Examination of Witnesses (Question Numbers
14 DECEMBER 2009
Q60 Mr Fallon: So it is approximately
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
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
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.