2 AN EXTRAORDINARY YEAR
4. All Treasury-associated bodies faced extraordinary
challenges during 2008-09, mainly arising from the need to respond
to a growing financial crisis and associated economic downturn.
In his foreword to the HM Treasury Annual Report and Accounts
2008-09, the Chancellor of the Exchequer placed these challenges
within the context of a world economy that "has faced exceptional
pressures through 2007 and 2008, with the financial crisis of
late 2008 resulting in the sharpest and most widespread global
downturn in well over 60 years" and acknowledged, with a
degree of understatement, that "this has been a difficult
year for the Treasury".[3]
His Permanent Secretary, Sir Nicholas Macpherson, told us that
2008-09 had been "certainly the toughest year in my working
life."[4]
5. We obtained a similar sense of challenging times
from other Treasury-associated bodies. For Robert Stheeman, Chief
Executive of the DMO:
2008-09 provided the most challenging operational
environment to date for the DMO. The requirements of the DMO this
year have been greater than ever before and the market conditions
in which the DMO had had to operate have been the most difficult
in the organisation's eleven year history.[5]
Lesley Strathie, Chief Executive of HMRC, wrote in
HMRC's Annual Report that "the last year has been one of
great change for HM Revenue and Customs" and that "the
prospect of a sustained global economic downturn meant we had
to fundamentally review the way we delivered our core functions."[6]
Similarly, Paul Spencer, Chairman of NS&I felt that "this
has been an exceptional year, in the truest sense of the word,"[7]
whilst Jane Platt, NS&I's Chief Executive, told us that "over
the last year we have certainly lived through some exceptional
times, as we have dealt with the flight to safety post the Lehmans
crisis in the autumn"[8].
The full force of this drama was felt less by the Royal Mint,
though it too had change to report since in April 2007 the Chancellor
announced that it was to be vested into a Government-owned company,
with transition expected to be completed by 31 December 2009.
Chief Executive Andrew Stafford confirmed to us during oral evidence
in October that "yes, we are on track. Everything is being
done to complete the process by 31 December."[9]
6. The rest of this section draws out common themes,
including the extent to which the Treasury and its associated
bodies have had to take on new activity and/or greatly increase
the volume of normal activity. We consider how successful this
activity has been, and the cost in terms of pressure on people
and other work.
New activity
HM TREASURY
7. Over the course of 2008-09 the Treasury and its
associated bodies had to take on a number of new activities. HM
Treasury undertook a series of interventions to stabilise the
financial system, of which the most novel were:
- the creation of UK Financial Investments Limited
to manage, on behalf of the Treasury, the Government's investments
in Northern Rock, Royal Bank of Scotland and the Lloyds Group;
- the development of the Asset Protection Scheme
to provide protection against future credit losses on certain
assets, in exchange for a fee. The terms and nature of the Asset
Protection Scheme changed through the year as financial conditions
improved; and,
- the establishment of the Asset Purchase Facility,
or "quantitative easing" to enable the Bank of England
to inject money into the economy through the purchase of assets,
primarily Government gilts.
HMRC
8. As announced in the Chancellor's 2008 Pre-Budget
Report, HMRC introduced a new Business Payment Support Service
designed to "offer otherwise viable businesses, in temporary
financial difficulty, a fast and streamlined service for arranging
to pay their tax bills to a timetable they can afford."[10]
In October 2009, Chief Executive Lesley Strathie informed us that
"by 11 October we had taken 335,700 calls from businesses
and we had arranged more than 217,700 time to pay arrangements
worth just over £3.8 billion."[11]
NS&I
9. Finally, at the height of the financial crisis
in autumn 2008, the NS&I became a safe haven for savings as
savers lost confidence in private banks and building societies.
Net inflows into NS&I (including reinvestments) rose to £9.57
billion in Q3 2008-09, a dramatic increase compared with previous
Q3 results of £2.49 billion (2004-05), £2.98 billion
(2005-06), £4.42 billion (2006-07) and £3.78 billion
(2007-08). As the table below shows, it is also revealing that,
over a 5 year period, the next two biggest quarterly net inflows
were recorded in Q2 and Q4 2008-09.
