House of COMMONS









Thursday 12 February 2009


Evidence heard in Public Questions 1 - 151





This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.



Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.



Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.



Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.



Transcribed by the Official Shorthand Writers to the Houses of Parliament:

W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935



Oral Evidence

Taken before the Liaison Committee

on Thursday 12 February 2009

Members present

Mr Alan Williams, in the Chair

Sir Alan Beith

Malcolm Bruce

Michael Connarty

Sir Patrick Cormack

Mr Andrew Dismore

Mrs Louise Ellman

Mike Gapes

Mr Michael Jack

Mr Edward Leigh

Peter Luff

John McFall

Andrew Miller

Mr Elliot Morley

Mr Mohammad Sarwar

Mr Barry Sheerman

Dr Phyllis Starkey

Keith Vaz

Mr Phil Willis

Dr Tony Wright

Sir George Young


Witness: Mr Gordon Brown, MP, Prime Minister, gave evidence.


Chairman: Welcome again, Prime Minister, on your third visit to the Liaison Committee. Today's hearing unusually is in five sections instead of the usual four, the first four of which will deal with the recession. Theme one, city and banking, will be led by John McFall. Theme two, consequences for the private sector, will be led by Sir Alan Beith. Theme three, public sector consequences, Edward Leigh. Theme four, international dimensions, we come back to John McFall. Then five, in conclusion, we have the foreign affairs section, which will be led by Mike Gapes. We go straight into theme one, city and banking.

Q1 John McFall: Thank you. Good morning, Prime Minister. The resignation of Sir James Crosby as Deputy Chairman from the FSA yesterday calls into question a number of issues. First of all, he was the chief executive of HBOS and had devised its strategy. When the chairman of HBOS came to the Treasury Committee this week he admitted that HBOS did not stress-test adequately, and the chief executive, Andy Hornby, said that "HBOS was over-exposed to wholesale funding. No one can take away our responsibility for that." Does the fact that Mr Crosby was in the FSA not bring into question the regulatory management and does it not discredit it?

Mr Brown: I have looked at this issue and I am not sure I can make my hearing as exciting as the ones you have had in the last two days! I have looked at this issue very carefully and there are two issues really you are raising. One is whether the Financial Services Authority did enough to supervise HBOS and whether the appointment of Sir James Crosby to be a member of the board of the FSA was the right thing to do. I have looked at these issues. In 2002 it is absolutely true that the Financial Services Authority conducted a risk assessment into HBOS. They identified a number of issues and then they reached a final assessment on these, that the risk profile of the group had improved and the group had made good progress in addressing the risk. The Treasury would not ordinarily be told of these interactions between a bank and the FSA; the FSA is in full charge of these issues and the Treasury was not likely to be informed. There were probably about 20 to 30 similar discussions going on with other institutions at the time. As far as Sir James Crosby's appointment is concerned, I do accept this is a matter of public interest, so I checked back on the appointment of Sir James to the board of the FSA. Remember, we are dealing with a situation here where we have allegations which have been made by one person but these are contested allegations. The appointment of Sir James to the board was done in a very clear way. A committee was set up to make the appointment. I of course as the minister take responsibility for what happened in that year when the appointment was made, 2003. There were six candidates examined, the committee panel was Sir James Sassoon; Callum McCarthy, FSA chairman; Deirdre Hutton, non-executive director of the FSA and Dame Judith Mayhew-Jonas, Provost of King's College Cambridge. They acted as the independent assessors and they recommended Mr Crosby for appointment as a leading industry practitioner with broad experience both as an actuary fund manager and retail banker. They said, "He was an outstanding individual with a strong intellect." That was the recommendation that was made to me in 2003; no information of course was given to the Treasury, as I have said, about the issues raised between the FSA and HBOS. These were regarded as issues which were ordinary issues which were normally dealt with by the interaction between the FSA and HBOS, and the FSA are statutorily responsible for their action in this area. So I believe the right decisions were taken. Of course in retrospect, we now know that HBOS had what was in the end a problem with its business model, more to do with that than with some of the issues which have been raised in the Committee.

Q2 John McFall: Prime Minister, I want to ask a few questions in a short time. You mention that panel interviewing Sir James, it seems to me that not many had banking experience. The conclusion from our evidence session this week is that banking is almost unique and even distinguished people, non-executives like Sir Peter Sutherland in the Royal Bank of Scotland, could not prevent folly taking place at the Royal Bank of Scotland taking in ABN Amro. So I think there is a need for a revision of the whole banking system and that aspect is one which our Committee will be taking up. Could I go on ---

Mr Brown: Could I just say, you are absolutely right to look at how people are chosen for particular jobs. The panel themselves said they were looking to "keep the current balance of practitioners and consumer interest on the board", in other words the board represents the whole industry of course and the public interest in the industry. We removed the system of self-regulation in 1997. There were seven separate self-regulated bodies, now we have statutory regulation, but I have to say to you that the FSA has statutory responsibility which it is its duty to perform.

Q3 John McFall: I understand. The Oxford English Dictionary says the definition of banks is for the safe keeping of customers' money. That has not happened. I think you have responsibility for ensuring we get back to banks which keep customers' money safely, and that is the reason for much of the anger which has been generated this week. On the economy, the Governor of the Bank of England came to our Committee in November and said, "The biggest issue facing the economy is bank lending." You produced a five point plan in January, I put it to you that there is little progress on that and there is still a huge problem with bank lending in this country. What are you going to do to satisfy businesses and customers to ensure good businesses do not fail as a result of this credit crunch?

Mr Brown: First of all, as regards the future of banking, I agree with you that lessons have to be learned. The regulatory system will have to be improved. In a sense what we are dealing with is a global banking system which is regulated only by national supervisors, and I have been pressing for some time that this has to be replaced by a national system side by side with global co-operation amongst regulators. For every bank we are talking about - the Royal Bank of Scotland, for example - its international exposure is far in excess of its national exposure. The problems which arose in the Royal Bank of Scotland arose in America and Holland more so than here in Britain, and we need a system of international regulation that can sort that out. So I accept, and I want to see, and we will push ahead with at the G20 meeting in London, reforms not only in national regulation but international regulation of the banking system. Your second question was about Mervyn King's point?

Q4 John McFall: Yes.

Mr Brown: Could you remind me of the second question?

Q5 John McFall: I have forgotten it! You have fuddled me! It was about bank lending, the most important issue in the economy today.

Mr Brown: He has had a very busy week! Bank lending: I take this issue seriously. What has happened to the British banking system is that half the lending in Britain was essentially done by foreign banks and or non-bank investors, and so to replace the capacity that is leaving as a result of American, Irish, tragically Icelandic and other banks which are no longer offering lending in Britain, the existing institutions have to do far more lending than they did in the past. That is why we are trying to sign lending agreements with all the major banks, so they will not just maintain their lending, which I believe they have done in quantum, but increase their lending over the next period. That is the crucial thing. What do we do to make that possible? 60,000 businesses are already benefiting from the scheme introduced by the Treasury for deferral. Secondly, the loan guarantee scheme, which is the enterprise facility, has already come in and we are offering existing as well as new firms loans of quite sizeable amounts for companies up to 50 million. Then we are introducing in the next few days the working capital scheme, and that will be capital for a year or more to medium sized or small businesses which need that working capital as loan finance. Also, we are introducing the asset guarantee scheme. The Bank of England will, on Friday of this week, provide the first payments under that asset protection scheme and that means, for example, big companies who have corporate loans, or syndicated loans, can go to the bank facility and the Bank will be able to give them the assurance they can lend and get the money they need. So small, medium, large firms; we have taken action in each of these areas. I believe that while obviously it takes time for this to filter through to the rest of the country, the information that is now available makes sure that you as MPs and others can tell small businesses, or medium or large businesses, in your constituencies what is now available, and it is on stream. As I say, tens of thousands of companies have already benefited from this.

Q6 John McFall: When the Treasury Committee visited Japan in October they told us in terms of helping banks and recapitalisation that we have to take the public with us. I feel we are not taking the public with us just now. The public is standing behind the banks to the tune of 500 billion; we invested 37 billion in October in recapitalisation. Incidentally, that is bigger than the defence budget of this country and we are fighting conflicts in Afghanistan and Iraq. Given that situation, how are you going to take the public along with you and assuage the public and minimise their anger? What is the taxpayer getting in return?

Mr Brown: You are right, these are very large sums of money and there is going to be proper public accounting for them, but the difference between the defence budget which you mentioned and the purchase of shares in the banks is that the purchase of shares in the banks is us taking something in return for the finance we are going to give the banks. So the shares which have gone down in value, but I believe will go up over time, are what we hold against what we have given to the banks. So it is different from an ordinary public expenditure grant or facility. We have shares in these banks, I believe over time the value of these shares will rise. I think the public now realise what in a sense we often take for granted, that without banks you cannot run a financial system, you cannot have mortgages, you cannot have businesses properly financed, you cannot have people secure about their savings, but that is also a responsibility on the banks. They have to be stewards of people's money and they cannot be speculators with people's money in the way they have been on some occasions in the past. That will require us to insist on the capital ratios, it will require us to insist on proper prudential standards of risk management, and of course it will require us, as Sir David Walker is about to do, to review the management of the boards and the responsibilities of board members, because it is clear that some of the members of boards of banks which got into trouble did not understand the risk in which they were involved. That is why the board of HBOS and almost all the members of the board of RBS have now gone, that is why the chairman and chief executive of these two companies have gone, and that is why there has been no severance pay for these people, and that is why there are no bonuses and no dividends being paid by these companies this year.

Q7 John McFall: I fear you are not correct in terms of the public being reconciled to what the banks are doing; I have had endless emails and letters on this this week in our Committee. John Prescott presented a petition with 25,000 signatures. I asked the banks when they came in, first question, "Why do the public hate you?" Barney Frank, from the US House of Representatives, went one further, he said, "They are hating us, the politicians, because we are hanging around with the bankers". We really need to get this banking issue and bonuses sorted out. Why is it that bankers and the banking sector are the only industry which gets rescued by the taxpayers? Woolworth's made 27,000 unemployed. Also, why does the banking industry need to be incentivised to 10, 15 times the salaries, unlike the rest of the population? Why do we not get rid of this obscenity, why do you not come out with some firm purpose this morning and say, "We are going to sort this out" so banking comes into the real world and lives along with the rest of the people in this country?

Mr Brown: The short-term bonus culture in banks has got to end, and we are putting in measures that will bring that to an end. The first stage of that is to make sure that performance is based on long-term success, allowing rewards to take place, and not on short-term deals. The second aspect of that is not to reward failure in any way. I believe there are rules which should govern the system of rewards and bonuses in the future, and I think the Financial Services Authority should be given the right in regulation to penalise a bank which is basing its reward system on short-term deal-making rather than long-term performance. I believe the bonus structure has to be over a number of years and not over one year, if it is to exist at all in these banks, and at the same time it should never be a one-way bet, in other words, if you fail there is a claw-back that is also possible within a bonus system. As far as what we have done already, I have repeated to you what we have done in relation to the Royal Bank of Scotland and what we have done with HBOS, and in none of these cases are the board members getting any bonuses, not cash bonuses and not share bonuses. There has been no severance pay for the chairmen and chief executives of these two companies, and of course the whole board in the case of HBOS has gone and almost all the board of Royal Bank of Scotland has gone. So the main people who have been responsible and had to come to the Treasury to ask for support so that the banks have now got government shares in them have gone. As far as the future is concerned, any system has to be based on long-term performance and that will have to be policed in future by the Financial Services Authority.

John McFall: Prime Minister, there is a long hard road to go to bring the public round on this issue.

Q8 Mr Jack: Prime Minister, I want to take you back to a response you gave a moment ago to one of John McFall's questions where he was discussing the Financial Services Authority's involvement in HBOS, and you said that perhaps that particular investigation would not have been the subject of discussion with the Treasury because you said, and I wrote it down, "20 to 30 other discussions were going on at the same time". But if one looks at the memorandum of understanding for financial stability, signed on 22 March 2006, what you find is that there is supposed to be a meeting between the Treasury, the Bank of England and the FSA, "if at no other level than deputy level, to discuss matters of co-ordination of authority action", and the committee were supposed to "regularly review the key systemic risks to the UK financial intermediaries and infrastructure" and co-ordinate those three authorities' response. Are you telling me that if one of the biggest banks has got a shot across the bows and 20 to 30 other conversations are going on, that these matters did not figure in a discussion involving the Treasury about risks to the UK banking system and the economy?

Mr Brown: Let me tell you first of all the purpose of the Tri-partite Committee and the remit you read out. It is to look at systemic risk. It meets very regularly, as you say, at official level. I may say in 2006 we carried out a huge exercise, we examined what would happen in the event of a bank running into problems, or a major institution, in America or Britain. We did a simulation exercise, we brought in the chairman of the American Federal Reserve, the Treasury Secretary of that time, Henry Paulson, we had all the American regulatory authorities present, we had the Governor of the Bank of England, we had the chairman of the FSA, we had myself as the Chancellor, the Financial Secretary to the Treasury, and we did this video conference looking at the problems which might emerge.

Q9 Mr Jack: Are you telling me you did this as a sort of theoretical exercise when 20 to 30 discussions were going on about the risks in the UK system and one of the biggest banks gets a real shot across the bows from the FSA?

Mr Brown: Mr Jack, I am explaining what the work of the Tri-partite Committee involved. We wanted to be absolutely sure we looked at issues relating to the solvency as well as the liquidity of financial institutions. I have to go back to the situation in HBOS to explain what actually happened, I think you are taking it in its wrong context.

Q10 Mr Jack: All I want to know is whether in all of this discussion you discussed any real world examples of banks.

Mr Brown: Of course. Of course the Tri-partite Committee discussed ---

Q11 Mr Jack: So you did discuss HBOS?

