House of COMMONS









Tuesday 19 July 2005



Evidence heard in Public Questions 1 - 102





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Oral Evidence

Taken before the Treasury Committee

on Tuesday 19 July 2005

Members present

Mr John McFall, in the Chair

Lorely Burt

Angela Eagle

Mr Michael Fallon

Damian Green

Susan Kramer

Mr Andrew Love

Kerry McCarthy

Mr George Mudie

Mr Mark Todd

Peter Viggers


Witnesses: Rt Hon Gordon Brown, a Member of the House, Chancellor of the Exchequer, Sir Gus O'Donnell, Permanent Secretary, Mr Jon Cunliffe, Managing Director, Macroeconomic Policy and International Finance, Mr Nick Macpherson, Managing Director, Budget and Public Finances, Mr Jonathan Stephens, Managing Director, Public Services, and Mr Michael Ellam, Director, Policy and Planning, HM Treasury, examined.

Q1 Chairman: Chancellor, good morning to you and your team. Welcome to this, the first evidence session of the new Parliament. We have friends old and new for you this morning to question you. Can I congratulate Sir Gus O'Donnell both on his knighthood and elevation to Cabinet Secretary. Welcome, everybody. Chancellor, this is about the G8 and other international issues and a number of the papers that you have given us this morning. Can I start on the international agenda. Sorry, Chancellor, could you introduce your team.

Mr Brown: Thank you very much, Chairman. Can I start by saying how pleased I am to be able to meet this new Committee so early on in the Parliament and to welcome the new Members of the Committee and also congratulate you and Mr Fallon on your re-election as Chairman of the Committee and Chairman of the Sub-Committee. I wanted, if I may, to introduce my team and to make some opening remarks that I think you will find relevant to the discussion today. On my right is Sir Gus O'Donnell, who is Permanent Secretary of the Treasury, of course, but, as you rightly say, will be head of the Home Civil Service from 1 August. On his far right is Nick Macpherson, who is the Managing Director of Public Finances. Next to him is Jon Cunliffe, who is the Managing Director of Macroeconomic Policy and International Finance. To my immediate right is Mike Ellam, the Director of Policy and Planning. To his right is Jonathan Stephens, the Managing Director for Public Spending. If I may give some initial remarks which I think will inform the Committee's discussion. We are submitting to Parliament today the Government's Annual Report on the IMF. It sets out the G8 decision on debt relief agreed at Gleneagles. We appreciate the all-party support for debt relief, aid and trade, as we progress from the G8 at Gleneagles to the UN Special Summit in New York in September and the World Trade talks in Hong Kong in December. On debt: first 18, then 27 and potentially 38 highly indebted countries will benefit from the offer of 100 per cent debt relief on the 55 billion of debts owed to the IMF, World Bank and African Development Bank. We will not support new conditionalities being added to this debt relief. I can confirm that for up to 30 other countries, subject to our assurance that resources will be used for effective poverty reduction, Britain will unilaterally pay its share of World Bank debts, and we invite other countries to join us in doing so. The Communiqué of the G8 states aid for Africa will double by 2010. In pledging to reach 0.7 per cent of income by 2015, European Union countries have stated that they will double aid from 40 billion to 80 billion by 2010. I can tell the Committee that looking forward to the UN Special Summit and beyond we want to work in partnership with African and other countries to prepare, develop and play a part in financing universal free primary school education and the attainment of the Gleneagles Summit's objectives for building health capacity, including as close as possible to universal access to treatment for AIDS sufferers by 2010. Maximising the availability and minimising the costs of vaccines and drugs is a central issue, so a G7 report on advance purchase mechanisms for drugs will be published by the end of the year. Within the next few weeks we expect the go-ahead for the International Finance Facility for Immunisation, and the G8 have agreed a working party on the setting up of the proposed International Finance Facility which would help some countries meet their aid targets and help others move faster in reaching them. On climate change, following the Communiqué I can announce that a major review of the economics of climate change will be undertaken by Sir Nicholas Stern, the head of the Government Economic Service. We will work with the World Bank in an innovative project to institute a new fund supported by fresh incentives for energy efficiency and alternative sources of energy for developing countries. In expressing its outrage against the terrorist bombings in London, the G8, and then the European Union Finance Ministers, also discussed counter-terrorism and counter-terrorist finance. I can announce that Britain will give support to do what we can to ensure that across Europe there will be no hiding place for those who finance terrorism. We have an undertaking from the European Union that they will make an offer to other countries who need advice and technical assistance to build up anti-terrorist finance capacity. A group of experts on tackling global terrorism financing set up under our G8 Presidency will report to Finance Ministers in September. Within Britain, assets for 45 accounts have already been frozen and we have established a group across Government to identify and vet further targets. While four years ago just 30,000 reports of suspicious transactions were sent to the NCIS, last year there were 15,000 and, of those relating to terrorist finance, more than 20 per cent either led to a longer term investigation or contributed substantially to an existing one. It is essential that the suspicious transactions regime be both proportionate and effective. The Home Secretary and I have asked Sir Stephen Lander to report by March 2006 on how these investigations of suspicious transactions can be best pursued under the new Serious and Organised Crime Agency. The House is being told separately that we are making available today 20 million from the reserve to the Home Office for the exceptional costs of providing support to victims and for policing and other activities that arise from the attacks in London on 7 July. This will include funds to cover the donation to the London Bombings Relief Charitable Fund which the Home Secretary announced yesterday. Overall spending on counter-terrorism and resilience, which was one billion in the year of September 11, was 1.5 billion last year and will be 2.1 billion by 2007-08; rising substantially, therefore, in the next few years. Chairman, the Committee will also be interested in a further matter on which the Chief Secretary is making a written statement to the House today and I thought I should inform the Committee because it is the first chance I have of doing so. As the Committee will be aware, the start of the next spending period will come ten years after the first Comprehensive Spending Review. To ensure we are equipped to meet the challenges of the next ten years, we are now instituting a second Comprehensive Spending Review to consider from a zero base the next stage of meeting our public service objectives. With this long-termist approach, which rejects the short-termism of the past, a report will be made on these public spending challenges in 2006. The Government will report on the next three-year Spending Review covering 2008-2011 in 2007 and will hold departmental allocations to the agreed figures already announced for 2007-08. The Committee also asked the Government to "inform Parliament in a timely fashion of its preliminary analysis that the (economic) cycle has ended" and said that to delay making an announcement, potentially for several months, to the next Budget or Pre-Budget Report, "would not be in the interests of informed public debate". I have no announcement to make about the end of the current cycle, but following the significant historical updating by the Office of National Statistics on 30 June, it is right to update what has been a provisional judgment that the current economic cycle started in 1999-2000. Growth of non-oil gross value added, the relevant measure of output used by the Treasury in assessing the economic cycle, was thought to have grown by 3.4 per cent in 1997, 2.4 per cent in 1998, 1.8 per cent in 1999 and forecast growth of 2.9 per cent in 2000. The ONS now believe that gross value added grew far higher and more substantially by 3.2 per cent in 1997, 3.4 per cent in 1998, 3.1 per cent in 1999 and 4.2 per cent in 2000, significantly faster growth above three per cent in every year. With the average figure for growth between 1997 and 2000 previously assessed at 2.6 per cent, but now known to be 3.5 per cent, all the evidence now points to the conclusion that the economic cycle started in 1997-1998. I will ask the NAO to audit the end date of the previous cycle as to whether our judgment is reasonable and cautious. We will continue to ask the NAO to audit trend economic growth to check that it remains a reasonable and cautious assumption. Thank you, Chairman.

Q2 Chairman: Thank you, Chancellor. In your report, Evidence of the UK Economic Cycle, I note you say: "It is a positive response to the view expressed by the Treasury Committee that the Treasury should not confine publication of material relating to its assessment of the cycle to the Pre-Budget and Budget Reports". I think that is a good start for the new Parliament and I hope we continue those sorts of measures.

Mr Brown: I will be happy to answer any questions you have got.

Q3 Chairman: On the issue of terrorist financing, you mentioned NCIS. Certainly in the last few years there have been representations made to me and other Members of the Committee by the financial institutions that when reports are made to NCIS there is little feedback and there seems to be a lack of co-ordination throughout Government on this issue. I hope Sir Stephen Lander takes those issues on board and we get more coherence throughout Government Departments on issues such as that. That is certainly a view that has been expressed by the banks and the financial institutions, Chancellor. I wonder if you could consider that.

Mr Brown: Perhaps I should say on that, Chairman, that if there were 150,000 suspicious transaction reports submitted in the last year and 20 per cent at least of these have been proven to be of some use, you are talking about 30,000 that have been of some use and that is a very substantial figure. What we want to do is to look at how in future we can have a better system for dealing with this. This is what Stephen Lander will look at and I will pass your views on to him as well.

Q4 Chairman: Thank you very much. You mentioned the UN Millennium Declaration Review Summit, which is obviously a very important landmark on the debt issue. What message will you be taking to that Summit and what outcomes do you hope to achieve there?

Mr Brown: As you know, the UN Special Summit is to deal with the reform of the Security Council as well as with the meeting of Millennium Development targets. As you have already seen, a lot of the debate running up to the Security Council meeting is about the composition of the Security Council in future. I do believe, however, that the Secretary-General with the report that he presented on the Millennium Development Goals is intent on making further progress on all the issues that were discussed at Gleneagles. I hope by that time, in advance of the IMF and World Bank meetings at the end of September, we will have full agreement from all the shareholders of the IMF and the World Bank about the debt relief package that we have been discussing over the last few months. It was approved in detail by the G8 at Gleneagles and it is now being discussed by the IMF Executive Board and by the World Bank Board. I am confident that there is goodwill about resolving these issues. I think when we get to the UN Special Summit and the World Bank and IMF meetings the debt relief issue, which has been a burden on the countries and an unsolved problem for really 20 years, may be an issue that we can bring to a successful conclusion, at least in the case of these 38 countries. Our offer to give another 30 countries debt relief is very important, in my view, and I hope that other countries will follow us. On aid, the issue is the delivery of the promises that have been made and, if possible, speeding up the promises. That is why our International Finance Facility proposal, which will be discussed in September, is very important to that. I hope when we get to the IMF and World Bank meetings we will also have agreement that to meet the Millennium Development targets on primary education for all, which I mentioned in my opening remarks, and the reductions in infant and maternal mortality, there will be a new impetus given to the fast track initiative of the World Bank on education and we will be able to report progress on advance purchase initiatives on health.

Q5 Chairman: Thank you for that. One aspect of the debate that concerns me a little bit is the expectation that this issue of debt, aid and trade, can be solved pretty quickly. What are you doing to, in a sense, dampen the expectations, to indicate to people that this is a long, arduous and tortuous road? I am scheduled shortly to go out to Ghana to look at the Poverty Reduction Strategy of that country. I know progress has been made but I am assured before I go that there is a long road ahead on this. How can we ensure that we keep the confidence of the public whilst making the slow progress that is inevitable on issues such as this?

