Examination of Witnesses (Question Numbers
OBE, MR IAN
29 MARCH 2010
Q60 Jim Cousins: Mr Chote, Mr Whiting,
Professor Talbot, how easy do you think it will be for the Government
to raise its share, the billion pounds from so-called mature infrastructure
Mr Whiting: This is basically
what we like to call privatisation or selling off assets?
Q61 Jim Cousins: Mr Whiting, really,
people will start to call you an unreconstructed old leftie if
you talk like that. Really we do not use terms like privatisation
any more. Could you recraft your thinking?
Mr Whiting: You are asking whether
the available and mature assets could be sold off?
Q62 Jim Cousins: Yes.
Mr Whiting: Clearly there is some
scope for the Government to raise some money from it, whether
they could get up to the billion is a moot point. One of the concerns
I would always have is that those assets that are sold off are
potentially no longer available to generate income for the Government.
Of course they may well generate tax revenues more than they previously
did but they may well not give the Government the cash flow that
they did when they were held by the Government.
Q63 Jim Cousins: So the accountants
call for not going in for, I hesitate to call it privatisation
but that word has been put on the table, do you agree, Ms Lagerberg?
Ms Lagerberg: In terms of do you
sell off your assets, well it is swings and roundabouts. The money
has got to be raised somehow. You are bound to look at it, who
would not. Is it going to raise the money you expect? It is a
very moot point because you just do not know what you are going
to get for it. The reality is we are in a very difficult situation.
We have clearly got to look at public spending. We have got to
look at tax. We have to look at a whole range of issues. You are
going to end up needing a combination of all of them to deal with
the economic situation we are in. Will one thing do it? No of
course it will not. Will a combination of things do it? A little
Professor Talbot: Obviously it
depends on two crucial things. One is do you need the assets,
are they genuinely redundant or not. If they are not redundant
then you have got to replace them by renting something, if it
is buildings, for example. A lot of the things around the various
efficiency programmes may lead to freeing up of some of those
assets through things like shared services, reducing the need
for building capacity and so on, and the second thing is will
the market buy them and what is the state of the market at the
time when you try and sell them.
Q64 Jim Cousins: Would you be an
optimist about that?
Professor Talbot: I have no idea.
I do not predict what is going on in the property market.
Q65 Mr Love: Can I take us back to
departmental efficiency savings because the Government has announced
in the Budget very significant increases. We have just heard today
that part of the Conservatives' plan in relation to increases
in National Insurance is further efficiency savings in education.
I just cannot resist, Professor Talbot, asking you the question
that Martin Weale asked us to ask the Chancellor which is if all
those efficiency savings were out there why have we not done something
about it so far? Is there anything in the operational efficiency
savings and public value efficiency savings that was not there
Professor Talbot: I do not think
there is anything particularly new from the Pre-Budget Report
to the Budget. There is detail here but there is nothing particularly
new. There is a very significant area which I bring the Committee's
attention to, and you may want to ask the Chancellor about, which
is the health budget. There is a very puzzling statement in the
Budget about what is going to happen to efficiency savings in
health. As part of the £11 billion they announced they were
going to make by 2012-13 health is supposed to contribute £4.35
billion. There was a great deal of debate in the press at the
time that was announced about where it was coming from, half a
billion from increased costs, staff productivity from reducing
sickness absence and those sorts of things. However nobody seems
to have picked up that also in the Budget it says in paragraph
6.14, "The Budget confirms that the NHS will deliver annual
efficiency savings of £15-20 billion by 2013-14" so
the year after it is delivering annual efficiency savings of £4.35
billion. That is an extraordinary jump from £4.35 to £15-20
billion in one fiscal year. There is nothing that explains where
that is suddenly going to come from. There is some detail given
in 6.14, £3½ billion will come through raising staff
productivity. Given that over the last decade or so staff productivity
in the NHS has gone down by about 3%, I am just puzzled how they
are going to achieve this.
Q66 Mr Love: Let me just be clear
about this, since they are a so-called protected area they will
be allowed to use resources to redeploy them?
Professor Talbot: Presumably,
I do not know, but it is a phenomenal amount of money. £20
billion, the upper limit of that is nearly 20% of the health budget.
Q67 Mr Love: Can I ask you, there
has been a lot of chatter from local government saying they have
been fixed up with a very rigid regime for efficiency savings,
are we asking too much of local government?