Table 2: Gross inflows into NS&I (including
reinvestments)[12]
As a consequence, as the table below shows, NS&I
took record levels of sales through each of its principal channels—post
office counter sales, post office postal sales, direct postal
sales, telephone sales and internet sales—during 2008-09.
Table 3: Sales performance by principal
channels[13]
High volume of 'normal' activity
HM TREASURY AND DMO
10. When not taking on new roles, HM Treasury and
its associated bodies have also had to handle increased volumes
of high priority 'normal' activity. The Treasury still had its
full range of objectives to carry out. Robert Stheeman, Chief
Executive of the DMO, told us that although over the last year
his priorities "have not changed that much. The overall task
that we have been set has become that much larger."[14]
In the case of the DMO, this involved the successful selling of
£146.5 billion of gilts through 66 auctions during 2008-09,
"by far the highest volume of gilt supply in a financial
year…delivered following two major revisions to the financing
remit set by HM Treasury."[15]
HMRC
11. HMRC too had to work harder to fulfil its primary
tax collection objective during a recession. For example, it had
to react quickly to introduce, at short notice, a reduction in
VAT. Lesley Strathie told us that "…the huge burden
for us was the speed at which we had to implement that change."[16]
Successes?
HM TREASURY AND DMO
12. HM Treasury and its associated bodies were understandably
keen to highlight their successes during the 2008-09 period. In
general, HM Treasury sought credit in its Annual Report for taking
measures which stabilised the financial system. More specifically,
the DMO could point to its continued ability to sell record levels
of gilts, and Sir Nicholas Macpherson stressed to us that "the
DMO has been remarkably successful at funding sudden needs."[17]
HMRC
13. Lesley Strathie pointed to the creation of the
Business Payment Support Service as "a huge success and a
real demonstration of how fleet of foot HMRC can be when asked
to deliver. Within three weeks we had this service up and running."[18]
She also commented, in relation to the introduction, at short
notice, of a reduction in VAT, that "again we did a fantastic
job to reach 2,000 businesses and the media and everybody else
in the industry to make sure people were in shape to do it."[19]
NS&I
14. Jane Platt, NS&I Chief Executive, told us
that:
NS&I and its operating partner, Siemens,
did a marvellous job in the face of huge unsolicited volumes in
staying open for business. Our contingency plans worked, staff
cancelled their holidays, they did extra shift, they really 'busted
a gut' to be able to make sure that we offered a good service
to customers.
Asking us to consider "what would have happened
if NS&I had not been open for business at a time when people
were so concerned about their savings" she recalled visiting
NS&I call centres during the 'flight to safety' and "listening
to people of all ages, some of them in tears, talk about how concerned
they were about the safety of their savings" and how experienced
NS&I operators "were able to calm people down at a time
when emotions were running very high."[20]
Measuring performance
15. It is striking that, during the course of 2008-09
HM Treasury, NS&I and the Royal Mint all changed their objectives.
Both HM Treasury and NS&I explained their changes as a consequence
of the prevailing conditions.
HM TREASURY
16. HM Treasury re-wrote indicator outcome 1 (a)—meeting
the fiscal rules—of its first Departmental Strategic Objective
(DSO). Famously, this indicator outcome used to measure the Government's
performance against the 'golden rule' that the central budget
be in balance or surplus over the course of an economic cycle.
HM Treasury's 2008 Pre- Budget Report explained that, to achieve
its wider financial stability objectives in exceptional circumstances,
the Government would depart temporarily from the 'golden rule'.
Accordingly, HM Treasury's 2009 Annual Report measures performance
with regard to meeting the fiscal rules against the following
temporary fiscal operating rule:
To set policies to improve the cyclically-adjusted
current budget in each year, once the economy emerges from the
downturn, so it reaches balance and debt is falling as a proportion
of GDP once the global shocks have worked their way through the
economy in full.[21]
During oral evidence, we put it to Treasury Permanent
Secretary Sir Nicholas Macpherson that this new statement was
full of motherhood and apple pie but not a lot of meaning. He
responded that:
It is always very important to have some sort
of objective or rule to guide fiscal policy. I can remember that
under successive governments the objective had changed from time
to time, but in terms of credibility one needs something that
guides policy.