Mr Brown: I think it is very important to explain to people that the target of universal primary education, which is one of the Millennium Development Goals, would not be met under existing rates of progress in Sub-Saharan Africa for 100 years. While we have enormous progress in countries like Tanzania where they will have 100 per cent primary education involvement by next year, in Uganda where educational involvement has trebled, and in Kenya where I think it is true to say one million children turned up for school out of the blue almost the minute that they announced primary education was free, there are many countries that are still way behind the target for 2015 who need exceptionally increased resources. They will be part of this new fast track initiative that has been agreed by the World Bank where, in addition to countries that have already been chosen for the initiative, another 20 countries will be added and I hope we can agree that further money will be put into this fund both by individual countries and by some of the international organisations. There is an impetus needed to the fast track initiative and the complacency that people may be tempted to have after Gleneagles is dented by this one fact, that it would take 100 years to meet the Millennium Development objective.

Chairman: Chancellor, thank you.

Q6 Mr Fallon: Chancellor, thank you for your kind words at the beginning. Turning to your Economic Statement, would you confirm that eight years after the event by moving the start of the cycle forward by two years, that helps your figures by around ten million?

Mr Brown: You are talking about the Golden Rule actually. I would update that at the time of the Pre-Budget Report. As you know, the cycle has not ended.

Q7 Mr Fallon: By moving the start of the cycle forward by about two years you are giving yourself the advantage of around ten million, is that right?

Mr Brown: We would meet the Golden Rule irrespective. This is an exercise that was required of us in the Treasury because the statement about the cycle was always a provisional one. Sir Gus O'Donnell was before the Committee and he was emphasising when this was discussed last by the Committee that this was a provisional judgment. In fact, many of the academic experts outside this Committee and outside the House - the Independent Institute of Fiscal Studies, Mr Weale of the NIESR - have said that their view was probably that the cycle had started in 1997 and not 1999. The most recent historical data is something that you as a Committee might want to look at, but it is absolutely clear when you look at it that instead of us going through a cycle from 1997-99, the growth rate in each of these years was above three per cent. On a superficial glance that would make you want to reconsider it. On the detailed work that is contained in this document, we are giving historical accuracy to what other people have suggested was something that we should look at. Now what had been a provisional judgment turns out to be one where the cycle started in 1997. As far as its affect on the Golden Rule, on the fiscal position, that is a matter for the Pre-Budget Report.

Q8 Mr Fallon: But the redefinition of the cycle does help you meet the Golden Rule, not make it more difficult.

Mr Brown: My view is it would meet the Golden Rule anyway. Maybe Sir Gus wants to explain the historical revision and why it is significant and why it is in the form of this paper today.

Sir Gus O'Donnell: If you remember, when I came before you in 2002 - quite a long time ago now - basically I explained that we were making a provisional judgment of 1999 as the start date, but I said then the ONS was capable of changing the GVA figures quite substantially and I said: "When that happens, we will have to go back and revise when we think cycles were". I actually warned the Committee very clearly that if there were changes to the GVA numbers we would revise our position. At that time, Martin Weale was arguing that 1997 might well be the start date and I said that was quite possibly true because what happened was we had this growth period and it had slowed a little, got towards trend, but now on the GVA numbers that the ONS have produced we know that it did not slow very much, it never went decisively through tend, so it has basically been one long upswing since 1997.

Q9 Mr Fallon: On your other decision to postpone the Spending Review, how will you dispel the suspicion that bad figures take longer to add up?

Mr Brown: It is nothing to do with that. This was exactly what we did in 1997. We decided in 1997 that we needed a long-term Comprehensive Spending Review to look from a zero base at both the trends in public spending and the challenges. Ten years on, because the next Review would start in 1008, it is the right time to do exactly the same again. I would have thought the whole Committee would applaud the idea of a zero-based review and look at the challenges ahead. I have got to say, in looking at the challenges ahead, and I would have thought this is subject to cross-party agreement, if you take what is happening to the British economy and British society, the demographic trends are a very substantial rise, 250 per cent actually, in the population of over-85s between now and 2030, and a 50 per cent rise in the numbers of 65 year-olds between now and 2030, so a very substantial demographic shift has got to be taken into account in future spending rounds. The other thing I think we have got to look at is the effect of competition from Asia and whether our priorities for investment are right. As a result of that previous Comprehensive Spending Review, we raised spending from 0.8 per cent of GDP on investment to 2.2 per cent now, so we have trebled the share of GDP going to net public sector investment. Again, in my view at this point it is important to look at whether the investment that we are making in infrastructure or science, where it is capital investment, is at the right level or whether, facing the trends and the changes that are resulting from competition from Asia, we either have to do more or less. That is a big question that a long-term review has got to address. I would have thought there should be no difference between the parties on this need to look long-term, to take a ten year perspective. If you take research and development and innovation, we are spending 1.8 per cent of our GDP as European nations on R&D but Japan is spending three per cent and America is spending more than us as well. Again, it is a good question, looking forward ten years ahead, what sort of Government expenditures alongside the private sector are going to be necessary because in a world where global production is moving we are going to be tested on whether we have the value added, we have the knowledge-based industries, so that is an issue for a future spending round as well. I do not think there is any doubt that these long-term trends have got to be looked at. You need to do it in the way that we did in 1997-98 with a Comprehensive Spending Review and that is the background to our decisions. As far as confirming the allocations for 2007-08, that is exactly what we did in 2004-05.

Q10 Mr Fallon: Thank you. Turning to the IFF, which of the major EU countries have actually signed up to the IFF?

Mr Brown: Of the four members of the G7, France and Italy have indicated their support for it. There is a group of France, Britain and Italy who have been supportive of moving ahead on the International Finance Facility out of the four members of the G7. We have still to persuade Germany to sign up to this in detail. We are discussing this with the rest of our European Union colleagues but our first discussion was to be in the G7 and then our discussion was to take place beyond the G7. I may say that the International Finance Facility for Immunisation, which is the pilot project which is the project that if we front-loaded four billion of expenditure on vaccines could save five million lives between now and 2015 according to all the reports that have been done on this, including by the Gates Foundation, has got the support of a large number of countries both inside and outside the G7. It includes countries as far spread as China, South Africa and Brazil who are supporting this IFF, Canada is supporting it, and many of the European countries. It is a joint partnership with the Gates Foundation. The level of support for an International Finance Facility as reflected in the one on immunisation is very wide indeed.

Q11 Mr Fallon: Okay. Finally from me, the Gleneagles' work programme includes work on an air ticket tax. Can you clarify the UK's position on this? Would this be hypothecating the revenue from our existing Air Passenger Duty or would it be increasing it?

Mr Brown: No, it would be hypothecating revenue from the existing ----

Q12 Mr Fallon: So it would not increase our Air Passenger Duty?

Mr Brown: The issue for other countries is quite different because they do not have an air ticket levy.

Q13 Mr Fallon: We would not increase ours?

Mr Brown: That is not the plan. The plan is to hypothecate existing revenue for the International Finance Facility but it would be dependent on an agreement to the International Finance Facility going ahead.

Q14 Angela Eagle: The US has been very sceptical about how the IFF proposals would fit into their budgetary constraints. Is it possible that the IFF could proceed without US involvement? Do you feel that you are at the stage where that might be happening and, if so, when?

Mr Brown: The great advantage of the International Finance Facility is that it allows countries to front-load their commitments to aid. It is not too dissimilar from other mechanisms that have been used in the past and it is certainly a bold initiative. The American view is that their budgeting is on an annual basis and it cannot be on a multi-annual basis. We wanted to wait until the G8 discussions were completed to decide how we should proceed. It is clear that there is a group of countries who wish to move forward and a group of countries who feel it is difficult for them to move forward and that is what we are now discussing. The G8 actually agreed to a working party of all its members to look at these issues and that working party will report. There seems to be very little difficulty on the technical feasibility of it. There is an issue about its scoring for public spending purposes which is being discussed at the moment by the European statistical authorities. I am in no doubt that if we are to meet the European target of doubling aid by 2010 we will need this International Finance Facility for the contributions that other countries are making and it would enable us, as Britain, to speed up our contributions and make them more effective in the short run.

Q15 Angela Eagle: The idea of front-loading is good to get things going and, particularly where so many lives are at risk, it makes a great deal of sense. Do you worry that if there is a success in front-loading there might then be a shortfall later on in the medium-term with people's aid?

Mr Brown: No. I can see that is an issue. First of all, we are committed as the major objective to meeting the Millennium Development Goals by 2015. If we cannot front-load money between now and 2015 our major objective of meeting the Millennium Development Goals will not be achieved and, therefore, it makes absolute sense to front-load your finance to do so. As far as what happens after 2015, it seems to me obvious that there are many additional countries who will become donors. In the last few years, countries have moved from being recipients to being donors. Russia is a classic case where it is now a donor in ODA. There are other countries in the next few years who will become donors. I have got no doubt that the ability to finance Overseas Development Aid after 2015 is safeguarded both by that and by the announcements that we have made that we will not let our contributions to the IFF affect our ability to give aid in the future.

Q16 Angela Eagle: In terms of the more specific IFF for Immunisation, you have been able already to announce that the UK, France and Sweden can go ahead and provide this £4 billion in partnership with the Gates Foundation, et cetera. Could you say a bit more about how you see that proceeding. Do you think that it is the first example almost of approaching an international hypothecated tax or agreement that might actually form a model in the 21st Century for dealing with transfers across the globe in order to assist those countries that have particularly fallen behind?

Mr Brown: I think the innovative things that are happening are, first of all, the International Finance Facility for Immunisation, which we hope will get the go-ahead in the next few days actually. The second thing that is happening which is innovative, which has cross-country co-operation, is the discussion about advance purchase mechanisms for vaccinations or for other forms of healthcare, drugs and treatments. If you look at it this way: if in countries like Mozambique, Tanzania or Kenya, some of the countries I visited a few months ago, suffering from high numbers of people with malaria needing either a vaccine or treatment, a vaccine becomes available they are not able to afford it, but if there is an international purchase agreement to guarantee the purchase of a certain amount of drugs in advance then not only will the development of that drug happen but we will be in a position at the end of it to see the price of that drug come down. That is why the work that is now being done on advance purchase mechanisms, like the IFF, is revolutionary in my view and it means that the international community can finance the development of drugs in partnership with the pharmaceutical companies but by the methods by which it finances the development of these drugs it can get the price down. By guaranteeing a market for these drugs for countries that otherwise could not afford them, many lives will be saved as a result. As far as the International Finance Facility for Vaccination, that is unrelated to the air ticket levy, it is not going to be financed by that means, it is going to be financed directly by contributions.

Q17 Angela Eagle: Finally, you have talked about the meeting in New York and looking at the future shape and reform of the Bretton Woods institutions. Do you think that some of the innovative agreements that are going on cross-country have lessons for how we might be able to reform the Bretton Woods institutions to make them fit for the 21st Century rather than a reflection, as they are at the moment, of the situation that existed after the Second World War?

