Pre-Budget Report 2009 - Treasury Contents


Conclusions and recommendations


Macroeconomy

1.  The Treasury's forecast in the Pre-Budget Report is for the economy to register growth of 1.5% in 2010 before going on to achieve much stronger growth of 3.5% in 2011 and 2012. There is, however, considerable scepticism among economists around the Government's growth forecasts for 2011-12. (Paragraph 11)

2.  Growth in private consumption is expected to provide a significant part of future GDP growth. The household saving rate is also expected to rise further, and then stabilise at a higher level than that seen in recent history. It should be noted that the period before the current crisis was marked by a steady decline in the household saving rate. An increase in the household saving rate above its pre-crisis level will be an essential part of the economic rebalancing. (Paragraph 20)

3.  The recession appears so far to have had substantially less impact on the labour market than might have been feared. There seem to be several reasons for this including the structure of the economy, the flexibility of the labour market, some Government measures and employers' attempts to retain skilled labour. However, the Government must remain vigilant to the potential that there may be further weakening in the labour market above that which it has forecast, which would of course impact on the public finances. There also needs to be careful analysis of the changes in the labour market during the recession, to understand the movements between full-time and part-time employment, especially differential employment rates for men and women, as well as changes in rates of pay. (Paragraph 23)

4.  We remain concerned over the levels of youth unemployment. While the story for the overall labour market has been more positive than might have been initially hoped at the start of recession, the young have, as we feared, been badly hit. We note the Government's measures in this area, and will continue to monitor their impact. (Paragraph 26)

5.  House prices appear to have stabilised, but at an historically high price to earnings ratio. We are concerned that such a position is potentially unsustainable, given that monetary policy will eventually tighten. We recommend that the Treasury undertake further work on the sensitivity of the housing market to future employment and interest rate movements, and report back at the time of the next Budget. (Paragraph 30)

6.  The Committee welcomes the fact that repossessions have been far lower than expected. However, we recommend that the Treasury proceeds cautiously over the timing and removal of Government support in this area. (Paragraph 34)

7.  The picture on bank lending remains uncertain, to say the least. While we do not want to return to the times of easy credit, the Government must remain aware of the risk that lending will not support renewed private sector growth as the public sector retrenches. The Treasury have assured us that they remain vigilant in this area, and we will continue to monitor their work. (Paragraph 37)

The Public Finances

8.  We appreciate that deciding the right time for fiscal consolidation requires making a fine judgement about the resilience of the recovery. As we have explored earlier, there is currently considerable uncertainty in the economic outlook; and any fiscal consolidation will have to function in that context. It may be difficult for any current consolidation plan to command universal support. It will therefore be very important to add greater detail and clarity to the plan sooner rather than later. (Paragraph 45)

9.  We have previously stated that a plan to restore the health of the public finances must deal with the structural deficit. We acknowledge the Treasury aims to cut the deficit from 9% of GDP to 3.6% of GDP in 4 years. However we note that although the Treasury believe the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, our expert witnesses all criticised the document for not providing enough information about how this will be achieved. (Paragraph 52)

10.  The Treasury use what they describe as cautious assumptions in the public finances forecasts. Some economists consider the structural deficit forecast is overly optimistic, many are concerned about the large uncertainties surrounding this forecast in particular and some doubt whether sufficient attention has been given to the structural deficit existing before the recession. Future Budgets and PBRs should attempt to quantify the downside risks around the structural deficit forecast. (Paragraph 53)

11.  We acknowledge the considerable uncertainties which affect the PBR. Those uncertainties are both political and economic. While some may think that a Spending Review should have been carried out before the next election, others will consider it is correct to defer such an exercise until there is at least some political certainty. The absence of a Spending Review, means that from 2011-12 the UK may temporarily return to an annual expenditure cycle. Should this happen, we urge colleagues on other Departmental Committees to scrutinise their department's financial documents particularly closely. (Paragraph 58)

12.  There is a sense that the Treasury are using uncertainty to suit themselves. Despite substantial uncertainties they still produce some forecasts out to 2014-15 and illustrative projections out to 2017-18. We can see no good reason for the Treasury failing to produce illustrative figures for future expenditure, at least the projected split between DEL and AME. We recognise that there will be uncertainty in these figures, but they are produced as part of the Spending Review process so there appears to be no argument of principle against their publication. The Fiscal Responsibility Bill will tie the Government into a fixed timescale for managing the deficit, and this will require close parliamentary monitoring. (Paragraph 59)

