Examination of Witnesses (Questions 160-179)
MR DAVE
RAMSDEN, MR
MIKE WILLIAMS,
MR EDWARD
TROUP, MS
SARAH MULLEN,
MR CHRIS
MARTIN AND
MR SIMON
GALLAGHER
18 MARCH 2008
Q160 Mr Brady: And that is not affected
by the level of growth forecasts? So even if it is way ahead of
the level of growth you are forecasting—
Mr Ramsden: The level of growth
in the economy?
Q161 Mr Brady: Yes.
Mr Ramsden: Hopefully it will
feed back on to it. If this public sector net investment is productive
then it might help the level of growth in the economy.
Q162 Mr Brady: I think public expenditure
as a percentage of GDP has increased by 5.4% since 1999. How much
of that is fixed expenditure and how much is variable? If you
wanted to vary the level of public expenditure, how much scope
do you have there?
Mr Ramsden: If you look in the
historical tables at the back of the Red Book, they give you a
run of both public sector current expenditure as a percentage
of GDP and public sector net investment as a percentage of GDP.
That enables you to look at how they have evolved over time. That
is where you get the information that shows that the ratio of
PSNI (Public Sector Net Investment) to GDP is going to go up to
2.25%. It is now 2% and it was about 0.75 of a per cent at the
beginning of this cycle in 1997-98.
Q163 Mr Brady: Could you give me
any idea what that would be as a proportion of that increase in
public expenditure?
Mr Ramsden: Public sector current
expenditure has gone up from 38.3% in 1996-97 and is 38.3% in
2006-07, so the ratio of public sector current expenditure to
GDP is unchanged whereas public sector net investment has gone
up from 0.7% to 1.9%. The increases have been in investment.
Q164 Mr Brady: I think you will be
aware that the think-tank Reform has published a paper recently
that suggests that since 1999 29% of GDP growth can be ascribed
to the growth of the public sector. I would be interested in your
comments on that.
Mr Ramsden: I will look at that
analysis because it sounds worthwhile. What we try and set out
in each Budget is the contribution that different sectors make.
We were talking about this in the context of rebalancing of the
economy earlier.
Q165 Mr Brady: In terms of your current
forecasts for the economy, how much of the growth you are forecasting
at the moment is attributable to continuing growth in the public
sector?
Mr Ramsden: In Table B4 you will
see the Government contributed three-quarters of a per cent to
growth on average from 2000-04. That is three quarters of a per
cent to total growth of 2.75%, total growth which is significantly
up on the UK's previous experience. It has fallen to 0.5% in recent
years and it is forecast to remain at 0.5% over the forecast period.
Q166 Mr Brady: So that will be 0.5%
of 1.5, 1.7 or whatever?
Mr Ramsden: The forecast figures
I was giving you earlier. When we have the economy returning to
trend of 2.5 to 3% from 2010 onwards and the Government is contributing
0.5%.
Q167 Mr Dunne: How can you tell that
you are on track to meet the Golden Rule in the next cycle when
you have not decided when the current cycle will come to an end?
Mr Ramsden: Because we have an
average surplus over the whole period from 1997. What we say is
that we have an average surplus over the whole period from 1997-98,
which was the start of the last cycle and what we say is that
we are over the forecast period meeting the Golden Rule. We do
not say over the next cycle.
Q168 Mr Dunne: You can determine
the starting point but you seem to be incapable of determining
an end point to a cycle. Is there any purpose to it any longer
as a fiscal rule?
Mr Ramsden: I do not think it
is that we are incapable. It is just that we are in the middle
of this period of real uncertainty. There is also uncertainty
over the evolution of the data. We are very much looking forward
to when the ONS produce their Blue Book national accounts figures,
as they are planning to this summer, which we think will give
us a clearer idea of what has been happening to growth. In a sense
because we are still over the forecast period meeting the Golden
Rule I do not think it is making it any more difficult to assess
the fiscal framework and frame a fiscal judgment.
Q169 Mr Dunne: Turning to the sustainable
investment rule, you have a margin of 0.2% which we heard yesterday
is £2.8 billion of headroom under the sustainable investment
rule in 2010-11. Given the average forecasting error that we have
heard about is £13-14 billion, do you think that that is
enough headroom given the present uncertainties over the economy?
Mr Ramsden: It is very much because
of the present uncertainties over the economy and in thinking
about the operation and the purpose of the fiscal rules to support
monetary policy and stabilise the economy that we are seeing increased
borrowing and actually that the margin on the sustainable investment
rule has gone down from the kind of levels we had at PBR time.