Mr Brown: Hold on. Of course the Tri-partite Committee discussed the major risk and they did discuss, for example, what happened at Equitable and other issues. But let me explain what was happening in relation to HBOS in case you wish to magnify the issue out of all proportion ---

Q12 Mr Jack: I want to know how this process was supposed to protect what subsequently has happened, which is some very serious, near collapses of our banking system.

Mr Brown: You are very kind and therefore you should allow me to say what actually happened. The FSA conducted a full risk assessment of HBOS in late 2002, and that is known as the ARROW assessment. We then decided, that is the FSA, to commission a skilled persons' report from PWC on HBOS risk management, then the FSA conducted a further full risk assessment of the HBOS book to cover the book's business. The assessment was that the risk profile of the group had improved and that the group had made good progress in addressing the risk. That was the point in 2004 when the allegations were made by Mr Moore, there was further action taken by the FSA, there was a review by KPMG which reported to the FSA, 80 hours of interviews and meetings with 28 individuals as well as the former head of regulatory risk, Mr Moore himself. That happened and the FSA approved the individual who replaced Mr Moore only when they received the results of this investigation. There was no evidence in the report that Mr Moore was dismissed due to being excessively robust in the discharge of his functions and the FSA followed up Mr Moore's concern by meeting him independently and separately discussing the KPMG report.

Q13 Mr Jack: That is all very interesting but why did they have to write in 2006 if all this work had been going on? I cannot believe that the three partners - the Treasury, the FSA and the Bank of England - did not actually discuss some real world examples. From what you are saying, I cannot tell what world these people were operating in.

Mr Brown: First of all, we do discuss real world examples and I am giving you an example of the extent to which we were going to try and look at what the risks across international borders were for British banks that were operating around the world and not just in Britain. Secondly, I have to say that the risk analysis that you are talking about in relation to HBOS led the FSA not to conclude that there was a systemic risk there, not to conclude that this was a matter that needed to be reported to the Treasury, not to conclude that this needed to be reported to the Tripartite Committee. You may wish to ask questions about what happened within the FSA, but I have to say to you that on the basis of the information I have got the FSA went through all the allegations that were being made, they examined all the details of what happened and they reached a conclusion. The FSA said the allegations by Mr Moore were taken seriously and were properly and professionally investigated. I have to say that the reason HBOS fell was not because of these specific allegations and the result of them, the reason it fell was because its whole business model was wrong.

Chairman: We will move now on to theme two, the consequences for the private sector.

Q14 Sir Alan Beith: Can I just quickly clarify a point from what was said earlier. When Sir James Crosby was appointed, did either you or this terribly distinguished panel of people check with FSA officials whether there had been any concerns about the management of HBOS while he was in charge?

Mr Brown: At that point the risk issues that you are talking about were being dealt with by the FSA and they did not see that to be a fundamental problem.

Q15 Sir Alan Beith: Did they know? Did you know, did they know at the time?

Mr Brown: I am just telling you. If the FSA chairman was sitting on the panel and if the FSA's non-executive director was on the panel they would know if there was anything serious that had to be alerted to the attention of the committee.

Q16 Sir Alan Beith: It seems to be a fairly obvious thing to do, you check it just as you take references rather than being carried away by bankers and the supposed glamour of banking.

Mr Brown: Sir Alan, I think you have got to understand we moved the FSA into a statutory regulation of banks and financial institutions in this country. Before we came into power there was no statutory regulation, it was self-regulation, so the bankers actually did it themselves. We set up the board of the FSA and we wanted to balance the consumer interest with having financial expertise on the board itself. When you look at the appointments that were made to the board it was an attempt genuinely to get the consumer and financial interests well represented together.

Q17 Sir Alan Beith: I would like to move on, if I can.

Mr Brown: You may wish to draw conclusions in retrospect about something that happened in 2002, but actually at that time I have to tell you the FSA were conducting very, very standard and routine investigations with the different companies. The fact that 29 investigations were taking place is not a sense that people were worried about a bank collapsing, they were raising one or two issues in relation to the bank and most of these were then addressed by action taken by the banks.

Q18 Sir Alan Beith: I just wanted to get that clear. Let us turn to the Governor of the Bank of England and what he said yesterday. He made it clear that we are very close now to the point where what in fancy language is called quantitative easing but what in popular language is called printing money was going to have to be the course of action. Do you stand behind what he said and what does it mean for business?

Mr Brown: The Bank of England, as you know from your work in this, has a statutory responsibility to meet the inflation target. The inflation target at the moment is two per cent. The Governor obviously has measures available to him when inflation goes above two per cent because he will raise interest rates in these circumstances to avoid inflation going higher and to get it down. If inflation goes below two per cent and is near zero, as he is suggesting, then he has also got to consider what measures are available to him. This is a monetary decision made by the Bank of England's monetary Policy Committee to look at what measures they need to get the inflation target met at two per cent. This is a symmetrical inflation target, our target is not zero inflation, our target is two per cent inflation. In respect of that he has announced, as Ben Bernanke, the Chairman of the Federal Reserve Bank has announced, the measures that he may consider taking to meet that target.

Q19 Sir Alan Beith: You do not want to put any restraint on the action the Bank might now take, not in Treasury funding but in effectively printing money in order to generate activity in the economy?

Mr Brown: What he has said is he has a duty to take action to get the inflation target met and the inflation target, in his view, will be met by taking certain steps and certain action. This is a monetary policy so that we have a proper balance in our economy over the medium and longer term. Therefore, it is right that he should be in a position, as Ben Bernanke had been in the announcement he made in December, to take that decision if necessary. The constraint, by the way, is he has got to meet his inflation target and if he meets his inflation target then obviously that is what he is seeking to do.

Q20 Sir Alan Beith: Which is looking far from easy. The other point I want to make is that the impact of the recession is being felt most severely in traditional manufacturing regions. Unemployment has gone up most in regions like the north, the north-west and the West Midlands, not the regions which actually generated the recession, if you like, not those where financial services are a key industry. The Government should surely be taking all the measures it can to stimulate the private sector in those areas. In that context, why has the Department of Communities and Local Government forbidden English regions to bid for unspent European money which could go to infrastructure projects which the private sector benefits from?

Mr Brown: First of all, every time someone loses a job or a business is in difficulty it is a matter of regret and a matter of sorrow. Like you, I came into politics to make sure that people had the chances to get jobs and to stand a chance to start their businesses and be entrepreneurial and the chances to have decent homes, to be able to get mortgages that are fair and affordable. We are in extremely challenging times. We are being tested all the time by what is happening in Britain and around the world and we have got to have a plan for dealing with it, and we do have a plan. I am confident that the plan that we have put in place will work to gain the results that I am talking about. As far as funding of the regions and of business is concerned, I have announced all the various measures. For example, with Nissan in the north-east we have given special help to the car industry that Mr Miller may want to talk about that because he has got a specific interest in helping ---

Q21 Sir Alan Beith: Why has DCLG blocked ---

Mr Brown: I am coming to DCLG now. The under-spend, I gather, is far less than people have said publicly. We are looking at what we can do especially to help the north-east and particularly the North-East Development Agency and, as I said to you in the House of Commons, I will report back to you on that.

Q22 Sir Alan Beith: Scotland and Wales are allowed to bid for this money but the regions of England where unemployment is highest have actually been instructed by the Department of Communities and Local Government that they cannot bid for money which is unspent.

Mr Brown: I just make the point that when you get money you have got to be able to balance it with other money that you have yourself. That is the point at issue here.

Q23 Sir Alan Beith: Scotland and Wales can do that but England cannot.

Mr Brown: They make a decision from their own budgets to do so. We have got to make the right decision for the regions as part of a UK decision and as part of an English decision.

Q24 Andrew Miller: Prime Minister, you are obviously aware of the problems being faced by some sectors in which we have very strong industrial bases. In bioscience, for example, liquidity is a serious problem in the smaller innovation companies. With vehicles, something close to my heart, there are some serious problems. When the CBI met Lord Mandelson recently they presented to him an analysis of what wage assistance is happening in other EU Member States for short-time working. When are we going to do something similar?

Mr Brown: Well, to some extent we are doing something that is comparable. We have got the Train to Gain budget. We are saying to companies that if they are going to train people for the next stage for future work and future skills that are needed we will be prepared to help them with the wage costs during the course of a working week. So instead of people being put on short-time, or people being made redundant, and Nissan is one of the companies we have talked to about this, JCB and other companies, about how we can provide help with training which is essentially an additional amount of hours per week, that could be funded in a different way.

Q25 Andrew Miller: But are we not behind the curve on some of these things? For example, the Germans have already had their scrappage scheme introduced on the back of a green agenda and that apparently is starting to have a real effect. Why are we not pursuing similar measures?

Mr Brown: I think as far as finance for companies is concerned, I will be honest in saying to you I think we are ahead of the curve in what is available. If you look at America at the moment they are just starting to introduce a number of the schemes that we introduced some time ago. As far as the individual scheme about car scrapping, obviously I am very happy to look at the results of that scheme. What we did was provide in total about 2 billion of finance that could help the car industry. What we are also trying to do, which in a way is a more green policy, is give the car companies the support to investigate and develop the new car technologies. I believe if we do so, and we have put a lot of money into this, particularly in relation to GM, as you know, we are talking to them about this, we could lead in the development of the new green or electric cars of the future. I am determined that Britain can be a world leader in this area. We have a good start in the sense that we have strict environmental targets. We know that there is an energy gap and our country has got to meet that, so it makes absolute sense in climate change terms as well as in economic terms to invest in the electric and low carbon cars of the future and we are working with the major manufacturers to do that.

Q26 Andrew Miller: Going back to your earlier answer to John McFall about the support to different sectors of industry to back up their liquidity, the problem in the manufacturing sector is we are not yet seeing any results, any benefits of such schemes. How long do you think it is going to take to really show some benefits from that kind of support?

Mr Brown: Obviously this is a tough time and a very challenging time because the measures that we have introduced are just beginning to take effect. As I said, for example, 60,000 businesses have now got some help through one scheme. On the Enterprise Finance Guarantee Scheme, which is the 1.3 billion scheme, I believe there are many millions of loans now in the pipeline. I believe that as people see first of all that this support is available, secondly that inflation is coming down and, therefore, mortgages, the price of petrol is coming down, the price of gas and electricity is coming down, then people will feel more confident about making purchases in our economy and then people in the financial institutions will be more confident about making investments in the future. We will do everything in our power and I am going to leave no stone unturned in what I do to implement what I believe is the plan that is now supported by most countries around the world to take us through these difficulties: capitalise the banks so that we stop them collapsing; monetary and fiscal stimulus so we give real help to people now; the easing of credit by making sure that working capital is available to firms by the funding provided by the banks; and then this investment-led growth that it is right for fiscal policy to sponsor at a time when monetary policy is not having the same effect as it normally does.

Q27 Peter Luff: Prime Minister, perhaps you should leave a few stones unturned and concentrate on the boulders. You said in answer to a question earlier from John McFall that we can all tell small businesses what is available, but the trouble is it is very difficult because there is such a bewildering array of these things. Nick Clegg yesterday at Prime Minister's Questions said three announcements a day. My research came up with something like 30 initiatives over the last few weeks. The trouble is not all of these are properly thought through, the implementation dates are not clear. I think the allegations that you suffer from some kind of initiative-itis have some substance. Would it not be better, rather than getting headlines, to concentrate on a long-term strategic approach, so concentrate on the boulders and not the stones?

Mr Brown: I have just talked about the plan that we have. A few days ago the same people were criticising us for not doing anything and now they are criticising us for having too many initiatives. What we have actually is a plan and the plan is very, very clear and I will go into it in some detail. The recapitalisation of the banks has involved 37 billion and that was essential to stop the banks collapsing. Building upon that, we have got to get the extension of lending started again, so we have got to get the funding of businesses. We have three central schemes. The first is for small business, the Enterprise Finance Guarantee. The second is for medium-sized businesses, the Capital for Enterprise Fund and the Working Capital Scheme. The third is obviously the Bank of England facility which opens on Friday for large companies that perhaps want their bonds guaranteed or syndicated loans guaranteed. On top of that we have the Inland Revenue help that is available. I think it is pretty clear that we are helping small, medium and large-sized firms. We are doing it in the ways that we can, in loan finance, in some cases grant finance, in some cases Bank of England support and through the Inland Revenue we are doing what we can to defer payments that people are not able to make. The plan is very clear. It is recapitalise the banks, get lending moving again, give a monetary and fiscal stimulus to the economy and invest out of this downturn into growth.

Q28 Peter Luff: We will come back to the Enterprise Finance Guarantee Scheme because I want to talk about SMEs in particular. I am not saying the initiatives you have taken, and there are a lot more than you have just listed to the Committee, are bad but they are not thought through. Why is it that a Downing Street advisor recently said: "We are burning up money, which cannot go on, and the frenetic activity makes us look like headless chickens"? Why did "a normally loyal minister" - I am afraid he is not identified - say of you, "He makes an announcement, gets the headline and then moves on when what really matters is making sure it works"? Why did Greg Pope say, "I do think the Government needs to slow down and take stock rather than having to react every time to the latest crisis"? Why does the Federation of Small Business say what you are doing is having no impact? Crucially, why does Richard Lambert of the CBI say, "We have urged the Government to move as quickly as possible to set out when the various support packages to tackle the credit crunch will come into effect, and to implement them quickly. Day by day constrained credit is damaging our economy". You are smiling but this is a serious point. This is Richard Lambert: "A lack of clarity creates a fear, the worst mentality, and could be costing people their jobs".

Mr Brown: So we are agreed that doing nothing is not an option.

Q29 Peter Luff: We are all agreed on that, Prime Minister.

Mr Brown: Doing nothing is not an option. I just have to say to you that everything that we have been doing, with limited exceptions, is now being followed by other countries around the world, so I take from that that we are doing the right thing and not the wrong thing. The right thing was to lead in recapitalising banks. The right thing was to give a fiscal and monetary stimulus to the economy, and we can debate the extent of that and the need for it in different sectors whenever you want to do so. The right thing to do was to deal with the issue of lending and get funding going again, get credit moving in the economy. The right thing to do is the fourth element of our plan and that is to have investment-led growth. This is not a series of initiatives, this is a plan, and I am confident that this is the plan that will take Britain out of the downturn.