He accepted though that:
Given the events of last year I would not attach
so much importance to the rule as to the actions of the government.
There comes a point when you can announce whatever rule you like.
What gives you credibility fiscally is what you do. [22]
And admitted that:
There was a debate about whether we should just
suspend the rules. Our view and that of the government as a whole
was that to suspend the rules would create more uncertainty than
if at least we made clear that there was some objective that informed
policy and then we would set policy consistent with that objective.
I do not believe this rule will be a permanent one.[23]
Finally, he pointed out, in a reference to the Government's
Fiscal Responsibility Bill, that:
if the government is to legislate a hard budget
constraint, which is my understanding of the announcements in
September and October, that will provide a harder edge and an
opportunity for both the public and parliament to hold the government
to account on whether it is hitting the target.[24]
We remain unconvinced that HM Treasury's present
DSO outcome 1(a) temporary indicator serves any real value. We
will monitor with interest the extent to which the Fiscal Responsibility
Bill, should it become law, comes to provide a rule against which
such measurement can be made.
NS&I
17. NS&I's usual first objective is to create
at least an agreed amount of 'Value Add' from its products. This
is normally a key measure of NS&I performance because it reveals
the extent to which it is cheaper for the Government to raise
money through NS&I compared with its other sources of financing,
such as gilts. During 2008-09, however, NS&I gained Treasury
agreement to suspend the Value Add target for 2008-09 and set
no Value Add target for 2009-10. NS&I Chief Executive Jane
Platt explained to us that:
We temporarily suspended value add at the time
when interest rates, the base rate, went down to half a per cent.
The base rate has never been that low since the Bank of England
was founded and certainly not since Premium Bonds and our other
products were introduced. So we looked very carefully at the value
add measure and realised that if we did not suspend it, it would
drive us to make some very difficult and unfair decisions in terms
of pricing for our customers. For example, with base rate at half
a per cent, that would assume on our value add measure that the
Gilt Office (DMO) would be able to raise financing for 11 or 12
years at less than 0.3%. That is just not true, so therefore we
had to suspend the measure because it was distorted and did not
give a true measure. [25]
In other words, the Value Add measure was suspended
because, with interest rates so low, and the cost of selling gilts
falling accordingly, it was simply impossible in these exceptional
circumstances for NS&I to raise money more cheaply than the
DMO. She reassured us that "as soon as the comparators which
make up that target and benchmark have some meaning, then we will
reintroduce it."[26]
She told us that "technically" Value Add could be reintroduced
in-year, "but only when the comparators have some meaning."[27]
She also observed that a proxy measure which NS&I had worked
up with the Treasury focusing on administrative ratios "does
indeed show that during the time that Value Add has been suspended
so far we are raising money more cost-effectively than the Gilt
Office (DMO)."[28]
It would have been helpful to have seen NS&I's proxy measure,
and the rationale behind it, clearly set out in its 2008-09
Annual Report. We recommend that, if circumstances do not allow
the re-instatement of the Value Add measure during the course
of 2009-10, the proxy measure is given greater prominence
in next year's NS&I Annual report. More fundamentally,
the unique circumstances of 2008-09—including the suspension
of the Value Add indicator—do raise questions about the
main purpose of NS&I, and the extent to which there is a tension
between its customer-orientated and Government-orientated aims.
We explore this in more detail in Section 5.
ROYAL MINT
18. The Royal Mint's first target is to achieve an
average rate of return on average capital employed—the target
for 2008-09 was 5.1%, which was exceeded. The Royal Mint calculates
the average rate of return on average capital employed by expressing
profit as a percentage of average capital employed. Profit for
this calculation will be taken as the retained profit plus interest
and dividend. Average capital employed will be taken as the average
of the monthly balance sheet capital employed plus loans and cash.
For 2009-10, the Royal Mint has amended the calculation to include
Bullion overdrafts within the definition of Average Capital Employed.
