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

Examination of Witnesses (Questions 300 - 319)



  Q300  Mr Todd: I want to illustrate it by putting a question that I put to them. There has been a substantial exercise to look at the balance sheets of the two institutions we now largely control and is based on the insurance schemes we have devised for them, one of which has been taken up and the other not. I wondered what level of information had been provided to UKFI and what had been found and I was told none at all. First, is that right? Obviously, in part it is not right if Ms Tulett is on the board and presumably has been party to some extent to the knowledge that has been gained.

  Sir Nicholas Macpherson: UKFI operates within the terms of its mandate. The asset protection scheme is something that the Treasury took forward on the basis of substantial professional advice from various sources and it also consulted UKFI on some of the implications for shareholders. We have a regular dialogue with UKFI.

  Ms Tulett: The level of detail that I see coming forward to the UKFI board would not indicate a high level of information or cross-over. 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. In these early days it is quite difficult to get the demarcation right, but I think we are getting there.

  Q301  Mr Todd: And also to define the principles of that demarcation?

  Ms Tulett: Yes.

  Q302  Mr Todd: To give a concrete example, most major shareholders would want to know quite a lot of what had been discovered about the asset base of a company where a very substantial part of it was being valued down. Where do you draw a line of principle in that regard?

  Ms Tulett: I do not quite know how we have articulated that line of principle being drawn, but I think the professionals who manage the data and knowledge around the asset protection scheme and the legitimate things that UKFI should know if it is to execute the responsibilities of its shareholding are things that professionals are used to doing.

  Q303  Mr Todd: It comes across as being well intentioned but vague.

  Sir Nicholas Macpherson: I give a concrete example. I was heavily involved in the recent announcements. You will recall that originally Lloyds signed up to the asset protection scheme and in the course of the summer its management began to take the view that there might be a different way forward. We consulted UKFI from the shareholders' perspective on whether to continue in the asset protection scheme or to get out of it would be better for the share price. In doing that UKFI had to have a very strong understanding about the implications for Lloyds. They gave us advice which was consistent—without giving away confidences—with the eventual outcome. The Treasury has a very strong shareholder interest but it is not simply that; we have an interest in financial stability.

  Q304  Mr Todd: That is why in concrete terms with a due diligence exercise over RBS which has been conducted I am slightly surprised to find that no knowledge has been exchanged between UKFI and the Treasury; indeed, I am not entirely clear how the Treasury has used the information that has been forthcoming.

  Sir Nicholas Macpherson: I would be happy to provide a note on precisely the way we have interacted with UKFI on this.[2] I have spoken regularly to John Kingman over the past few months. There are mechanisms whereby we consult. The critical thing on these big interventions is that decisions need to be taken not just from a fiscal perspective but from the perspective of financial stability and only the Treasury can do that.

  Q305  Mr Todd: I was interested in your Objective 1. I turn to pages 41 and 42 where you talk of the professionalisation of the procurement function in government. Have you examined research—I have in mind particularly the procurement of ICT projects which tends to dominate at least the political horizon—which shows that we do rather worse in this than, say, the Netherlands which is held up as an example of a rather smarter procurement process?

  Sir Nicholas Macpherson: Clearly, on procurement we can learn from other countries; we can learn from the private sector, although the latter also has problems with procuring ICT. The critical point is that the OGC under the leadership of Nigel Smith, who has real and deep experience in this area, is committed to driving further improvements. If the adoption of the Dutch approach is the right way forward I am quite certain that they will consider that.

  Mr Todd: To be really concrete, I did not spot in the document—it may be due to my speed reading—a benchmarking process in which you examined procurement practice against best practice elsewhere. Can I commend that to you? This looked like a rather internalised way to manage improvements in procurement, if I may say so.

  Chairman: We give you 10 minutes to come up with an answer to that question. We shall suspend the hearing.

The Committee suspended from 4.35 pm to 4.45 pm for a division in the House

  Q306  Chairman: And you may answer.

  Sir Nicholas Macpherson: I have just managed to speak to the chief executive who was getting off a train at Euston. We do not do any formal benchmarking against other countries. Obviously, we have quite a strong dialogue with other procurement authorities and seek to learn from one another. Occasionally, they learn from us. For example, 28 countries have adopted our approach to the gateway process. Your point is a good one and we may want to follow it up.[3]

  Q307  Chairman: What hard evidence does the Treasury have that quantitative easing is working?