Q30 Peter Luff: We will concentrate on the plan then, Prime Minister, because we have been talking about addressing the issues of credit insurance for a long time and nothing has happened and the crucial issue in the automotive sector is people are not buying cars, applications for credit are being turned down, support for car finance companies has been talked about for a long time and nothing has happened. The Enterprise Finance Guarantee Scheme, which I agree with you in principle is a very good idea, was first announced before Christmas, we got further details on 14 January but still we do not know where we are. The Forum of Private Business said ---

Mr Brown: I am sorry, I have got to correct you. The Enterprise Finance Guarantee Scheme was launched on 14 January, banks are receiving hundreds of inquiries and the first loans are now being made. It is wrong to misrepresent this scheme as inactive, it is actually happening.

Peter Luff: The Forum of Private Business say many businesses are being rejected for loans and overdrafts still. A Scottish small businessman emailed me to say he only found out about the scheme because he watched the Parliament Channel early in the morning, a repeat of Ian Pearson's statement on 14 January: "I can truthfully say I have never heard of the scheme until seeing that debate. Rhetoric is all well and good but action is what is required and publicity has to be obtained". Perhaps more substantively, Mark Durkan ---

Chairman: This is a very long question.

Q31 Peter Luff: The Prime Minister likes facts and I like facts too, Chairman. Mark Durkan says it is still not clear whether the Enterprise Finance Guarantee Scheme applies to Northern Ireland banks or not. He has written to the Business Secretary to seek clarification of this point. The banks are unaware of the mechanisms and procedures for applying the scheme. There are problems with these schemes still.

Mr Brown: There are many, many calls but at the heart of this issue is whether we are taking the right action that is necessary to get the funding into businesses in our country. When I tell you that 60,000 businesses have already benefited, you cannot say that nothing is being done, you cannot say that the initiatives are not working. At the same time, the Enterprise Finance Guarantee Scheme, so that your constituent or other constituents are clear, was launched on 14 January and already loans are being made. The Working Capital Scheme comes in on 1 March after approval from the European Commission. The Bank of England scheme comes in on Friday and that is for large companies. The Inland Revenue scheme has been working over these last three months and helping thousands of people. It is true that there are different ways of helping different companies. Small company needs are different from the large company needs. Medium-sized companies often simply want working capital. We are taking steps in all these areas to provide the help that is needed.

Q32 Sir Alan Beith: Prime Minister, for the record I wonder if afterwards your office could write to the Chairman and let us know how that figure of 60,000 businesses is made up. I do not want to enter into a debate about it now but it would be helpful if we could know what it is based on.

Mr Brown: I would be very happy to give all the details. I just say that I think some of your questioning is behind the times because we are getting money out to companies and we will continue to get more money out to companies. I want it to be quicker, obviously, as do you, but the idea that companies are not starting to benefit from this scheme is simply wrong.

Q33 Mr Morley: Prime Minister, I was very interested to hear what you were saying to Andrew Miller about the idea of the UK being a world leader in such things as green cars. I am sure you will be aware that in terms of the fiscal stimuli which are being applied around the world President Obama, who is just finalising a huge financial package, has very much focused on the green economy. In fact, he said that the US fiscal stimulus was being used finally to spark the creation of a clean energy economy and to create green jobs. Given our commitments that we made as a country, but quite rightly in relation to reduction of emissions and also in the lead-up to the Copenhagen/UN agreement, do you think that the UK fiscal package is focused adequately enough in terms of encouraging new, green technologies?

Mr Brown: I admire what President Obama has announced for America and I think it is true that about ten per cent of this fiscal stimulus will go to environmentally important technologies and potentially jobs in the green industries. I think you will find that the percentage of our expenditure is as high, that we are investing a great deal in environmental technologies and in insulation, everything from what we can do for individual houses and businesses to what we can do for cars and new technologies in relation to vehicles and other things. Of course, as you know, internationally we are investing a great deal also on the Environmental Transformation Fund which is trying to help the process of climate change be addressed in developing countries. We want to be in the lead in these low carbon technologies. We are considering how we can lead in carbon capture storage. We are obviously investing a lot in electric cars. We have, of course, the biggest offshore wind farming industry and we want to develop that, so the range of environmental technologies I think you will find that we are not only investing in but also in time we will create substantial numbers of jobs.

Q34 Mr Morley: These are all welcome investments but I did notice that the Pre-Budget Report itself did concede that the amount of money put forward in terms of supporting green developments may not be enough. On the Environmental Transformation Fund, again, that is a very important investment but a lot of that money is going into established technologies, particularly energy efficiency, again important but not necessarily encouraging the new low carbon technologies in terms of what we can do in this country with our science, with our engineering, with our design. I think there is perhaps a great deal more that we could do in relation to a new green deal. I might also say that I know you will be chairing the G20 meeting in April and these are the kinds of approaches we need to see globally as well.

Mr Brown: I appreciate this because you yourself have taken an important lead worldwide in pushing for these issues to be at the top of the agenda and I respect the work that you have done. I can say to you that to develop low carbon technologies in this country we are not only, with the new Department of Energy and Climate Change, investing more money; we are also concentrating our efforts on where we can be world leaders, and I think you will find that, like carbon capture storage, there are other areas where low carbon technologies and offices to develop these technologies are being developed over time. As far as the Environmental Transformation Fund is concerned, you are absolutely right that a lot of that has been about energy efficiency. A great deal of that is about forestry, by the way, and how we can reduce carbon emissions by avoiding deforestation and investing in that, and remember, 20 per cent of our carbon emissions round the world are from forestry -----

Q35 Mr Morley: Deforestation.

Mr Brown: ----- more than from many other sources. I think you will find over the next few months a general consensus developing round the world as we move to Copenhagen that this is not just a burden upon us to reduce carbon imprints on the world but an opportunity for us to develop these new industries and technologies in the future. I hope, with President Obama and with the European Union coming together on these issues, we can make substantial progress.

Q36 Mr Morley: I notice that just today Lord Stern has said some very similar things and you, of course, commissioned him for his very influential report on the economics of climate change. He is calling for these kinds of measures. Do you think that message will be heard in other capitals around the world?

Mr Brown: Yes. As you can see, I commission a lot of people to do reports. Lord Stern did a report on Africa and then he did the report on climate change, and I think his report is a world-leading report in the sense that it has influenced the debate in many other countries which are doing similar Stern reports. I think he is right: we should see this not just as a challenge but as a basis on which we can build what would be a low carbon economy in the future. Coming out of this downturn I think you will see Britain, with low carbon industries, with digital industries that are leading the world, with some of our creative industries doing well, but I would say also our advanced manufacturing, and I think you will find that in a whole range of manufacturing industries Britain has both the technology and the enterprising companies so that we can invest our way out of this downturn in a way that can create jobs in our country.

Q37 Mr Willis: Can I just follow that up, Prime Minister, in terms of coming out of the downturn and looking at the future? In particular when you became Prime Minister you did in fact say that you wanted to have straight talking and an end to spin, so could you in just a couple of sentences tell us what "market-driven industrial activism" is?

Mr Brown: That is working with the industries of our country to develop the innovative technologies for the future and, instead of saying industry and Government do not talk to each other and they are doing completely separate things, working in partnership. If you are talking about new, innovative industries, they can normally only be developed with a degree of support in science and research from either government direct funding or from the tax credits that are available for people who are doing very important research. I think you will find there is a whole range of industries in this country that need these research incentives.

Q38 Mr Willis: With the greatest of respect, Prime Minister, that is not really what Lord Mandelson, Lord Drayson and Lord Carter are saying it means. They are talking very much about good old-fashioned Government interventions, about picking winners.

Mr Brown: No, they are not.

Q39 Mr Willis: They are not?

Mr Brown: No.

Q40 Mr Willis: So when Lord Drayson makes a speech to the Foundation for Science and Technology, which is literally about putting our research effort into areas where Britain is world-class, what is that other than picking winners?

Mr Brown: The picking winners strategy was about taking one company or a second company and saying that we were going to back this single company to the hilt, and it led, of course, to some of the problems of the old industrial policies. This is a policy of saying, look: there are sectors where we have got great genius. Biosciences, life sciences, is one; advanced sections of information technology is another; the creative industries are another. Let us back the development of skills and research in these sectors. That is what we are talking about.

Q41 Mr Willis: But you have to pick them, because everybody says that they are good at everything.

Mr Brown: Yes, but they pick themselves in a way, because we have got -----

Q42 Mr Willis: They pick themselves?

Mr Brown: We have got great world-class success stories, or potential success stories, in a whole range of industries and sectors, and that is why some of the pessimism about our economy must be replaced by optimism about what we can do in key industries and key sectors of the future. It is not about taking one company and saying we are going to bet the bank on that.

Q43 Mr Willis: I appreciate that, but, Prime Minister, you are talking about key sections, key areas of industry. That means that you have to select them. Given that you have been notoriously bad at selecting losers, as we have been talking about for most of this morning, I want to know what are the criteria you are going to use to pick these winning sectors.

Mr Brown: First of all, I do not -----

Q44 Mr Willis: You are not going to do it?

Mr Brown: First of all, I do not agree with what you said about the original discussion this morning. Banking, whichever way you look at it, -----

Q45 Mr Willis: You have backed a lot of losers, Prime Minister.

Mr Brown: ----- is a strategic sector in the economy, and you cannot, as we have found, because banks are so entangled and interlinked with each other, allow banks to fail. That has been the lesson of this crisis and that is why the regulation has to be tougher. Banking is a strategic sector; you cannot ignore that fact. The second thing is that we are not picking individual companies. We are saying, "Here are sectors where we are doing well, where we have got great expertise -----

Q46 Mr Willis: No; I have agreed on the science. I want to know how you are going to pick the sectors. What Lord Mandelson is saying and what Lord Drayson is saying is that in terms of these world-class areas we have put public funding in science, for instance, into developing those new, innovative industries, and that means that this is a massive change of policy whereby you do not follow the traditional route of blue skies research and serendipity in terms of creating the industries of tomorrow; you start to pick them.

Mr Brown: We are one of the few countries in the world that is increasing its science budget very substantially during a downturn. We are doubling the science budget. That is pure science and that is applied science, but we are not neglecting pure science to back applied science. We are increasing our investment overall in science.

Q47 Mr Willis: You believe then that in terms of picking these key areas that your Science Minister is talking about, now with a Cabinet committee, that there is not a change of policy to identify those areas at the expense of others?

Mr Brown: No. What we -----

Q48 Mr Willis: It is not a credible position, that, is it?

Mr Brown: Let me just be absolutely clear. We are not picking individual companies and saying what we are going to -----

Q49 Mr Willis: No, we have agreed on that. We are talking about key areas.

Mr Brown: Equally, we are seeing sectors in our economy which have growth potential where scientific advance is giving us new opportunities for the future, and it would be foolish of us not to invest both in the pure science and in the application of it, and that is what we are doing.

Q50 Mr Willis: So "market-driven industrial activism" is just another piece of spin then?

Mr Brown: Not at all.

Q51 Mr Willis: It is business as normal.

Mr Brown: Not at all. We are investing in those sectors which in a sense choose themselves because of our scientific genius and prowess and making sure that we can get the benefits of that scientific research in a way that we have not done always in the past.

Q52 Mr Willis: But you have a massive example of plastic electronics which was a disruptive technology which was going to be a world leader. We have developed the science here in Britain, out it goes to Dresden to be manufactured and then into the States.

Mr Brown: But that is exactly the issue that we are trying to address. Where we have scientific advance and where we are making huge progress in both science and technology we should be in a position to benefit industrially from that. That is exactly what we are saying, so you make my point for me.

Chairman: We now move to the public sector consequences.

Q53 Mr Leigh: Good morning, Prime Minister. With the recession deepening by the day and with interest rates at an historic low and deficits at an historic high, what more can you do now to boost the economy without ruining it so that it really does become flash rather than Flash Gordon?

Mr Brown: I do not agree with you. I think the action we are taking is absolutely essential and I hope that you would agree it was the right action to be taken.

Q54 Mr Leigh: No; I am not arguing with the past. I am just saying what more can you now do with interest rates at such a low and deficits at such a high?

Mr Brown: If you take what is happening, for example, the VAT cut, you have seen two months of the VAT cuts. It has got another ten months where it is going to raise the amount of money that consumers have in their pockets. You will see a number of measures that are coming in in the next few weeks and months that are dealing with the problems, as we have said, of loan finance for small businesses. The measures we have put in place will start to have their effect, and, of course, the Governor of the Bank of England has stated his policy to make sure that inflation gets to two per cent.

Q55 Mr Leigh: So you have shot the arrows and that is it?

Mr Brown: No, I did not say that at all. What I said was that a number of measures that we have announced will be coming in in the next few weeks -----

Q56 Mr Leigh: But there are no more arrows you think we can afford?

Mr Brown: I am not going to get into predicting what is in the Budget at all.

Q57 Mr Leigh: We have seen that if we rush public spending, and there have been numerous PAC reports into the Rural Payments Agency, the NHS computer, we often get waste. As you bring forward your spending plans to boost public spending which was originally planned for 2011 how are you going to avoid waste?

Mr Brown: Because we have already, first of all, implemented the Gershon plans and we are going further than Gershon. Gershon, you may remember, wanted to achieve efficiency savings of 25 billion. At that point we decided also to reduce Civil Service numbers by a net 80,000, and I believe that has now been achieved. The Civil Service numbers are at their lowest for many years. Now we are embarking on the next set of efficiency savings after Gershon and that is a matter for the different departments to meet their commitments to meet these efficiency targets.

Q58 Mr Leigh: Actually, you are finding it fairly difficult already under current spending plans to meet your efficiency gains. The independent National Audit Office report in 2007 found that of the efficiency gains reported at that time one quarter fairly represented efficiency gains, so as you dramatically increase spending how are you going to ensure that you maintain the pressure on efficiency gains?