This was presented to us as a technical change to, as described
by Chief Executive Andrew Stafford, "make sure we have a
more realistic method of calculating the terms for shareholders."[29]
Financial Director Andrew Lawrence informed us that the change
"made our target slightly harder, but it is the right decision
for the business."[30]
Unfinished business
19. As we also noted in our recent Pre-Budget Report,[31]
the UK population is living at a time of great economic (and political)
uncertainty. Although the risk of a systemic collapse has now
receded—and we acknowledge that some Government measures
over the past year have contributed to this—substantial
financial and economic challenges remain, and it is too early
to draw a line under this extraordinary period.
HM TREASURY
20. It is hard to put a final evaluation on the success
of HM Treasury's financial stability interventions. It is not,
for instance, possible at the present time to ascribe a total
overall cost to the taxpayer of all the financial interventions.
In relation to Government shareholdings, Permanent Secretary Sir
Nicholas Macpherson felt that "there was a good chance"
that the Government would make a profit on some of them. He noted
though that although "there was a trough in January when
we made a loss on our shareholdings of £26 billion…a
couple of months ago there was a brief period when we were in
profit."[32] He
also noted that HM Treasury had received "quite decent fees"
for the credit guarantee scheme and the Asset Protection Scheme,
though in a later oral evidence session Exchequer Secretary Sarah
McCarthy-Fry MP felt that, with regard to potential losses under
the Asset Protection Scheme, "it is an ongoing situation
and I do think it is too early to give any timetable or exact
figures at this stage."[33]
Equally Sir Nicholas Macpherson told us, in answer to our question
as to whether quantitative easing is working, that:
This is a very difficult issue to assess because
one is assessing against a counterfactual that none of us knows.
…quantitative easing is a journey into the unknown. We do
not understand every aspect of it. I am sure that it will keep
academics busy for many years to come.[34]
21. We looked in more detail at the relationship
between the Treasury and UK Financial Investments, the organisation
which now manages the Government's bank shareholdings. Sir Nicholas
Macpherson explained to us that, formally:
UKFI works at arm's length from the Treasury,
but there are a number of instruments designed to ensure that
it has a very clear framework. It has to agree an investment mandate
and business plan with the Treasury. If it is to do anything serious
like selling shares in the two major banks that must be cleared
with the Chancellor of the Exchequer...Appointments to the board
must be approved by the Treasury.[35]
We examined how the separation of functions between
the Treasury and UKFI was working in practice, asking in particular
whether the Treasury had shared with UKFI its analysis of the
balance sheets of the institutions in which it is now the largest
shareholder. Louise Tulett, Group Director of Finance and Procurement,
HM Treasury, who sits on the Board of UKFI, told us that:
Everybody is conscious of the controls to protect
information to allow only legitimate shareholder information to
be known by UKFI and with the Asset Protection Scheme, which is
now to be administered by an arm's length body in the opposite
direction, there is clear water between the two.[36]
She admitted, however, that "in these early
days it is quite difficult to get the demarcation right, but I
think we are getting there."[37]
When we probed further on where the line was drawn with regard
to sharing with UKFI information about the banks' asset bases,
she replied that "I do not quite know how we have articulated
that line of principle being drawn..."[38]
In an earlier report[39]
we stressed how important it was that the arms length relationship
between the Treasury and UKFI was clearly defined so that what
constituted appropriate behaviour could be clearly discerned.
It appears to us that the relationship between the Treasury
and UKFI remains a work in progress, and we recommend that the
Government considers whether the formal terms of the relationship
need some re-definition in the light of experience. It is important
that the lines of demarcation are clear, and reflect the reality
on the ground, not least to ensure that other shareholders are
properly protected.
