Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Examination of Witnesses (Questions 286 - 299)



  Q286  Chairman: Sir Nicholas, I welcome you back to the Sub-Committee. Perhaps you would briefly introduce yourself and your colleague for the shorthand writer.

  Sir Nicholas Macpherson: I am Nicholas Macpherson, permanent secretary to the Treasury. On my left and your right is Louise Tulett, finance director of HM Treasury.

  Q287  Chairman: Today we are to cover the 2008-09 year which is probably one of the toughest that the Treasury has had. Is that right?

  Sir Nicholas Macpherson: It is certainly the toughest year in my working life.

  Q288  Chairman: You appear to have paid yourself and your seven senior staff bonuses totalling £115,000 for that year.

  Sir Nicholas Macpherson: No. Those bonuses were paid in respect of 2007-08. The bonuses in respect of 2008-09 will be published in the next departmental report. In case you are interested, I chose to waive my bonus so my wages will be lower in respect of that year.

  Q289  Chairman: Is the position, therefore, that the 2008-09 bonuses have been decided but not yet published?

  Sir Nicholas Macpherson: That is correct.

  Q290  Chairman: But you expect them generally to be lower than in 2007-08?

  Sir Nicholas Macpherson: We have to take into account two things: first, the current pay environment; second, 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. It can be argued that one should look at the outcomes. We have ended up having to bail out banks and GDP is falling. But one has to balance performance against objectives, against commitment and sheer effort.

  Q291  Chairman: You have a huge number of measures to stabilise the financial system. Are you able to give the Sub-Committee the total overall cost to the taxpayer of all the financial stability interventions?

  Sir Nicholas Macpherson: We can do two things. First, at Budget time we made a fiscal provision of £20 billion to £50 billion. Second, both in these accounts and whenever we have an update in either the spring estimates or main estimates we set out both contingent liabilities, ie a running commentary on the loss on our shareholdings—so far it has been a loss—but also provisions for interventions like the asset protection scheme. Needless to say these numbers will continue to move around a lot. The Treasury is committed to as much transparency as possible on these issues and will continue to report both at PBR but also in future accounts.

  Q292  Chairman: Do you expect to recover the sum set aside for these financial stability measures or make a profit from any of them?

  Sir Nicholas Macpherson: There must be a good chance. Today I tried to work out the running loss on our shareholdings. I believe that the trough was in January when we made a loss on our shareholdings of £26 billion. By the time of these accounts that number had come down to £17 billion. As of close last night it had reduced to about £9 billion. Indeed, a couple of months ago there was a brief period when we were in profit. I am reasonably confident that we will get a decent return for the taxpayer. The shareholdings are one of a series of interventions, some of which received quite decent fees such as those under the credit guarantee scheme. If those guarantees are not called we shall make quite a nice turn on that intervention. Similarly, RBS is paying reasonable fees for its access to the asset protection scheme. There is huge uncertainty around it. Obviously, if the economy suddenly turned down and there was a double-dip recession things could look quite different, but currently I am cautiously optimistic.

  Q293  Chairman: If any of these liabilities are called in—you spoke of the £50 billion—how will they be funded by the Treasury?

  Sir Nicholas Macpherson: It would depend on what form they took, but if we suddenly had to indemnify a lender where we had given a guarantee obviously we would have to fund it through conventional borrowing. I am aware that a few weeks ago Robert Stheeman of the Debt Management Office was before you. The DMO has been remarkably successful at funding sudden needs.

  Q294  Chairman: The simple answer is that you would issue gilts?

  Sir Nicholas Macpherson: Yes.

  Q295  Mr Plaskitt: I turn to chapter 1 of your report where paragraph 1.5 says that the government has set out plans to deliver a sustained fiscal consolidation once the economy emerges from the downturn. Table 1A shows the impact of those plans which is to halve the PSNB between 2010-11 and 2013-14, yet the only money figure I can see in the report to contribute to that is the £26.5 billion reduction in borrowing mentioned in paragraph 1.13. The reduction of £26.5 billion comes nowhere near amounting to a halving of the PSNB, so which bits are missing?

  Sir Nicholas Macpherson: That is a good question. The £26 billion to which you refer represents measures that reduce the deficit and they are primarily but not wholly tax. One reason the deficit will reduce over the period is that the economy is set to recover and revenues will begin to grow and for a given level of public spending that growth slowly reduces the level of borrowing. The reason the government has had to take measures is that it cannot rely totally on a normal cycle to close the gap. That is why measures were set out in the Budget both on the tax side but also in terms of setting quite tight spending plans in future.

  Q296  Mr Plaskitt: Referring to table 1A which shows PSNB falling from 11.9% to 5.5% of GDP, is that heavily contingent on hitting the projected GDP growth figures for the economy? You seem to be saying that a return to growth is the biggest contribution to delivering the corrections to the fiscal balances.

  Sir Nicholas Macpherson: At Budget time this year borrowing was set to be 12.4% of GDP; it falls to 5.5% in 2013-14. That is a reduction in the deficit of £78 billion from £175 billion to £97 billion. The economic growth element is only a component of that; it could be about one half. I would need to come back to you to confirm the assumption on that, but my view is that broadly you can rely on recovery to get you about half way and measures for the rest of it.[1]

  Q297  Mr Plaskitt: You have acknowledged that the forecast is uncertain because in response to the Chairman's question you entertained the possibility of a double-dip recession?

  Sir Nicholas Macpherson: Just as you can have very rapid growth. I believe today's forecast by the Bank of England points to reasonably rapid growth, but clearly it is a factor.

  Q298  Mr Plaskitt: Are you saying that if you hit 5.5% of GDP for net borrowing in 2013-14 that is a condition you would describe as sustainable fiscal consolidation?

  Sir Nicholas Macpherson: I think it is a good start at a reasonably rapid pace, but no one is in any doubt that further consolidation is needed if we want to get borrowing down to a level that past governments of whatever persuasion have regarded as prudent.

  Q299  Mr Todd: I want to ask about two different areas. First, can you outline how your relationship with UKFI operates? You will be aware that recently it appeared before us. The impression one had was that a strategic direction had been given by the Treasury with tactical day-to-day relationships with the banks being carried out by them. Do you want to expand on how you see this working?

  Sir Nicholas Macpherson: My colleague can put me right because she is on the board of UKFI. 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. I have just been involved in appointing the new chief executive. I was only one member of the panel which was chaired by David Cooksey. Appointments to the board must be approved by the Treasury.

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