Examination of Witnesses (Question Numbers
CBE, MR ALAN
29 MARCH 2010
Q20 John Mann: How big a reduction
in public sector employment could the economy sustain in the next
12 months, without having major knock-on impact, in your view?
Mr Weale: Unlike the previous
witness, I expect unemployment to resume its rise fairly shortly.
I am sure that is even on the assumption there are not large job
losses in the public sector between now and, say, the end of the
Q21 John Mann: Mr Chote, government
borrowing: remind me what your projection was a year ago in terms
of what the public sector borrowing would be now?
Mr Chote: I cannot remember from
a year ago. We certainly assumed, on the basis of the pattern
of government borrowing through the year so far to date, that
it was likely to come in below the 178 million for this year that
the Treasury predicted in the Pre-Budget Report. That is reflecting
in part the fact that tax revenues have been more buoyant than
anticipated. So that did not come as a surprise to us. I think
the fact that the Treasury is assuming that pretty much that saving
persists into future years as a permanent improvement, slightly
offset by a lower growth forecast for 2011, we would be a bit
more sceptical about that. When we produced our last set of public
sector borrowing forecasts we agreed with the Treasury for this
year but we thought that part of that good news would be, as it
were, given up because revenues would not grow as quickly as anticipated
over the next five.
Q22 John Mann: I saw one forecast
a year ago suggesting that the figure was something like 225 in
terms of Government borrowing. How do you think people could get
it so wrong?
Mr Chote: One factor, which came
as a surprise to the Treasury as well, between the Budget and
the Pre-Budget Report was that the economy had shrunk by much
more than it had anticipated at the time and yet the public finances
did not appear to deteriorate by as much as you would have anticipated
in the face of that. If they had gone in parallel then it would
have been reasonable to justify much higher borrowing forecast.
In the end the Treasury had to significantly downgrade its growth
forecast between the Budget and the Pre-Budget Report but only
pushed up its forecast for net borrowing by £3 billion. In
a sense we have had a similar sort of good news between the Pre-Budget
Report and the Budget now. The growth has not been wildly different
from what the Treasury anticipated at the time of the Pre-Budget
Report and borrowing has come in lower so we have had two favourable
pieces of good news in that sense of good luck, how we want to
describe it, between the Budget and the PBR and the PBR and now.
John Mann: Final question, can any of
you name a eurozone economy which you would regard as significantly
better positioned at the moment than the UK in terms of the next
12 months? No? No more questions.
Chair: Nobody can think of it then! I
will give you your starter for 10! Nobody. Okay.
Q23 Ms Keeble: I wanted to ask about
the deficit reduction and the speed of it because quite a lot
of commentators have been saying, "This is a phoney Budget,
we will get the wrong one with the cuts after the election".
What do you think of that?
Mr Chote: I do not know about
a phoney Budget, I think this close to an election, realistically
with the Chancellor being tugged in one direction by the sort
of demands that you describe for having a more ambitious, more
in detail deficit reduction plan and on the other hand the concerns
of the voters, the most likely outcome was always going to be
that those two pressures would largely offset each other and we
have in effect had a very neutral Budget. There is a very small
net giveaway in the next year which is effectively covered by
the unexpectedly large receipts from the bank bonus tax and then
in the longer term there is a very modest net tax increase. Overall
it is not changing the pattern of the deficit reduction plan very
much at all. I think you are right that a bigger change is going
to wait until after the election.
Q24 Ms Keeble: Obviously what that
looks like depends on the outcome of the election. Last time when
we spoke I asked about what the sharper reduction would look like
and both you, Robert, and Martin talked about the impact on pensions.
Do you still hold that view, if there was to be a sharper deficit
reduction than the one which the Chancellor has projected that
the main area which would take the hit would be pensions?
Mr Chote: I am not sure I would
have said that pensions was most likely to take the major hit.
Q25 Ms Keeble: You talked about the
removal of the earnings link.
Mr Chote: Yes, that would not
change and the time at which the earnings link happened does not
make an enormous difference in terms of the timing. You are looking
at the moment from the Government for a tightening of a little
under 5% of GDP over the period through to 2016-17 taking the
policies which have been signalled after Budget 2008. If you were
to go a bit further than that, you could certainly make the point
that already implied in the Government's own figures is such a
large squeeze on spending on public services that if you were
going to go further beyond that it may well be that the pressure
leads you more in the direction of cutting the welfare budget,
about which there has been very little discussion or debate, or
in the direction of further tax increases.
Q26 Ms Keeble: If it is the welfare
budget then it is pensions?