Mr Brown: What happened with Gershon was that he identified 25 billion of efficiency savings. That was a very big decision that we made a few years ago, to cut the number of civil servants as well as to cut the amount of leeway that departments had without assuring us that they had made efficiency savings. Since achieving Gershon we have pushed up the amounts.

Q59 Mr Leigh: No; that is precisely my question, Prime Minister. You have not achieved Gershon. The independent National Audit Office said that only one quarter fairly represented efficiency gains. We all know that achieving efficiency gains is the most difficult thing in Whitehall. Now you are dramatically increasing spending and we want to know how you are going to ensure that you meet your present targets.

Mr Brown: I do not accept that we have not met Gershon. We have met Gershon. I think it is generally recognised that what we set out to do with Gershon was achieved. It was 25 billion of savings. We achieved them before the time that we had set for achieving them. We reduced Civil Service numbers by a net 75,000 or 80,000; I cannot remember the exact figure, but that is what we managed to do, and we are embarked on a further round of efficiency savings. I think your question may be about what we are going to do in the next stage and I am quite happy to explain that to you, but I do not think you should doubt what we achieved in the last stage.

Q60 Mr Leigh: So how are you going to maintain the pressure now on efficiency?

Mr Brown: Because departments now have very tough targets that they have to meet in relation to efficiency for the future. You chose a number of high profile projects. I disagree with you about the NHS computer. I think it is a necessary project. I think the fact that it is a difficult project does not mean to say that it is not -----

Q61 Mr Leigh: 12 billion spend, four years late, Fujitsu having pulled out, Lorenzo only working in one ward in primary care trusts. Do you think that is a great achievement, Prime Minister?

Mr Brown: And patients are getting electronic prescriptions now, people are being able to book their hospital appointments from their computer. You cannot say that that is not an advance, for all the huge problems that a huge project like that has created. You want to abolish it. I say that that is a necessary -----

Q62 Mr Leigh: I do not want to abolish it. I want it efficiently.

Mr Brown: No, you do want to abolish it, and I think that is a necessary -----

Q63 Mr Leigh: When have I said that?

Mr Brown: Your party has. I am glad we have now found that he disagrees with his party.

Q64 Mr Leigh: My last question is that you are going to rely -----

Mr Brown: I just say that with something like the NHS computer it is easy to say it is of no use to anybody, but actually it is providing the electronic prescriptions, doctors' records are being kept, at the same time as providing a means by which people can book hospital appointments.

Q65 Mr Leigh: You are going to rely very much on the private sector as you boost investment. How are you going to ensure that projects like PFI do not suffer with a lack of private capital investment or that the burden falls on the taxpayer as they pull out?

Mr Brown: We have been looking, obviously, at the Private Finance Initiative and we have been looking at it in relation to the problems that private investors have. Many projects are still going ahead as planned, I just have to say to you, and many of the projects that we are looking at we believe we can find a way forward for, and I think you will find that the Treasury will announce what it plans to do in the next few days.

Q66 Mr Sheerman: Prime Minister, can I carry on with that line of questioning in the sense that evidence given to our committee, Children, Schools and Families, from the Construction Industry Council and from the Royal Institute of British Architects only ten days ago did express some real concerns about some of the really flagship projects that I know you as Prime Minister are very proud of, Building Schools for the Future, the rebuilding of the further education estate, and, of course, they are, if you like, in full flood. There were some real concerns that there were some serious difficulties with gaining the finance because a lot of that finance was coming from overseas. I know you cannot give too much away but are you confident that we can meet that demand for finance in these PFI contracts?

Mr Brown: Obviously, we want to look very carefully at how we can make sure that what is probably the most ambitious programme for schools infrastructure in the history of education, that is, to rebuild or modernise every single secondary school, can be properly funded for the future. I am told that no Building Schools for the Future schools have failed to reach financial close. I am told also that 2009 has started more positively for BSF than many predicted. The total value of BSF schemes reaching financial close is now 1.3 billion of conventional capital and 1.9 billion of PFI credits, and that means there are currently 100 schools in construction within BSF and we expect a further 20 schemes to reach financial close by the end of 2009, so, while people obviously will be worried that their financial backer on the private side may not be available, the record at the moment is that we are bringing these projects to a conclusion, but where there are difficulties in terms of private finance I believe the Treasury is about to bring forward proposals.

Q67 Mr Sheerman: Prime Minister, there is serious concern. I have heard from Manchester, from Birmingham, from Wakefield, from London boroughs that they are struggling to get finance. These banks are no longer willing to commit to 25 years. They are preferring seven to ten years with a break in the middle. This is really affecting the fundamental basis of PFI initiatives. I am really concerned. What I am picking up in the country is not what I am hearing from ministers.

Mr Brown: I just have to say to you that half a dozen banks have indicated in the last few weeks that they are in the market to finance this CDM debt, and while individual authorities may have questions I think you will find that the Treasury is working on measures by which existing PFI projects that some people think may be at risk can be secured. I take very seriously what you say because we want these projects to go ahead. They are an important stimulus to the economy if this investment can take place quickly, but, as I say, there are currently more than 100 schools in construction under Building Schools for the Future at the moment.

Q68 Mr Sheerman: I acknowledge that, but, Prime Minister, the other thing that can happen in a recession too often is that the private sector cuts back on training, cuts down on skilling and reskilling their workers. That is a real challenge and if you had seen the reports from the IUSS select committee and my own committee you will see that we have recommended that even to meet the present targets you are going to have to encourage massive investment in apprenticeships in the public sector - in hospitals, in health, in universities, in colleges and local authorities. How are you going to respond to that challenge?

Mr Brown: I am pleased you have asked that because you are absolutely right. The public sector has not been as good at apprenticeships, with very specific exceptions like the Ministry of Defence which has done very well in the past. We are looking at how different departments and organisations, the Health Service, education services, can contribute to apprenticeships for the future. At the same time we are saying that in this period of difficulty we will pay for 35,000 extra apprenticeships this year, so where the private sector is unable to do this we are persuading leading providers of training to what you might call over-train, to take on additional apprenticeships, and already hundreds have been taken on or are about to be taken on, so that we can maintain the level of training of apprentices in the future. Remember, ten years ago there were 60,000/70,000 apprentices in the country. Today there are something in the order of 225,000. We want to be able to maintain that in all the sectors in which it is important and that is why we will give special finance to the 35,000 extra apprenticeships this year.

Q69 Mr Sheerman: But, Prime Minister, in a recession it is a real opportunity to invest in skills. If you only listened and perhaps talked to Chris Humphries, the Chief Executive of the Employment and Skills Commission, who believes that putting noughts on what we are doing at the moment in terms of skilling our workforce, reskilling, enabling people over 18 to come easily back into apprenticeships is the fastest way to do something about the recession. Indeed, to go back to Elliot Morley's question, he believes that reskilling the workforce to green the public estate alone would produce seven times more jobs than investment in capital projects and it would come quickly.

Mr Brown: You said if I could only talk to Mr Humphries. I talked to him on Monday. We had a meeting with him and the National Employment Panel on Tuesday. We are looking at a proposal, which I know Elliot Morley will be happy about too, for the greening, if you like, of our public estate. That is an idea that is being worked through at the moment, so I can assure you that all the indications I have are exactly what you say, that training is important at this time, apprenticeships not being reduced but increased so that we can take ourselves through this downturn, and, of course, getting young people who leave school into jobs or apprenticeships is going to be a very important part of that.

Q70 Mr Sheerman: Prime Minister, can you give a guarantee that no young person leaving school at 16 in this interim period, in the recession, before we get the leaving learning age to 18, which I strongly support, will be without training or an apprenticeship?

Mr Brown: I want us for school leavers to be able to be in a position to say that every school leaver will have the chance either of a job or of an apprenticeship or of some form of training that will take them through to a job in the future and we will publish our proposals on that in due course.

Q71 Mrs Ellman: Prime Minister, have you been given any information on how many train operating companies have told the Department of Transport that they are facing difficulties in meeting the conditions of their franchise obligations because of a reduction in passenger numbers that has come about because of the recession?

Mr Brown: First of all, the railway industry has been one of the success stories of recent years. Far more people are using our railway industries and there has been far more investment in the railways than in the past. We have announced today, as you may know, a 7.5 billion investment, which I think is worth more than 20,000 jobs, for new building of trains for the future. We will continue to invest in the industry. I have not directly heard from rail operators myself. I know there is an issue both about rail fares and also about the usage of the railways during this particular period of time.

Q72 Mrs Ellman: I would like to go further on this whole issue of the franchises because it is very important. It was reported to the Public Accounts Committee by the Director General of National Networks at the department that a number of franchise holders were on what he called "a red light". It is also alleged that there is a memo in circulation from ATOC, the Association of Train Operating Companies, warning the department about problems the train companies are facing. That should be of concern to you, surely, and if it is the case that those companies are coming to the Government and saying they cannot meet the conditions they promised to carry out will the Government give them more money or will they let them cut services to the public?

Mr Brown: Contrary to some reports, and I hope I am reflecting the views of ministers in the Department of Transport, the possibility of cutting services has not been raised at any meetings with ministers. Under the current regulatory system, and you are more expert on it than probably I am, risks and rewards are shared between the train operators and government and most franchises are set up to ensure that the operators are supported during periods of economic slowdown, and in turn they share the profits with the government in times of strong economic growth. That is the basis on which we continue to move forward.

Q73 Mrs Ellman: But if the companies are saying they are not going to make their anticipated profits will the Government renegotiate the contracts or will the Government take over those contracts themselves?

Mr Brown: We expect operators to abide by the requirements of their franchise agreements.

Q74 Mrs Ellman: And if they tell you they cannot do that what will you do?

Mr Brown: I believe the operators understand that, and I just repeat: the possibility of cutting services has not been raised at meetings with ministers.

Q75 Mrs Ellman: And if the train companies could not continue with their franchises would the Government consider taking them over themselves?

Mr Brown: I am not going to talk about hypothetical instances because the information I have is first of all that passenger volumes remain high.

Q76 Mrs Ellman: But the train companies have said they are not as high as anticipated, and indeed the official statistics on passenger ridership shows that passengers are increasing but at nothing like the anticipated level. Do you not see that as a problem?

Mr Brown: Passenger volumes remain high; they are increasing but not as fast as people expect them to increase. We are investing 15 billion in the network over the next five years. 10 billion of that is on increasing capacity. We have a regulatory system that deals with these issues when they arise, but I want to correct reports that somehow the possibility of cutting services has been raised with ministers. It has not.

Q77 Mrs Ellman: Let me ask you about train fares. There has been great public concern because of a massive increase in fares that came about in January. That was based on the retail price index last July. Because of the recession the RPI has come down and is now just over one per cent, but because the increases were based on the situation last July it meant that train passengers were facing increases of at least seven times more than the rate of inflation, in some cases very much more. Do you think that is reasonable?

Mr Brown: The RPI Plus 1 has been the index that has been operated. I just say to you that in 2009 the July RPI, which is the basis on which future fare increases will be decided, is expected to be very low indeed, and that means that further fare increases should be expected to be low. Over the last ten years, as published by the Office of the Rail Regulator, their fare index shows that increases of these regulated fares have on average been below inflation, and that is a point that has been taken into account.

Q78 Mrs Ellman: But our concern is in the future and that is not the case now. When the train companies were questioned -----

Mr Brown: Mrs Ellman, if I may say so, -----

Q79 Mrs Ellman: When the train companies were questioned about this in the Transport Committee and they were asked if they would be reducing their fares next year if the RPI went down again, they hesitated and they said that would be up to the Department for Transport, so will you be happy for train fares to be cut if the RPI goes down next July?

Mr Brown: I am pleased that you now allow me to make the point that I was trying to make but the fare increases in 2010 will be based on July's 2009 RIPI figure. I do not know what it is going to be but I expect it to be very low.

Mr Leigh: Thank you very much. We are now going to look at the impact of the recession on housing, first with Phyllis Starkey and then with Andrew Dismore.

Q80 Dr Starkey: Prime Minister, housing of course is both a private and a public sector issue, and the Government is committed to stepping up the rate of house-building to deliver three million new homes by 2020, with an increasing proportion of new homes for social rent or otherwise affordable. I want to say that all the evidence that our Committee has had is that the housing need which actually underpins those targets has not gone away. What has gone away of course is people's ability to express that need through economic demand and, as a result, the new house starts in 2008 are half that in 2007. The measures that the Government has announced have been largely welcomed by witnesses to my Committee, but what they have complained about is that the scale of them is inadequate. There is no evidence that it is actually feeding through into speeding up house‑building. Are you considering increasing the scale of the amount of money that is being put into this?

Mr Brown: Let me say one thing by way of introduction about the housing market. The housing market in Britain is different from America or from countries in Europe such as Spain. In America there has been an over‑building of houses. One of the reasons that their problems have been so great is that they have got a whole stock of houses that over a period of years may not be buyable. Of course, it is true in Spain as well where one of the big problems of their downturn is over‑building ---

Q81 Dr Starkey: Prime Minister, can I get you back to our problem. We know what the problem is: we do not have enough houses to meet housing need and they are not being built because of the economic downturn. How are you going to get it restarted?

Mr Brown: I know you have got a limited amount of time and therefore you want to press on with the questions, but I do think that the context is important. Therefore there is a shortage of supply in the long or medium term in Britain.

Q82 Dr Starkey: Absolutely.

Mr Brown: Therefore it is right to use this downturn, where possible, to stimulate the housing market. There are two aspects of that. Firstly, building companies have insufficient capital and therefore are holding onto land but cannot develop it and, secondly, people cannot get the mortgages that they want at an affordable rate, so you have got to deal with both problems. The first problem we are looking at is how we through the Homes and Communities Agency can stimulate the use of existing land with planning permissions to get building moving again, and there are measures we are looking at to do that.

