Examination of Witnesses (Questions 300-319)
RT HON
ALISTAIR DARLING,
MR DAVE
RAMSDEN, MR
MIKE WILLIAMS,
MR EDWARD
TROUP AND
MR SIMON
GALLAGHER
19 MARCH 2008
Q300 Peter Viggers: Chancellor, you
led your Budget with a proud statement about resilience and said,
"This resilience puts the UK in a strong position to deal
with the current global economic uncertainties," but commentators
do not agree with you and they think that the UK economy is less
resilient than most other OECD countries. The market, of course,
has blown you a comprehensive raspberry since the Budget; how
can it be that you are right and they are all wrong?
Mr Darling: I believe that our
economy is resilient and perhaps I would draw a comparison between
where we are now and where we were, say, in the 1990s. Now we
have comparatively low levels of debt; we have low interest rates;
we have inflation that is historically low; and we have unemployment
the lowest it has been in 30 years. In the early 1990s we had
much higher levels of debt; we had more than three million people
out of work; we had interest rates that were in double digit figures
and, as a result of that, our economy took a huge knock—in
fact there were the two biggest recessions in the 1980s and 1990s
of the last century. Now our economy is much more resilient than
it was in that case and it has enabled us, if you just look to
more recent times, to get through the dot.com bubble burst in
the United States at the beginning of this century and the Asian
market problems that we had in the late 1990s and our economy
has come back strongly after both of these. And after 9/11, for
example, when the stock markets really took a dramatic drop we
were able to come back quickly because we have a resilient economy,
we have much more flexible labour markets, we have flexible capital
employment markets, which we simply did not have then. So I think
our economy is in very good shape to deal with these uncertain
times and, at the same time, as I said to Mr McFall, we have also
been able, which is one of the things we set out to do right from
the start, to maintain investment in key things like health, education
and transport and so on, which are actually vital for the future
of our economy.
Q301 Peter Viggers: Every one of
the points you have made looks backwards, but commentators are
looking forward to the fact that we have very strong links with
the United States; we have a housing market which has been overpriced
in a similar manner to that of the United States; and of course
we rely much more on the financial markets than most of our European
colleagues, making us similar to the United States in that way.
You have looked backwards; the Treasury paper on resilience looked
backwards. If you look forward can you be similarly confident?
Mr Darling: Inevitably, if you
want to examine how resilient the UK economy is you do need to
look backwards to see what happened when there have been shocks
in the past. But looking forward, let me deal with some of the
points that you made. Firstly, it is true that in a number of
respects in relation to our financial markets we have a lot in
common with the United States, and a lot of their banks are over
here and a lot of our banks are over there, and both would share
a common feature that our biggest banks are truly international.
Also, if you look at our relationship with Europe most of our
trade is actually with the European Union and, as I think Dave
Ramsden was saying yesterday, if you look at the various risks
to which we are exposed there are downside risks in relation to
the financial markets looking across the Atlantic and there are
perhaps more upside looking at the trade as far as the European
Union is concerned. You asked about housing. In our housing market
clearly there are similarities but there are quite big differences
between us and the United States, and I would highlight three
of them in particular. One is in this country we have historically
had more people wanting to buy houses than there are houses there
to be bought; in other words, the supply of housing is not meeting
the demand and that is what has pushed house prices up, as you
know, not just in the southeast of England but really in many
parts of the United Kingdom we have seen house prices growing
at about 10% a year. In America at the moment they have thousands
of unsold houses and in parts of the country people are handing
back the keys and you simply cannot sell houses for anything.
