Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 40-44)


29 MARCH 2010

  Q40  Jim Cousins: That is very interesting. Mr Chote, could I ask you a different point. You have just now referred to the fiscal stimulus of the current year. Am I right in thinking that fiscal stimulus of the current year has virtually completely gone next year?

  Mr Chote: Yes, that is right, we are talking here in terms of the current financial year, so in 2009-10 the fiscal stimulus was worth about 1.6% of national income, about £23 billion if you sum together all the spending and tax announcements that had been made after Budget 2008, and obviously the largest single contributor to that was the temporary VAT cut which was over at the end of the calendar year let alone at the end of the financial year. Then, as I say, that basically goes away and the net impact of tax and spending measures announced since Budget 2008 on 2010-11 the next year is pretty much zero. As I say, you have this stimulus in 2009-10, pause for breath 2010-11, tightening gets underway in 2011-12.

  Q41  Jim Cousins: Mr Chote, let us just get our head around that thought because a lot of my colleagues will be off treading the boards around the housing estates of the nation debating whether fiscal consolidation should proceed this way or that way. In fact, what you have just told us is the biggest single act of fiscal consolidation in the whole piece for years to come has actually already happened, the withdrawal of the fiscal stimulus and not replacing it?

  Mr Chote: Yes, we talk of little else round our way as well. No, you are absolutely right. Occasionally I am somewhat puzzled when the Chancellor, for example, says that it would be madness to withdraw the fiscal support for the economy at the moment when that is exactly what is being done. The net move in terms of the discretionary policy measures is larger between this year, 2009-10, and next year than it is on average in the subsequent period when, as Alan said, you are talking about an average tightening of 1% a year. Other than Argentina, we are withdrawing our stimulus earlier than most—

  Q42  Jim Cousins: Other than Argentina?

  Mr Chote: Other than Argentina; amongst the G20 countries we and Argentina are the only countries to be withdrawing our stimulus in financial year 2010 whereas most others are leaving it in place, partly because they announced theirs later than we did when we knew that the recession was going to be deeper.

  Q43  Jim Cousins: Mr Weale, we hear a lot of talk about Keynes at the moment, having heard that, and we are all debating Keynes, in fact built into the Government's very own budget is there not one of the greatest anti-Keynesian cut deficits by timetables we have ever seen?

  Mr Weale: I hesitate to say that it is the greatest cut deficit by timetable because my knowledge of history is not good enough. There are different ways of looking at the fiscal tightening. For example, if you look at cyclically adjusted public borrowing, that is set to fall by 1.1% and one could say that was a measure of withdrawal of stimulus. I think we do have to remember that we have learnt a number of things since Keynes wrote. One is that debt piles up and has long-term effect which he explicitly said he was not going to pay any attention to, he was going to focus only on the short-run, but the long-run is a real consideration. The other point we have to remember, which is more pertinent than I think it was in the 1930s, is that the Government is perhaps more at risk of a borrowing crisis than it was and if you think that is indeed a major risk then of course one does have to take that into account. The policy issues need to be looked at taking account of things which Keynes explicitly did not take into account but, nevertheless, I do feel that a good case could have been made for maintaining the stimulus into this year or perhaps with the sort of stimulus measure which you know is not going to go on, for example, by giving taxpayers a one-off credit.

  Q44  Chair: The Chancellor is coming tomorrow, what issue should we keep uppermost in our mind for his appearance? I will start with Simon and then move along.

  Mr Hayes: For me the biggest first order issue comes down to the growth outlook over the next few years. The Treasury's forecasts are at the top end of the range of forecasters. The analysis that we have done suggests that is of first order importance to these issues. If the economy grows by 2% a year over the next five years instead of 3½% a year, the debt ratio will be at 85% not 75% in four or five years' time. Although there are of course issues to do with timing and tightening and precisely how you go about it, I think having that idea of what would you do if things do not turn out the way you are expecting, do you go for more tightening or do you accept the fact that your debt ratio is going to rise further, your deficit is not going to fall as quickly as before, it is important the next government has a clear idea of what their plan B would be.

  Mr Clarke: I would echo that. I would stress the point that the Government has got to issue £190 billion of gilts, there or thereabouts, this year. Last year, we were saved, the Bank of England bought about £200 billion of them. This year will probably be okay, a lot of pension funds and insurance companies have seen their equity holdings go up and they are rebalancing their portfolios buying gilts. This year we are in a reasonable position. 2011-12 they are still going to be issuing well north of £100 billion gilts per year, that compares with £50 billion or so per year prior to the recession. How is the Chancellor going to convince the markets to keep buying them, particularly in the environment where we are not the only country that is issuing government bonds in huge proportions.

  Mr Chote: I think the growth question is obviously a very good one to ask. I think it is also worth asking him why I believe when he spoke to you after the Pre-Budget Report he thought that he was likely to be able to provide more information on the envelope for public services' spending over the next few years. We did not get anywhere with that. You might want to ask him why he did not feel it possible to do more on that front.

  Mr Weale: I suppose I would ask him as a matter of public administration why a situation was allowed to build up where there are apparently now such large efficiency savings to be made. How did a situation arise where that could happen.

  Chair: Good. Can I thank you for your evidence. It has been very helpful. We will move on to the next session.

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