independence for women pensioners, so that, as I understand it, with the citizen's pension, both partners in a married couple would have a pension entitlement. Would you accept that that is an important part of the proposal?

  Mr Brown: The proposal, if I remember it correctly, is for a women's pension after the age of 75, and therefore it is not strictly the equality that some people have said is the issue. We have approached this as a Government in the last few years as an issue of removing the poverty that many widows in particular have had to endure, and where there has been no proper provision for their own pension and where their husband or their partner has not built up sufficient industrial and private pension entitlements and where they have very few savings, that very big group of women and widows in particular have been forced into poverty as a result of there being no other provision. We have tried to solve this problem for this generation of pensioners. Two-thirds of the people who get the pension credit are women. I think it has taken a large number of women pensioners who might otherwise have been in poverty out of poverty and I believe it has helped reward the small savings that large numbers of these women have by maximising their income as a result of taking into account their savings as well. So for this generation of women pensioners, particularly widows in their 70s and their 80s, the Pension Credit has been a means by which they have got additional income. What the Turner report is about is a debate about the next generation and the generation after that, and I think we have to look at all these proposals and see whether (a) this is the right way forward and (b) whether they are affordable.

  Q396  Ms Keeble: I would certainly accept the shift from wallet to purse, which has been very welcome, particularly through the operations of the various Tax Credits, Pension Credits the various other tax credits. Would you accept however, Chancellor, that the improvement in women's income has been achieved primarily through means testing and that there are issues there about women having to comply with some quite rigid reporting requirements which have perhaps not always been universally welcomed?

  Mr Brown: I have to say that we have tried to enable people to make their applications by telephone rather than having to fill in forms themselves. We have tried to limit the amount of information that people have to give. We have tried to find a better system of taking into account people's savings, so that while it is an income test, it is not a test that covers everything that people have as assets. We have also tried, in a situation where we calculate that pension credit for a year, to calculate that for more than a year, for a period of years, so that people do not have to fill in information each year. So we have tried to change the system but, at the end of the day, what we have been trying to do is to help that generation of pensioners who should have been better provided for, who do not have occupational pensions of their own, whose husbands or partners did not accumulate large amounts of savings or occupational pension, and we have been able to focus support on widows in a way that has not been done before because we have had the Pension Credit. In this debate that goes ahead, I think people should acknowledge that there are hundreds of thousands of widows who have benefited from the system, and it is precisely because we have been able to focus resources to these widows that we have been able to take that large number of people out of poverty.

  Q397  Mr Mudie: Going back to the Turner report, one of the five principles, indeed, the first principle you put down, is that it must promote personal responsibility. The main proposals for the 21st century are to continue with State Pension as one of the pillars. The second pillar is a government stakeholder scheme, low-cost investments, with an 8% investment. The principle of both from Turner seems to be to leave it to Government. "We will give you a State Pension and secondly, pay 8% and that will finish your involvement." How does that promote personal responsibility?

  Mr Brown: I think the main recommendation of Turner is actually the encouragement of private savings. He has this proposal about auto-enrolment. Over the next few years people need more information, they need more encouragement to enable them to build up their own savings for retirement, and of course, people have a range of different savings that they prepare for their retirement. The main one will of course be their own pension. What I would like to do is to look in detail at the Turner proposals that encourage both employees and employers to make provision for their pensions and look at what different decades have put aside for their pensions so that they are satisfied that by the time they do retire they have proper provision. Most people will make their own decision about what proportion of their pre-retirement income they will need in retirement, and they will take into account whether they own their house in full or still have a mortgage, they will take into account the other savings, sometimes shares, that they have, as well as taking into account what savings they have. The main recommendation of Turner is actually to encourage that individual saving, and I want to help him implement recommendations that would help people save more themselves during the course of their working lives. But the state and governments will always have responsibility to ensure that there is a proper framework for pensions savings, and we have to look at his recommendations, including the cost of them, before there is a final decision, but that is a debate that is going to continue in the country.

  Q398  Mr Mudie: I accept that, but Turner actually seems to feel he has satisfied the debate and the problem by saying to people, as you have just confirmed, there will be a State Pension plus 8% and that will be sufficient. What you are talking about is making people more responsible and willing to actually participate in their portfolio. But that is not what Turner is suggesting. Turner is suggesting a stakeholder pension which will be either run by the Government or an agreed stakeholder provider, with no input from the individual either in terms of choosing their investments or choosing the level of their investments.

  Mr Brown: To be fair to Lord Turner, his national savings scheme is designed to encourage more individual saving by people preparing for their retirement, to encourage people to start saving at a far earlier age to give people the incentives to do so, and create a framework within which that can happen. One of the issues is that people have proper information about what their pension entitlements are going to be, and one of the problems, I think, for people in their 20s, 30s and 40s is that they feel at the moment they do not have the full information on which they can base their decisions, and we need to disseminate more information, either through the pension provider or through better systems of doing so, so that people can then make a decision about how they save more toward their retirement. I think Lord Turner's report is an encouragement which I welcome for people to look at what individual saving they are doing themselves.

  Q399  Mr Mudie: Is the Treasury giving any consideration to incentives that would match people's increased contributions to a private pension scheme a" la Turner?

  Mr Brown: We have a number of pilots looking at how people can save more in which we are giving in some cases £1 for £1, in other cases 50 pence for £1. This is in low-income communities where saving has been difficult, and we are trying to make it worthwhile for people to save more, or to save at all, which is something that has not been happening. We are hampered by having large numbers of people who do not even have bank accounts still in this country, but the experiments or the pilots that we are doing have been relatively successful in encouraging more people to save.

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