Mr Chote: If it is the welfare
budget then there are basically three ways you could do it. One
is you could freeze or limit the generosity of benefits across
the board, that saves you money. You could effectively means test
some benefits which are not currently means tested or you could
means test some means tested benefits more aggressively. There
would be a variety of ways of approaching that. At the moment
implicit in the Treasury's documents is that benefits and tax
credits continue to go up unless otherwise specified in line with
the normal usually inflation-linked basis. I think after the election
I would not be surprised to see more adjustment on that side.
Q27 Ms Keeble: Martin?
Mr Weale: Could I just make a
very general and simple point. The Treasury estimates rightly
or wrongly that the country's income has fallen by 5% as a consequence
of the crisis. I think most people if they found their incomes
had gone down by 5% would expect, at least as a reference point,
to think of reducing their expenditure by 5% across the board.
If one did that obviously welfare budgets would be reduced as
well as spending budgets, but actually what we have seen has been
lots of discussion about what is not going to be cut at all and
that of course means that the things which are cut have to be
cut much more sharply. My general sense is that in discussing
what is or is not going to be cut politicians and others have
lost sight of the fact that the country is now probably about
5% poorer than we had expected before the crisis.
Q28 Ms Keeble: Robert, I wanted to
ask some more questions about the very interesting paper you did
on the proposals for not raising National Insurance where you
said that would leave around about £6 billion extra of cuts,
and the largest unprotected area would be schools. I wondered
if you would like to elaborate these points.
Mr Chote: This is on the Conservative
Q29 Ms Keeble: Yes?
Mr Chote: Yes. The announcement
is effectively saying that the Conservatives would seek a £6
billion saving in 2010-11 in central government spending on public
services outside the NHS, outside defence and outside overseas
aid. If you can find the £6 billion cut to that set of unprotected
areas, you are right that schools would be the largest one of
those. Effectively it amounts to cutting that area of unprotected
spending by about 2.8% next year below what would be implied by
the Government's existing plans. That is the magnitude of it.
Q30 Ms Keeble: What does that look
like in terms of if people are looking at what happens to their
Mr Chote: The Conservatives have
today said that their advisers, including Sir Peter Gershon, have
identified a number of efficiency savings that would ensure that
cut could be achieved in effect without the public noticing it
in terms of the quality of public services. That is always a debatable
claim, as it is when any party, and all of them do, makes claims
about efficiency savings of that sort.
Q31 Ms Keeble: That £6 billion
would be on top of the already increased pace of fiscal tightening,
would it not?
Mr Chote: At the moment in 2010-11
we are withdrawing, looked at in aggregate, the measures since
Budget 2008, we are withdrawing the fiscal stimulus that is in
place in 2009-10 in 2010-11. Then you have a pause for breath
for a year and then the tightening proceeds thereafter. The implication
of the Conservative proposal would be that you would increase
the size of the net tightening between this year and next because
in addition to having the removal of the stimulus package you
have a modest additional tightening in 2010-11 which then goes
away largely in the following year because you are spending it
on a tax cut. It does further frontload in that sense the overall
Q32 Ms Keeble: Compared with what
people have experienced, what would it look like? What set of
previous tightenings would it look like?
Mr Chote: Looking at tightenings
in particular years, it is hard to get a very clear picture. If
you look at what is in prospect over the likely period for the
next spending review, then that is already, under the Government's
plans, looking like a real squeeze on public services' spending
of the sort that we have not seen since the mid-1970s. Having
an additional cut in public services' spending at the beginning
of that period would obviously make that relatively eye watering
picture look even more so.
Q33 Ms Keeble: The biggest unprotected
area would be schools?
Mr Chote: The biggest unprotected
area would be schools, but that is not to say that it would see
the biggest hit, that remains to be seen.
Q34 Chair: I think Sally was looking
for a nastier answer! You mentioned the deficit, Martin, how would
you go about reducing the deficit if you were in No 11?
Mr Weale: I suppose I would start
off by thinking about reducing spending broadly in line with the
reduction in national income but, of course, there are some types
of spending which are contractual: debt interest is one, existing
Civil Service pensions is another. That means that you have to
reduce other types of spending slightly more. Beyond that we have
the problem that the tax take is not as large as we had thought,
in particular there is less tax from the financial sector although
the Treasury is expecting some buoyancy in that. To the extent
that the problem comes because the tax take has fallen, then my
first thought would be about what taxes I might think of putting
up to replace the taxes that are no longer delivering the golden
Q35 Chair: Admirably vague, I have
to say, but there you are. What about the banks' perspective?