That, indeed, is one of the problems that the Americans face and
many people believe that until the housing there bottoms out then
it will be difficult to resolve some of the problems that they
face. The second thing is that our regulatory regime here in relation
to the selling of mortgages is tougher than it is in the United
States. The FSA has made changes to try and avoid people getting
themselves into a position where they take on a mortgage that
they cannot pay, and if you look at the default rates in this
country they are at a historically low level. The third thing
I would say in relation to housing is that if you look at the
root cause of the present difficulties, the sub-prime problem,
we just have not had this problem on anything like the scale that
has happened in the United States. Of course, that is the root
cause of the present difficulties—not the only cause but
it is one of the big problems. So I think there is a distinction
to be made between our housing market and the American housing
market. The other thing that I think is important, dealing with
the points you make, is that if you look at the last American
labour market statistics and look at ours published today they
are very different. The Americans are understandably concerned
about what is happening in relation to unemployment levels. I
look at today's UK figures and they are pretty sound. That is
not to say that we do not need to be vigilant in the future—we
most certainly will be—but, as you rightly say, looking
back is useful as a check, if you like, but looking forward is
absolutely essential. Despite the uncertainties which we face
I think that the forecasts I have set out are reasonable and we
have taken account, as Dave Ramsden was saying to you yesterday,
of the uncertainties we face, but what we have tried to do is
to look at the evidence that we have not just in the United States
but also in Europe. The other thing is—and maybe we will
come back to this—that even in the present times we reckon
that the global economy, if you like, will grow at about 4%, which
is less than people thought, but it is still quite a useful upward
pressure on the overall prospects.
Q302 Peter Viggers: Could I turn
to one other question? I want to ask about non-domicile tax papers.
There are three categories, of course. The very rich, we are told
that something like 3000 people might leave. So my first question
is how concerned are you that some of these might be very prosperous
and important employers and entrepreneurs? The second question,
how do you expect companies to deal with executives who are caught
by the £30,000 impost; and my third part of this question
is how many—categorise them as Polish plumbers—people
are there who may not be registered for tax, who have some kind
of external financial connections will be caught by this, and
how will the Revenue cope with this larger burden of taxpayers?
Mr Darling: The 3,000 is the estimate
that we made and with anything the Treasury does it has to make
an estimate as to how many people might be affected. I think in
relation to Polish plumbers, that unless they were left over 80,000
a year offshore rather than remitting it to this country, which—maybe
they have very successful plumbing practices in Poland—I
think is unlikely, it would not be worth their while to pay the
£30,000. In relation to the general point that you were asking
about companies and executives, perhaps I could just make a general
point and then come to the particular? One is that I do not want
people to leave this country, far from it. Our country's wealth
over the last few years, and especially over the last ten years
or so, has been substantially enhanced by people coming from all
over the world, choosing to live and work here. Some will come
for a short period, and of course until you have been here for
seven years this measure does not affect you at all and I think
it would have been quite wrong to impose a charge from day one
as some have proposed. These people contribute substantially.
I also want to see people to continue to live here after that
seven-year time if they choose to do so. I just remind you that
the position is that we are one of, I think, two countries in
the world that operate on the basis that if you are non-domiciled
you pay tax on what you earn here but above that only on what
you choose to remit here either by income or way of capital. What
we are saying is that if you want to maintain that tax treatment,
which is more favourable than anybody who is domiciled here, then
you need to pay a fee of £30,000. As I said to you at the
start, unless you are actually remitting more than about £80,000
a year it is not worth your while doing it. But I do think it
is fair that if you live here for a long time you should make
a contribution. I believe that if you actually look at what we
are proposing, as opposed to some of the speculation about what
we are not proposing to do, I think it is fair, I think it is
reasonable and I hope that not only will people remain here but
that more people will choose to come and live and work in the
UK because, frankly, the UK has an awful lot going for it that
many countries do not.
Q303 Mr Love: In your budget statement
you talked about fiscal policy supporting monetary policy, and
this was a theme that your officials took up yesterday. Did the
fiscal position allow you to provide enough support considering
the very difficult economic circumstances that we face?