Mr Brown: We have put forward quite detailed proposals for the reform of the IMF and the World Bank. We believe in contrast to what the purpose of the IMF seemed to be after the Second World War as dealing with balance of payments problems of individual countries in a fairly sheltered international economy, the main role of the IMF in future is to ensure that there is proper transparency in the operation of the world economy. Individual countries by codes and standards are encouraged through the surveillance of the IMF to be transparent in the way they operate their fiscal, monetary and other policies. I believe that the IMF should have a stronger independence for that surveillance function for the future. I believe that if you look at Africa, but also Asia, where there have been financial crises that have never been identified in advance over the last few years where simply the publication of information and a requirement to do so would have prevented a problem becoming a crisis, the case for the IMF reforming itself is very strong. I think some of the allocation functions of the IMF and the World Bank could then be brought together. If you are looking ahead, clearly the world is so different from what it was 50 years ago. It is a global open economy where before it was sheltered and protected, but the problems that countries have to deal with I think require greater transparency in the future. Anybody looking at corruption in Africa, far less looking at fiscal failures, knows that transparency and the incentive to transparency that an international institution could provide would be one central means by which some of their problems could be addressed.

Q18 Chairman: Chancellor, can I ask you, on the IMF we have the report, A Stronger Global Economy, from HMT and in that you mention: "The UK will support the strengthening of country ownership as the IMF reviews its conditionality and also seek closer collaboration between IMF and World Bank, particularly implementing the new joint debt sustainability framework". What do you mean by "strengthening of country ownership"? The debate on poverty reduction strategies and others is that there is an imposition from outwith, particularly demands for privatisation, for example, and some of these countries when you visit them say, "We cannot have a hope of getting up to standard on trade when we have got these impositions put on us". There is this dichotomy between what the World Bank and IMF are saying they are going to do and what the reality on the ground is. What do you mean by that?

Mr Brown: First of all, I think there are some misunderstandings about what happened. For example, I know that the Tanzanian water programme is one that is regarded as an example of the World Bank, the IMF or international institutions forcing upon the Tanzanian Government a course of action it did not want to take. In actual fact, I have heard President Mkapa explaining that it was their decision and their wish to organise the supply of water in that particular way. We must be sure when people talk about the conditionality sometimes they exaggerate the extent to which the IMF and World Bank have done it. Generally, our view is that conditionality to donors is less important than what should be happening and that is accountability of these countries to their own people. The issue is transparency. It comes back to the point that Angela Eagle raised with me on the future reform of the international institutions. We should have mechanisms in place that encourage rich and poor countries alike, non-discriminatory between rich and poor, to be transparent in their dealings. That is the key conditionality that we are talking about. It has happened in our policy towards aid, we have removed a lot of the old conditionality and certainly the tying of aid, and gradually I think it is going to happen in the way the international institutions work as well. I see a change in the environment here where instead of ever-increasing conditionality and accountability of poor countries to the donors, what people are saying is, "Let's have transparency between you and your own people" and that would be the key test of whether the policy is acceptable.

Q19 Peter Viggers: Switching to oil prices, in your Budget you said: "the risks to the global outlook of higher oil prices have diminished". What do you think of that judgment now?

Mr Brown: As you know, I think I have always said in every Budget that oil prices are volatile. That is the judgment I would make generally and that has been the consistent view of the Treasury. We have had oil prices at $10 during this period of government and we have had oil prices at $60. I do not think any government has seen such a huge shift in oil prices. In any other decade a doubling of oil prices would have brought inflationary pressures into the world economy, particularly into an economy like ours, that would have made it very difficult for a government to overcome them. I think it is a remarkable feature of the last year or two that even when oil prices have doubled, inflation in the world economy, particularly inflation in the British economy, has been kept low.

Q20 Peter Viggers: You did not increase fuel prices and this was criticised by Greenpeace's spokesman, among others, who said: "It just beggars belief. The day before Tony Blair welcomes world leaders to Gleneagles to broker a deal on climate change he shows himself incapable of taking even the most modest and obvious step here at home". Would you comment on that? How is your judgment one of not increasing oil prices?

Mr Brown: Because as a Government we have got to make the right judgment about the balance between meeting the environmental standards that they are talking about and respect for the interests, needs and worries that the motoring public and the freight moving industries of our country have and the challenges that they have got to meet, and I think we have made the right judgment.

Q21 Peter Viggers: Do you see a contradiction between all the rhetoric of the G8 about the need to combat climate change and your postponing of the rise in petrol duty?

Mr Brown: I think the fact of the matter is that motorists and freight companies are facing the effects of a very large increase in the world oil price. There is a variety of things we can do about it, and we are trying to work with other countries. By the way, there has got to be greater transparency in the oil market because one of the problems is the lack of knowledge about supplies. The refining capacity of the world has got to be looked at again because essentially one of the problems at the moment is the limited amount of refining capacity. The way that OPEC works is unsatisfactory and I do not think in any other area of world economic activity does a cartel exercise so much control and that is something that I think the whole world should speak out about. There are a number of things we can do but at this stage I do not think we have made anything other than the right judgment not to raise fuel taxes.

Q22 Peter Viggers: Whilst the price of energy is, of course, important in this country, it can be as much as six times as important in less developed countries. What response have you had to the G8's invitation for oil producing countries to contribute to a new trust fund to support poor countries facing commodity price shocks?

Mr Brown: That is a very important question and I do appreciate you asking that. First of all, as far as our invitation to the OPEC countries, to those countries that are benefiting very substantially from the rise in oil prices, that is something that we will pursue through to the annual meetings in October. Remember the fund that we are talking about is a contribution to the IMF debt relief initiative. When the IMF is offering to wipe out the debts of the poorest countries who owe something like ten billions to the IMF, we would like a contribution made by countries who traditionally have not contributed, either through the G8 or through other initiatives that the World Bank and IMF have taken. I think I should also draw your attention to the proposal from the World Bank that I mentioned in my opening remarks. To help developing countries we see the advantages of a dialogue between producers and consumers and between developed and developing countries being something that is a feature of the way we approach climate change issues in the future. The new President of the World Bank, Mr Wolfowitz, has offered to bring forward an initiative that will come at the end of September for a new fund or a new facility of the World Bank that would help developing countries seek alternative sources of energy and help them look at more efficient means of using existing fuel supplies. I think that is a very important initiative which could bear significant results. Clearly it is in the interests of poorer countries to have some help if they are moving to more efficient uses of existing fuel or examining alternative sources of energy. They will not have the resources themselves but some stimulus provided by the international institutions, particularly in the case by the World Bank, could be very, very useful. I think your question about helping developing countries is an important part of it.

Q23 Peter Viggers: So you would encourage a further initiative like the one in 2001 when the World Bank provided £155 million of additional assistance. You would encourage it, but would you support it?

Mr Brown: I think we would encourage the World Bank to do more but what Mr Wolfowitz is looking at is not just immediate assistance, which did happen in the past, but dealing with the causes of high costs for poorer countries, their failure to develop alternative sources of energy, their inability to do so through inadequate resources and the search for more efficient use of existing fuels. If the international community through the World Bank help with that, I think that is a major advance in dealing with energy needs but also with climate change.

Q24 Peter Viggers: Thank you. Finally, one question on the Extractive Industries Transparency Initiative. Do you believe that having this in place on a voluntary basis is satisfactory? Do you think it would encourage other countries if companies operating within the United Kingdom had to operate within a mandatory basis on this?

Mr Brown: That is something you would have to look at if the voluntary initiative failed. The evidence is that the voluntary initiative is succeeding. I have met some of the oil companies in the last few days and they have embraced this initiative. It is part of the transparency that we are talking about which is going to become the most important feature of the way that the international community looks at how it can help developing countries. If it can work for extractive industries I think the next stage would not be to make a voluntary initiative mandatory, the next stage would be to see whether we could operate it in other areas where commercial activity has been subject to criticism for either corrupt practices or for the lack of transparency.

Q25 Susan Kramer: Just to quickly turn to the new information that we got today. The change in the start date of the economic cycle and the delay in the Comprehensive Spending Review, do you think there will be a perception that the Government is marking its own exam papers? Do you think there is an argument for an independent body to carry out these kinds of reviews?

Mr Brown: No, I do not think that should be the conclusion at all. Clearly a ten year Comprehensive Spending Review starting from a zero base and reports that will come next year and the year after are exercises not in hiding information from the public but in greater transparency. The first thing is that people are going to know more about it and there is going to be a wider debate about long-term challenges and trends in public spending. I do not think people will feel that this is a Government excluding information from them; it is a Government being prepared to discuss things with the public. On the cycle, I said at the end of my statement that I am going to ask the NAO to audit the end date of the previous cycle, so instead of a situation where we have 11 indicators examined by the NAO, which includes the trend growth rate, there will be a twelfth and that is the end date of that economic cycle. That is a step forward in the transparency that you are asking about. When we came into power in 1997 - we have got to put this in its historical perspective - there was no independent auditing of any aspect of government fiscal projections or government economic forecasts or individual aspects of economic forecasts, so the Government could choose whatever employment or unemployment figure it sought to base its social security projections on, it could choose whatever figure three years ahead its privatisation proceeds might be and it could choose a percentage for rises in consumer spending that VAT revenues would reach. All of these things are now properly audited and, in fact, we do so not just in a reasonable way but in a very cautious way. In addition, we have asked the NAO to audit the trend growth rate of the economy and we will be going back to the NAO very soon to ask them to do this again. It was the NAO that looked at the demographic features in 2007-08 and gave us their judgment on matters like that. They said that what we were doing was reasonable and cautious. It is quite wrong to suggest that there is not a degree of both transparency and independent auditing at the moment. Take the economic cycle: I just ask you to look at the evidence. The evidence is four years of growth above three per cent. On the surface that suggests that we did not go through a complete economic cycle. On four years of growth above the trend rate of growth it is very difficult for people to suggest that in some way having received these new figures, having been asked by this Committee to come to them even before a Pre-Budget Report with any evidence that things are up-to-date, it is very difficult looking at the evidence to contest that. In fact, it is to the credit of Mr Weale at the NIESR and the IFS that they always thought that the cycle started in 1997 and not in 1999. We are putting the date of the end of the previous cycle, implicitly the beginning of the next cycle, to the NAO to audit now and if they do not think that what we are suggesting is reasonable or cautious then they will undoubtedly say so. Your point about the Government being judge and jury is dealt with by us asking the NAO from today to audit the end of the previous cycle. I think people will welcome that advance. Instead of 11 indicators being audited there is a twelfth now which I think the Committee, given what it has previously said, should welcome.

Q26 Susan Kramer: Just to turn to the issue of debt relief, can you confirm for us, because I think there has been a lot of confusion here, that the G8 commitment to increase aid to 50 billion includes, or is it completely separate from, the numbers for debt relief?

Mr Brown: It includes the numbers for debt relief.

Q27 Susan Kramer: So the number for debt relief is within the 50 billion?

Mr Brown: It has always been the case that aid ----

Q28 Susan Kramer: I just want to understand.

Mr Brown: The reason it is included is always the figures that are published for aid include debt relief. When Britain publishes its ODA figures they do not exclude debt relief, they include debt relief. That has always been the understanding.

Q29 Susan Kramer: That was the fear rather than the hope, I think.

Mr Brown: I think it would be a major departure if the ODA figures were published without including the amounts that are paid in debt relief, that has been the traditional practice. Jon, could you say something about that?

Mr Cunliffe: This is the definition used by the Development Assistance Committee of the OECD, so it is the standard definition that includes debt relief within ODA.

Q30 Susan Kramer: You spoke very eloquently and I am sure we would all support the importance of transparency, but if I could pick up a little bit on conditionality. Chancellor, do I understand you correctly or am I wrong that for every dollar of debt cancelled, in effect there will be a reduction in the IDA flow to that particular country? It would then be in a position to apply for new IDA grants but conditionality would apply to those grants. Is that not the sort of concern that people have, that in effect conditionality would come in through the back door because of that process?

