Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 200-219)


12 DECEMBER 2006

  Q200  Mr Fallon: You set this out at great length and there is a box explaining it at great length, so it confirms my belief that the longer the explanation the more serious the error. You are supposed to be good at forecasting this stuff. You said North Sea oil revenues would be £13.5 billion and, in fact, they are going to be £10 billion—that is a 21% error in just nine months. Why did you not forecast all these things would happen?

  Mr Ramsden: We did our best.

  Q201  Mr Fallon: You did your best? A 21% error?

  Mr Ramsden: At the macro level what we were trying to do at Budget 2006 was take account of the fact that there were significant increases in oil prices which were leading to significant increases in investment, and our assessment was it would lead to less of a fall in production. That investment would feed through into production. Indeed, our forecast still showed that happening in the medium term, but it has not happened in the short term. It is a forecasting error and we are extremely transparent in accounting for it.

  Mr Cunliffe: If I can just make a couple of general points, the difference in that year between Budget and PBR, taken overall, is 0.12 billion on the plus side. If I can make another point, it is that, as we have reported to this Committee before, I wish we could forecast 18 months out with complete accuracy. We cannot. No other forecaster in the world can. Our fiscal forecasting record compares quite well with other forecasters—better than the Americans and better than most Europeans—and our economic forecasting record compares quite well. When you are asking the question that you have had an unprecedented rise in the oil price and you are trying to work out what effect that will have on one part of the global oil picture, you can make assumptions and you can have models but whether 18 months out you can predict that with accuracy I would very much doubt. I would very much doubt that we could find a similar example in UK or other history where that sort of thing is forecast with 100% accuracy. It is sensible to look at our overall forecasting record on public sector net borrowing, but if you want to look at the forecasting record for individual components of that, I think you then need to look at it against other forecasters.

  Q202  Mr Fallon: This is a very big component and you are supposed to be making cautious forecasts. Let us turn to inflation. In March you said it would be 2.65% in September and it turned out to be 3.6% in September. That has added another £1.5 billion a year to your pension and social security bill. How did you get that wrong?

  Mr Cunliffe: I think our forecast for inflation in March was very similar to the Bank of England's forecast and very similar to other commentators' forecasts. I am afraid the point about forecasts is that they do not give you 100% accuracy. When one is dealing with a very large price shock on oil and trying to work out how it will go through to the economy and the extent to which it will come through to inflation, that it a very big puzzle for the Bank of England, and it is a puzzle for us as well.

  Q203  Mr Fallon: If you had not got all this wrong by £5 billion a year you would not have had to put up taxes by £2 billion from April. So all our constituents are having to pay for these errors.

  Mr Cunliffe: The taxes were forecast. They were in the equation. We had the same revenue forecast going forward but, unfortunately, you have to base your forecasts on the past, and when you are dealing with areas of large uncertainty, such as how does the world respond to a big oil shock, you cannot take the uncertainty away.

  Q204  Mr Fallon: So I am right: last Wednesday you had to increase taxes next year by £2 billion a year because of forecasting errors of £5 billion.

  Mr Cunliffe: No, I do not think that is right at all.

  Q205  Mr Fallon: Why are taxes going up by £2 billion a year?

  Mr Cunliffe: I think last Wednesday the PBR set out the fiscal position for the next three years, which includes some tax increases and it includes some revenues with shortfalls, but I think to assume that there is a direct causal relationship between the two is not right.

  Q206  Mr Todd: Can we turn to the Gershon Review and progress on it. First, if I quote the Chief Secretary from five days ago, he said: "It is important that we provide full information on the programme because the more transparency there is the better the chances of success". Is that information that is contained on 140-141 the sum total of the disclosure about this subject that we are going to be entitled to?

  Ms Brivati: If I may try to answer that, there is some information in the PBR document about progress in the Gershon programme. This gives the latest achievement on Gershon, which is that we have, so far, reached £13.3 billion of efficiency gains against our £21.5 billion target. It is not the sole total of information that will be available because departments will publish in their departmental reports individual departmental achievements and contributions to that target.

