Examination of Witnesses (Questions 320-339)|
13 DECEMBER 2006
Q320 Mr Fallon: In your Pre-Budget
Report, you said there is an assumption that it will end in early
2007. Are you aware that Martin Weale of the National Institute
told this Committee on Monday that in fact most people would be
saying that "the cycle ended in 2003 and we are in a second
cycle, much closer to the normal sort of business cycle than the
protracted 10-year cycle that the Chancellor is describing".
When I asked him what would have happened if we had kept to the
normal cycle in terms of missing the Golden Rule, he said, "He",
that is you, "would have missed the Golden Rule by large
Mr Brown: If the cycle had ended
in 2003, we would have met the Golden Rule, but the cycle did
not end in 2003 and I do not think this Committee, which reviewed
all these things in 2003, 2004, 2005 and 2006 now, has ever in
any of its reports suggested that the cycle ended in 2003. It
is up to this Committee and other people to look at what they
think the evidence is, but we assume that the cycle could end
in 2007, but we are not making any statement that it has ended
and you can only judge that once you have got all the information
available to you. Therefore, I neither accept your first proposition
that we have changed our position, nor do I accept your second
proposition that the cycle ended in 2003. For this, there has
been no statement by your Committee to any effect like that.
Q321 Mr Fallon: What we have said
is that the start and end dates of the cycle should be independently
audited. You do invite the Auditor General to check your trend
growth assumption. Why will you not have the start and end of
the cycle independently and honestly audited?
Mr Brown: I think you are wrong
here again, Mr Fallon, and I will just correct you. We have said
that the NAO would audit the end of the cycle.
Q322 Mr Fallon: But that is after
it. You are now saying already that it is going to end in early
Mr Brown: You cannot audit something
until you have a pretty clear view that something has happened.
There is no point in auditing it every few months.
Q323 Mr Fallon: But do you not undermine
the credibility of your own framework? You are like Alex Ferguson
and you are not just moving the goalposts, but you are allowed
to shorten the pitch, judge the offside rule and so on. You are
your own judge and jury.
Mr Brown: I think Alex Ferguson
would take exception to that statement that somehow to shorten
the pitch, remove the goalposts and everything else was in the
interests of Manchester United. I do not think that is the reason
that Manchester United are top of the league, I think it is because
they are playing well and I would suspect that people would agree
that our economy is doing well also. The fact is that the test
is whether the economy decisively moves through trend. We do not
believe that that has happened. I do not think this Committee
has ever suggested that that has happened. I think most of the
independent commentators would agree with us in this matter and
the NAO, just to correct you, will be able to audit the end of
Q324 Mr Fallon: Let us turn to public
finances. By how much in billions are you increasing taxes next
year as a result of the PBR?
Mr Brown: I actually believe,
if you look at the figures for the tax-take in GDP, the tax-take
is lower next year than we predicted in previous years that it
would be, so, if you look at the tax-take, the tax-take in 2006-07
will be 37.3. I think in all our previous Budgets we were predicting
it would be higher, so the tax-take is lower than what was previously
Q325 Mr Fallon: In terms of the Pre-Budget
Report, you actually have to increase taxes by £2 billion,
£1 billion from air passenger duty and £1 billion from
business taxes and tax-avoidance. That is the correct position,
is it not?
Mr Brown: I do not think you are
right there actually because, first of all, there is an APD tax
change from February and that is worth about £1 billion over
a year, but the second set of measures are to do with avoidance
and they are not business tax rises. They are to deal with avoidance
and I am very happy to go through each one of them with you and
explain why we have had to deal with the problem of avoidance
in the economy and why generally we have support from the business
community for doing this. I think you should hesitate to call
these "business tax rises"; these are measures to deal
with avoidance which I hope there would be all-party support for.
Q326 Mr Fallon: But you are increasing
tax through air passenger duty, you are increasing your borrowing,
you have been cutting PE investment and this is really because
you got your forecasting wrong, did you not, of North Sea oil
receipts and you badly forecast the September inflation rate which
has meant that there has been an outlined increase in public spending?
Mr Brown: Not at all. What has
actually happened in the North Sea is that the production levels
in the North Sea have been different partly because of rehabilitation
of the oil rigs themselves and partly because of the rate of depletion
in the North Sea and I do not think that you can accuse the Treasury
of mismanagement in this area. This is simply an updating of what
is actually happening in the North Sea, but generally I think
people are impressed by the fact that the Treasury is not only
on course to meet its fiscal rules, but the deficit comes down
annually and, despite, I think, the forecasts of you and others
over the last year, we have welcomed the 3% which is set by the
Q327 Mr Fallon: But your own forecast
was that you would receive over £13 billion in receipts from
North Sea oil and now you are adjusting that to just over £10
billion, £2.8 billion out, which is a 21% forecasting error.
Mr Brown: Mr Fallon, I think we
have been round this course long enough to know that, if production
falls in the North Sea, that is not the fault of the Treasury.
Q328 Mr Fallon: But you are the forecaster.