Mr Brown: There are three different forms of debt relief: bilateral debt relief, IMF debt relief and World Bank debt relief and African Development Bank. You are specifically talking about this third ----

Q31 Susan Kramer: African Development Bank.

Mr Brown: There were two separate proposals, one was for servicing the debt and one was for a write-off of debt. Eventually the world community chose to write-off their debt and then to compensate the countries through IDA allocations. Perhaps Jon can say more about the detail of how that is going to work. It is being discussed in detail in Washington at the moment.

Mr Cunliffe: For the HIPC countries who receive debt relief, they receive that debt relief----

Q32 Susan Kramer: These are the initial 18?

Mr Cunliffe: The 18 and then it will go to the 38. They receive that debt relief without conditionality, it is irreversible, it reduces the debt on their balance sheets and they then have the certainty going forward that the debt service payments they would have had to have made to IDA and to the African Development Fund will no longer need to be made. So they get that certainty at the point of debt relief. In order to ensure that IDA and the African Development Fund were not then operating with less finances than they would otherwise have because these flows from these developing countries would no longer be coming back, the G8 countries agreed to replace dollar for dollar the lost flows. Those flows would then be allocated to the poorest countries through the normal IDA mechanism, which is a performance based lending mechanism. IDA's grants are loans. The debt relief given to the poor countries is irreversible and it is not subject to any additional conditionality.

Mr Brown: This is true moving forward as well. It is not a commitment simply to top up for the next two or three years, it is a commitment to provide the additionality right through. The second thing is that the UK's contributions affect not just the 38 countries but up to 70 countries where we are unilaterally providing our share of servicing of the world debt. That is additional to what is happening. I should just say, thirdly, that while there is a debate about the technical details of this, and it has still got to be concluded, generally speaking the proposals that we agreed have been welcomed by the HIPC countries.

Q33 Susan Kramer: Could you just give us an update on what has happened to the UK's proposals to part fund the debt write-off by revaluing IMF gold reserves? Is that off the table now or is that potentially back on the table?

Mr Brown: That proposal was never off the table. What happened was the IMF was able to give us information that they had additional funds that they could release for wiping out the debt of the poorest countries that did not require there to be gold sales. In other words, the IMF has a series of accounts, they had additional funds that were available and on top of that there was an agreement that the individual shareholders of the IMF would provide additional resources and, as Peter asked, the oil producing countries giving some donations or help or grants as well. At the moment the funding of the IMF debt relief is possible without gold sales but if it were to be the case that it could not be done unless there were gold sales we would certainly put it back on the agenda.

Q34 Susan Kramer: Certainly the public at large is very concerned, obviously, about where additional money that is freed up by debt relief goes. What kinds of assurances and structures do you see in place to make sure it goes to education, health, the other kinds of key projects?

Mr Brown: What has been remarkable in recent weeks is the statements that have been made by the individual countries that are going to be the recipients of debt relief. When I was in Tanzania, President Mkapa made a statement about the money going directly to education and to health. When I went to Mozambique, we signed an agreement with Mozambique and they said that the money would go to education, health and the infrastructure needs of the country. There is no doubt that one by one the individual countries are announcing themselves where that debt relief will actually be spent. This increased emphasis on transparency means it is very difficult for these countries now to get away with buying presidential planes or having new buildings or siphoning off the money for military expenditure. There is a new spotlight, a new searchlight, partly from the NGOs and the churches and the faith groups, partly from the civil societies in their own countries on where this money is going. I think the announcements that have been made by the individual countries give us reason to hope that the surveillance that we are talking about, which ought to be stepped up over the next few years, will allow the international community to know where that money has gone. The pressure will be on the developing countries themselves to show that the money has gone to education and health.

Q35 Susan Kramer: Lastly, you said that the UK itself would focus on the needs of 70 countries and expand beyond the 38. What prospects do you see of a broader range of countries, the broader group essentially, to bring that full 70 into the picture? What sort of timetable?

Mr Brown: You are absolutely right, it is a very important issue. The world community moves in stages and it does take time to move from one proposal to another. This is definitely going to be on the table as a British proposal to other countries. Canada has already indicated that they would do likewise, so that is progress. I think the more people see that the HIPC countries are one group of countries, that it would be unfair, for example, for money to go to HIPC countries but not to be available to countries which have got relatively lower debts but still got major needs, is a very important issue for us. We are determined to highlight the problems of these additional 30 countries in the next period.

Q36 Chairman: Chancellor, I looked at Zambia's debt last year and of their total debt I think private debt was nine per cent. What measures would you take to ensure that there is no unilateral ratcheting up of this private date and we do not get into the situation that you are describing whereby the money that is going for aid here has been well used but there is a bolthole where all that good could come to nothing?

Mr Brown: The aim of debt relief is not that countries can never borrow again. We must be clear about this. It is important that countries can clear their historic debts so that they have got economic stability, they are in a fiscal position that is sound. It is not an attempt to prevent them ever borrowing any money again, it is an attempt to get rid of unpayable debts and to put these countries into a position where anything they do is sustainable. On the private sector debts, Jon, do you want to say anything?

Mr Cunliffe: I think all of these countries will have an ongoing relationship with the World Bank, with the African Development Bank, the bilateral donors, possibly with the IMF, and there are tests about debt sustainability, how much they can bear. In that ongoing relationship the donors will actually make it clear that for some countries it will not be possible, it is ill-advised for them simply to replace the debt that has been written off from the IMF and the World Bank with private sector debt. For those countries where there is a debt sustainability issue, I think in their agreement with the World Bank and the African Development Bank there will be some agreements about the amount of extra debt they can take on and where they can take it on because for some countries, having made them sustainable by writing off all their debts, it would not be sensible for them simply to use that headroom immediately. Transparency is part of that.

Q37 Chairman: That could be a bolthole if the World Bank and the African Union do not get it right.

Mr Cunliffe: Debt sustainability going forward is a key part of the framework.

Q38 Damian Green: Can I ask a question about the spending announcement. You have already got long-term reviews going on in some of the big expensive areas, on pensions, on transport and on skills training, so is the new review going to review the existing reviews or is it going to take them, or are they going to be scrapped? How do they fit in?

Mr Brown: The new review is to bring together a spending announcement for 2008-2011, so you have got to take into account what has been said by the existing reviews and you have got to look at other long-term trends. I mentioned this whole issue of investment in our infrastructure and I think it is a common call between all of us that we under-invested as a nation under both governments for 30 or 40 years. We have transport needs, we have education needs, we have health needs and general infrastructure needs as well. The question for us is whether the figure that we decided on ten years ago, that you increase public investment from 0.8 per cent to 2.2 per cent, is now the right figure or should be less or might have to be more. I think we will have to look at what is happening around the world, at the effect of competition on the British economy and what is affordable. If you like, a review on transport and a review on skills will come together in an assessment of what is the right level of investment for the economy looking forward to the next ten years.

Q39 Damian Green: Will they still be published separately?

Mr Brown: They will be published separately.

Q40 Damian Green: Before you presumably ----

Mr Brown: They will work to their own timescales. The first report of this new Spending Review will be next year and that will look at the long-term trends and challenges. The final allocations for spending a year in advance of the 2008 start date of the round, which will take you to 2011, will be 2007. If I may say so, there is a long-termism built into our whole approach. We have got to look at the long-term trends. People have to have a degree of certainty moving forward about what the nation is doing. Personally, I believe that it is possible to have a shared consensus, perhaps even across all political parties, about what is the right thing to do for Britain to be equipped for the future needs of the country in education, in transport, in infrastructure generally. I think part of the debate of this new spending round is whether we can reach that sort of consensus about whether it is right for an advanced industrial economy like ours facing massive competition in a global economy, particularly from low cost producers where we are going to be increasingly dependent on our educational skills and on our creative talents, and therefore science and technology, and what it is right for us to invest in our future. Perhaps we may never get to that consensus but I think we should seek that.

Q41 Damian Green: If I can move on to agricultural subsidies. In your UNICEF lecture recently you talked about the "hypocrisy of developed country protectionism". With the CAP in mind, where are we? Is the Government actually tabling detailed reform proposals and are you using the Presidency to advance this? Are we in any sense in negotiation about CAP reform?

Mr Brown: We have said first of all that we hope the World Trade talks will come to a more ambitious settlement about agricultural protectionism and the removal of some of the protectionist measures. For example, in our own election manifesto we said that we would see export subsidies phased out by 2010, ie within five years, and that would be our proposal. To that extent, our proposal is already on the table. I think you should wait for further submissions from the Secretary for Defra on this very matter. There is no doubt we have already put one proposal on the table but it may be that we will be able to discuss more during our Presidency.

Q42 Damian Green: Do you think it is possible to have any kind of meaningful CAP reform without reopening the subject of the levels of agricultural spending that have been agreed up to 2013?

Mr Brown: I think you have got to say that the 2002 deal - this is controversial in itself - was expressly without prejudice to future financing arrangements, so it was subject to an agreement about the future financing of the European Union, and that is where we are at the moment.

Q43 Damian Green: I am not sure that takes us a tremendous amount further forward.

Mr Brown: You must look at the Communiqué on that deal when the 2002 deal was talked about. I do not have the actual wording here, I may be able to pass it to the Committee, but it was said to be expressly without prejudice to future financing arrangements.

Q44 Damian Green: We are probably no further forward then. Do you think there would be any justification for the British rebate if we achieved a decent CAP reform?

Mr Brown: I think you have got to go back to the statements the Prime Minister has made both to the House of Commons and to the European Council on this. We have got a budget of the European Union where even in 2013 more than 40 per cent of that budget is going to subsidise a part of the economy which is only two per cent of the economy and employs less than four per cent of the workforce. That is a situation that is part of the debate, and bound to be part of the debate, about the future of the European Union. As far as the conditions that we will lay down, I think I refer you back to the statements that he made.

Q45 Damian Green: Finally, it is clear that all of this will be academic without some equivalent move by the Americans who are at least as guilty as the EU in terms of over-subsidising this particular sector. President Bush has offered to drop his subsidy scheme in exchange for the EU dropping the CAP. Do you think this is a real opportunity or do you think it is just rhetoric around the issues?

Mr Brown: This is a very important question. This is going to be at the heart of the debate moving forward to the WTO talks in December. Agricultural subsidies are around $300 billion. They dwarf the amount of official aid that is provided, five times the amount of official aid, so what is gained in aid is lost particularly to developing country producers by the extent to which we subsidise our own producers to compete against them. If I understand it right, what President Bush was talking about was export subsidies and I think he was offering to abolish US export subsidies. I think he was suggesting that a timetable should be agreed for the abolition of them. That is where the European Union and the Americans will be discussing things over the next few months. It may be the case that an agreement was not reached at Gleneagles, not because there was no will to do so but because it was understood that all of these things will come together in December in Hong Kong. I would not say that there is no will on the part of the European Union to reach such an agreement, I think there are many forces within the European Union who want that sort of agreement, but I think there is a general sense that this agreement will come - if it comes - in December at the WTO talks. I think President Bush's offer and the European Union change in its position over the last few months on this issue give us hope that some agreement can be reached on the basis that you are talking about, but I think it is essentially about export subsidies.