Q83 Dr Starkey: Sorry, are you looking at additional measures?

Mr Brown: Of course.

Q84 Dr Starkey: Does one of those include, for example, the Homes and Communities Agency sharing the equity on some of that land with developers, because that would help to unlock development and bring it forward?

Mr Brown: This is a very interesting issue that we are exploring. It is how land with planning permission can be released for building by people who cannot afford to build on it at the moment, and whether you can get arrangements between government and private building companies, or third parties who may wish to come in and invest in this, so that for social housing as well as for ordinary building of private housing for sale, you can actually get the market moving, so, yes, we are looking at this.

Q85 Dr Starkey: Good, can I encourage you to do that.

Mr Brown: The second aspect of that, just to say, is on mortgages where, you are absolutely right, we have to get to a situation where mortgages are more available now than they have been over the last few months. We are talking to the banks and the building societies about that. When they sign a lending agreement with us so that they can secure the advantages of the latest measures that we have put in place, we will be asking them to increase their lending and get quantitative figures that can assure us that lending will increase. We are also looking at how we can, if you like, use Northern Rock more effectively to offer standardised mortgage products.

Q86 Dr Starkey: That was indeed one thing that I was going to suggest, if we slowed down the rate at which Northern Rock were repaying the taxpayer, as a quid pro quo we could ask them to deliver that money into shared ownership mortgages, which would then help with other actions that the HCA is continuing to take to try to meet the needs of those first‑time buyers. Can I just deal with another issue about the money. The money that has been set aside for these measures ‑ and we welcomed it ‑ is mostly, almost all in fact, not new money. It is money from the CLG budget which has been brought forward, and the problem with that is that we are going to have a problem then in 2010/11 because the money that should have been spent in 2010/11 on the housing starts that would be required will not be available. What are you going to do to make sure that we are not robbing future years to ensure building goes ahead now?

Mr Brown: I think you will agree with me that it is right to bring forward the money so that money is available now, so that houses can be built in situations where there are building workers and also building companies able to do so. Obviously we will look at the situation again, but the priority now is to get the housing market moving as quickly as we can, both by the new building that we want to see and by getting mortgages into place.

Q87 Dr Starkey: But preferably by new money not by taking it from the year ahead?

Mr Brown: There is some new money here, but I think the first thing to do is to advance the existing money so that we can get action now at the time when it is most needed when the people are looking to the Government to act in this way.

Mr Leigh: We have to keep within time I am afraid, Prime Minister, so Andrew Dismore.

Q88 Mr Dismore: In a recession a Bill of Rights, including social rights like housing, could help protect hundreds of thousands of ordinary people against powerful interests like the banks. Could this be done without involving the courts in political decisions, for example through legal and administrative procedural safeguards like a right not to be evicted without proper due process? That would have overcome the recent decision in the courts, for example, which allowed someone's house to be sold over their heads after just one mortgage default without any court order, by making them trespassers, which is what the law presently allows?

Mr Brown: As you know, I am very worried about some of the practices of people at the bottom end of the house loan market. I do not believe that these practices can be justified, and we have got to make sure that we can give people better rights than they have at the moment. There is new advice, as you know, to judges that you have to go through all the necessary procedures before you can contemplate a repossession taking place. There is also the agreement that we are having with the building societies and banks that there is a moratorium on action for repossessions, and we will be bringing in a new measure that I mentioned in November, and that is that we will be prepared to work with the building societies to provide a floor, so that when someone asks for an extension of time to pay their mortgage, we can work with the building societies to make that possible. The changing of the rules, the moratorium on mortgages, the support for the unemployed, and then, at the same time, what we are trying to do to provide a floor for this market are things that I think will help all the people that you are talking about.

Q89 Mr Dismore: But it does not help when loopholes appear because there is no overriding general right. Whilst the courts can enquire into a general repossession case, they have no power to intervene where a mortgage company sells the house over somebody's head, which they have got the right to do. The householder is then a trespasser in their own home and they can be repossessed, with no defence, no enquiry by the courts, along the lines that you have suggested. If you had a general right against eviction, subject to appropriate enquiry, that would overcome that. Why can we not have a general right like that in a Bill of Rights?

Mr Brown: There is, as you know, a huge debate about the Bill of Rights and Responsibilities that we are looking at. We are going to publish detailed proposals on that very, very soon, and obviously what the rights are in relation to housing will be one of the most interesting and most debated areas. For the meantime, I think the advice that we are giving to judges is important, but I agree with you that there are problems, mainly at the bottom end of the lending market, where unscrupulous practices, in some cases, have deprived people of rights that in any civilised society you should have, and so we are looking at that with a special eye to make sure that these repossessions do not happen in that way.

Q90 Mr Dismore: I was interested in what you said about a Bill of Rights coming soon, Prime Minister, because I asked you that in December 2007 and you said that it would be coming out in January 2008, so we are now a year on and we still do not have a Green Paper. Are we going to see it before Easter?

Mr Brown: We have been having discussions about this. This is obviously very difficult territory because what is a right and what is a responsibility and what is the legal basis of it and what is the constitutional necessity or advisability of legislating in these areas is very important, and it leads on to issues of a written Constitution for Britain and everything else, but I can assure you that the work is being done with the department and you can expect a publication soon.

Q91 Mr Dismore: One other aspect on this, have you any objection in principle to a public sector duty to achieve progressive realisation of rights such as housing, health and education in a Bill of Rights, building on a similar approach that you have already proposed in relation to the targets for child poverty, which are statutory, and the NHS Constitution. Do not political, economic and social rights all go together? Are they not all interlinked?

Mr Brown: In each area we are talking about both rights and responsibilities. The NHS Constitution, as you know, is a set of rights but also a set of responsibilities, on both the NHS but also on the patients themselves, and I think we have to look at housing in that respect as well. You are right, this is a major issue of debate and I think it will be advanced by the publication of the paper on the Bill of Rights.

Q92 Mr Dismore: Are we going to get that before Easter?

Mr Brown: I cannot give you an exact date, and I think given my past statement on this it would be better to say "as soon as possible"!

Mr Leigh: Right, Prime Minister, we have saved the best till the end: Keith Vaz.

Q93 Keith Vaz: Prime Minister, yesterday the ONS published statistics which showed that the number of people out of work had gone up but also that the number of people in jobs who were of foreign origin had also gone up. Mr Sheerman was born in Sunbury‑on‑Thames; Mrs Ellman was born in Manchester; and I was born in Aden in Yemen. Does it really make any difference if anybody is contributing to the economy that we should be recording statistics of those who are born abroad but have every right to work in this country?

Mr Brown: First of all, this is a decision that the independent Office of National Statistics has made. This is not a decision that the Government has made to publish this information. I actually think that the information records the fact that only eight per cent of the British workforce are people who are non‑UK nationals. I think if people put that in its proper perspective they would say that those people with skills who are making a contribution to our economy, who have come from other countries, can make that contribution, but, equally, the number of non‑UK nationals and non‑UK born people in our workforce is substantially less than countries like America or Australia.

Q94 Keith Vaz: Were you flattered or angry when you saw a line out of one of your speeches being put on the banners outside the oil refinery in Lindsey? Do you think that statements of that kind may well be misused by the Far Right in their campaign to basically stop immigration into the United Kingdom?

Mr Brown: Statements taken out of context can be completely misleading. I think if you look back on the speech that I made, I wanted to say that in an open global economy, where there is a huge amount of mobility, it is important that we do everything in our power to give British workers the skills that are necessary for them to be able to get the jobs that are available in our country. I think everybody round this table would want that to happen. It was an issue about giving people the skills in Britain that made it possible for them to get jobs, and that of course is in situations where we are still needing skills in a number of key areas, and we need to persuade people to get the skills.

Q95 Keith Vaz: My Committee took evidence from the BMA and the National Farmers' Union; there is still a shortage of skills in this country. Do you think the points‑based system will address the shortage of skills while creating a proper balance between jobs in this country?

Mr Brown: I would like there to be more appreciation of what the skills points system is trying to achieve. It is trying to get the balance right. Where people have a contribution to make to this country with skills, we should welcome people, but where there are no skills needed in a particular area, we have just got to be honest with people that that is not an area where we need their skills. That is really what the points system is doing. The points system is continuously revised, so as people have more information about skills deficits, but also skills surpluses, we can make decisions in these areas. I think you will find over time that the points system that we have introduced reduces the number of people coming to our country, but it enables us to get people with the skills that they have to contribute to our economy and society.

Q96 Keith Vaz: Finally on crime, there was a memorandum that was passed from the Home Office to your office in which it said that there was a risk of a "credit crunch crime wave", in particular in respect of knife crime, where we have seen 84 knife murders last year, 23 of them being teenagers in London itself. What further action is the Government going to take first of all on the general issue of the credit crunch crime wave and specifically on knife crime?

Mr Brown: I think you are actually talking about a memo that went from the Home Office to the press without necessarily coming to my office! It is of course important that we do everything that we can. First of all, greater measures have now been taken to deal with the problems that might arise from burglary, but there is also what we do about knife crime. I met the Knife Action Group panel this week. I met a very brave man, Mr Taylor, who has been campaigning since the loss of his son Damilola. I also met other people such as Brooke Kinsella, whose brother died as a result of a major crime last year. All the people there from the different groups are determined ‑ so many different campaigns in different parts of the country ‑ to make the carrying of knives unacceptable to young people. This is a key point: you are not safer with a knife, you are less safe because the danger is that it might be used. This campaign "No to Knives", which has enlisted the support of football clubs and people from sports and the music world and everything else, is now taking root in the country, telling young people in schools and clubs and everywhere else: "Do not carry knifes. Like guns, knives are completely unacceptable in our culture." I think it will start to make a difference, particularly to that group of people who have been most susceptible to being persuaded that they might be safer carrying a knife.

Keith Vaz: Thank you.

Q97 Chairman: Prime Minister, how optimistic can you be about regenerating the housing market when traditionally nearly half the mortgage sources are from overseas?

Mr Brown: First of all, as I was explaining to Phyllis Starkey, there is a pent‑up demand for housing in this country over the medium term. Whatever is happening in the immediate circumstances that people face, we are not in a position where we have too much supply; we have too little supply of housing. That is the difference between us and other countries. When circumstances are favourable, builders will want to build, and we have got to give them the incentives to do so as quickly as possible. Then we have to solve this problem of affordable mortgages, and I believe that perhaps the mortgage market could be simpler. There is no justification for mortgages above 100 per cent but there is a justification for mortgages for people to get into the housing market at 70 per cent, 80 per cent, 85 per cent and so on, and that is what we are looking at at the moment.

Chairman: Thank you. We now move to the final session on the recession, the international dimension, and back to John.

Q98 John McFall: Prime Minister, in answer to an earlier question from me I understood you to say that you want the FSA to have powers to penalise banks over pay and bonuses. Was that correct?

Mr Brown: What I think the Financial Services Authority could do is look at the position and capitalisation of banks, and on the basis of the risks that they are taking, with short‑term bonuses for employees, they can be tougher in their regulatory standards. That is one way that you can discourage irresponsible behaviour. The issue in our country is this: we want to reward hard work, we want to reward enterprise, we want to reward effort, and we want to reward responsible taking of risk, but we cannot reward irresponsibility and excess. If the regulatory authority is in a position to say that this is an unacceptable risk or a risk that is too great and therefore we would discourage it, but if it has a sanction to discourage it, I think that would make a difference.

Q99 John McFall: The reason I ask that is that the Banking Bill has been going through Parliament for the past two months. Could you give a commitment this morning to insert such a clause in that Bill so that it is loud and clear exactly what we expect?

Mr Brown: The head of the FSA is doing a report for us on these very matters to report by the time of the Budget. I think it would be premature to say that we have the exact legislative words on this, but I can give you an assurance that when the report is done by the Head of the FSA it will be dealt with very quickly.

Q100 John McFall: And when is the Budget, Prime Minister?

Mr Brown: That is a matter for the Chancellor but I understand that he is announcing the date today.

Q101 John McFall: On the global debate on the banking system, is it not the case that you have been out‑manoeuvred by Obama? You have been left at the starting post both on the issue of limits on executive pay and on the issue of tax avoidance, on which your Government is hugely ambivalent?

Mr Brown: No, I think you are wrong on that. In October we took far tougher action than other countries. We said to the chief executives of these companies and the chairmen that there were no bonuses, no cash bonuses and no shares bonuses, and we said that there were no dividends to be paid. We actually said, as they resigned, that the whole boards would have to be restructured or go. We took very tough action at the time, both in relation to pay and in relation to the ability of people to stay on who had been in banks that were coming to government for support. I think you will find that that was some of the toughest action that was taken around the world. Now we have got to look at this issue below the board room of bonuses that are being paid. Contractual obligations have been entered into, but the principle must surely be this for the future: no short-termism in the award of bonuses; rewards only for long‑term success; rewards only if what you have achieved is sustainable; and rewards that can be taken away because this cannot be a one‑way bet if at one point your performance is not good enough. I think that these principles could form the basis of a better system of remuneration for the future, backed up if possible by the regulatory work of the Financial Services Authority.

Q102 John McFall: Chancellor, I have remembered my second point which was tax avoidance.

Mr Brown: I think you will find when we get to the G20 in April that there has been a considerable amount of work done on this about both tax and regulatory havens, so I do not think you will find that we are behind the curve on this at all.

Q103 Sir George Young: Prime Minister, can we go back to an answer you gave to an earlier question when you outlined the measures that have being taken to cope with the recession, and you said that, with limited exceptions, everything the UK had done was being copied in the rest of the world. One of the limited exceptions is the reduction in VAT, is it not?

Mr Brown: I am very surprised that you wish to raise this.

Q104 Sir George Young: That is not an answer to the question. Has anyone else copied it?

Mr Brown: There are different measures that have been taken in different countries to boost consumption.

Q105 Sir George Young: But no‑one has actually cut VAT?

