Examination of Witnesses (Questions 40-59)|
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
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
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
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,
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
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
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
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
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.