Q46 Mr Mudie: Chancellor, in your very good annual lecture to UNICEF you said that empowerment can be achieved through health, education and economic development. What practical steps were taken at Gleneagles to expedite economic development? What did you have in mind?

Mr Brown: I think the ability to finance new infrastructure, the help for private sector development in countries in Africa, the micro credit initiatives that form part of that, the World Bank initiatives on these very issues just before Gleneagles, they are all very much part of this idea. It may be helpful in the short term to provide support for health and education but if we cannot help these economies develop into prosperous economies in the future, all we are doing is providing temporary aid while a serious situation remains, so what we must do is help those countries - and I think I used the word 'empower' those countries ‑ to move to prosperity by investing in infrastructure, by encouraging a vigorous private sector, and by means of micro credit, helping small companies and agricultural co‑operatives. I saw quite a few examples of very successful ones when I was in some of the countries in Africa which I think the Chairman is going to visit as well over the next few months.

Q47 Mr Mudie: Considering that the Millennium Goals were supposed to be implemented by 2015 and you in the same speech pointed out that education will be 2129, child deaths 2115 and poverty 2150 (and these are areas where we have concrete ideas of how to ease it), what confidence can we have in you and your colleagues to deliver economic development?

Mr Brown: That speech was made in advance of the finalisation of the ‑‑‑

Q48 Mr Mudie: Yes, but most of the aid will go specifically for the first term. You mentioned the private sector. Are there any signs that the private sector is taking economic development in Africa seriously?

Mr Brown: I think there is a huge amount of additional investment now ready to move into some of the countries that we are talking about. What has happened over the last few years, we must not forgot that more countries have become democracies, more countries have got greater economic stability, more countries have got low inflation, more countries have sorted out some of their fiscal problems, more countries having got debt relief and are in a position to move forward, so the position is a lot better than it was five or ten years ago. There are significant exceptions like Zimbabwe but, generally speaking, for developing countries the situation is better. The question then is how do people build on that. You only need to visit one of the countries to know that infrastructure investment is absolutely crucial. If there is no investment in transport or in telecommunications, then the idea that these countries can trade even with each other, far less than with the rest of the world, the idea that trade is going to be possible or easy, even if you got rid of all the tariffs, is really a delusion. There must be a degree of investment in the transport systems, the roads, the railways and the infrastructure. The cost of a phone call from Africa to America is five times the cost of a phone call from a developed country to Africa, simply because the telecommunications infrastructure is not highly developed and therefore the costs have not come down, and that is another issue that is going to be dealt with. These infrastructure developments are absolutely crucial as is the encouragement of private investors to work in Africa. I was in Mozambique and they have got a huge resource in everything from coal, to timber, to tobacco, to sugar. What they need is the means by which they can get the best out of that resource, including processing some of the timber and so on in their own country, and therefore infrastructure investment and help with private investment is going to be very important.

Q49 Mr Mudie: That was a long answer ‑‑‑

Mr Brown: I am sorry about that .

Q50 Mr Mudie: No, it was very informative, but the most interesting part and key part was when I asked you what indication there was, and your answer said private sector investment is ready to move in, so it has not moved in. How do you know it is ready to move in, because all the things you have spoken about depend on it coming? You are conceding that it has not come in and you are saying it is ready to come in. Is that no more than a phrase?

Mr Brown: In the modern world it is undoubtedly the case - and you just need to look round the global economy whether it is developing or developed countries ‑ that investment will move to those countries that are in a position to show that they have, firstly and fundamentally, a stable economic environment. It is simply not possible to imagine investment in countries where there is conflict or where there is a history of economic as well as political instability. There is no doubt that very big advances have been made over the last few years. Partly in recognition of this, countries have got their inflation down, they have shown themselves to be more stable, and obviously with the advantage of debt relief they have got their fiscal position in a better position, as well as their monetary position, and that is a base on which they can build. There were a number of private sector forums related to the Africa initiative and the evidence from talking to businesses is that they want to play their part in the development of the economies that we are talking about and are indeed ready to invest, but they will invest on the basis of the economic foundation being a stable economic environment, so with countries which are prepared to show that they are going to make the investments in transport and telecommunications and infrastructure, that is conducive to investment as well.

Q51 Mr Mudie: Are you and you colleagues taking any initiatives to bring them together with governments and countries in Africa which are ready now for their investment? Are there any initiatives on the table or being prepared?

Mr Brown: When the President of the World Bank Mr Wolfowitz went to Africa, he announced a new initiative on private sector lending. There is the Dillon-Martin (?) Commission that published its report a year or two ago which was adamant about the importance of private sector lending and therefore the incentives that were available for that to happen in countries in Africa. There is an enormous amount of work going on ‑ and I have been talking to people in the last few days ‑ on micro credit which is going to be very important to help small businesses develop.

Q52 Mr Mudie: If I can go back to the official brief now. What needs to be agreed at Hong Kong for you to regard the trade talks as a success? Did anything happen at Gleneagles that took practical steps to encourage that success?

Mr Brown: I think the Communiqué showed a determination to reach an agreement. I think people recognised that that agreement was going to be part of the final discussions at the trade talks in December, so I would not read the lack of a timetable for the removal of export subsidies at this stage as being due to an unwillingness to reach an agreement. I think it was just understood that this agreement could come when everybody got together to end the Doha round at Hong Kong in December. The G8 called on all WTO members "to work with renewed energy to end the Doha negotiations by 2006" and it recognised the importance of a successful outcome. They stated their commitment to eliminate all forms of export subsidies by a credible end date and substantially reduce trade distorting domestic support, so the principles were laid down. They also said, and I think this is important, that they recognised that if you opened up trade, poor countries faced particular problems, and they needed themselves the flexibility to decide and plan and sequence their own trade reform, which I think is a shift in the position of the international community to recognise that these programmes should be country‑owned.

Q53 Mr Todd: Can I turn to the EU Presidency and the tasks that you have got ahead of you. You would probably recognise the phrase "certainly their unemployment is lower than ours but if you take the big elements in society ‑ health policy, the fight against poverty, spending involving the future ‑ you notice that we are much, much better‑placed than the English." To what extent do you think there is a consensus on the need for economic reform in Europe?

Mr Brown: I think you are quoting from President Chirac last week when he said that child poverty was higher in Britain than in France, and that is why one of our central objectives as a Government is to tackle child poverty. I had a meeting yesterday with the French Finance Minister, Mr Breton, and I think there is a growing recognition in all parts of Europe that we have got to face up to the challenge of global economic change. The assumption of the European Union for 30 years was that national economic integration would be superseded by European economic integration. In other words, instead of having national companies, you would have European companies, instead of national flows of capital, European flows of capital, instead of national brands, European brands, and all the policies of the European Union that then flowed from that were based on that assumption of economic integration at a European level followed by political and cultural integration. However, what has actually happened is that events have overtaken that model because instead of having European flows of capital replacing national flows of capital you have now got global flows of capital, global brands, global companies. The minute you recognise that is the case, what Europe has got to do to be successful moves it from being the policies of a trade bloc of Europe to the policies of competing in a global economy, and you will need different policies to compete in a global economy than the policies you needed for the era of the trade bloc. In the trade bloc era you could afford to look inwards, break down the barriers within the European Union, and almost forget about the world outside you. In the global era, what matters is whether you are outward looking, whether you can build a trading relationship with the rest of the world, and whether you respond to the challenges to your competitiveness from what is happening particularly in Asia but also from high productivity rates in America. I think people are beginning to see that that is the context within which Europe has no choice but to change. I think the issue now is not whether Europe is going to change to meet these challenges but how quickly. That is what the debate is about.

Q54 Mr Todd: But there are at least two elements of that. One is a cultural change. In institutional terms, Europe has been founded on the principles you have just laid out of inward‑looking integration and protectionism and then the development of a set of policy tools which will bring about what you seek. We have got six months or less to make some progress towards those goals. How do you think we are going to achieve them?

Mr Brown: Tony Blair has announced that the summit that is normally held in October will be a discussion and dialogue about the future of Europe particularly related to the social dimension. We have got a meeting of the European finance ministers in Manchester in September and the theme is how Europe will adjust and equip itself in the global economy. The debate over these next few months is exactly around these issues we are talking about today ‑ how Europe can equip itself for the future, what changes it needs to make, why the old model is no longer relevant for a new situation, how you are going to respond to a situation where 50 per cent of manufacturing exports are now going to come from developing countries where Europe, traditionally the home (with America) of the majority of the world's manufacturing is actually going to have to respond to that Asian challenge by moving up a gear, by becoming more focused on science and technology, more aware that creative skills are going to be the determinant of your prosperity, and what then we are going to do about the policies that are necessary to succeed in this global era. I think that is where the debate is going to move. The question I think we have got to ask is if it is the case that these are the changes that have got to be made, the issue is how quickly we can make them.

Q55 Mr Todd: We have concentrated quite a lot on the rather bloated and easy target of CAP on which broadly there is a consensus in this country. Is there not a wider debate about what the EU should fund and where its goals should be and how it distributes its budget? On what principles do you think that debate should be founded? I think we all accept that vast spending on agricultural subsidies is both inappropriate and foolish. What do you think they should be spending money on?

Mr Brown: I think you are right, there are two issues here. One is what should the countries of the European Union be investing in, and whether it is right that so much investment is going towards protecting or sheltering or subsidising sectors that employ very small numbers of people now and are responsible for a small share of the output, and whether the investments in science and skills and infrastructure that are essential for a strong competitive base in the future are your priorities. However, that leads to a second question as to whether these investments should be made at a European level or through subsidiarity at a national level and I think that is part of the debate about the budget. We have already said that although we think investment in science and research and education and training are the right things to do for European countries, that there is no case for additional competences in these areas being given to the European Union, to the Commission itself, unless there is very good reason because of mobility of labour across the European Union and having to encourage that, or because of cross‑border gains through co‑operation, such as in science and technology.

Q56 Mr Todd: But there is even a basis for questioning some of the competences that are already in place in some of those areas. 15 years ago in business I participated in various EU programmes which I must admit I could not see an enormous intellectual basis for.

Mr Brown: You can always return the money!

Q57 Mr Todd: I am long gone from there! However, I would have thought there is a basis for strong scepticism as to whether anything more than enabling capabilities in R&D are appropriately carried out at a European institutional level as opposed to a national government level.

Mr Brown: I would dispute that in this sense: where Europe can co‑operate together and where the advantages of cross‑border co‑operation are real - such as in some of the science projects that the European Union has entered into together, such as in cross‑border transport and infrastructure projects or even, as we found a few minutes ago when discussing the European initiative on international aid and debt - proved not just the case for the European Union but the leadership of the European Union across the world, so I would not dismiss this level of co‑operation across borders as being irrelevant in the modern world. I think the more it can be done on the environment, for example, or on energy issues, or on science issues, the better, but there is a question about how the payment of that should be organised.

Q58 Kerry McCarthy: If we can move on to terrorist financing. You say in today's ministerial statements that a group of financial experts has developed a programme of reforms to ensure that we identify and isolate terrorist funds on a global basis and you are going to ask that group to report to the meeting that you have mentioned of finance ministers in Manchester in September. Can you give any indication of what sort of measures they are looking at and what they will be presenting there?