13.  It is generally agreed that the Spending Review process has introduced more transparency and certainty about medium term plans. The Liaison Committee, in cooperation with this and other Select Committees, has already produced proposals to improve the way in which the House and its committees can scrutinise these medium term plans, linking the process to the system of annual authorisation of expenditure. These proposals have been endorsed by the House of Commons Reform Select Committee. We look forward to these proposals being debated and urge continuous dialogue between the Government and the House of Commons on how to ensure the Spending Review is timed in a way which allows effective scrutiny. (Paragraph 65)

14.  However we are pleased to acknowledge that the Government has already taken one step to improve financial scrutiny. In our Report on last year's PBR we recommended that "the Government makes available a full day's debate for the Pre-Budget Report." The Government has now agreed to our request, and has announced a full day's debate, with sufficient notice to enable us to prepare and publish this Report before it takes place. (Paragraph 66)

15.  Both the Chancellor and Mr Ramsden offered reassurance on future demand for UK gilts. We also note the methods now employed by the Government to reduce the risk of uncovered auctions, such as syndication, mini-tenders and top-up auctions. We are pleased that there have been no more additional uncovered auctions since that reported in the Committee report on Budget 2009. However, 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. (Paragraph 74)

16.  The Committee understands the views given by Mr Ramsden that credit ratings are often a lagging and not a leading indicator, and that in many cases a downgrade will already be priced into the market prior to a rating reduction. (Paragraph 80)

17.  The Committee notes that debt interest forecasts depend on a number of assumptions, and are necessarily an estimate. However, the Bank of England publishes forecasts showing the possible range of rates; we recommend that the Treasury consider whether publishing information about debt interest on a similar basis would be useful. (Paragraph 86)

18.   The potential losses from the financial interventions have changed in both size and nature since the Budget 2009. This has been due to the revision of the APS and the fact that Lloyds Banking Group are no longer participants in the scheme. However the Committee notes that the reduction in the possible loss is highly dependent upon the claim that RBS will not need to use the APS. We understand the need for certain market sensitive information to remain confidential, but given the large financial implications if RBS did have to use the APS, we recommend the Government reports on its assessment of the potential losses from the APS in both Pre-Budget and Budget reports in future. (Paragraph 89)

19.  The Committee understands the rationale for using a different accounting treatment for national accounts than that used for departmental accounts. However, the accounting rules chosen mean that while PFI contracts will show on balance sheet in departmental accounts, prepared under IFRS, they will not appear in the calculations of net debt in whole of government accounts. We recommend that future Pre-Budget and Budget Reports include a reconciliation between Public Sector Net Debt calculated on a national accounts basis, and the same figure calculated using the IFRS principles which apply to departmental accounts. (Paragraph 95)

Other Topics

20.  We remain convinced of the continued importance of the commitment to eradicate child poverty, notwithstanding the limited progress that has been made to date, and the UK's changing economic circumstances. We recommend that the Government clearly sets out the steps it proposes to take to move nearer to its 2010-11 target in the time available and to achieve the eradication of child poverty by 2020. (Paragraph 102)

21.  We reiterate our previous recommendation that, at a time when the public sector will be pressed to make further savings, it is vital that any savings made are properly recognised and quantified. We also stress again the importance of establishing robust data collection processes at the start of future efficiency programmes to assist evaluation. (Paragraph 110)

22.  Independent evaluation as well as the communication of best practice will become even more important if, as suggested by Robert Chote, efficiency savings will be harder to achieve in future. We therefore call again on the Government, in the interests of transparency and communicating best practice, to commit to publishing all information relating to efficiency in one document. (Paragraph 111)

23.  Finally, we re-confirm our support for Ministerial Champions of value for money within each department, but observe again the need for appropriate training and guidance to help them fulfil this role. We note the "big challenge" of building an internal capability to deliver efficiency savings and major change and seek a summary of the method to be employed in achieving this. (Paragraph 112)

24.  We welcome the Chancellor's assurance that asset sales will not take place if the Government does not expect a good return. The sales should anyway take place within a strategy which defines the purpose of the retention of assets and the value in achieving policy goals of any sale. We will monitor, with other Committees, the extent to which the implementation of the Government's asset portfolio plans observes this long-term value for money principle. (Paragraph 115)

25.  The Government considers that the purpose of the tax on bank bonuses is to change behaviour so that banks increase their capital, rather than providing large discretionary payments to employees. We urge the Treasury Committee in the next Parliament to assess how effective it has been in this, and to examine the effectiveness of any regime introduced by the Financial Services Bill, in terms both of its success in altering bank behaviour, and of its effect on the competitiveness of the UK financial sector. (Paragraph 124)





 
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