DMO
22. The DMO has a continued requirement to sell unprecedented
levels of Government gilts—for 2009-10 it currently has
a remit to sell £220 billion gilts—and the outlook
is uncertain with the potential for yields to rise and a risk
that the market for Government gilts will become saturated. As
Chief Executive Robert Stheeman acknowledged to us, "we have
been fortunate as well over the last six months in that probably
market conditions have been more benign than we and some commentators
would have actually expected." [40]
Benign market conditions for Government gilts are at least in
part a consequence of the role of the Bank of England over the
past year in acting as a guaranteed final buyer for gilts in pursuit
of quantitative easing. Indeed Robert Stheeman stressed to us
that "we have to be fully aware and cognisant of the fact
that the Bank itself has been buying gilts in the secondary market."[41]
As he explained to us in October, the net impact since the beginning
of the 2008-09 financial year of the DMO selling gilts and the
Bank of England buying gilts has been "a decline in available
gilts in the market by approximately £30 billion."[42]
Against this background, it is not so surprising that the DMO
has been able to raise money "at relatively, in historical
terms, cheap levels."[43]
23. Robert Stheeman remained confident in the ability
of the DMO to continue to sell record levels of gilts, seeing
no signs of market saturation. He accepted though that the climate
will becoming more challenging when the Bank of England starts
to reverse quantitative easing, and looks to the DMO to sell still
more gilts, observing to us that "exactly where yields would
be were the Bank not to buy, I don't know."[44]
During our Pre-Budget Report hearings, both the Chancellor and
Dave Ramsden, his Chief Economic Adviser, also offered reassurance
on future demand for UK gilts. As we noted in our Pre-Budget Report,
there remains the risk that the combination of the large amount
of gilt auctions planned in 2010-11 and the cessation of quantitative
easing will result in an excessive supply of UK gilts onto the
market at a time when other governments will be offering similar
products, with the possible result that auctions are uncovered
and yields increase.
24. The significant deterioration of public finances
during the 2009-10 period, casts a long-shadow, with public sector
net borrowing projected to be higher than at any time since the
Second World War. It follows that it is very difficult to draw
final conclusions regarding the level of success that should be
attributed to HM Treasury and its associated bodies for 2008-09—too
much remains unfinished business.
Fallout?
25. Although it is not yet possible fully to gauge
the level of success, it is possible to examine some of the costs
to date, in terms both of people and effort on other priorities,
arising from the need for the Treasury departments to respond
to the unique challenges posed during 2008-09.
HM TREASURY
26. We looked first at people, taking into account
Sir Nicholas Macpherson's comment that "there are people
in the Treasury who have given an extraordinary amount of their
time in the past year. A number of people have worked almost day
in and day out over many weekends."[45]
Against this background, we asked Robert Stheeman whether he had
enough people to handle DMO's increased workload, and were assured
that "we have had discussions with the Treasury about the
resources. We have received the resources that we have requested
and we requested more resources, also financial resources, and
we have received those."[46]
We asked a similar question of Sir Nicholas Macpherson about HM
Treasury as a whole and received similar assurances that "we
have taken in more resources and on the financial stability side
in particular the Treasury is much bigger; it has grown in size
during this period. All I would say is that it has been helpful
to us to have the resources to deal with what we have had to do…"[47]
27. Conscious of the increased risk of overstretch
and burn-out, we asked the Treasury whether it was prudent to
proceed with its efficiency programmes at a time of greatly enhanced
workload. Louise Tulett, The Treasury's Group Director of Finance
and Procurement, accepted that increasing productivity at this
time was a major task, but affirmed that "it is one that
we are on track to deliver."[48]
Sir Nicholas Macpherson was equally clear that the Treasury should
not "give up on the efficiency agenda" not least because
it was a means of freeing up more resources and "in a crisis
one needs to bring in more resources."[49]
28. We also asked the Treasury whether other priorities
had suffered as a consequence of the additional work required
to stabilise the financial system. Unsurprisingly perhaps, Treasury
Ministers were reluctant to go into details. Sarah McCarthy-Fry
MP accepted that "obviously we have had to prioritise our
resources, and there has inevitably been a priority, a focus,
on stabilising the banking system", but she was equally clear
that "we have tried not to let the bread-and-butter issues
go. We are keeping them on track, but inevitably there has been
a prioritisation on the banking stability side."[50]
When we pressed her on whether any lower priority activities had
been stopped, she replied that "we are trying to keep them
ticking over."[51]
29. We asked in particular whether the Child Poverty
agenda had suffered. The Financial Secretary Rt Hon Stephen Timms
MP was quick to reassure us that "in terms of Ministerial
commitment, I would not have been able to identify a negative
impact from the difficulties that we have seen."[52]
His Permanent Secretary, though, was prepared to admit that, with
regard to the Child Poverty agenda, "inevitably, from a personal
perspective I have had less time to devote to the details of this
agenda as in previous years because I have had to spend much of
the year dealing with the banks and the implications of the recession
in terms of monetary and fiscal policy"[53]
adding that "in terms of my personal time, I must prioritise
otherwise, I would never get any sleep at all."[54]
We look in greater detail at the Treasury's performance with regard
to Child Poverty and its other objectives in the next section.