Mr Brown: Some people have frozen VAT rises but nobody has cut VAT, as I understand it. I think you will find that our measure is actually working. I just do not understand how political parties in this country see it to their advantage to say that the cutting of VAT and giving people consumer power is such a bad thing to do. That is exactly the way that you get money into people's pockets so that they can, with more confidence, spend during the period of a downturn.

Q106 Sir George Young: Many European finance ministers have taken a totally different view and said that there are better ways of spending the money than that.

Mr Brown: Some people in your own party have taken a different view. I think you have got to be a bit more balanced in the way that you approach this.

Q107 Sir George Young: Can we move on to how this is all going to be paid for. If you look at the holding of government gilts, roughly one‑third are held overseas, about 150 billion, and if you look at the Pre‑Budget Report, the Government is going to have to borrow about 630 billion in gilts over the next five years. Have you not got to have a look at the impact of this on sterling? Can I just quote what the Deputy Governor of the Bank of England said one possibility for sterling was that "external investors lose faith in the policy framework that the UK operates under..." Does that not have to be a constraint on what you can do in coping with some of the internal pressures for reflation?

Mr Brown: But the policy framework is the right one. Look, you have got to understand that what has happened is that monetary policy has lost its ability, because of the downturn, to have the impact that it normally should have. In these circumstances, as the Governor of the Bank of England has himself advocated, what is left to the Government is to use fiscal policy. I think you would agree with me that almost every government in every part of the world is now using fiscal policy to do so. We are in a position to do so because we have lower national debt than many other countries, not higher national debt. I would appreciate it if people recognise that debt levels are higher in France, Germany, Italy, Japan and America, and we are in a position, in what is a very difficult circumstance, to borrow to enable us to take us through this downturn.

Q108 Sir George Young: I understand that but is not one of the constraints on fiscal policy the impact on the exchange rate? If you look at the risk premium that is factored into holding sterling, it is widening as compared with other countries' steps. If you look at what the President of the ECB says: "If you augment too much of your own borrowing, you might be punished by the markets. If you are at the limits of what you can do, you lose more with the absence of confidence and loss of ability to proceed than you would from the simple additional spending." In other words, if you reflate and you lose confidence in your currency, you are worse off than if you stayed where you were.

Mr Brown: I am sorry to disagree with you. I know there is this new penchant to quote Europeans all the time to justify a particular case. I do say to you this: first of all, we are not targeting sterling. That policy of trying to fix the exchange rate was not successful, whether it was shadowing the Deutschemark or shadowing the ERM, or then in the ERM; it was not successful. As far as confidence in the British economy is concerned, the Chief of the Debt Management Office has just said in the last few days: "The amount of debt we are raising is sustainable. The market has shown the ability to absorb the much bigger amount of issuance." Faced with a situation where in America the fiscal stimulus is far bigger and where in Europe every country, including countries which decided that they did not want to do it originally, are now doing this fiscal stimulus, I have to say to you that in the conditions that we face at the moment, which is essentially a global banking crisis that has deprived the economy of liquidity and then the economy of funding, and where monetary policy cannot have the impact that it normally has, the responsible and the prudent thing to do is to use fiscal policy to take us through these difficult circumstances.

Q109 Sir George Young: Without any regard to the impact on the exchange rate?

Mr Brown: We do not target the exchange rate.

Q110 Sir George Young: That was not the question.

Mr Brown: I am not going to get into a situation which previous Governments have got into where they make statements about the exchange rate in a way that is damaging to the British economy. I think if you reconsider what you have said, you would be careful about making those statements as well.

Q111 Sir George Young: Can we move on to the IMF. I assume that you have no plans to go to the IMF. You hope that you do not have to, but is it something that you can rule out?

Mr Brown: I think the level of discussion about the position of Britain and the position of every economy in this world is reaching an absurdity when people make these comments or statements. Look, we are an economy with a low level of debt and with low inflation, and we are an economy that has low corporate debt outside the financial sector. We are a country that is investing substantially in our future in a way that is designed to give us the jobs and the industries of the future. Every country in every single continent of the world is facing these problems. If I told you that yesterday China announced that they had a fall of 41 per cent in their exports in January and that Japan had a fall of 20 per cent in its industrial production in the last three months, this is a global crisis, and the idea that this is a unique British phenomenon that requires us to take measures that are quite extraordinary for our times is just simply ridiculous.

Q112 Sir George Young: Can I quote what the Managing Director of the IMF said at a seminar earlier this week, which I think you were at: "The IMF has bailed out a number of countries but there will be many others in need of help in the months ahead." The IMF has also said that the UK is facing the most severe slowdown of all developed economies. Against that background, how can you be quite so confident that we are not going to face troubled waters?

Mr Brown: I think you are doing yourself a disservice by the way you are putting these questions. Everybody knows that the debt level of the United Kingdom is lower than other countries. In other words, we are able to afford the borrowing that we are undertaking. Everybody knows also that all the other continents of the world are facing problems that are similar to ours as a result of what is a global banking crisis. This attempt you are making to make this somehow a uniquely British phenomenon, that has got British causes only and British ministers or British Governments to blame, is a disservice to actually getting to the heart of what is the problem and how we deal with it. This is a global banking system that melted down. It is a freezing of global financial markets. We are all trying to get out of this situation by dealing with the problems of our banks ‑ and these are banks in every country of the world. The problem is that our banks are so international that national regulation systems cannot deal with this on their own, and that is why we need international co‑operation. I think it is a disservice to our country to try and suggest that this is a unique British phenomenon, because it is clearly not.

Sir George Young: I think against a background of previous problems that Labour Governments have had on the foreign exchange front, these are wholly legitimate questions to put to a Prime Minister.

Q113 Michael Connarty: I would like to talk about protectionism. In the present economic downturn, from your own speeches, you appeared to accept that some countries, including what you might call the more developed EU countries, are acting in a protectionist manner, particularly with financial protectionism, in withdrawing finance facilities from emerging EU countries. For example, financing is down from 300 billion in 2007 and predicted to be only 20 billion in 2009 and there are also in threats to withdraw car production facilities from those same countries. What are you doing to defend UK businesses who trade and work in this these EU countries against damage from such activities?

Mr Brown: The first thing is there is no answer to this problem by protectionism. If you have a continuation of protectionism, all you do is what happened on other occasions and there is a downward spiral affecting every country. What has actually happened in the last few months is there has been a withdrawal of foreign banking capacity in countries such as Eastern Europe and the rest of the world. That is now feeding through into a reduction of trade and the danger is that we have financial protectionism that is matched then by trade protectionism. I think we should be very cautious about what is being done, and that is why it is right to monitor any protectionist measures that are taken in other countries. As far as the British car industry is concerned in relation to other car industries, we have done what we can to make sure that the loan finance is available. We introduced a 2.3 billion scheme only a few days ago. Of course we are looking at the car loan market as well. We will take the action that is necessary, but we must warn other countries that protectionism is not the answer because it leads to a downward spiral where there is less trade and less consumption and fewer jobs.

Q114 Michael Connarty: What you seem to be saying is in fact what we do is a little in our own country and we warn others. That does not sound to me like actually doing anything to answer the question I just gave you. What are we doing across Europe? I notice the Czech Presidency is going to call a special Euro Group conference on protectionism. That is action. What are you doing?

Mr Brown: The special European Conference is not on protectionism; it is about the measures that we take together to reach a recovery. For example, on Tuesday the European finance ministers met to consider the general principles that should guide us as we deal with the questions of bank losses and failed assets in the banks, and where you can achieve that co‑operation, so you do not have one country doing something at the expense of another, it is to the benefit of us all. I think what we should be looking for is greater European and global co‑operation through this time. If you take, for example, a bank that is a British bank with a lot of assets in America, or in Eastern Europe, or in Germany, then we are all affected by the impact of its poor assets on the banking system generally. We have got to find means by which we deal with these problems together. If you take the car industry, it is important that we discuss what measures are taken across Europe and America. It is important, as I say, that you send out a message that protectionism is a short‑term panacea that does not work.

Q115 Michael Connarty: Moving on to labour protectionism, I have just come back this week from the COSAC EU Committee Chairmen's conference where it was made plain to me that the UK is seen as initiating, and thereby inviting, protectionism in labour policies with the recent "British jobs for British workers" strikes. It was made quite plain by a number of speakers. We know there are 47,000 UK posted workers on contracts in other EU countries and only 15,000 non‑British posted workers in the UK, but recently publicly on television the threat was made by the Unite full-time official in Scotland that there was a threat of ships full of low‑paid non‑British workers sailing up the River Forth and taking the jobs at Mossmoran in your constituency and at Grangemouth in my constituency. Is it not time now to make NAECI construction industry agreements legally binding for the Posted Workers Directive, as they are in some other EU countries, thus avoiding the exploitation of workers and underpinning support for labour mobility throughout the EU without exploitation?

Mr Brown: You are right about the National Association for the Engineering and Construction Industry; they have issued a statement over the last few days to clarify their position. Their position is that while it is of course a Single Market for both the award of contracts and for the mobility of people that the sensible thing for British companies and non‑British companies who receive contracts in Britain, is to advertise where jobs are available locally so that people can get the chance to get these jobs. Of course there are obligations where there are displaced workers in the existing firm where they get a contract in another country, but where there are jobs available the advice is to advertise locally so that these jobs can be taken up. That is not only the advice but the policy that is being pursued by that industry federation now.

Q116 Michael Connarty: You have not answered the point. Is it not time that these agreements, as they are in Ireland, are legally binding for the Posted Workers Directive? If we have a national agreement on industry, why should the Posted Workers Directive not ensure that workers coming to this country are paid those rates of pay? That would then get rid of this problem of what is a total fantasy of people being accused of coming to this country to be exploited and underpaid.

Mr Brown: If I may say so, the issue that has arisen is the last few weeks is not about the rates of pay.

Q117 Michael Connarty: Yes it is.

Mr Brown: No it is not.

Q118 Michael Connarty: Yes it is.

Mr Brown: It is not mainly about rates of pay at all.

Q119 Michael Connarty: Yes it is. I disagree with you, Prime Minister. It has been made quite plain, I believe in fact you had a delegation yesterday in Number 10 to say that is what they want. They want legal binding agreements for the Posted Workers Directive.

Mr Brown: The issue of the Posted Workers Directive is now subject to a group that has been set up by the Commission to look at the implications of all these judgments, which include Laval and Viking and all the other judgments, and there is a group that has been set up of the employers and the workers to look at this issue. We will look at what these two groups say, and if there is a need for change in our legislation we will make it.

Michael Connarty: Excellent.

Chairman: Before we leave this theme Tony Wright wanted to ask a question.

Q120 Dr Wright: Could I just go back and pick up a conversation that Michael Jack was having with you earlier on. You are trying to get us out of this mess, but I do not think we yet know quite how we got into it, and the more that you say and the more that comes out each day suggests that we still have a lot to learn about this. We know that there was a reckless approach to risk. We know that there was an obsession with growth on the part of these financial institutions. We know, as you have said today about HBOS, there was a flawed business model. You said that the FSA to some extent knew about these things. When we have a catastrophe in this country, normally we have a proper forensic inquiry to find out what the cause of it was and what the lessons are to be learned. This is a big catastrophe; do we not deserve an inquiry like that?

Mr Brown: This is, as I think you understand yourself, a set of global issues that is affecting every country, so there is not one set of causes in one country and another set of causes in another country; there are common causes that have got to be looked at. The context was external imbalances, the context was the search for high yield, but the trigger was the failure of the banking system itself. It started, as you know, in America and the mechanisms that people thought were there to, if you like, spread risk and diversify across the system actually spread contagion across the system, and so there was a seizing up of the mortgage markets in the States and that then led to a seizing up of general financial markets across the world. If you are going to look at the source of this problem, and the causes, you have got to look at the whole global picture. I think that is a lesson that the G20 would want to learn when it meets in April. There is very considerable international discussion in the IMF, in the World Bank and in the international organisations like the BIS of the causes of this. Obviously there are lessons to be learned for regulation, and I will do everything that I can to make sure that any changes that are necessary in the regulatory system are made. Basically the regulatory system was trying to keep up with huge advances made in technology and in financial engineering in the system, and the regulatory system has got to be changed so that we can deal with these problems in the future. However, this is certainly a global financial crisis that started as a global banking crisis.

Q121 Sir Patrick Cormack: Prime Minister, if you believe that, as you clearly do, and you say these things very convincingly, I put to you a question that I put to you on the floor of the House last week. People out there are expecting political leaders to work together to combat what is the greatest crisis perhaps for 60 years, in the words of the Chancellor, or for 100 years in the words of Ed Balls. Would it not make sense, as you seem to have all the answers, listening to you this morning, for you to invite in the leaders of other parties and seek to get some support for some of these measures that you have been putting before us?

Mr Brown: We did have, as you know, meetings with the Opposition parties around October and then the statement was made by the Leader of the Opposition that he had changed his mind about co‑operation. I think that where people can work together that is a good thing. That is why I have brought into the Government people from outside politics who can bring some expertise to our work. Most recently Mervyn Davies, who was the Head of Standard Chartered, has come in as our Trade Minister. I am trying to draw on the broadest possible group of people in the business world as well as in the political world to help us. We have set up the British Business Council and that involves all the major leaders of our major industries, not the financial sector but our major industries, and they are working with us, too, on these issues, so where we can achieve co‑operation we will, but I am afraid that there is a fundamental disagreement at the moment about what actually should be done. We believe that there has got to be monitoring and, on top of that, fiscal action, and there is not yet an agreement amongst all the parties that this is the right thing to do.

Sir Patrick Cormack: You should try and persuade them.

Chairman: Peter Luff would like to follow up on a point you made about the Budget.

Q122 Peter Luff: Just briefly, Prime Minister, I see that the Chancellor has announced the date of the Budget as 22 April. That is quite late by Budget standards. Is there a reason for it being so late?