Mr Brown: My goodness! The other
reason of course that receipts are different is because of the
change in the dollar to pound exchange rate and again you do not
expect us to forecast to a point of total accuracy what the dollar
exchange rate is going to be at any one particular point in time.
I think you really are barking up the wrong tree if you are trying
to attribute to the Treasury incompetence because there has been
a change in the production cycle in the North Sea and because
also there has been a change in the dollar exchange rate. These
are things that I do not think people in their wildest dreams
would think were within the control of the Treasury. It just emphasises
my point that generally, despite the uncertainties of the world
where you had political instability, you had a volatile dollar,
you have had the trade talks stalling, you have had a slowdown
in America, and all these things are happening over which we have
very little control, our public finances are actually on course,
our growth is higher than we forecast, despite the gloom that
was on your side of this Committee last year about what we would
be able to achieve this year, we are actually better than forecast
for growth, and I would say that generally the economy is on course
to achieve the objectives that we have set. Your point about North
Sea oil, I think, merely reinforces that the Treasury has got
it as right as the Treasury can get on this matter.
Q329 Mr Fallon: So a 21% error is
as right as you could get. How did you get inflation so wrong?
In March you said it would be 2.6 in September and it turned out
to be 3.6, throwing out your social security increases. How did
you get that wrong?
Mr Brown: Our Budget inflation
forecast was exactly similar to that of the Bank of England's,
Q330 Mr Fallon: Why was it wrong?
Mr Brown: If you want to blame
us, I think you have also got to blame the Bank of England.
Q331 Mr Newmark: Come on!
Mr Brown: Well, the point is that
both of us have been looking at what is a very serious problem.
Under your Government, Mr Fallon, when oil prices trebled or when
house prices went up substantially, the economy went into recession
and that was the record of your Government. Under our Government,
we have managed to have stable growth with relatively low inflation.
Now, what we had to look at was what were the second-round effects
of an oil price rise and in fact a general commodity price rise
because it is not just oil which has risen, it is commodity prices
that have risen as well, and I think what has happened over the
last year is that there have been some second-round effects, but
it has not fed through into rises in wages. I think you will find,
when you see the figures published about what is happening to
average earnings, they are relatively stable and that is why we
are now able to forecast that inflation will be back to target
during this first half of next year and we will be at target next
year and the year after. Given what has happened in Europe to
inflation, and interest rates have gone up there, and given what
has happened in America, and interest rates are higher there than
they are in Britain now, I think that we are surmounting what
has been an inflationary pressure on the economy better than other
economies and you will see the inflation rate going down over
the course of the next year.
Q332 Mr Fallon: What has happened
in fact is that you are losing control of the public finances
and our constituents have to pay higher taxes because of your
Mr Brown: I have just given you
the figures for taxation. Mr Fallon, I would appreciate it, if
you want to make these statements, that you research them before
you make them. The forecasts for taxation are lower than they
were at the time of the General Election in terms of tax-take
per head. In terms of business taxes as well, we are lower than
in many years under the Conservative Government as a proportion
of GDP. I think, if you look at the tax-take in Britain, it is
lower than most of the main competitors that we face.
Q333 Mr Fallon: When you leave, your
legacy in fact, Chancellor, will be real cuts in some public services,
fairly nebulous efficiency savings, ever-rising borrowing and
a continuing structural deficit. That is a hospital pass to your
successor, is it not?
Mr Brown: Mr Fallon, I think the
fact is that we have had 10 years of stable growth, national income
per head has moved from being seventh out of seven in the G7 to
being second only to America, we have created two and a half million
jobs in this economy, inflation is at half the level it was under
your Government, interest rates and mortgage rates are at half
the level they were under your Government and people are substantially
better off over the last 10 years. Now, I am interested not in
talking about what happened over the last 10 years, as you are,
I am interested actually in talking about what the future is for
our country and I believe we can have a low inflation with a stable,
high-employment economy where people are prosperous over the next
few years if we make the right decisions, such as we raised in
the Pre-Budget Report with the many reviews which we have published
on which we will make decisions at a later date.
Q334 Mr Fallon: With a new Chancellor.
Well, let us turn to one of those issues. Did you double air passenger
duty to change behaviour?
Mr Brown: I believe it will leave
people with a choice as to what they do and I think people will
make these choices. I think one of the things that is very interesting
about the aviation industry is that the scope for savings on emissions
is becoming clearer every day. I have been talking to the aviation
industry itself and, with the amount of aviation fuel which is
wasted, I think at this point there is a huge challenge to the
industry now to use the resources better and in a more environmentally
Q335 Mr Fallon: And how many fewer
people will fly?
Mr Brown: I do not think that
is the issue that I am raising with you. The issue is that people
have a choice, knowing what a truer cost of the environmental
effect of flying is.
Q336 Mr Fallon: If you are raising
it now by £5, why did you cut it by £5 in 2001 just
before the Election?
Mr Brown: Because we had to deal
with the European Union Directive that you could not have a different
levy for the rest of Europe than you had for Britain, so at that
point, if I am right in saying, the levy was £5 for Britain
and £10 for the European Union. We cut it by half for the
rest of the European Union, but it remained the same for Britain
where most of the flights took place, so it was simply as a result
of the European Directive that we had to charge people who were
flying within Britain and within the European Union the same rate,
and that was the reason why we did it.