  Sir Nicholas Macpherson: It has some evidence. This is a very difficult issue to assess because one is assessing against a counterfactual that none of us knows. All one can do is look at things like asset prices, the gilts market and long-term yields and whether lending is increasing. We can also look at the wider corporate bond market. There is evidence. The governor will be far more eloquent on this than I am, but 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.

  Q308  Chairman: In box 2B of your report you say that the chancellor authorised up to £150 billion of purchases of which £50 billion should be used to purchase private sector assets, but according to the Bank of England website the actual amount of such assets is only about £2 billion. Can you elucidate?

  Sir Nicholas Macpherson: How the bank operationalise quantitative easing is a matter for the executive of the Bank of England. The bank would argue that its interventions in the corporate market have been successful and that the corporate bond market is now functioning much better—that is down in part to QE but also wider developments—and that therefore further purchases in that area are unnecessary. I do not want to put words into their mouth.

  Q309  Chairman: Let us hear it from the mouth of the Treasury. The chancellor has authorised this total of purchases and it says clearly on page 57 that up to £50 billion should be used to purchase private sector assets but only £2 billion worth of assets have been bought, so is it not right that they are adopting a very different portfolio profile from the one the chancellor wanted?

  Sir Nicholas Macpherson: I think we wanted to enable them to buy private sector assets if they wanted to. Our view at that time certainly based on the experience of other countries like the United States was that this could be a fruitful line of intervention.

  Q310  Chairman: So, is this sentance "up to £50 billion should be used to purchase private sector assets" just a suggestion?

  Sir Nicholas Macpherson: It was a suggestion and it also pre-dates the pure quantitative easing process. There was an intermediate phase at the beginning of the year in which we authorised the bank to buy private assets funded through the issue of Treasury bills rather than central bank money.

  Q311  Chairman: Is it right that it is no longer quite as operative as it was?

  Sir Nicholas Macpherson: I think you should ask the Bank of England about it.

  Q312  Chairman: But it is your policy.

  Sir Nicholas Macpherson: The Bank of England is independent in the conduct of monetary policy and this is now a monetary policy issue; at the turn of the year it was not because it was not being funded in the same way.

  Q313  John Thurso: I should like to look at the outcomes in DSO 1. Referring to indicator outcome 1(a) which is about meeting the fiscal rules, during the course of the year you changed that to a new statement which seems to me to be rather full of motherhood and apple pie but not a lot of meaning. Was there any real point in having it?

  Sir Nicholas Macpherson: 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 has changed from time to time, but in terms of credibility one needs something that guides policy. 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.

  Q314  John Thurso: That is the point I am getting at. Would it not be worth saying in the current circumstance that rules are pointless and we should watch your actions?

  Sir Nicholas Macpherson: 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.

  Q315  John Thurso: It is not really a rule but a statement of hope?

  Sir Nicholas Macpherson: It is a statement.

  Q316  John Thurso: It is a mission statement.

  Sir Nicholas Macpherson: What matters is the policy but since then the government has announced it will legislate the decision to halve the deficit over four years and I suppose that at that point it becomes a rather harder rule.

  Q317  John Thurso: Will this be replaced in the near future by a rule against which measurement can be made? You cannot measure anything in that other than, "We are doing better"?

  Sir Nicholas Macpherson: I think you can, but 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.

  Q318  John Thurso: I turn to outcome 1(b) which is to ensure that the tax yield is sustainable and the risks managed. What are you doing to sustain the tax yield?

  Sir Nicholas Macpherson: Two things. First, Revenue and Customs are working very hard to focus all their activity to maximise the tax yield for a given set of policies, but especially in the current environment we also must look across the tax policy spectrum to see where the system needs to be improved to maximise revenue.

  Q319  John Thurso: What are the risks that you are managing?

  Sir Nicholas Macpherson: The immediate risks arise from the downturn which has hit revenues very badly, perhaps even more than expected. With the benefit of hindsight, some taxes are more geared to both the financial service sector and housing and therefore revenues have fallen far more than GDP. That will provide important lessons for the future.

2   Ev 104 Back

3   Ev 109 Back

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