Mr Brown: It is for the Chancellor to make these decisions but, as you know, we have a meeting of the G20 on 2 April, and I think the context for any financial decisions that are being made by most countries is going to be what internationally we can achieve. I have a real hope that on 2 April we can make some steps forward. How we solve the problems will depend on the level of international co‑operation.

Chairman: We now move to our final theme, foreign affairs, and Mike Gapes.

Q123 Mike Gapes: Prime Minister, the appalling situation in Gaza has caused a great deal of concern, both in this country and internationally, and also I have to say some anger. We have now got unilateral ceasefires but that was not a negotiated solution. What prospect is there for a lasting agreed ceasefire?

Mr Brown: First of all, I talked to Prime Minister Olmert yesterday, and also met President Abbas in the last few days from the Palestinian Authority. I believe if we do not seize the current situation and try to build on that with positive moves towards peace we will back again in the same situation in a year or two's time. Yes, you are right, first of all, we have got to get a wholly intact ceasefire; secondly, as I said to Prime Minister Olmert, he has got to guarantee humanitarian access; thirdly, we have got to support the Egyptian conference on the reconstruction of Gaza but, fourthly, we have to move forward with the elements of the peace process which are essential, not just for getting a settlement between Israeli and Palestinian peoples but essential for the security and stability of the whole region. I would like to see an initiative taken very soon. Obviously George Mitchell is now the US envoy to the region, he is working with Tony Blair, who is also the representative from Number 10, but I think it is important we take an initiative soon on the peace process.

Q124 Mike Gapes: We will come on to some of those questions in a moment. Can I just press you on the current situation and the conflict. The Secretary General of the UN, Ban Ki-moon, described Israel action as disproportionate. The International Committee of the Red Cross and the United Nations Relief and Works Agency have both spoken about the closure of Gaza and the difficult access as being a form of collective punishment. What can and what should the international community do to pursue those matters to make sure that those issues are dealt with appropriately in international bodies?

Mr Brown: First of all, we have got to make sure that there is humanitarian access, and that is what I was pressing Prime Minister Olmert on. All the relief agencies, the aid agencies, are saying that the amount of aid that is getting in is insufficient to meet the difficulties that they now see have got to be dealt with. So that is the first thing. The second thing, obviously, is we have to make sure the peace settlement holds, now that will require the opening of the borders and agreements on that as soon as is possible. I know that talks have been taking place on that but beyond that, I stress, you are not going to get out of these problems because the problems in this region are essentially illustrated by what happened in the war. You have got Israelis worried about the security, you have got Palestinians without a viable state, you are not going to get through these problems in the long term unless you move towards the peace settlement we are talking about.

Q125 Mike Gapes: If a country says that it is going to take disproportionate action, as Prime Minister Olmert said, and if the UN Secretary General says an action is disproportionate, what sanctions and what action can the international community take to deal with such conflicts?

Mr Brown: As you know we supported - America abstained - the resolution of the United Nations, not only calling for an immediate ceasefire but calling for all the humanitarian access you are talking about and calling for reconstruction programmes to be implemented. I think this can only be solved as a matter of negotiation, and I think there is enough there that is a possible framework for the settlement around the Arab peace initiative as well as around the statements that Mr Olmert and others have made from Israel for peace talks to begin very soon. I would say myself that you can see the elements of a solution, of a settlement, you can see what you need to do on land, on refugees, on Jerusalem, as well as on the building of settlements and the release of prisoners. There is a basis for moving forward and the sooner we get these talks started again the better.

Q126 Mike Gapes: In 2007 we had a Palestinian national unity government and at that time the international community decided that it would not engage with that national unity government because it had Hamas ministers. At this stage efforts are being made to re-establish a Palestinian national unity government. Will the Quartet and the international community now engage with that national unity government, if it is formed, including with the Hamas ministers?

Mr Brown: I think you are speculating about the possibility of the national unity government. I talked to President Abbas, obviously this is what he wants to achieve, but I do not think that I can be as sure as you that is what is going to happen. Look, at the end of the day, it will be the other Arab states that will put pressure on the Palestinians to come together. We want an unarmed Hamas not an armed Hamas and we want them to recognise the state of Israel instead of denying its existence but I think what you will see over the next few weeks is more that we and others are trying to bring the Arab peace initiative to life so that every Arab state is in a position to recognise Israel and then there is a basis for settlement based, as I say, on these problems being solved: land and the 67 borders, a one to one land swap, then you have got the issue of Jerusalem, and how you can solve that, and I can see a way forward and others can as well, and then the issue of refugees.

Q127 Mike Gapes: Prime Minister, is there not a fundamental problem here though. You will never get a two state solution, you will never get a viable Palestinian state whilst the Palestinian authority is divided. You need to have a national unity government of some kind but if the European Union, the United States, the Quartet, collectively, do not engage with aspects of that national unity government, if we do not allow our Quartet envoy Tony Blair to engage with Hamas, if Senator Mitchell on behalf of the US does not engage with Hamas we will never have a political solution that allows the two state solution and the kinds of outcome that you just described because it will not be possible because of the continued division amongst the Palestinians.

Mr Brown: I have just got to say to you, even if you had that national unity government you would require the support of those countries that have signed up to the Arab peace initiative. I think we would be deluding ourselves if we believe this is not going to be a settlement that involves many of the Arab states having to come together ---

Q128 Mike Gapes: Absolutely.

Mr Brown: --- possibly within the framework of the Arab peace initiative itself and, therefore, it is a wider process of peace-making which is going to be the solution to this problem.

Q129 Mike Gapes: Prime Minister, is not that Arab peace initiative itself now under threat because of this division? There was a conference where the Qataris and the Syrians established a kind of rejectionist position. I met the delegation of Iranian MPs who came here and they were positively crowing about the fact that the 2002 initiative was in deep trouble and that the rejectionist position had been strengthened by this conflict.

Mr Brown: I do not agree that the Arab peace initiative is in the trouble that you talk about. I think there is a general will from Arab states to make that work. I think, obviously, the lead is, Saudi Arabia and Egypt. I think Qatar could be persuaded to be part of that initiative rather than part of the other conference that you are talking about but that demands us to say, "Look, here is the basis of a settlement. It is probably very much in line with the original Arab peace initiative and all sides have got to come together to talk about it". I think that is more than just the Palestinians coming together, it is the Arab world coming together as you say.

Q130 Mike Gapes: Does Tony Blair have a role though in terms of bringing about that, not just the economic reconstruction but the political outcome, bringing together a Palestinian national unity government engaging with Hamas?

Mr Brown: Yes, of course he does. The issue, however, is not to assume all the measures you are suggesting are going to happen automatically at all, but the issue is Tony Blair will be working with George Mitchell. I have already talked to George Mitchell, he will be visiting us in London very, very soon. We take a very direct interest in trying to move this peace process forward. I do not want us to be back in a situation two years from now where instead of making progress after a terrible catastrophe in Gaza we simply allowed another set of events similar to develop in the region.

Q131 Malcolm Bruce: While all this is going on, Prime Minister, it is the people of Gaza who are suffering, and they suffered many, many months before the conflict, not just through it. We have 80 per cent who have food insecurity, and poverty at levels worse than sub-Saharan African; we have 500,000 people without access to clean water; we have sewage running in the streets; we have 50,000 malnourished children; we have 71 per cent suffering anaemia and 80 per cent with a vitamin A deficiency and Israel preventing all the essential supplies from getting in. The UK has put 253 million over the next three years into development in Palestine and 27 million into humanitarian relief but how on earth are we going to get that into a position where we turn those figures round in the current crisis? Indeed, is that money going to deliver a real benefit to the people of Gaza and the West Bank?

Mr Brown: You are absolutely right. Not allowing access for humanitarian aid is completely unacceptable. When I have raised it with Prime Minister Olmert, as I have done on a number of occasions, he has promised that he will take action to get supplies into Gaza but the whole international community must put that pressure on. It is urgent that those people who have been left injured or those people who have been left homeless by what has happened in Gaza are given the proper treatment and help that is necessary.

Q132 Malcolm Bruce: Prime Minister, this is not just emergency relief, this is basic day to day life support systems which are being denied to the people of Gaza.

Mr Brown: As you know, we are putting money in, others are putting money in. There is a conference to take place in Egypt very soon. It will give, I think, of the order of $500 million of aid and, therefore, we will increase not only the amount of aid that has been provided by the international community but will also increase the mechanisms by which you distribute the aid. I have also to be clear that Hamas must stop stealing aid that comes in to Gaza for its own purposes. We must make sure that the aid gets directly to the people of Gaza.

Q133 Malcolm Bruce: Of course I agree with that but UNRWA have made it absolutely clear that that is a minor problem by comparison with the lack of access. Can I also focus on our development budget generally because that is coming under intense pressure. We are being asked to put more money into a situation which should not have required it if there had not been this degree of conflict and this degree of oppression but with the depreciating value of the pound and the fact that more people are falling back in to poverty, is it not the case that Britain's development budget will not be able to achieve the objectives that we had? Can I point out specifically that we give a billion pounds of our aid a year to the European Commission, except we give it in euros and when the Government committed that billion pounds the pound was worth a third more than it is now, that works out at 3-400 million a year we have to find out of the aid and development budget simply to make up the sterling shortfall. How on earth are we going to meet our objectives?

Mr Brown: First of all, we are a country that has raised the amount of aid that we have given to countries around the world, and I think whatever disagreements there are amongst people around this table we should be proud that Britain has played a major role in helping to eradicate some of the worst diseases around the world. Today we are working very hard to eradicate polio and malaria but equally HIV Aids as well as educate millions of children by giving them the chance of schooling. There are millions of people who are affected by this world downturn. This will be a subject of the G20 meeting in April. We need other countries to join us by not cutting their aid budgets but making sure that their aid budgets are maintained so that we can get help to people in need. Personally I believe that the World Bank could play a far bigger role in this and I have talked to the President of the World Bank, Mr Zoellick. They have the resources that are available to them. They are a triple-A rated institution. They can extend their lending and what international institutions can do in addition to domestic or bilateral aid is, I think, an incredibly important part of solving this particular crisis.

Q134 Malcolm Bruce: I accept entirely what you said and I accept entirely that this country has stepped up to the plate, and I think all parties have support and recognition for that and for your own Government's commitment to it. My concern now is the change in financial situation means that the development objectives we have set up are now under severe pressure. If we have to find 400 million more simply to pay our commitment to the European Union that is 400 million not available for HIV Aids or poverty reduction in Africa. If at the same time we are having to deal with escalating problems in a place like Palestine, where actually the world should be able to solve the problem without aid and development, is it not the case that we are now going to find ourselves in terms of our ambitions unable to fulfil them and having to cut back and concentrate on countries that can effectively use the aid and maybe pull out of some that cannot?

Mr Brown: I would put it the other way round. The world cannot solve its own problems without involving these developing countries and emerging market countries. They too are subject to the impact of this financial recession and so the world should come together and agree what it can do to help those countries. I do believe the greatest benefit will come from the use of the international institutions in the short term because they have resources that are available to help with famine and food poverty and also to help with education and health. I think you will see some measures over the next few weeks that will make that happen.

Q135 Sir Patrick Cormack: Prime Minister, I am sure you would agree with me and probably everybody in this room that one of the most exciting and positive things that has happened in recent months has been the election of President Obama. Would you also agree with me that one of the most refreshing moments of the last few weeks was when he very genuinely agreed that he had screwed something up and did not that departure from infallibility make him an even more attractive leader?

Mr Brown: Absolutely, and when I messed up on the 10p tax rate I apologised to people. I do say really two things. One is, as I think you emphasised at the beginning, that President Obama's administration's original announcements, the first announcements, have been very important - about torture, about Guantanamo Bay - but, secondly , what America is doing to resuscitate its economy is very much on similar lines to what we are doing in Britain.

Q136 Sir Patrick Cormack: How many conversations have you had with the President since he assumed office?

Mr Brown: I have talked to the President and I do not want to announce in advance of public announcements but my conversations with him will continue.

Q137 Sir Patrick Cormack: You are having regular conversations with him?

Mr Brown: It has always been the case that British leaders and American leaders have worked very closely together, and that happens at all levels of the administration, as you know. I will continue to talk to him, particularly about the vital issues that we face.

Q138 Sir Patrick Cormack: Are you going to hope to replicate the Blair-Bush chemistry with Mr Obama?

Mr Brown: Everybody deals with challenges in different ways and no one decade is replicated exactly in another decade. I feel the relationship between America and Britain can be stronger because of the shared policies, the shared values by which we approach the international problems that we have. There are four major problems in the world at the moment which really have got to be dealt with. The first is the rebuilding and actually the building of a global financial system. That has not happened because national regulators rather than international supervision and actions happen, so we have got to work on that together. Climate change and energy, we have got to work on that together, and we are looking forward to Copenhagen. It is fortunate for Britain that President Obama shares our views about the need to tackle climate change. Then there are the huge security issues: Afghanistan and Pakistan, looking at them both together which I think is going to be a feature of future months. Obviously we have both made statements about what we plan to do in Iraq for the future, the terrorist threat generally and the problems of the Middle East. Then you have got these huge issues of inequality and poverty which I know President Obama is concerned about but if globalisation, which is where we are, is going to work, it has got to be not only open and flexible and free trade, it has also got to be inclusive and sustainable and these are the challenges we face together, challenges that I think we can work on with a great deal of success over the next period of time. It is also fortunate that European leaders and the American leadership can work together as well.

Q139 Sir Patrick Cormack: Indeed, Prime Minister, and what do you feel are the main implications for British foreign policy of the Obama emphasis on humanitarian aid, on peace-keeping and on a greater engagement with the United Nations, all very significant departures from the previous administration?

Mr Brown: I think it is even bigger than that, I think it is a multi-lateralism that foreshadows the creation of a global society in our lifetime. What has happened around the world is that we have had global markets, global financial flows, global contact through the ease of travel and particularly the ease of instantaneous communication but what we are actually doing is in addition to our national institutions and our national identities and loyalties, we are also building a global society at the moment. President Obama's determination to work multi-laterally, his determination to deal with some of the issues of human rights like torture and his determination to bring a solution to the problems of Afghanistan and Pakistan and the Middle East, as two of the major problems we face, I think makes us see that if we can rebuild the global institutions so that they can actually do a job that solves some of these global challenges then in our generation we can build what people will describe as a global society.

