Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 40-59)

MR ROBERT CHOTE, PROFESSOR DAVID MILES, MS BRIDGET ROSEWELL AND DR MARTIN WEALE

11 DECEMBER 2006

  Q40  Mr Todd: Is there a clear-cut case that you can make for discriminating in investment in that way or do you think that that will just be a mechanism for a political wheeze for arguing that this particular investment does bear future revenue returns and another does not?

  Ms Rosewell: I think that there are issues about the slightly arcane way in which projects are compared and contrasted in different areas of government activity, for example, so there is no consistent way of thinking about it and there is no consistent way of, say, comparing a project which pays back in terms of some revenues which are generated and one which might not; some might pay back their debt, others might not pay back their debt and we do not think about it in that way. Instead we have rules for particular departments which are based usually on non-monetary ends and objects, so we do not really have a way of thinking about it which enables you to make those distinctions.

  Q41  Mr Todd: Would you encourage a greater development of—

  Ms Rosewell: I would, yes.

  Dr Weale: Yes.

  Mr Chote: Just on a belated related point, could I suggest also that if the Treasury has said, "To meet the sustainable rule with confidence net debt will be maintained below 40% of GDP in each and every year of the current economic cycle", you may again like to ask Treasury officials what that means looking forward.

  Q42  Mr Todd: Does that mean he is going to change his rules after that?

  Ms Rosewell: Next year.

  Mr Chote: Implicitly he could do. Of course, we are now, in some definitions, in the first year of the new current cycle but you might like to check with Treasury officials—

  Q43  Jim Cousins: Do you think that is all on-balance sheet debt that you are talking about there?

  Mr Chote: That is on the average by definition, but you could have averaging or in every year so you might like to check.

  Q44  Mr Todd: Is there a case for saying that public sector borrowing is crowding out private sector borrowing at all? Is there any indication of that?

  Professor Miles: You would be pretty hard pushed to make that argument because the cost of capital to the corporate sector is unusually low and real interest rates are exceptionally low. Long-term real interest rates are under 1%; the way that public borrowing would naturally crowd out private investment is by making interest rates high.

  Q45  Mr Todd: Can we turn to a subject favoured by others on this Committee, which is what is classified in public sector debt, and particularly PFI projects? There does appear to be a rather inconsistent rule as to what appears in the public balance sheet and what does not, and indeed there are some projects that appear not to appear either in the private sector or the public sector balance sheet. Do you have some concerns about how that works now?

  Dr Weale: I think that any set of accounting rules is bound to be arbitrary because things are either there or they are not there. Proper publication of government contingent liabilities, which I think is happening, is a help but whether some fraction of those, 20% of them, ought to be added on to public liabilities to indicate the risk that they may be called—

  Q46  Mr Todd: So just a broad contingent liability ought to be added to take—

  Dr Weale: Well, some allowance for it. I can see a case for that. Of course, you then have the issue associated with what are actually much larger numbers, like Civil Service pensions which do not appear as a liability anywhere.

  Q47  Mr Todd: We are coming to that in a second. Since the 40% is not any hard rule, all that would happen if we included a number of these elements in it is that someone would say, "We will raise the figure then"?

  Ms Rosewell: Add it on both sides, yes.

  Q48  Mr Todd: Turning to public sector pensions, do you feel that those are reflected appropriately in the Government's accounts at the moment, the liabilities of future public sector pensions?

  Ms Rosewell: It would be nice to see them treated as they are for the private sector, which they are not.

  Q49  Mr Todd: Presumably the implication of that would again be that you would simply raise the rule and say, "Okay, we are working within a rather larger margin".

  Ms Rosewell: That is entirely possible, but at least it would be more transparent.

  Q50  Mr Todd: I was going to turn you to that. Does it have a further value of bringing home the importance of the value of these particular liabilities?

  Ms Rosewell: I think that would be quite important.

  Dr Weale: I think very much we have a situation where we are not sure whether public sector workers are badly paid or well paid because of the obscurity of the pension arrangements and the costs associated with them.

  Q51  Mr Todd: So it is less an economic argument and more a transparency argument?

  Dr Weale: It also helps Government planning. One can argue that the fiscal rules should be to keep expected future taxes constant and you have to take account of public sector pensions.

  Q52  Mr Todd: But the forecast shows that spending is going to go up from 1.5% of GDP to 1.9% in 2025-26. Does that seem a reasonable projection based on what we know of the changes in public sector pension policy?