Mr Brown: Some of the measures which people promised to freeze terrorist assets have not been as successful as they should be. What we are looking at is whether we need better mechanisms both in national states and across the European Union so that we are in a position to identify and then to freeze assets. The examination of terrorist financing is almost the modern equivalent of the work that was done on code‑breaking during the Second World War because it is at a very sophisticated level of asset tracking. I remember seeing the work that was done to trace the assets of the 11 September bombers in the United States and they were eventually traced back to one set of bank accounts. If that information had been known in advance it could have had a profound effect on the way people looked at what happened then. This more sophisticated method is sometimes forensic accounting to track terrorist assets. We have got to learn from what each country is doing and there has got to be greater international co‑operation in the exchange of information. However, what we are really worried about now is if you can get 25 members of the European Union to act and to do the same things to track terrorist assets, outside the European Union you have got countries that are allowing themselves to become havens for the laundering of money, then you are only as strong as your weakest link, and therefore we want to provide funds to help those countries which have done very little to get the capacity to do what we can do in the United Kingdom and other countries. These are the measures we are looking at.

Q59 Kerry McCarthy: That slightly pre‑empts my next question. You talk about this offer of help and improved technical assistance. That is obviously conditional upon countries choosing to take up that offer of assistance. What ideas do you have for those countries that are not playing the game?

Mr Brown: Some of them have implemented legislation but have not got the resources to do the surveillance work and to do the tracking of assets. I think we in Britain will be helping 13 countries in this area but the European Union is making an offer to a far wider range of countries. So it may be sometimes helping them write the laws, it may be providing the financial systems, and it may be providing, if you like, the detective work and support that is necessary to do this. When we signed the Presidency Plan for Action on Terrorist Finance we had five points to it. I will just remind you of them: promoting efforts in other countries to freeze terrorist assets effectively; making it compulsory for wire transfers of money to be accompanied by information about the identity of the sender; updating the EU money‑ laundering rules to meet international standards (this is following the work of the Financial Action Task Force internationally); completing the European Commission-sponsored review of the structures of tackling terrorist finance (and that review will report in December and will lead us into the Austrian Presidency); and a Code of Conduct to prevent the use of charities by terrorists, which is an important issue as well.

Q60 Kerry McCarthy: You have given a figure of £370,000 for the value of suspected terrorist funds that are currently frozen in the UK. Are you confident that that represents a sizable proportion of the funds that might be used to fund terrorist activities, is it the tip of the iceberg, or are you simply not in a position to say?

Mr Brown: The impact of this is more than this £370,000. The figure represents only the funds that were in the pipeline at the time of freezing so the effect will be far broader than £370,000, which sounds a small figure if you are dealing with it globally. The fact that 45 accounts have been frozen is probably more significant. At any point far more money could have been going through these accounts. This was the money that was in the pipeline at the time and we could get hold of.

Q61 Kerry McCarthy: When you say it is held by "our institutions", do you mean UK institutions or does it include London‑based branches of overseas institutions?

Mr Cunliffe: It is all institutions in the UK who are supervised in the United Kingdom.

Mr Brown: Under the suspicious transactions legislation they are obliged to inform us as to whether there are any suspicious transactions, and this is the issue where we have had information about a very high number of potentially suspicious transactions and we have got to look at how we can make this law work at its most effective.

Q62 Kerry McCarthy: Just one final question, you say in your statement that you would seek to conclude work on the money laundering and payment systems. Is there a timescale?

Mr Brown: Jon, have you got a date for that?

Mr Cunliffe: We wanted to ensure that the European Union brings its money laundering laws in line with the latest recommendations on counter‑terrorist financing by the end of the year.

Mr Brown: The Directive has secured political agreement from the Council and Parliament already and is aiming for its adoption in October or November this year, so that brings you up‑to‑date.

Q63 Lorely Burt: Chancellor, in your opening statement you were talking about a major review of the economics of climate change and I would like to focus on climate change for a minute, if I may. The Lords' Select Committee on Economic Affairs recently published a report recommending that the Treasury should take a more active role in scrutinising work on the costs and benefits of climate change policy. Is this how you are intending to tackle this? Can you speak a little bit more about the parameters that you use and how you will know how effective that review is going to be?

Mr Brown: I think this is very important. What we recognised at Gleneagles was that we had a report from the Commission for Africa which became the basis of the recommendations to act on debt relief and aid, and what we sensed in the discussion about climate change is there is still a great deal of work to be done on the economics of climate change. That is why Nick Stern, who many of you may know was formerly Head of Research and Economics at the World Bank, has agreed to do this review. He will work with Defra, with the DTI and all other agencies of government to do it, but I have got to be honest I think following the report of the experts just before Gleneagles there is a recognition that there is a gap in our knowledge about the economics of this. Rather than me tell you what the results are, I think we should all agree that this is an important issue that has got to be examined.

Q64 Lorely Burt: Okay, thank you. Could I just turn now to the Climate Change Levy. The Budget 2005 announced a freeze in the rates of the Climate Change Levy for 2005‑06. Would you say this represents a wasted opportunity to increase savings of carbon dioxide emissions?

Mr Brown: I think the evaluation by Cambridge Econometrics, which you may have seen, shows that it is more effective than we expected at reducing carbon dioxide emissions. It is expected to deliver annual savings of 3.5 million tonnes of carbon in 2010. That is well above the original estimates made at the time of the Levy's introduction. The Climate Change Levy has been more successful than we expected. We are meeting our targets for Kyoto in this regard. What we have always got to do is to balance off the advantages that are gained in tackling climate change with the costs that we know industry has to meet. At every Budget you have got to get that balance right. To say it is more effective you may argue then that we should be doing more. My argument is that we have got to always get the balance right between what we are achieving in tackling climate change and what are the costs borne by industry.

Q65 Lorely Burt: Perhaps when we get the results of the study that is going to be done we will get some sense of proportion as to whether we are doing enough.

Mr Brown: I think so. I think the world is going to enter a new phase on the debate on climate change and the uses of energy. Perhaps I should not over‑emphasise it but I think this World Bank initiative has the seeds of being something very big indeed because if we can get developing countries as well as developed countries into the dialogue, and if we have an international institution with the resources to be able to provide the incentives and the support for developing countries to do more, we are at the beginning of achieving things that we have not achieved for the last 20 or 30 years. Even the advances of Kyoto could not achieve what this potentially might be able to achieve, particularly for the years after 2012.

Q66 Lorely Burt: Okay, just talking about the Levy itself, experts have noted that the Levy is "anything but a carbon tax. It is an energy tax and the tax rate does not vary directly with the carbon content of fuels. It is not applicable to transport or households and it offers electricity generators no incentives to switch between low and high carbon fuels." How do you tackle those criticisms?

Mr Brown: This was, if I may say so, the debate that took place at the time of the introduction of the Climate Change Levy as to what we actually did and what some people wanted, which was simply a carbon tax. We do provide money for the Carbon Trust as a result of revenues that are coming to us. I may say that there is some quite exciting work that has been done. I mentioned in the Budget in 2005 incentives for carbon capture and storage. As you know, there are quite a number of companies wanting to move on this front. There is a project for this new technology to be investigated and to be developed in I think the North of Scotland, and we are now considering how we might support financially the development of the carbon capture and storage as well as the potential for other new economic incentives. I think we will be able to make further announcements on that matter. We are not ignoring this issue of carbon.

Q67 Lorely Burt: But would you not think that perhaps the Levy would be more effective if we did discriminate between fuels with a carbon content?

Mr Brown: As I say, that was the debate that was taking place at the time of the introduction of the Climate Change Levy, and I think I am trying to emphasise to you in relation to carbon some of our initiatives are more path‑breaking in terms of how we develop new research into the use of carbon or the storage or reduction of carbon. I hope to be able to say more in the Pre ‑Budget Report or the Budget on this.

Q68 Mr Love: Chancellor, commenting on the agreements reached both at Brussels and at Gleneagles, at the weekend The Economist commented: "The EU's targets mean that giving to foreigners [their words] will be the fastest growing item of public spending in several Member States at a time when all of the European members of the G8 are nursing big budget deficits." What is your sense of the sustainability of the promises that have been made?

Mr Brown: I think you have got to put it in its proper context. We are talking at most of countries that are raising the amount of money they are spending of not more than 0.7 per cent of their GDP. While economists talk about huge rises of expenditure, there are rises of expenditure but you are raising expenditure from in some cases 0.3 per cent of GDP to 0.5 per cent of GDP. These are not (in relation to the whole national income of these countries) as big as the economists imply. The question then is whether it is in the enlightened self‑interest of European countries to contribute towards development aid. There is no doubt that the next stage of the development of the world economy after China's phenomenal growth and India's phenomenal growth will depend on these developing countries moving forward at a faster rate. It would be in Europe's interest to be in partnership with them in doing so.

Q69 Mr Love: Can I lead you on to the write-off, so‑called, of multi‑lateral debt. I understand that this is part of current negotiations that are on-going. Can you just reassure us that that write‑off will not prejudice the future capacity of both the World Bank and IMF to deliver in the future?

Mr Brown: I am glad you asked this question and it is similar to the question Miss Kramer asked about what the World Bank was doing and what was the true additionality. In the case of the IMF, the use of the IMF internal reserves is not, in my view, an issue of principle. If the IMF has additional internal reserves that it can use towards this purpose then I think it is important that we release these first. But we have a fall‑back position where individual shareholders are going to contribute so that the money can be provided. I do not see a situation myself where the poorest countries are discriminated against because of the arrangements that we have agreed in relation to IMF. The bigger problem of course arises in relation to the World Bank where we have got to be absolutely sure that the money is additional. If you look at the Communiqué from the finance ministers, it is not just mentioned but emphasised repeatedly that it is additional finance that we are talking about, not just in this IDA round but in future IDA rounds, and clearly the world community is going to monitor whether these additional funds are being provided, and the test will be whether poor countries are in a position to get some relief not only from their debts but from their poverty.

Q70 Mr Love: Can I just comment, and again it is taking up something that Susan Kramer said earlier on, there has been the release of this document from the Belgian official Willy Kierkens which comments that rather than giving full, unequivocal and unconditional debt relief, countries would receive grants, etcetera, etcetera. Can you reassure us that that sort of conditionality will not prevail?

Mr Brown: What I did want to be clear of in my opening remarks is that the British position is that the conditionalities already exist, there is no need for further conditionalities. This is a matter of debate. Clearly to get a debt package agreed it is not sufficient, nor should it be, that simply the G7 or the G8 agree it. It has got to be agreed by all the shareholders of the World Bank and the IMF. In fact, constitutionally it has got to have an 85 per cent vote of the IMF and the World Bank.

Sir Gus O'Donnell: The IMF.

Mr Brown: The IMF needs to be an 85 per cent vote, so it is important that it is seen to be the vote of the widest possible group of shareholders. I am confident that we will have these discussions and make some progress and certainly the British position remains that we do not need additional conditionalities to those we have already got.

