Pre-Budget Report 2009 - Treasury Contents


Examination of Witnesses (Question Numbers 60-72)

PROFESSOR SHEILA DOW, MS KAREN WARD, MR ROBERT CHOTE AND MR MARTIN WEALE

14 DECEMBER 2009

  Q60  Mr Fallon: So it is approximately 7 then?

  Mr Chote: It is this slightly weird profile that the Government—

  Q61  Mr Fallon: I understand that.

  Mr Chote: —has basically put in place, a loosening in 2011-12 and 2012-13 through the protection of these key spending areas and then that drifts off.

  Q62  Mr Fallon: The net yield from the two 0.5% increases in National Insurance roughly covers then that spending increase, is that right?

  Mr Chote: Yes. There are roughly 3 billion or so. Just looking at the measures in the Pre-Budget Report, take 2011-12 you have 7.7 billion of additional spending and 3.5 billion of additional tax. Go ahead to 2014-15 and you have only a 5 billion increase in spending and by then the taxes are bringing in 8.5 billion.

  Q63  Mr Fallon: So, very roughly, the extra taxes announced last week go towards extra spending?

  Ms Ward: Yes, more than.

  Mr Chote: They cover roughly half the additional spending planned for 2011-12.

  Q64  Jim Cousins: Mr Chote, what do you estimate the direct employment effects of the £36 billion cut in public spending to be?

  Mr Chote: I have made no attempts to estimate that. It would depend very much on how you made those cuts, where you wanted to, do you want to do it on the public sector pay bill and do you want to do it on the level of pay or number of people in the public sector. It would depend on what choices this Government or any government made about how you may do the mix.

  Q65  Jim Cousins: The Government has set out its policy on public sector pay.

  Mr Chote: Which is to restrain the level of settlements by 1%, but it has not said anything about what it would do with the overall pay bill. It depends on what the mix will be.

  Q66  Ms Keeble: I would like to ask Robert Chote whether you agree that there should be more fiscal consolidation in the lifetime of the next Parliament and if you agree with Martin as to what that would look like.

  Mr Chote: Clearly there certainly could be. As Martin said, the choices you have are raising taxes, cutting spending on public services or cutting the generosity of welfare payments. You could have the adjustment on any one of those three.

  Q67  Ms Keeble: What do you think will be possible, or acceptable, put it that way?

  Mr Chote: After an election my best guess would be that given the likely squeeze on public services that is already planned I would assume that more of it is going to come in the form of tax increases rather than spending increases, and that is indeed the way in which the balance has shifted between the Budget and the Pre-Budget Report. The Budget had 20% tax increase, 80% spending, and it is now more like one-third tax increases and two-thirds spending, and I would not be at all surprised if after the election it did not shift further in the direction of taxes.

  Q68  John Thurso: On measures for business which are mentioned in the Pre-Budget Report, if I could ask you to comment on two things. First, there is a general and widely accepted sentiment that our economy needs to rebalance away from being dominated by financial services to a more broadly based economy. Secondly, that the Government needs to be investing in areas such as renewables and green energy in order to give that a push. Is what the Government has set out the right way to go about it or would you like to see other measures?

  Mr Weale: I must say at a time when the Government is looking for revenue anywhere in which it can find it, I would much prefer measures which tax the things that are thought to be harmful rather than involving extra spending on things that are thought to be desirable.

  John Thurso: Has anybody else got anything on that?

  Q69  Chairman: What unusual things are happening in the housing market presently?

  Ms Ward: I think it is just another example, like financial markets, where monetary policy is working. Interest rates are at a record low and that has fed into mortgage rates, not to the same extent entirely. With mortgage rates low, foreclosures are falling in the UK rather than in the US where they are rising very strongly. Because you are not seeing forced selling, I think that is why house prices seem to have stabilised. I think that is quite different from saying house prices are now set to rocket back off again. Affordability measures did not really correct, even though house prices did fall quite substantially. So overall, I think the whole household de-leveraging process which is underpinned by the housing market will now happen in a much more orderly fashion because monetary policy is doing its job and working very well.

  Q70  Chairman: Both the Governor and the IMF have called for a credible plan to reduce the deficit. What would you like to see in that plan?

  Mr Weale: Could I repeat the point I made at the beginning that because the future is uncertain a credible plan has to include statements of what will happen in response to particular eventualities rather than simply being the sort of single line on a graph that this document is full of. It has to say that if the deficit does not go down then we will look at things like squeezing old age pensions, for example.

  Q71  Chairman: You think politicians would do that!

  Mr Weale: I am saying that is what I think would be needed to be credible. Maybe that tells you how likely we are to get a credible plan.

  Q72  Chairman: We have got you all here for reality land!

  Ms Ward: There needs to be a fiscal consolidation plan. As we have just pointed out, there were tax increases in the Pre-Budget Report, so we have exhausted some of the potential tax increase measures, but again it has gone into higher spending so we are back to stage one in terms of the size of the deficits, so it needs to be a fiscal consolidation plan. In terms of making it contingent on a recovery, the one thing I would just say is I think it is important we do not get into the potential pitfalls that you could argue Japan has experienced where for all the time that you are putting off the chance of fiscal consolidation, private saving keeps rising on the anticipation of future taxes and you never get the recovery that you are waiting for to consolidate the deficit. That has to be a real risk.

  Mr Chote: I think, as we have discussed before, more detail on the outlook for spending. We have a rather opaque difference between what are projections and what are actually plans. If there were a clearer indication of the numbers that we know the Treasury produces on what they think the outlook is for some areas of spending they have little control over, more information on the outlook for public services, that would be helpful. Of course, for the period beyond 2013-14 we have much less of an indication, not even whether it will be tax and spending over which the remaining part of the tightening will be undertaken. Clearly that is very uncertain at that stage, but perhaps if there were a more indicative idea of how the Government would plan to go with that that would all sound more credible.

  Professor Dow: Given the uncertainties, it would be a mistake for the Government to tie itself to a definitive plan, but more indication would be very helpful. The trouble is there are two audiences: there are the analysts and those in financial markets who take a particular view of the Government's fiscal policy and, on the other hand, there are households and firms who would perhaps be encouraged to withdraw from spending if they thought that taxes were going to rise significantly in the future. Perhaps that is a judgment that was made by the Treasury that given the uncertainties it was better not to say very much.

  Chairman: Can I thank you very much for your evidence this afternoon. Illuminating? Let us see. Thank you very much.


 
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