Mr Darling: Yes. As I think you
were discussing yesterday, if you look at the position over the
next three years there is a fiscal loosening this coming year,
the position is more or less neutral next year and there is a
slight tightening the year after, and that is consistent with
our forecasts for growth. As I said when we were discussing borrowing,
for example, in the Budget last week, borrowing will go up next
year but it is actually an awful lot less than it was 15 years
ago; but that is the right thing to do to support the economy,
especially at this time. The important thing is to have the scope
to do these things and by getting borrowing debt down to a level
that is much lower than we had in the past we do have that room
for manoeuvre that we would not have had in the past; and, of
course, as you know, the Bank of England has been able to reduce
rates in December and then again in February. The Bank of England
clearly has an inflation target that it has to reach but if you
look at the combination of last year's budget and this year's
budget there is a loosening this year, which I think will help
the economy. As I say, we remain vigilant but my objective, just
as my predecessor's obviously was, is to make sure that we maintain
a stable economy, which means looking to the long term—taking
account of what is happening in the short term, but we remain
very much focused on what is happening in the long term.
Q304 Mr Love: Let me just press you
a little on that. The markets have been suggesting that there
will be a further cut of a quarter point in interest rates later
on this year. How much was that a factor in the desire to have
an interest rate cut in your decision about the Budget judgment
you made?
Mr Darling: As you know, the Bank
of England's job, the Monetary Policy Committee's job is to have
regard to our inflation target, which I reset again at the Budget
at 2% on a CPI basis. That is its policy. We do not comment on
what it does and the Bank of England has to reach a judgment—that
is the whole point of having an independent Bank and that is one
of the great reforms we made ten years ago, which has been very
successful. When we set forecasts of course we look at the inflationary
outlook and, as I said last week, we said that inflation would
rise in the short term and yesterday's figures bear that out,
but we expect it to return back down to the target towards the
end of this year and into next. So we do take those things into
account. The inflationary pressure at the moment is energy prices
but many of the other historically troublesome pressures on inflation
we have been able to deal with. But it is all part of maintaining
that stable economy.
Q305 Mr Love: Yesterday we met the
Managing Director of the IMF and he said to us that the IMF's
view of the international difficulties that we are all facing
would be longer and deeper than most people were estimating. In
those circumstances, if it is going to be slightly bleaker is
there not some pressure on you to put more money into the economy,
if I can put it in its crudest terms?
Mr Darling: I think what Dominique
Strauss-Kahn was saying—as I think I met him just after
you and I just wanted to check to see what he told you!—is
exactly what I said, that if you had asked people what do you
expect world growth to be a year ago they would have probably
said that it was "5% plus and we think it is going to come
down to about 4%". We have taken that into account just as
we have taken into account the lower growth that we would expect
in America and in other parts of the world. In relation to what
should we be doing—and people do raise this when they say,
"Look at what is happening in America, why are you doing
something different?" and the obvious thing is that the American
economy's demands are different from our own—we will do
what is right for this economy, and my judgment was what I announced
in the Budget last year, that a slight loosening this year, and
a slight tightening in two years' time was the right thing to
do having regard to where we are. As you rightly said, I have
also said that our fiscal policy will support monetary policy,
but I believe—going back to both John McFall's question
and Peter Viggers' question—that we have a resilience and
therefore a flexibility to respond to these that perhaps we would
not have had in the past, and I think we will have in the future.
Q306 Mr Love: One of the interesting
things about the American experience, very dramatic in recent
weeks, has been the working together of the Treasury Secretary
and the Chairman of the Federal Reserve. How is the relationship
between you and the Governor of the Bank of England? Are you consulting
each other to make sure that we get the right path ahead for the
economy?
Mr Darling: Yes, of course. We
speak very regularly and we meet very regularly, as you might
expect, just as I speak and meet with the Chairman of the Financial
Services Authority. Especially at this time we keep very, very
closely in touch, and I may say that both in the lead-up to the
Bank of England's decision last December to put more money into
the system, which resulted of course in the inter-bank lending
rate being reduced towards the policy rate, and again the Bank's
decision to continue that facility earlier this week, that was
an example where the three of us are working very closely together.
As you would expect at this time we work very closely together,
it is absolutely essential.
Q307 Mr Fallon: Chancellor, you say
things are stable but your borrowing for the next three years
is 29 billion higher than at the time of the last Budget and 18
billion higher than you yourself had planned at the time of the
pre-Budget report just six months ago. Why have the public finances
got so much worse so quickly?
