Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 315-319)


13 DECEMBER 2006

  Q315 Chairman: Chancellor, good morning to you and your colleagues and welcome to this inquiry into the Pre-Budget Report. Can you introduce your colleagues please.

  Mr Brown: Yes, good morning. I have with me Jon Cunliffe, who is the Managing Director for International Finance, Dave Ramsden, who is the Director of Macroeconomic Policy, Mridul Brivati, who is a Director of Public Spending, Mark Neale, who is the Managing Director of Budget, Tax and Welfare, and Michael Ellam, who is the Director of Policy and Planning in the Treasury.

  Q316  Chairman: You said you have a short statement to make.

  Mr Brown: Well, I thought the Committee might be interested in being made aware of advances we have made in a particular area. Missing trader fraud, sometimes called "carousel fraud", has been the biggest single attack on the taxation systems of the European Union, including its effects on Britain where £4 billion of VAT payments have been targeted by criminal groups. Securing a derogation from European Union VAT law to enable what is called a "reverse charge" has been a vital part of the Government's strategy against carousel fraud. The reverse charge would enable VAT to be charged for those particular items where fraud has been more prevalent, mobile phones and computer chips, at the point of sale to the consumer rather than at different points in the supply chain. This now would remove the mechanism by which the fraudster steals VAT in the supply chain. I am, therefore, pleased to tell the Committee that last night an agreement was reached on the derogation we have sought with France and, with the support now of other Member States, I am confident that the derogation will be adopted. For the purposes of the public finances and in line with the Code for Fiscal Stability, the impact of the reverse charge has been cautiously estimated with a yield of an additional £500 million in 2007-08, although the true impact will obviously depend on the levels of fraud in future years. However, the reverse charge will move the mechanism for stealing VAT from around 90% of goods currently traded in carousel fraud. I can also say that yesterday officers of HMRC were deployed across four countries, executed 50 search warrants across the UK and arrested 15 people in a major operation against carousel fraud, so we are determined to ensure that this missing trader fraud, which has been the most major attack on our tax system in recent years, is dealt with, and I am pleased that the measure that we have sought in the European Union is now going to be acted on immediately.

  Q317  Chairman: Thank you, Chancellor. You mentioned the Code for Fiscal Stability. That obliges the Treasury to publish a PBR each year outlining, so far as is reasonably practicable, any significant policy proposals under consideration for the Budget. Is your statement really a "pre"-Budget document with matters for consultation as opposed to the first instalment of next year's Budget?

  Mr Brown: No, it is a pre-Budget document and I think this year in particular emphasises why it is a discussion prior to the Budget. We have published probably more significant long-term reviews about what we need to do as a country than at any point in the last 10 years. We are really looking ahead to how an economy like ours faces up to the global economic challenge. It is a completely different world from 10 years ago. We now have China responsible for the majority of computer sales in the world, we have China responsible for 60% of digital electronics and half the growth in the world is now in India and China. We have to respond to this new world as an economy and that is why we have these reports on skills, on transport and infrastructure, on planning and we also have the reports on science through Sir David Cooksey and obviously on intellectual property by Andrew Gowers, so we are preparing the way for the Budget in that particular respect. These reports are now out for consultation and we expect to hear people's views on them. Some of the proposals are more controversial than others, but I think this is exactly in the spirit of what you would expect a pre-Budget report to be.

  Q318  Chairman: Talking about the long-term challenges, Pascal Lamy, the Head of the World Trade Organisation, has stated that the Doha Round "now faces collapse". What are the critical developments that need to take place in order to ensure that the Doha Round resumes and has a successful outcome and what alternative avenues could the Government explore, in conjunction with other countries, to promote trade should the Doha Round collapse?

  Mr Brown: Well, I would congratulate this Committee on taking an interest in the international institutions and what can actually be done to ensure that what is to the benefit of Britain, but also the world, and that is a free trade world, is achieved. We look around the world and we see the growth of protectionism, whether it is in America or in Europe or in any other continent, but, in my view, this is a huge danger to the world trading system and also to the long-term growth of the world economy. Trade has been growing twice as fast as growth in recent years and, if trade were to be stalled as a result of the failure to reach agreement, then I believe we would all suffer in both our growth rates and in our prosperity. I still am of the view that progress can be made. It is obviously difficult and it is probably more difficult because of some of the events of the last few weeks, but I have talked to Pascal Lamy himself recently and I have also had talks in the last week with the Treasury Secretary of the United States, Mr Hank Paulson, and we are determined jointly to do what we can to progress negotiations. It is clear to me, as I have said before, that both Europe and America will need to move on agricultural subsidies and on agricultural tariffs, America on agricultural subsidies with Europe on agricultural tariffs. I have set forward before in some detail some of the things that I think could be done. If that were to happen, I believe there would be a response from Brazil which has indicated that it would respond for the ways that it has and India for the ways that it has and, on that basis, I think we are looking for some progress either with the joint initiative from America and Europe or with simultaneous or consecutive actions by these two continents. I think we have got a window still of opportunity here and, even though on the surface it seems disappointing, I think everybody knows that a lot of discussion is taking place about how the talks could be revived; they are indeed very important to the growth of the world economy in future years.

  Q319  Mr Fallon: Chancellor, could you confirm that this is the third time you have had to change the length, or the end, of the cycle to avoid breaking your fiscal rules?

  Mr Brown: No, there is confirmation about the end of the cycle in the Pre-Budget Report. The end of the cycle can only be judged after we have the full provision available to us and, therefore, there has been no policy change on the part of the Treasury at all. There is a forecast and estimate, but no decision and you cannot make that decision until all the evidence is available to you.

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