Examination of Witnesses (Question Numbers
150-159)
MR NICHOLAS
MACPHERSON AND
MS LOUISE
TULETT
22 OCTOBER 2008
Q150 Chairman: Permanent Secretary, could
you introduce yourself and your colleague formally for the shorthand
writer?
Mr Macpherson: I am Nicholas Macpherson,
Permanent Secretary to the Treasury, and on my right is Louise
Tulett, who is the Financial Director.
Q151 Chairman: We are here to review
your annual report and performance over the last year. I note
from page 14 that your objectives are to maintain a stable macroeconomic
environment and promote efficient stable financial markets. Yet
over the last year the British economy is suffering from a massive
collapse in asset house prices, has been over exposed to the downturn
of financial services and the financial market has been so poorly
promoted that five of our banks have needed public support. Has
the Treasury not failed?
Mr Macpherson: I think I would
be the first to agree that it has been a very challenging year
for Her Majesty's Treasury. The organisation has been having to
cope with and address challenges on a very broad front. Have we
succeeded or have we failed? On the positive side, I think we
are moving to a far more stable situation for the banking sector
following the recapitalisation of 10 days or so ago. On the wider
economy, clearly we are in very difficult conditions, certainly
the most difficult I have seen in a long time, and what is making
those conditions particularly complicated is that this is not
just an isolated set of events in the UK—if it were, the
policy response would be rather easier—it is a global set
of circumstances which are creating real pressures and problems
right the way across the world, and you have seen that over the
last week with a number of countries having to go to the IMF,
Iceland being perhaps the most striking example, which is having
quite big implications for us.
Q152 Chairman: But your objective
was to have a stable economic environment and efficient and stable
markets. This is a massive policy failure, is it not, by the Treasury?
Mr Macpherson: If you think that
it would have been possible to maintain inflation at 2%, steady
growth through the last year and a thriving banking sector, given
the conditions which exist both in the UK and across the world,
that just simply is not possible at times like this. I think the
Treasury has done a good job in these circumstances but I fully
accept that conditions are very challenging. Inflation is 5%,
the budget deficit has increased through the year—these
are difficult circumstances. All we can do is try and ensure that
policy is in the right place to deal with those conditions.
Q153 Chairman: You referred to sound
public finances. You were supposed to be borrowing £43 billion
this year. You have already borrowed £37 billion. Is there
no upper limit on the amount of money you as accounting officer
will allow ministers to borrow?
Mr Macpherson: What is driving
the current public finances is a revenue effect primarily. If
you look at both sides of the balance, it is a problem around
revenue. As accounting officer, we are not in a world of tax-farming
where I am required to go out and get a certain level of tax.
Q154 Chairman: What is the answer
to my question? As far as the accounting officer role is concerned
there is no upper limit over which you will not allow ministers
to borrow?
Mr Macpherson: As accounting officer
I have clear responsibilities in relation to both the level of
spending in the Treasury and also for various key funds, like
the Consolidated Fund. If we were in the business of spending
money which Parliament would not permit or had not agreed to,
then I would have a real problem as an accounting officer, but
we are in challenging times. For example, only last week ministers
came to Parliament for an out of turn supplementary estimate.
These are very challenging conditions and in some places spending
will be higher.
Q155 Chairman: So there is no limit
on what ministers can borrow, in your view, as accounting officer?
Mr Macpherson: Ultimately, the
limits are partly defined by Parliament in terms of the taxes
you are prepared to raise and the spending you are prepared to
agree to but also the markets, in that, ultimately, borrowing
has to be financed.
Q156 Chairman: But we cannot rely
on you to set the limit. The out of turn estimate that you have
just referred to, you requested £4.6 billion for Bradford
and Bingley and £600 million for the transfer of deposits.
In the memorandum provided to us you explain that the net payments
were actually lower—£4 billion and £595 million—because
you had an off-setting payment. Why were these payments made to
you by Abbey and ING and why did you request a gross rather than
a net figure in the estimate?
Mr Macpherson: I will ask Louise
in a minute to explain the accounting side of this, if I can home
in on the substance. The money relating to Bradford and Bingley
was that part of the deposits which were effectively sold to Abbey
Santander, which was not covered by the Financial Services Compensation
Scheme. My recollection is that there was something like £18
billion worth of deposits, £14 billion of which will be paid
for by the FSCS. That leaves the remainder. We received, I think,
£600 million from Abbey Santander for the branches and the
deposit book, in effect, and that will obviously net out. Louise,
do you want to explain why we have to get an estimate for 4.6
rather than four?
Ms Tulett: The estimate requires
not only cash but also the authority to spend money, and, therefore,
in keeping with normal supplementary estimates, we would have
asked for the authority to spend the gross amount and then we
have surrendered the receipts over to the Consolidated Fund. So
the advance from the Contingencies Fund was a request not only
for cash but also the expenditure authority.
Q157 Chairman: Has the accounting
treatment for these two transactions been agreed with the NAO?
Ms Tulett: No, it has not yet.
We are in the process of actually working through the fine detail
of those and, once we have settled our proposed treatment, we
will pass that to the NAO for their comment.
Q158 Mr Todd: Last year you managed
to produce resource accounts for us which I think we congratulated
you on. This time round you produced your resource accounts after
the production of your annual report. There was a delay. Was there
a reason for that?
Mr Macpherson: Yes, a very good
reason. First, we welcome the fact that you welcomed what we did
the previous year, which is to try and get a single report out
promptly, and in the previous year that was possible to do in
June. This year—it relates to the previous question about
Bradford and Bingley—there were particularly tricky accounting
issues around Northern Rock. We were determined to get our report
out before the summer, but there was a point in July when it looked
like there was a real possibility that we would not resolve those
accounting issues with the National Audit Office this side of
the summer. We took the decision that we had to get something
out there, so we published the annual report. As it happened,
within a week, we did resolve those issues, so we got the accounts
out too. Personally, I would much prefer to have these things
in one document—it is easier for you and it is easier for
us—but we had to make that judgment. I would very much hope
that we can resolve any accounting issues in good time next year
to ensure that we publish a single document in the summer, but
we have been in slightly new territory in the last year and it
was genuine technical accounting issues which had to be worked
through, not the fact that we were not extremely open with the
NAO or that the NAO somehow—
Q159 Mr Todd: Was there an issue
of timeliness, because the commitments over Northern Rock were
quite some time before the requirement to produce your annual
report or resource accounts? There were clearly some issues to
resolve, but was there a problem of timeliness in discussing the
matter with the NAO?
Mr Macpherson: I think one of
the problems was that Northern Rock was nationalised fairly late
in the financial year. Louise, you were actually involved in these
discussions.
Ms Tulett: Yes, the conversations
were around not only how the investment would appear on the balance
sheet but also around evaluating the guarantees that were being
given. We did not end up in any particular dispute with the NAO
around the treatment of these items. In fact, you will note that
the departmental report's unaudited figures did not move between
the departmental report and the actual accounts being published.
So, even though they are called unaudited in the 2007-08 outturn,
in the departmental report they are consistent with the figures
that eventually appeared in the annual accounts. There was no
major shift. It was not only around the accounting treatment but
also around the quality and the depth of the disclosures that
we were discussing, but we did not at any point have a dispute
with the NAO. We wanted to make certain ourselves that the information
that we presented to the NAO for audit was robust and was something
that we would recommend to the accounting officer to publish,
and then the NAO, quite properly, had to take a proportionate
amount of time to do their due diligence around that and to come
to their conclusion that that was a true and fair representation
of the situation.
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