Q71 Mr Love: Can I take you on to the issue that was raised earlier where you commented that the IMF needs to be involved in ‑ I think your words ‑ independent surveillance of the world economy and in talking about Africa when there was a problem making sure that that does not become a crisis. You yourself however have been very critical of the IMF's monitoring of the UK economy, particularly about public finances. Could you say a little more about the type of surveillance. Would it be focused particularly on third world countries? How do you see that surveillance regime operating in the third world economies?

Mr Brown: If you look at their reports on Britain and then you look at their reports on Europe or other countries, I think sometimes they are far more critical of other countries. The question really for the future is whether you can establish a system of independent surveillance that has credibility and authority so that it genuinely influences both the way countries perform and the way markets are educated about how countries are doing. We have set up an independent evaluation office for the IMF to look at how well it does its work. That has been an important advance, but there is a case for a surveillance unit that is more independent of the political process. You may remember that history shows that when the IMF was set up there was a choice made between having a political committee as it was called or what was Keynes's proposal, which was to have it something more akin to an independent central bank. I think the functions that the IMF now has to perform looking forward for the future of the world economy are more those of surveillance and therefore ensuring transparency. Thus you need a greater degree of independence to be able to do that. That is why we have put forward this specific proposal. Countries will have to take the rough with the smooth if the IMF criticises them but I think the more important thing is to establish that we have a properly independent system of surveillance, and we do not actually have that fully in place at the moment.

Q72 Mr Love: If I could take the example ‑‑‑

Mr Brown: By the way, I should add just for the record in summing up the Executive Board commended the UK authorities for their skillful macro‑economic management and flexibility in responding to economic change.

Q73 Mr Love: I am sure this Committee would echo those sentiments!

Mr Brown: Unanimously, I hope!

Q74 Mr Love: Can I move on to the issue of sanctions in those circumstances. It is really commenting in a sense on your comments on Africa where you were saying we must make sure that a problem does not turn into a crisis. Yet surely the situation would undoubtedly occur where countries were relatively open when things were going well and transparency would be palpable and then when a problem occurs that is when they start to be less transparent. How do you ensure that they maintain transparency? What sanctions regime would be available to the IMF or others to ensure that we did have the openness and transparency that is necessary when problems occur?

Mr Brown: I think that is where the IMF and World Bank can be at their best. If they are reporting situations where there is a deterioration in honesty about the use of resources, and if the world responded to that, then countries would find it very difficult to go to the international market or to find the investors in situations where they were not doing the right things. I think this whole debate is moving forward. I think I said in that UNICEF speech that George Mudie referred to that we used to think the way forward for developing countries was strong leadership through modernising, almost authoritarian, figures who would really push forward reforms, but I am afraid that has ended for some countries in the situation like Mugabe in Zimbabwe and his rule. Now people recognise that instead of putting your faith in one individual or one group of individuals you have really got to create a system where there is proper transparency and accountability. That looking forward would be the best, both in tackling corruption and in making sure you get value for money for the spending on aid, as was raised earlier. For people to see where the money is going, clearly you need proper systems of both accountability and openness in reporting what has actually happened to the money.

Sir Gus O'Donnell: Could I just add that in the path‑breaking work that Amartya Sen did, the thing that he identified as the most important for countries in avoiding famines and droughts was openness and transparency through a free press rather more than any of the things you might have thought of in a technical sense.

Mr Brown: What Sen did was compare India 20 or 30 years ago with China 20 or 30 years ago and where India had famine and drought, it was reported, people knew about it and something could be done about it, it was a catalyst for action, but where it was hidden and obscured from both the international community and the population, nothing was ever done, and so he was putting the case for both democracy and transparent and accountable systems being the means by which that democracy was pushed forward.

Q75 Mr Love: Can I turn to the reform of international institutions to which the Government is committed. First of all, just a quick comment, you are meant to bring forward a report on the IMF, perhaps you can tell us where that is at in relation to this year, and then about the sort of reforms that you foresee for both the Bretton Woods institutions?

Mr Brown: Yes the IMF is doing a strategic review and that is to report when?

Mr Cunliffe: By the annual meetings in October

Mr Brown: By the annual meetings, which is September. That was discussed in the G7 meetings and had been discussed at previous G7 meetings. Our proposals and work for the IMF is contained in this report which was circulated last night.

Chairman: We have all got it.

Q76 Mr Love: My apologies, I have not got it.

Mr Brown: It was published today and is available in the Vote Office but we sent you each a copy last night.

Q77 Mr Love: Thank you very much. Can I finally focus more on these voice issues about seats on the board, about capacity‑building for executive directors, about more transparency. We are talking a lot about transparency in the decisions the IMF and World Bank make. Is the Government sympathetic to those and what prospects are there for achieving one or all of them in the future?

Mr Brown: I know this Committee has done some work on the IMF and on the international institutions in the past and I would encourage you to do more and to listen to the voices that are coming from around the world about the need for reform. To be quite honest, the world community has faced so many policy problems over the last few years that the idea of structural reforms within the IMF itself has been seen to be less important than grappling with the effects of the Asian crisis and September 11 and then the oil crisis that we found. There is no doubt that we need to do more about improving the capacity of the developing countries to participate in the IMF, and that is why there is more help being given to staff the offices of these countries. As far as representation on the IMF monetary and finance committee, the chairman of the development committee has now been added to the group of people there, so normally it would be an additional African voice. It is an additional voice in the case of Trevor Manuel, the Finance Minister from South Africa, but there is a longer term debate about the representation of both the IMF and the World Bank Development Committee, and we will contribute to that debate. I think we have got to recognise that the voices of Africa in particular have got to be heard more.

Chairman: A few colleagues have a number of other questions they wanted to ask. Peter?

Q78 Peter Viggers: While looking at international institutions what are the club rules of the Group of Eight (which started in 1975 of course as the Group of Six to which Canada and Russia were added)? Are there club rules? Are they democracy and free trade? Why those eight?

Mr Brown: If I may correct this in one sense. The finance ministers meet as G7 and on only one occasion in the year do we meet as G8, and that is in preparation for the G8 Summit. Finance ministers meet as central bank governors and finance ministers. Russia is normally in attendance for most of the meeting. This year and last year before our meetings we normally have a session with China, India, Brazil and South Africa. On some occasions we have had a separate meeting with China on its own. Far from this being a rules‑based organisations - and you are asking for the membership rule book - it is actually a very flexible organisation which allows for different countries to play a part in some of the discussions at various times. As far as finance ministers and central bank governors are concerned, for most of the time it is meeting as G7 with the addition of Russia for many of the sessions.

Q79 Peter Viggers: As far as G8 is concerned, would it not look more credible if India and China were included, and has the UK taken an initiative on those lines?

Mr Brown: The initiative, to be honest, that we took was some time ago in inviting China, India, Brazil and South Africa to participate in parts of our meetings. That, if I may say so, has been very successful because they have important contributions to make about the emerging markets of the developing countries and these have been very productive sessions. I think when you start from the history of the G7 and the G8, it was originally the G5, and then Canada was added by America and Italy was added by Europe, and it has evolved in not a structured a way as people might imagine. It is far more flexible in the way it operates but China and India have a voice at these discussions that we have with the Group of Four.

Q80 Peter Viggers: Do you see it helpful to explore the possibility of having (I call it club rules) principles to which members subscribe?

Mr Brown: That of course would both be an opportunity for others who are not named in any of the lists that I have given you to demand that they have access, but it also may exclude some countries who might not meet these rules in terms of the wider groups I am talking about. I do not think it has ever been seen like that because the G7 or G8 has no permanent secretariat. It is simply one country year-to-year taking on the secretariat and doing the work and, as you know, it is Russia that is actually hosting the G8 next year. One of its strengths, to be honest, is its flexibility. I think the other thing that this Committee may note and may wish to comment on at a later date is that the only arena in which United States and Canadian ministers (NAFTA) meet European ministers for economic matters is by being part of the G7 or G8. There are political and military mechanisms for co‑operation between Europe and America. The G7 and G8 of course include Japan as well but there is no other forum where on economic matters ministers from European countries meet ministers from American countries. There is the annual EU‑USA meeting to discuss all kinds of things but if we are talking about ministers of Member States of the European Union and ministers of NAFTA on economic matters this is the one place where it happens. It is very useful but it does raise questions about whether there should be stronger arrangements between America and Europe.

Q81 Peter Viggers: Russia has identified the broad theme of energy as being the area it wishes to pursue during its own Presidency. What expectations do you have coming out of that statement by Russia?

Mr Brown: We will have to wait and see the proposals they are putting forward. It is actually the theme of energy security that Russia has selected. We are looking forward to seeing the specific proposals that Russia puts forward. I think it continues the discussion that is taking place on climate change and, undoubtedly, that will be part of it but it is also in the context of high oil prices. I think that would be another issue. I think we need to do far more about greater knowledge of the oil markets, of oil reserves, about how oil markets work, about how OPEC itself can function in relation to the rest of the world economy, and if energy security is a means by which we open up some of these issues it is definitely to our advantage.

Q82 Peter Viggers: What is your best estimate of the cost of the Gleneagles G8 Summit?

Mr Brown: The cost in terms of policing?

Q83 Peter Viggers: Total cost including specifically policing?

Mr Brown: Well, as you know, we have set aside some money for the policing and security costs but there is no separate budget for the G8. The Foreign Office will finance some aspects of it, the Treasury will finance the G7 parts of it. There is no one budget for the G7, partly because it is a continuing responsibility of each department. Maybe this is the right time to call on Sir Gus O'Donnell who is going to be head of the domestic Civil Service and Cabinet Secretary to tell us whether that is the case. I do not think there is one itemised G8 budget.

Sir Gus O'Donnell: It will be spread around. Some of it will be borne by Scotland for example. It is in different parts all over the place.

Mr Brown: He will be looking to cut down on the administrative costs, I can assure you!

Q84 Peter Viggers: Members of Parliament have questioned the security costs. I would have thought the Treasury would be able to give a best estimate of the total cost of the accumulated cost.

Mr Brown: We do know about the policing costs obviously but I think it is too early to be able to report what has been the final cost of policing because as you know, what happened with the rally and events in London meant that resources had to be moved around the country.

Q85 Chairman: Sir Gus, you will be able to bring all this together in your new job in August, will you not?

Sir Gus O'Donnell: I will indeed. During these events I was attending COBRA to learn and observe what was happening with regard to terrorist elements.

Mr Brown: One of the advantages of his new job is he does not have to report back to this Committee!

Chairman: We will get him in other ways, Chancellor!

Q86 Mr Todd: You have been a critic in the past of the Stability and Growth Pact.

Mr Brown: Are you talking to Gus?

Q87 Mr Todd: No, I am directing it to you, Chancellor. What is your appraisal of the changes that have been announced?

Mr Brown: I think the test will come over the next period of time but the three changes at an intellectual level are the right ones. The first is to recognise the importance of the cycle, which I think this Committee has commented on before. The second is to recognise that investment is something that can be taken into account separate from consumption, which is actually in the Maastricht Treaty but has not necessary been at the centre of the Stability and Growth Pact. The third is this issue of debt sustainability. What a country is in a position to do with low levels of debt as opposed to what a country is in a position to do with high levels of debt is something that the Stability and Growth Pact never fully took into account in the past. I suppose our hope is that we move towards interpretations that take more account of the cycle, more account of the "golden rule" of the levels of investment, and start from the position that sustainable investment is more possible if there are low levels of debt. We shall see how it evolves over the next period of time but these were the factors that were added, if you like, as being more important to the operation of the Growth and Stability Pact over the next few years.