HMRC
30. HMRC has an ambitious transformation programme
to improve its efficiency involving a reduction in the number
of people working for it, and a reduction and redistribution of
the locations of its businesses. HMRC has already reduced the
number of people in its organisation from 105,000 to fewer than
89,000. In her Annual Report Review, Chief Executive Lesley Strathie
explained that "such is the scale of our transformation,
it is not surprising the past year has been challenging for our
employees."[55]
Indeed, at HMRC the relationship between staff morale, efficiency
measures and performance appears to be particularly sensitive,
and we explore it in greater detail in Section 4.
CONCLUSION
31. We appreciate the magnitude of the challenges
faced by HM Treasury and its associated bodies during the course
of this extraordinary year, and commend the extent to which the
workforce has been willing to go the extra mile in response to
these challenges. It is important though that Departments do not
take this commitment for granted and continue to monitor for signs
of burn-out and over-stretch. This is particularly important because,
as we have highlighted above and in other recent reports, the
challenges posed during this extraordinary period remain very
much ongoing business.
32. In the remainder of this report, we examine individually
and in greater detail the performance of HM Treasury and its associated
bodies. We look first at the Treasury Group's performance against
its objectives.
3 HM Treasury, Annual Report and Accounts 2008-09,
July 2009, HC 611, p 5 Back
4
Q 287 Back
5
Debt Management Office, Annual Report and Accounts 2008-09,
July 2009, HC 853, p 9 Back
6
HM Revenue and Customs, Departmental Report 2009, July
2009, CM 7591, p 8 Back
7
National Savings and Investments, Annual Report and Accounts
2008-09, July 2009, HC 470, p 3 Back
8
Q 37 Back
9
Q 82 Back
10
HM Revenue and Customs, Departmental Report 2009, July
2009, Cm 7591, p 26 Back
11
Q 167 Back
12
National Savings and Investments, Annual Report and Accounts
2008-09, July 2009, HC 470, p 7 Back
13
Ibid., p 20 Back
14
Q 2 Back
15
Debt Management Office, Annual Report and Accounts 2008-09,
July 2009, HC 853, p 9 Back
16
Q 190 Back
17
Q 293 Back
18
Q 166 Back
19
Q 190 Back
20
Q 39 Back
21
HM Treasury, Annual Report and Accounts 2008-09, July
2009, HC 611, p 34 Back
22
Q 313 Back
23
Q 314 Back
24
Q 317 Back
25
Q 73 Back
26
Q 73 Back
27
Q 75 Back
28
Q 75 Back
29
Q 143 Back
30
Q 144 Back
31
Treasury Committee, Fourth Report of Session 2009-10, Pre-Budget
Report 2009, HC 180 Back
32
Q 292 Back
33
Q 469 Back
34
Q 307 Back
35
Q 299 Back
36
Q 300 Back
37
Q 300 Back
38
Q 302 Back
39
Treasury Committee, Seventh Report of Session 2008-09, Banking
Crisis: dealing with the failure of the UK banks, HC 416 Back
40
Q 15 Back
41
Q 15 Back
42
Q 16 Back
43
Q 17 Back
44
Q 16 Back
45
Q 290 Back
46
Q 35 Back
47
Q 359 Back
48
Q 358 Back
49
Q 359 Back
50
Q 388 Back
51
Q 389 Back
52
Q 390 Back
53
Q 381 Back
54
Q 382 Back
55
HM Revenue and Customs, Departmental Report 2009, July
2009, CM 7591, p 9 Back
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