  Ms Rosewell: I have no information which enables me to make that calculation.

  Dr Weale: In terms of the Government's long term fiscal projects I would guess that that is one of the safer numbers.

  Q53  Angela Eagle: On that point surely if that change was made and some public sector pensions are funded whilst others are not there is a range of different issues there? If that change were made, that is not compatible with the sustainable investment rule, is it? Would that not imply massive cuts in public expenditure or the abandonment of the rule?

  Professor Miles: If you decided to measure the present value of the cost of future public sector pensions and count it as government debt, and you had always done that, you would not have set the number at 40%; it would have been 65% or some higher number.

  Mr Chote: It is as large as public sector debt anyway, so we are talking a far larger order of magnitude than PFI commitments would imply there. You would have to just set a completely new target or ceiling.

  Q54  Angela Eagle: Do you all think that is a reasonable thing to do here?

  Dr Weale: Yes. I do not think you would want to run a large surplus to drive down the overall—

  Angela Eagle: You would have to abolish public expenditure.

  Q55  Mr Newmark: Given that, and this I think is the point that Bridget was making, private companies are now expected to show what their pensions are and what their pension liabilities are, just because we have this arbitrary figure, as you have said, of 40% of the sustainable investment rule, the fact of the matter is that these pension liabilities are real liabilities and if you do include them, public sector pension liabilities plus PFI, it looks as though it is 100% or 105% of GDP, and I am just curious as to what your thoughts are with having a figure of 105% of GDP rather than 40%, as a figure.

  Professor Miles: But against it you have got the enormous asset which is the ability to raise taxes from future populations, so personally I would not get terribly excited if you decided to include the present value or cost.

  Mr Newmark: You should get excited. If you have an expanding public sector those liabilities are there for future generations to pay. Surely you should care about whether your children or grandchildren are facing increasing public sector pension liabilities. You are right, in a theoretical sense it does not matter because future generations will have to pay.

  Q56  Chairman: So get excited! Brooks, on you go.

  Dr Weale: Could I just say in response to that, what I think is particularly important is accounting for the cost of extra public sector pensions as it is incurred so, if you like, they would just be starting from where we are now, they would be notionally funded and if they were notionally funded then in the current budget balance we would see the cost of the pensions as well as the cost of paying the workers. That seems to me much more important than what we do with the balance sheet number.

  Ms Rosewell: And that one could have a debate about those matters.

  Mr Chote: You could do that formally or informally, but one the point of worth saying is that the Treasury is publishing projections of what it thinks it will cost to pay these on an ongoing basis, rising from 1.5% of GDP now roughly to 2% as a steady state. That is telling you the adjustment future generations will have to make and then the issue is how quickly do we do it.

  Q57  Mr Newmark: One other question. The point of PFI is to transfer risk but with a number of projects it does not look like that risk is being transferred. One of the arguments for keeping it off-balance sheet traditionally is that you are transferring risk from the public sector to the private sector. Would anybody care to comment on the fact that there are a number of PFI projects that are not transferring risk?

  Dr Weale: It seems to me inevitable that as PFI was set up there were learning processes among civil servants, and I think you typically—

  Q58  Mr Newmark: What happened to the Chancellor, is he learning?

  Dr Weale: You typically find in all countries that have tried this sort of thing that there are cases where the private sector has taken the public sector for a ride.

  Q59  Mr Newmark: Given the costs of capital in the private sector versus the public sector, it seems that it is costing the taxpayer more money to effectively pay up for not transferring risks on these projects.

  Dr Weale: I would not be amazed if that had happened but, again, Britain would not be the only country where that has happened if it is the case.

  Ms Rosewell: You have to be slightly careful because I think there is a difference between income risk and capital risk. The contracts that go wrong are essentially where the capital, the balance sheet of the private company is not big enough to handle those risks and inevitably all that comes back on government. Risks always go back to the larger balance sheet. If you talk to the oil and gas industry you will see exactly the same thing. They have understood that and they manage their contracts on that basis so that income risk is passed to the contractor and not the capital risk because generally their balance sheets will not bear that. I do not think we understood that with PFI, hence the balance sheet risk is coming back to government where it probably properly belonged in the first place, but we did not do well enough at transferring some of the income risk.

  Chairman: Can I thank you very much for that. We will move on to session two.


 
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