Mr Darling: In relation to borrowing
and what I am forecasting for next year, it is in relation to
the fact that having regard to what is happening in the financial
markets that it is bound to have an effect on the revenues that
we can expect, both in relation to corporate tax receipts and
in relation to stamp duty on shares, on commercial property and
so on. That is quite simply why it has risen. Yes, I could have
done something about it but at this stage, and especially at a
time when I think we need to be supporting the economy rather
than trying to take money out of it, it is the right thing to
do.
Q308 Mr Fallon: But you have done
something about it—you have increased the borrowing.
Mr Darling: I said that the reason
borrowing will go up next year is because of the pressures that
we face because of what is happening in the financial markets
at the present time, and the effects that we think it will have
overall. I am simply taking account of what I expect to be the
case and what I forecast would be the case actually starting from
the pre-Budget report last year.
Q309 Mr Fallon: But the credit crunch
began last summer.
Mr Darling: It did but it started
to manifest itself in August and then through September, and by
the beginning of October, when I presented the pre-Budget report,
that is the time, you may recall, that I down rated my growth
forecasts.
Q310 Mr Fallon: But you have changed
them again now; you are 18 billion wrong.
Mr Darling: But it is inevitable
given that things have changed between October and March that
I would take account of that. Indeed, the figures for this year
came in as I said, and I think it is prudent to assume that in
the coming year borrowing will rise for precisely the reasons
I stated.
Q311 Mr Fallon: But the fear is that
as well as dithering over Northern Rock and messing around with
non-doms and botching the capital gains tax reform that you have
actually lost control of the public finances at the very point
that the British economy is at its most vulnerable.
Mr Darling: If you want to exchange
political banter I am tempted to do so but I will not, but what
I would just say about Northern Rock is the decision that we took
at the time was right and it was widely supported—I cannot
remember whether you supported us or not—and it was the
right thing to do. I think it was also right over last autumn
to see whether or not we could find a private sector solution.
My guess is that if we had not done so and had moved straight
to nationalisation then many of the people who now say, "You
should have done it," would have been the first to say that
we are acting peremptorily, and that is just nonsense, frankly.
In relation to the non-doms, I think it is fair and reasonable,
and fairer and more reasonable than some of the other suggestions
that were put about in the House of Commons. In relation to the
public finances, just as I said to Mr McFall and Mr Viggers earlier
on, I think the action we have taken over the last ten years has
been right, it has enabled us to get debt down, it has enabled
us to have a far stronger and more stable economy than we have
ever had, frankly, in recent times, and I think that is very,
very important. If you actually look at the amount of borrowing
that we have at the moment, if you look at the average borrowing
we have had it is a lot lower now than it has been in the past.
So I just do not accept your analysis.
Q312 Mr Fallon: Bear Stearns was
rescued over a weekend but you messed around with Northern Rock
for six or seven months. Other industrialised countries are running
a surplus and not a deficit. What the City is wondering, Chancellor,
is whether you are really up to this job. Are you?
Mr Darling: You raise two separate
issues there. In relation to Northern Rock, at the risk of repeating
myself we took the action that we did last September to maintain
stability in the financial system, to protect savers and depositors
and we succeeded in both those regards. If you go back to last
September you will recall that at that time when, I think, in
the wider world people did not realise just how serious these
problems were becoming, if we had attempted to do what you suggest
with Northern Rock when its shares were very much more than the
equivalent of Bear Stearns, then I think that might have had consequences
which might be quite damaging, which is something that you yourselves
recognised in your very good Treasury Select Committee report,
to which I think you were a signatory, Mr Fallon. So I agree with
your analysis on that point—your position today is slightly
different, it would appear. In relation to the rescue by the Fed
and JP Morgan over the weekend, by Friday Bear Stearns' shares
were virtually worthless—they were two dollars a share and
at the beginning they were worth substantially more than that.