Q88 Mr Todd: The Governor and other central bankers appear to have been rather less guarded than that in their picture of the changes. Do you share any of those misgivings?

Mr Brown: I thought the European Central Bank had been quite positive about it. You mean the Governor of the Bank of England?

Q89 Mr Todd: Yes, the Governor has quoted central bank colleagues in Europe as being "seriously concerned, and I think dismayed would be a better word". It does not sound quite such a guarded "let's wait and see how this works" view of the changes that have been made.

Mr Brown: It is true that ‑ am I right Jon ‑ half the countries of the original European Union are probably now in breach of the Stability Pact. It does raise questions about whether it is right at this time in the economic cycle for people to be asked to cut their investment or spending, but the new Stability and Growth Pact has only just been introduced and I think it is important - and it has been introduced in circumstances where, for example, Portugal has been found to have a six per cent deficit - to see how this operates over the next few months before one comes to a judgment.

Q90 Mr Todd: You have just returned from the ECOFIN meeting at which there would have been some discussion about that, particularly in its application to Italy and Portugal. What is your appraisal of how this appears to be working now?

Mr Brown: There were decisions made on both Portugal and Italy. On Italy they will report back later, is that right?

Mr Cunliffe: I think the decision on Italy is different to the decision that might have been taken under the old pact which is that there is an excessive deficit and it has been asked to correct it. Some attention has been given to the very high level of debt in Italy in reaching that but because the Italian economy is weak it has been given until the end of 2007 to correct that, whereas under the old pact it would have had to have made all of the adjustment much more quickly, which would have had a very adverse impact on the growth of the economy.

Mr Brown: That is the Stability and Growth Pact reformed. If it had been the old Stability and Growth Pact they would have had to correct it by 2006. Under the new Stability and Growth Pact ‑ and we had to make a political decision on this because it is not fully in operation ‑ they will now have until 2007. So let us see how that operates. I think the Portuguese Government is in a different position because it has a deficit of 6.2 per cent and there is an excessive deficit report being launched with recommendations on Portugal which will come in the autumn. I doubt that a 6.2 per cent deficit will be considered acceptable under any Stability and Growth Pact.

Q91 Mr Todd: You have rightly emphasised the importance of long‑term debt levels, a measure on which this country performs well in comparison to almost every other European country. Does that suggest that there should be a greater focus in collective economic policy- making in Europe on reducing long‑term debt levels? What advice would you give to some of your European colleagues to achieve that?

Mr Brown: The thing about Europe is that there is a range of debt levels from almost zero to over 100 per cent. Even within the euro countries like Belgium and Italy, they have deficits of around 100 per cent. The Maastricht criteria was a 60 per cent or below deficit. I think countries that wish to invest for the future must have debt at a sustainable level. The question is then how you move towards that. There is no doubt that in every country ‑ America, Japan, Germany, France, all the major countries ‑ the debt levels have increased quite substantially over the last few years as a result of the world downturn.

Q92 Chairman: It was the Governor who appeared before a previous Committee on 24 March and expressed his dismay on the Stability and Growth Pact and said that finance ministers "had driven a coach and horses through the pact" so there was an opportunity for open discussion and he had been very clear with us and it was there all the time.

Mr Brown: But I think Mr Todd was giving the impression that the Governor was criticising the pact. You are saying the Governor was criticising the fact that countries were not meeting the pact.

Chairman: That is right. He was fairly clear on this.

Q93 Mr Mudie: Chancellor, time allows me to just pursue you on the Millennium Goals again. They were supposed to be completed in ten years' time in 2015. You have projected that it would take 100 years and even 145 years on the poverty one. Does this mean we have given up the ghost on the Millennium Goals target dates and, if so, have we taken the next step of setting new ones or are we just drifting?

Mr Brown: No, I think as a result of the decisions made in the last few months that that timescale that I mentioned in the UNICEF speech should be narrowed. The question is how much it is going to be narrowed and how quickly we can move to a far better position. As I say, there are three goals. The first one is on education. I think we were suggesting today that a fast‑track initiative is ready and should be adopted to support the World Bank initiative to make quick progress on primary education. There is no technological, scientific or other reason why we cannot get children into primary education. That is the first thing. The second one is on infant and maternal mortality. That depends on a whole series of factors including wealth as well as medical science, but again, I think we could make rapid progress on that.

Q94 Mr Mudie: But that answer and those details confirm that we have not set any fresh dates because we are now still projecting ‑‑‑

Mr Brown: 2015 is the date. We still must try to get to that date. That is for Sub‑Saharan Africa and that is for the three goals for 2015. I think we may be able to revise these figures as a result of the agreement that was reached at Gleneagles but countries must deliver the money that they promised.

Q95 Mr Mudie: When you came before us two or three years ago we pressed you on the Millennium Goals, and nobody seems to have taken the seriously, and that seems to be reflected in the figures you mentioned in the UNICEF speech.

Mr Brown: Except there is a summit on these goals in September.

Q96 Mr Mudie: No, in this document here as set out, are you saying to the Committee that we are still taking 2015 as the date? To keep credibility do we have a back‑up date? Are we starting to talk about this being unrealistic and setting a new date? Because the figures, as you have pointed out, drift and nobody is accountable to doing them by a date?

Mr Brown: But the whole purpose of the focus on Africa and developing countries at Gleneagles and subsequently at the UN Special Summit is so that we do not drift. It is to bring the Millennium Development Goals back on to the agenda in a way we can assess what we must to do deliver them. Part of the Africa Commission report is what it would take and the cost of delivering the goals. The money is now in place in a better way than previously. It may not be as much as people wanted but it is a significant step forward. The question is whether that money is provided. In practice where it goes to and whether the initiatives that have been set in place - like the fast‑track initiative on education - can be got up and running quickly enough to deliver by 2015, that is what the UN Special Summit in September is supposed to discuss. I think we have got to review the position and perhaps the Committee might ask us to send a note to them after the Millennium Summit and after the IMF and World Bank meetings which will be looking at these things, on where we are. I would not be happy if we have to admit that here is no chance of meeting these goals. At the moment on the current rates of progress we would not. With the new resources there is a chance. The question is whether these new resources are going to go to the right things over the next few years.

Q97 Mr Fallon: One of the very big investment projects facing this country is the London Olympics in 2012. The candidate file says that the budget has been prepared and approved for that and there is a reserve of $105 million. Do we imply from that that you expect the Olympics to break even or make an operating profit?

Mr Brown: I did not hear the first point about $105 million.

Q98 Mr Fallon: The candidate file for the London Olympic bid says that its budget has been prepared in a prudent manner and the resource had a contingency reserve of $105 million. Do we imply from that that you expect the London Olympics to break even or even generate a profit?

Mr Brown: What I expect is that the funding that we have set aside and the mechanisms that we have set aside for raising the funding will yield the results that we said in the detailed submission we made to the International Olympic Committee. The Government and the Mayor have agreed a package of 2.375 billion. That is made up of 1.5 billion from the Lottery, 625 million from the Council Tax and 250 million available from the London Development Agency, so the funding that has been put in place and the package was said by the International Olympic Committee: "the budgeting process is very detailed and meticulous. Assumptions are well‑supported and they are achievable." That is the basis on which we are funding the Olympics.

Q99 Mr Fallon: That is what is going in but do you expect the Olympics to lose money or to break even or to make a profit?

Mr Brown: We expect to be able to fund our commitments to ensure that the Olympics are successful in 2012. That is what we want to do. That is our objective. You are saying is our objective to make a profit or to make a loss. Our objective is to fund the Olympics properly for 2012. I am setting out to you what the major elements of that package are which have already been agreed and are being put in place in the way I have suggested ‑ from the Lottery, Council Tax and LDA.

Q100 Chairman: Chancellor, the Governor of the Bank of England when he was here previously was talking about the global international financial architecture and he mentioned in his discussions with you he had spoken about it. He said: "The monetary system internationally is something that we must talk about. I am sure the Chancellor would wish to push it. He has encouraged us to do that." I note in the G8 Summit Chairman's report there was no mention of global economic imbalances or international currencies, so how do you propose to tackle these issues in the latter half of the UK G8 Presidency?

Mr Brown: I think there was a separate statement issued on the international economy, separate from the statement on Africa and from the statement on climate change. I think we should send it round to the Committee. I think Mr Cunliffe has it here. I think it did draw attention to the global economic imbalances, but the way that we feel that action should be taken is America has got, as it recognises, to sort out its two deficits, Japan has got to sort out its financial sector, and Europe has got to engage in structural reform. It is called The Global Economy and Oil. I will send it immediately to the Committee. It says: "Challenges remain, especially persistent global imbalances and high and volatile oil prices. Differences in growth rates and investment patterns have resulted in a widening of global imbalances. To promote a transition to more widely shared global growth a comprehensive set of policy measures is needed." Then they list fiscal consolidation and savings in the States, actions to raise productivity in Canada, further structural reforms in Russia and the European Union to boost growth, employment and domestic demand, and further structural reforms including fiscal consolidation in Japan.

Q101 Chairman: We do not have it but it would be good to have that opportunity. A last question Chancellor: the G8 finance ministers have reaffirmed their views that exchange rates should reflect economic fundamentals, how well do you think that the current fixed exchange rate regime operated by China reflects economic fundamentals?

Mr Brown: This is a long and very detailed question.

Q102 Chairman: A simple question!

Mr Brown: And a discussion that is sometimes best carried out behind closed doors! However, in the interests of transparency I should say there are debates taking place about this. There is a new view being reached in the world community about the value of fixed and floating exchange rates. There is a general sense that China must make its own decisions about moving forward on this. There is a sense that, yes, one of the issues in the world economy that contributes towards the imbalances is exchange policies in Asia. I think we have got to recognise that China will have to take its own initiatives on this.

Chairman: Chancellor, that has been a very interesting session we have had. We are the first select committee to get off the blocks in terms of evidence sessions, so thank you for your attendance. The discussions on aid, trade and debt have been very interesting for us, particularly in developing countries, and we intend to keep an eye on that, as we do with the IMF and the World Bank changes. In our visits to America in the past we have scrutinised that and we wish to continue that process. We will be looking at the information that you have given us on public expenditure and the timing of the economic cycle in the PBR in November and December. If you can come back to us with early dates for the PBR, that will help us on that issue. One of the earliest inquiries we look to undertake is on financial inclusion, and we are looking at issues such as access to banking services, savings and assets as a trading gateway, affordable credit, and I know that you have made a number of comments on that issue, and also the work of the Financial Inclusion Task Force and Financial Inclusion Fund, and we hope to gather information on that issue. The Sub‑Committee will be in the autumn having its hearing on the Treasury Annual Report with the new Permanent Secretary, and we hope to be in touch with the Department to visit yourselves to go over the work of the Treasury with the new Permanent Secretary and other officials in the Department. We have had a constructive relationship with Ministers and officials in the past and we thank you and your officials for that and we hope that that continues over the coming Parliament. Lastly, can I thank Sir Gus for the opportunities he has given the Committee in the relationship he has had and wish him every success in his new post. Thank you for your attendance this morning, Chancellor, and we hope to continue this constructive relationship.