Q140 Sir Patrick Cormack: Just two brief points, Prime Minister. I agree with all of that but would you accept that unless America does exercise its super-power status in the Middle East, the problem that we have seen in Gaza recently, the dire tragedy, is likely to be repeated? Would you also say a word or two about President Obama's forthcoming visit to the United Kingdom? I know that he is coming for G20 and not just for bilaterals but I trust that there will be plenty of opportunity for you to talk to him privately. Will there be an opportunity for him to address both Houses of Parliament?

Mr Brown: First of all, I am encouraged that the Americans have already appointed an envoy to the Middle East. George Mitchell, as we know, is someone who has got international stature for what he achieved in Northern Ireland, so I have got absolutely no doubt that the Americans wish to play an important role and will play an important role in securing a peace settlement. As I keep saying, despite all the violence and all the suffering which may seem to make it unlikely that these elements are in place, I think the elements are in place and we need the political will to move them forward towards a peace settlement. I cannot give you any details of President Obama's visit to the United Kingdom, other than he is looking forward to coming to the United Kingdom and being part of the G20.

Q141 Mike Gapes: One of the areas, Prime Minister, that the new administration has foreshadowed a new approach on is towards Iran. Do you think that there is a real possibility of progress? Are you optimistic that will lead to the Iranians complying with the United Nations Security Council resolutions specifically concerning enrichment?

Mr Brown: I think you are absolutely right that the statement that has been made by the President of Iran that he would welcome dialogue has got to be set in the context of Iran also having international obligations to meet. I want a good relationship with Iran, I want the world to recognise Iran as a partner in development and the prosperity of the world, but I think Iran has got to recognise that if it does not want to be isolated from the international community it has got to abide by some of the decisions that it has agreed to about its role in the international community, and that is why the issue of nuclear weapons is such an important problem because Iran has accepted obligations on the nuclear proliferation agreements but at the same time appears to be wishing to flaunt them. I think the sooner Iran can make a statement saying it is ready to abide by the concerns of the international community then the sooner we build a partnership with Iran. I do not want Iran to be isolated, I want Iran to be part of the international community.

Q142 Mr Sarwar: Prime Minister, the recent finding of a national opinion poll conducted in Afghanistan on behalf of the BBC showed that the Afghans are becoming increasingly disillusioned and uncertain about what the future may hold for their country. Only 40 per cent of those polled believed that their country was heading in the right direction, down from 77 per cent in 2005, and only 38 per cent held a favourable view of Britain. In my view one of the main reasons is because the operations of NATO forces have resulted in thousands of civilian deaths and in some tragic cases wedding parties and children in schools have been killed. What new steps do you think should be taken to revitalise our operations in Afghanistan and improve the situation of the Afghan people so that we can bring a reversal to this process?

Mr Brown: First of all, I appreciate your longstanding interest in these issues and all of us have been worried about two things which have changed over these last few months. First of all - this is what we are going to deal with and this is why I think you are reflecting public opinion and their views on this - the change in tactics by the Taleban. They are effectively fighting a guerrilla war now, roadside devices, suicide bombers, all these IED devices that have caused so much grief to British families because of the loss of brave British soldiers and members of our armed forces but also changing the way that we have to deal with public opinion. The second issue that is, of course, a difficult one is that we can see the flow, unfortunately, of terrorists from Pakistan to Afghanistan and we know that if we are dealing with the al-Qaeda problem we are dealing with a problem that exists in Pakistan as well as Afghanistan. Now that is why there is this two month review that has been decided by the new administration. I have met Mr Holbrooke in the last few days to talk about this review. I think it is important to recognise that first of all we have got to take action to deal with the new type of threat that we have got, secondly that means taking action on the borders, and working with the Pakistan authorities to deal with the terrorist problem there but, thirdly, our policy in Afghanistan must be to work with the people of Afghanistan, and the tribes of Afghanistan, to make sure that in addition to the military action we are taking, we are training their soldiers and police, we are making possible economic and social progress in the country, and we are giving and making sure that there is a system of local government that is effective. So this can never be simply a military strategy, this is about how we can advance development and governance and Afghan people being able to control their own affairs.

Q143 Mr Sarwar: I was in Pakistan, Prime Minister, with a parliamentary delegation and we had the opportunity to meet the Prime Minister and the President and the Speaker of the National Assembly in Pakistan. Believe you me, their view was they are obviously extremely concerned about this rise in Taleban influence in Sawat and FATA areas. They are worried that whenever they make progress, one attack kills some innocent people in Pakistan and that creates some kind of sympathy with the Taleban. Now how can we stop this?

Mr Brown: I too have met President Zardari and Prime Minister Gilani and also the head of the army, Mr Kayani, and I understand their determination and their wish to do something about this terrorist problem. I believe that the Holbrooke Review of the United States of America is directed also to this problem as well as to what is happening in Afghanistan and how we can help the Pakistani authorities fight terrorism. They have responsibilities upon themselves if they are going to make sure that the Government can carry the legitimacy that is necessary, they have got to deal with the terrorist problem themselves, but we also have a duty to help them to deal with that and that is what we want to do. I think you will find as we get to the NATO meeting on 3 and 4 April there will be a new set of proposals about how we deal with the evolving situation of both Afghanistan and Pakistan.

Q144 Mike Gapes: Prime Minister, in Iraq, and we have seen the welcomed recent elections, there was a surge that was very successful in changing the security climate. Do you think there should be a surge in Afghanistan?

Mr Brown: Afghanistan is a very different country, as you know, because the land area of Afghanistan is so great that in areas it is very, very difficult to police or to have a military presence or to have the air support that is necessary. I have just pointed to the change in the tactics over the last year of the Taleban. The issue of troop numbers in Afghanistan is under consideration, as you know, in the United States of America. We have added to our numbers recently, as you know, for a period, and obviously all of us have got to look at what our responsibilities are in Afghanistan, but I do say to you that the answer in Afghanistan will be a combination of military action but also taking action to train the Afghan army themselves. There are 75,000 at the moment, the plan is to raise the Afghan army to 120,000 but even that is, in my view, completely insufficient for dealing with the territories that we are talking about and we will have to train more or help the training of more Afghan soldiers and Afghan police and that really has got to be part of the strategy for the longer term as well. It cannot simply be a military presence without support from local government, national government reform and the development strategy to bring greater prosperity to the country.

Q145 Mike Gapes: In the time that we have got left there are two or three other areas that we need to touch on. Firstly, the recent dispute between Russia and Ukraine highlighted the dangers that we have for the stability and security of European gas supplies and it also raised concerns about the behaviour of Russia towards European Union countries. What can we do to deal with these problems?

Mr Brown: I have talked to President Medvedev on a number of occasions about this and other things. He will be coming to the G20 meeting in April. I believe that we need an energy strategy for the European Union. We cannot afford to be as dependent on one source of energy, whether it is in one country in Europe, outside Europe or anywhere else, and that is why the European Energy Strategy that is being discussed at the moment is important to this. We have got to reduce our dependence on oil and gas, we have got to go for greater access to renewables. We in Britain, as you know, are building nuclear power stations. 16 of the 27 European countries have now decided to either continue or go for a nuclear programme and one of the ways of dealing with this is to reduce our dependence on one country.

Q146 Mike Gapes: Russia has also had big concerns about the United States' ballistic missile defence programme. There seems to be, at least rhetorically, some improvement in US-Russian relations. If the US decided to no longer go ahead with its ballistic missile defence programme, given the positions that our Government has taken saying that was necessary to deal with perceived threats, would the Government then change our position to go along with that American position or do you think that those perceived threats would still be there?

Mr Brown: The main European sites for this new system were not in Britain, they were in other countries in Europe. It is premature to say what has been decided or is likely to be decided by the US administration. I would like to talk to President Obama about these issues first.

Q147 Mike Gapes: If there is an improvement in US-Russian relations, and we have had our own difficulties with Russia on the British Council, harassment of our ambassador, the murder of Mr Litvinenko and a number of other issues, do you think there will be an improvement in British-Russian relations as well?

Mr Brown: These are issues that remain on the table simply because we have not had satisfaction particularly on the first two that you have raised. I keep saying we want good relations with Russia. We have worked with them on Iran, we worked with them on the Palestinian-Israeli issues and we want to work with them in co-operation in the European and international recovery of the economy. We want to work with the Russians and it is only these instances that have prevented the stronger degree of co-operation that we want to see. As far as the relationship with America and what happens in discussions on disarmament, I believe there are major advances we can make over the next year or so on nuclear disarmament. I believe there is a will in America and a will in Europe that we take positive steps on the road to renegotiating the Non-Proliferation Treaty to make sure that we can prevent the proliferation of weapons around the world, to do so with some, if you like, credibility around the world by making measures for disarmament in the countries that have large nuclear weapons. I think that is a very big part of the agenda for the future. If we are to be credible in persuading other countries that they must not have nuclear weapons we must take action in America and Russia particularly to reduce the amount of nuclear weapons that they have.

Q148 Sir Patrick Cormack: Just a very quick question on Zimbabwe, Prime Minister. What is the British Government's attitude going to be now that the power sharing government appears to have been formed? Are we going to be prepared to give aid while Mugabe remains a part of this government? Do we see ourselves as having a role to play in strengthening it? What is your attitude?

Mr Brown: I talked to Morgan Tsvangirai, the new Prime Minister, as you would expect me to do, this week. I talked to him on Tuesday. I said to him that obviously we would want to see humanitarian aid getting to people who are in the distressed position that, for example, the terrible cholera outbreak has caused. I also said to him that until the government of Zimbabwe could convince us that there were going to be free and fair elections, and at the same time that there was going to be the removal of repressive legislation, including the release of political prisoners, until these things happen we could not treat Zimbabwe as if it was an ordinary country. I hope there will be considerable pressure by the international community to release political prisoners, to get in a credible team to deal with the finances and to have a clear roadmap to the next elections that will take place in Zimbabwe. These will be the indicators of change that we will be looking for and I fear that President Mugabe will still stand in the way of these changes.

Sir Patrick Cormack: Thank you very much.

Q149 Keith Vaz: We have really taken you around the world in this session, but I am sorry to raise another country and that is Sri Lanka, which is in a desperate situation. It does not get as much publicity as the situation in Gaza. 70,000 people have died in the troubles, hundreds of thousands of people are trapped at this very moment. It is a humanitarian crisis. You have called for a ceasefire, the Foreign Secretary has met Secretary Clinton and they have issued a joint statement. You have spoken to the President and you have also ensured that aid has been doubled. What further steps can we take because the Sri Lankan government continues to do what it is doing? Can we raise it in the Security Council? Can we use the Commonwealth? What other initiatives do we have to save these people?

Mr Brown: There are two issues that have got to be addressed almost immediately. One is to get to a ceasefire. There was an attempt at a temporary ceasefire a few days ago and that failed, and I am sorry that failed. The second thing is to get a political settlement of what is a long-running dispute that has brought about so much loss of life and so much suffering to this country. I have asked Des Browne, our former Defence Secretary, to be an envoy for Sri Lanka. I want him to be involved in seeing whether there is scope for political progress in Sri Lanka as well as looking at the issues of humanitarian aid. These are very difficult issues but I think he has the experience and the competence and the support of people across the House of Commons that he can do this for Britain, and I am very pleased that he has accepted that. The important thing is to emphasise to all parties that without a ceasefire and then an attempt at a political process we will be back to the same problems that we have had before.

Keith Vaz: Thank you very much. The appointment of Des Browne will be warmly welcomed by the British Tamil community.

Q150 Mr Dismore: In your speech to mark the 60th anniversary of the UN Declaration on Human Rights you were very forceful in your view that the ban on torture was absolute. There has now been a series of very detailed allegations from Human Rights Watch, The Guardian, evidence given to my Committee last week and most recently this week the case of Benyamin Mohammed, that UK intelligence and security agents have been complicit in torture and the mistreatment of suspects by foreign agencies, particlarly in Pakistan but also in Guantanamo. Do these not undermine the credibility of the Government's stated position against torture? Is it not time that we had some transparency about this and some proper answers perhaps through an independent inquiry looking at some of the policy issues? Not just the detail obviously because that would be secret but the actual policy implications of what is going on here and what rules our intelligence services operate under.

Mr Brown: I think you are right to raise these issues because of the public concern. Our policy is very clear: we do not practise torture and we do not condone torture. That is the policy of our Government and I am pleased that is now also the policy that has been promulgated by the American administration under President Obama. The Foreign Secretary has made two statements in the last few days about the case of Benyamin Mohammed. I think you know the details of what he has said. I can only say in addition to that, the allegations that have been made are being investigated by the Attorney General, as you probably know, and we will have to wait for her report on that before we can go further.

Q151 Mr Dismore: The allegations are pretty clear, Prime Minister, that UK agents supplied questions to be put to these people, that they were there interrogating after they had been tortured where visible marks were on their bodies and it must have been apparent, therefore, that they had been tortured. If that was viewed as complicity that would be completely contrary to the UN Convention Against Torture. Should we not have some transparency, some of this coming out into the public domain so we know what exactly has been going on? The policy statement was absolutely clear and you have restated it today absolutely clearly, that is an admirable, laudable position, but the real question is, is this filtering down to the agents actually working on the ground?

Mr Brown: I just say that these accusations were put to the Attorney General on 23 October by the Home Secretary. The Attorney General is consulting on these issues. I have got no information about how she is likely to proceed because it is a matter for her. I think the earliest we will receive her decision is March. It is important that we go through that process and the questions you have raised are very much part of the process that she is undertaking.

Chairman: Thank you, Prime Minister, for very full answers to an enormous range of questions. Thank you.