Of course the Fed has played a major role in providing guarantees
to make that takeover possible. My guess is that if you had attempted
to do that to Bear Stearns last August the reaction might have
been quite different. So I do not think you are comparing things
in quite the same way. In relation to the public finances, again
I have made this point to you before and I will repeat it again,
that I believe our public finances today are in much, much better
shape than they were 15 or 20 years ago, and I think that will
stand us in good stead during this time just as it will in the
future.
Q313 John Thurso: Chancellor, can
I ask you about the Golden Rule? Clearly the concept of rules
is a good one but the value of financial rules must be that they
are clearly understood and able to be used as an honest benchmark.
Given the problems that we appear to have with defining when the
economic cycle ends or begins, is the Golden Rule really that
useful?
Mr Darling: Yes, it is. If I cast
my mind back to the period in the 1980s and 1990s you may recall
that that government appeared to have several different objectives
and they changed over the period. I think nowadays people demand
markets, demand a deal of certainty, and I think the principles
of governments not borrowing to fund current consumption and also
being able to maintain the public investment are actually quite
important; and that borrowing should be kept at a sustainable
level is important too. So, yes, I do think these Rules are important
because they do provide a discipline.
Q314 John Thurso: Do you think that
the problem with defining the Golden Rule, not knowing when the
cycle starts and ends devalues the value that you have just described,
and could we not express this in a way that people had more faith
in?
Mr Darling: I certainly do not
see any difficulty, far from it, of having rules that span a cycle
because the whole point of doing that is to allow for the fact
that in any cycle there will be some years that the economy will
be growing above its trend road to growth and other times it will
be growing below it. It is a perfectly stateable case to say that
you balance the books every single year but I think that would
lead to some very disjointed planning. As I said earlier, I think
in reply to Mr McFall, if you had had another fiscal rule which
said you cannot borrow when the economy is growing above trend
that would have resulted in quite a substantial cutback in public
investment. So I think looking across the cycle is fine but there
are always going to be arguments—and I know that this is
an argument that many of the groups that come and see you have—as
to the difficulty in defining when the cycle came to an end, and
I can appreciate that you could have an interesting debate on
the matter, but I think the principle is a sound one.
Q315 John Thurso: Can I ask you to
clear up one matter of fact for me? When Mr Ramsden was replying
to my colleague yesterday he said, "We say that we are over
the forecast period meeting the Golden Rule. We do not say over
the next cycle." But in paragraph C13 it says, "The
government is therefore on course to meet the Golden Rule in the
next economic cycle." Is the Budget therefore saying that
we are on course to meet the rule in the next cycle, or not?
Mr Darling: Not being here yesterday
I think it is a bit unfair of me to comment on what Mr Ramsden
said.
Mr Ramsden: I do not think there
is any contradiction with what I said and what the Budget said.
Q316 John Thurso: "We do not
say over the next cycle," and this one says, "in the
next economic cycle".
Mr Ramsden: No, the key words
in what you just read out were "on course".
Q317 John Thurso: I am sure that
is a great clarification.
Mr Ramsden: We are on course.
Mr Fallon: Working towards!
Q318 Mr Dunne: The sustainable investment
rule. The headroom three years out is less than £3 billion.
Given that the average forecasting error for the budget deficit
where only one year ahead is between £13 billion and £14
billion are you effectively acknowledging that the sustainable
investment rule is no longer fit for purpose?
Mr Darling: No, I am not. As I
was saying to John Thurso, I think the sustainable investment
rule has a lot of merit because what it says is that it allows
you to maintain public investment but it says that it should be
kept at a prudent level, which we say is 40%; but it does allow
you, even when there are times when the economy is not as growing
as strongly as it has been, that you can maintain your public
investment, which I think is very important. Take transport. That
has been the casualty par excellence of successive difficulties
with which successive governments have been faced, and I think
that is something that the rule is there to clarify.
Q319 Mr Dunne: The ONS have determined
that the public financial initiative off balance sheet debt will
come on balance sheet, and you have decided to defer that by a
year. Why did you not discuss how you would treat that in relation
to the sustainable investment rule in the Budget when you know
it is going to happen?
Mr Darling: I think it is something
that clearly we need to consider. What I would say to you is that—
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