Since the alternative would have been to tighten policy during
a period when the economy is forecast to operate below trend,
looking at the way the fiscal framework gives flexibility, we
thought it was the right thing to do to allow current borrowing
to increase and to continue to borrow to invest. That is why we
have got closer to the sustainable investment rule margin. We
see this as a strict rule. In a sense the fact that we are below
40% ensures that it remains strict. If you look at where our net
debt started from, it is significantly lower than countries like
Germany. That again suggests that we have sustainable public finances.
Q170 Mr Dunne: What is the chance
of breaching the rule?
Mr Ramsden: We do not do our forecasts
in that way.
Q171 Mr Dunne: Would you comment
on the 50:50 chance that commentators said about yesterday?
Mr Ramsden: We have set out very
clearly that the net debt peaks at 39.8%.
Q172 Mr Dunne: That excludes Northern
Rock and the changes to IFRS.
Mr Ramsden: The kind of commentary
you got yesterday suggested that this is all one way. As we set
out in the Budget document, they are forecasts based on cautious
assumptions. They are also based on the data as we have it now.
As we set out in the Budget book, we are expecting the ONS to
be making changes to the denominator for the sustainable investment
rule calculation. They have said they are going to introduce this
thing called FISIM, which is Financial Intermediation Services
Indirectly Measured, which, other things equal, will increase
the level of money GDP and we will have to factor that into our
calculations as well. I do not think the specialists you had before
you yesterday mentioned that. There are factors moving in both
directions.
Q173 Mr Dunne: You do not use this
Budget as an opportunity to discuss what might happen in the event
that you were to have breached the rules? Do we take it that there
is an absolute determination not to breach the rules because otherwise
you should presumably start to lay out the policy framework in
case that was a real risk?
Mr Ramsden: I think we set out
very fully throughout the document the risk to the forecasts and
the assumptions on which it has been based and the fiscal judgments
that have been made on the basis of those assumptions.
Q174 Mr Dunne: But you do not begin
a debate about the sustainable investment rule in the event that
you were to breach it?
Mr Ramsden: There is a debate
that this Committee has led on issues around the fiscal rules.
I think in the document, in the way we have tried to set out in
two boxes the purpose of the rules and as I have tried to explain
to you today, we are trying to emphasise that they are trying
to support monetary policy in stabilising the economy, ensure
sustainability and protect Government investment. So I think we
are contributing to the debate in that sense.
Q175 Mr Dunne: You decided to exclude
Northern Rock from the public finances on the basis of the Code
for Fiscal Stability. This refers specifically to temporary operating
rules. What time period do you think is covered by the Code of
Fiscal Stability to allow you to use the temporary definition
to keep Northern Rock off the public finances?
Mr Ramsden: Just on the question
of us deciding, the Chancellor set out when he made a statement
on Northern Rock in January our position on the treatment of Northern
Rock and why we thought it did not make economic and fiscal sense
to include it in our fiscal framework. I think all the experts
you talked to last night broadly agreed with the assessment that
we had made. What we are always trying to do is to ensure the
credibility of our fiscal framework and the fiscal framework through
the Code of Conduct allows us, as you have said, to approach considerations
like Northern Rock in the way that we have. There has been a statement
by the Northern Rock Board today and a written statement by the
Chancellor on the back of that which sets out their initial thinking
in terms of where they think Northern Rock is going and that is
also on the back of the state aid notification that we made last
night. It is in that context that you should be thinking about
the definition of temporary.
Q176 Mr Dunne: We have not had the
benefit of seeing the statement.
Mr Ramsden: I apologise for that.
It was only issued at 9.30.
Q177 Mr Mudie: You said earlier that
you had seen the experts so you know the questions I am going
to ask on child poverty and I presume I will get specific answers.
What was the target when we set out? Was it 3.4 million children?
Mr Ramsden: If it is appropriate
and if it is okay with the Committee I will hand over to Mike
Williams to answer that.
Q178 Mr Mudie: Was it 3.4 million?
Mr Williams: 3.4 million is broadly
right, yes.
Q179 Mr Mudie: The first target in
2004-05 was you were going to do a quarter which I calculate to
be 850,000 children. What figure did you actually finalise on
because you did not meet your target for the quarter if I recall?
Mr Williams: If I remember rightly,
Mr Mudie, I think we got to 23%, not 25% on that figure.
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