  Q207  Mr Todd: Bearing in mind the difficulty of both getting a consistent picture across a wide range of departments with slightly different ways of delivering this and the need to impose some methodological consistency anyway on how these things are measured, would it not be rather better to have a coherent government picture of delivery in this rather than relying on individual departments to say it in their own specific words?

  Ms Brivati: The reason we rely on departments to report their own progress against targets is that those targets are departmental targets and the Secretaries of State for those departments have accepted those.

  Q208  Mr Todd: This programme was announced in a huge fanfare and then subject to large-scale political competition at an overall corporate level in government. I think it is not unreasonable to expect some consistent overview other than the overviews already brought about by the NAO and, to some extent, by Public Accounts.

  Ms Brivati: Departments remain accountable for their targets, and that is an important point in terms of ensuring delivery of the targets. We do aggregate the numbers to report overall progress and that is why we are reporting it in the PBR. As you say, there are methodological issues which we continue to explore with the NAO about how best—

  Q209  Mr Todd: So the answer to my question is we wait until the NAO produce their next report on how you are getting on?

  Ms Brivati: No, that is not the answer I am giving you. I think the answer I want to give you is that there is more information in the public domain about the methodological issues and how we approach those, which is publicly available on the OGC website, for example. We hope that that illuminates the issues about how progress and efficiency is measured.—

  Q210  Mr Todd: Let us take the little bit that we have been given in this exercise. Of the reported savings of £13.3 billion, the Chief Secretary gave information on 7 December that total savings of £8.4 billion were attributable to three work streams but did not give us any information on the remaining work streams and how those broke down. Can you give us some information on that?

  Ms Brivati: I do not think I have that breakdown with me.

  Q211  Mr Todd: Local authorities are expected to meet their Gershon efficiency target a year ahead of target. What incentives are there to achieve that?

  Ms Brivati: What incentives are there on local authorities to achieve it?

  Q212  Mr Todd: Yes.

  Ms Brivati: Local authorities operate under the same sorts of incentives as other public sector bodies.

  Q213  Mr Todd: Are we going to await the same reporting framework for them as for individual departments, so we will hear from all the individual local authorities how they have been getting on?

  Ms Brivati: It has been our practice to subsume the local authority efficiency achievement in departmental progress.

  Q214  Mr Todd: How is that going to be achieved, with all the local authorities around the country achieving these savings in their own different ways without any coherent audit framework across them?

  Ms Brivati: I do not think I would agree with you that there is not a coherent audit framework for that. The way in which efficiency gains are measured by the OGC, which reflects the advice we have had from NAO, takes that difficulty into account the difficulty—and it is a difficult matter to attribute local authority efficiency progress to department totals—but that is the way we have done it over the course of the programme so far.

  Q215  Mr Todd: There is a risk, of course, which the NAO have identified, that this programme will actually deliver lower quality services. Indeed, there have been comments that that has actually happened. To what extent is that taken into account in the way in which you examine the success or otherwise of this programme?

  Ms Brivati: It is taken into account. We have been conscious from the outset that that is a risk in terms of pursuing and delivering efficiency savings.

  Q216  Mr Todd: Is it a risk that has been delivered in reality?

  Ms Brivati: The answer to that must be no, because the precautions we have taken have been to include measures of service quality as part of the assessment that is made when the OGC are assessing whether an efficiency saving has been made. So in order to know whether an efficiency saving has been made rather than a service cut been delivered, that will be clear.

  Q217  Mr Todd: Bearing in mind the straitened circumstances of the Department of Health budget at the moment, does the saving of £3 billion in the last 18 months suggest that this programme is being achieved without pain?

  Ms Brivati: The circumstances of the Department of Health budget and the reasons for what is going on in the NHS are many and different—

  Q218  Mr Todd: There is no contributory factor from the Gershon review in this process?

  Ms Brivati: I would hesitate to make a direct link between the two.

  Q219  Mr Todd: There seems to be a slight contradiction over the relocation of civil service posts. The Chancellor said that—a very precise figure—10,179 posts had been announced for relocation, but your own document gives a rather rounder figure of 10,500 having actually been relocated. Which is true?

  Ms Brivati: The figure I have is that 10,574 posts have been relocated out of the South East.

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