Select Committee on Treasury Minutes of Evidence

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 amounts".

  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 2007.

  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 the cycle.

  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 forecast.

  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 European Union.

  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, so—

  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 forecasting errors.

  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 efficient way.

  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 green taxation?

  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.

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