Q337 John Thurso: Chancellor, you
spoke in your introductory statement about the global challenges
that we face and climate change must surely be one of the biggest.
I would like to ask you generally about your thoughts on the efficacy,
or otherwise, of green taxation. According to the Office of National
Statistics, a proportion of total tax revenues made up from environmental
taxes has fallen every year since 1999 from a peak of 9.8% down
to 7.7% in 2005, and the IFS estimates that the decision to increase
fuel duty and air passenger duty together will add about 0.1%.
Could you not have used the PBR to take more action on raising
Mr Brown: Mr Chairman, I think
the Member seems to measure the effectiveness of a policy on the
environment by how much you raise taxes. That is not how I measure
the effectiveness of our policy on the environment; it is how
we meet the Kyoto targets and how we cut emissions generally.
I would say to the Committee that there are essentially a number
of ways in which we can act as a government with the public to
make a difference in this area. One of course is the huge advances
which have been made in science and innovation in dealing with
environmental issues. The second is the use of market mechanisms,
such as global carbon trading, which we are promoting. The third
is the exercise of personal and social responsibility by individuals
and by companies in their own right where we can incentivise,
and encourage, people, but these are individual decisions which
have got to be made. The fourth is the public investment which
we are prepared to make in environmentally efficient ways of doing
things, including, for example, insulation, but also a whole range
of different things. The fifth is either tax incentives, that
is, tax reliefs, or the taxation that you are talking about. I
think you have to judge the effectiveness of a policy not by one
lever that you are raising, and in fact only part of the tax lever
because you are only talking about tax rises, but actually whether
you can make advances in science, in market mechanisms, in personal
and social responsibility, by public investment, by tax incentives,
of which there were many in the Budget, to reduce the taxation
for environmentally efficient fuel as well as tax and stamp duty
for the future building of carbon-free homes as well as the taxation
you are talking about. I do think the Committee would be making
a mistake if it assumed that the test of your effectiveness as
an environmental champion is simply whether you raise taxes.
Q338 John Thurso: I concur with much
of what you say, Chancellor, and it is quite clear, looking at,
for example, the big grain distilleries in the whisky industry,
that carbon trading is changing their behaviour and is being effective,
but does your answer indicate that you actually do not believe
that what is known as "green taxes", environmental taxes,
as a percentage of the total take is a useful indicator and that
it does not actually change individual behaviour very much?
Mr Brown: I think there are different
definitions of what a green tax is. Some of the percentages that
you have given me are very different from the percentages that
I have here, but I would say to you that the test is: what cumulatively
is the effect on emissions? We have had 28% growth in the economy
and we have had a 9% cut in the emissions necessary to meet the
Kyoto targets. That is a combination of the tax measures that
you are talking about, but also of good public investment, people
taking more responsibility themselves, the growth of carbon trading
which of course will have a bigger effect in future years and
the degree of public investment in insulating people's homes and
getting a better use of fuel. Now, in future years we proposed
in the Pre-Budget Report carbon-free homes. The Secretary for
Communities and the Housing Minister are launching today their
proposals to encourage, by new Building Regulations, homes to
be carbon-free, not simply carbon-neutral, but carbon-fee by 2017.
Just as with petrol duty and vehicle licences when we created
a new band that was zero, it is taking time, but it is actually
having an effect on the production of cars, so too by creating
a new tax incentive will it have an effect on people's decisions
about homes. I visited yesterday a carbon-free home and in three
ways it had been made carbon-free: by solar panels; by proper
insulation; and by wood pellets for the boiler. They effectively
meant there was no carbon being used in the home, so it is possible
to do these things. The tax system can operate as a powerful incentive,
but sometimes in this area, because it is applied most to social
housing, it may be public investment that can make a difference
as well and a lot depends on the extent to which individuals,
who, as consumers, have a right to make these choices, react to
the incentives and to the measures which are available.
Q339 John Thurso: You would agree,
I think, therefore, that the right taxes can have an impact on
behaviour. Have you looked at, for example, instead of the Climate
Change Levy, a carbon tax?
Mr Brown: We looked at all these
things when we introduced the Climate Change Levy and we have
looked obviously at what the situation is, moving forward. I have
to say to you that, first of all, the Climate Change Levy, which
has not been supported by other parties in this House of Commons
previously, has been one of the most effective instruments in
reducing carbon emissions and I would hope that there would have
been more general support for the carbon levy. It has also led,
because it is not operating simply by taxation because we repaid
it in National Insurance, to hundreds of climate change agreements
signed within industries which will achieve greater fuel efficiency,
but, because there is a European agreement about the level of
carbon emissions now, I just have to say that to move the Climate
Change Levy to a carbon levy would actually make no difference
to the overall levels of emissions at this stage at all. Therefore,
if you have the Climate Change Levy plus carbon trading agreements
and you have a ceiling for carbon which is already established
until 2012, then to move from the Climate Change Levy to a carbon
levy at this stage would not make a difference.