Mr Clarke: Just to put the thing
in context, the planned narrowing the deficit is roughly just
over 1% of GDP per year for the next four or five years with the
exception of next year, it narrows by 2%. That is roughly in line
with the average of post-war fiscal consolidation, so it is respectable.
I think probably you could do 1½% of GDP ever so slightly
more to get it done quicker because I think people lose patience
after six or seven years. What would I do to do that additional
½%? VAT I think is very lucrative, it will earn an extra
£10 billion per year. It did not hurt the economy, I do not
believe, putting it up and I do not think there were huge benefits
from the cut in terms of consumption growth a year ago. I think
VAT would be a prime candidate to narrow the deficit quicker.
Q36 Chair: You taste their palate
Mr Hayes: I actually agree with
that. I think particularly on the issue of credibility, I am concerned
that the current set of plans on spending cuts are insufficiently
detailed and also difficult to assess the credibility of some
years ahead whereas if you implement tax increases it is pretty
straightforward to work out what they are going to raise in terms
of cash. In terms of the current mix, looking for some additional
tightening, then I certainly think a rise in the rate of VAT to
20% would get you very sufficiently there in terms of accelerating
the degree of fiscal tightening in the way that financial markets
would then maybe be satisfied with it. It is a relatively straightforward
thing to do, and I agree I do not think it would be that damaging
for the recovery so long as it was appropriately timed.
Q37 Chair: The £10 billion,
that is VAT going up to 20%, is that correct?
Mr Clarke: Yes, I went on the
conservative side, I think the ready reckoner says it should be
more like £12½ billion. Relative to continental Europe
in terms of the VAT rate, 20% would be reasonable.
Q38 Chair: You mentioned the markets,
how did the markets react to the Budget announcement?
Mr Hayes: There was very little
reaction overall just because I think there was no great expectation
that we were going to see a big shift in the macroeconomic outlook
because of the Budget, and that indeed was what happened. There
was a marginal positive to take away from the fact that the Chancellor
used the extra windfall gain on revenues to lower the debt and
deficit rejections but the numbers were small and so the reaction
was very muted.
Mr Clarke: There was a bit of
a move on 10-year government bond yields, about a 6 or 7 basis
point rise in yields, so there was a bit of disappointment, I
gather, particularly overseas gilt investors were selling positions
afterwards. They were a bit disappointed. The consensus of economists,
which is not the same as the investment community, it is just
a guide, thought gilt issuance would be in the region of £180,
maybe close to £190 billion. The markets were looking for
something a little bit lower than that and were a bit disappointed.
Six basis points is not a lot but the day-to-day movement is substantial.
Q39 Jim Cousins: Mr Clarke and Mr
Hayes, just to follow that last point up, are you telling us the
future pattern of fiscal consolidation that it is a bit like British
AirwaysI must not say picking a fighthaving a fight
with its workforce which sends the share price up so that in terms
of fiscal consolidation you would prefer a big VAT rise nice and
early to any uncertainty about fiscal consolidation and how it
would be done down the track?
Mr Hayes: I think that would be
seen very positively by financial markets. One of the issues that
we are trying to address here amongst all of these things is minimising
our future debt costs. People talk about downgrades and so on,
that is not really the issue whether you are Triple-A or Double-A,
it is how much are you paying for debt servicing costs because
the more you pay on that front the less there is to devote to
public services. What you do not want to do is find yourself in
a situation where you are implementing some adjustment after the
event which if only you had done it a few months earlier you could
have avoided any crisis situation. The attractive thing at the
moment, I am afraid, about tax increases is that they are straightforward,
they can be pre-announced, they are credible and you have a reasonably
good idea of how much money they will raise.
Mr Clarke: I have sympathy with
that. Ireland is a great example. It is not really the best demonstration
of fiscal austerity but, put it in context, they have had four
or five budget rounds where they have announced measures worth
6-7% of GDP. They have taken the bull by the horns and fixed things
and the market has rewarded that. When government bond yields
for peripheral Europe were exploding in the last couple of months,
the Irish bond yields' relative to Germany were flat as a pancake.
The market saw the government was dealing with it quickly and
rewarded it for that. In the context of what that would cost the
Government if UK bond yields rose by, say, ½ percentage point,
which is a fair estimate of what would happen if we got downgraded
or if the market thought we would be downgraded, that is worth
roughly an additional £10 billion in interest costs to the
taxpayer. I think there is a premium for fixing things earlier
rather than letting the market hurt you and force you to do it
at a later stage.