Professor Talbot: Local government
achieves more in the Gershon round of efficiency savings more
quickly than central government did.
Q68 Mr Love: There is a lot of waste
Professor Talbot: A lot of the
savings were confirmed by the NAO unlike a lot of central government
savings. Local government has already done a great deal and they
are being challenged to do significantly more in this round of
efficiency savings. Certainly the feeling amongst a lot of local
authority chief executivesI heard one quoted the other
day saying we are finally getting decentralisationis it
is decentralisation of cuts.
Q69 Mr Love: Mr Chote, can I ask
you about relocation. They are putting quite a lot in the Budget
for savings from relocation and yet a lot of people said most
of the easy savings have already been made, it will be much more
difficult. What is your view?
Mr Chote: Colin may have a better
view on what the historical experience suggests.
Q70 Mr Love: I am going to ask him.
Mr Chote: I would have thought
that quite a lot of that low hanging fruit may already have been
plucked. Therefore whether you can expect to maintain the same
sorts of savings looking forward as you think you have achieved
in the past, Colin will have a better view on. Just on your previous
question, if I could just mention, it is notable if you look at
the size of the efficiency savings that the Government has identified
by 2012-13 by department and compare it with what they are spending
in 2010-11 it is not surprising that local government is being
asked to achieve a larger reduction. It is 8% of their departmental
expenditure limit in 2010, larger than any other department.
Q71 Mr Love: Just picking up on what
Mr Chote has said, you have already indicated that local government
proved more lucrative in the Gershon round. Is there evidence
out there to suggest that perhaps putting more onus on local government
to achieve these savings is because it will be easier to find
them in local government?
Professor Talbot: Local government
and local services. The one thing we have not had yet, unless
I have missed it, was that the Budget promised on 25 March the
Total Place report was going to be published which would outline
how large savings could be made in local services taken as a whole,
not just local government but the other services provided in a
locality. As far as I am aware that has not been published yet,
I am not quite sure why. Coming back to the other point about
relocations, there is no strong evidence that the Government has
made any real savings so far on the 20,000 relocations under the
Lyons Review which was associated with the Gershon efficiency
programme. The combination of relocation costs, having to pay
people to move, redundancy costs for people who did not want to
move and so on. is such that, as far as I can see, they have made
no real savings at all. That might explain why this time it is
only 15,000 rather than the 20,000 last time.
Q72 Mr Love: Finally, can I come
to you, Mr McCafferty. There is quite a focus in the Budget on
help for small business. Is it real? Is that the right area to
be looking at or should we be looking to help larger businesses
Mr McCafferty: Given that the
Budget had so little money to play with of course any help across
the board tends to cost rather more and, therefore, focusing such
help on the most needy clearly makes some sort of sense. In reference
to my earlier answer, clearly in terms of flows of credit the
small business sector has fewer opportunities for credit outside
the banks than do medium and larger firms who can have recourse
to bond markets and elsewhere. In terms of the focus of the measures,
it is clear that the annual investment allowance, the increase
in that from £50,000 to £100,000, is a help, but given
the costs where the initial £50,000 was scheduled to cost
£1.5 billion and the extension, the doubling of the allowance,
costs only a couple of hundred million or so does suggest that
it is only a marginal extra assistance to business. The other
one that I would suggest is of long-term help is the change in
CGT for entrepreneurs where it is clear that the extension of
the lifetime allowance will allow more entrepreneurs to invest,
particularly serial entrepreneurs who build up a business, sell
it, restart, build up a new business and then sell that. The extension
of that lifetime allowance to £2 million is more in line
with the gains that most of these entrepreneurs would expect to
make being serial entrepreneurs and, therefore, should encourage
investment in start-up businesses. The other measures are welcome
if you are a very small business, but most of them are targeted
on businesses of under 20 people and, as such, helpful to that
sector but make only marginal difference to the other elements
of the small and medium firm sector.
Q73 Chair: Is there anything new
and significant in the Ending Child Poverty document that
was published alongside the Budget?
Mr McCafferty: I have not got
any comments on that particularly.
Mr Chote: There is effectively,
I think, as close as we are likely to get to a formal admission
that the target for 2010 is missed, basically saying the projection
being we are looking at child poverty of 2.3 million in 2010-11,
well above the target and roughly in line with what we predicted
when talking to you in previous sessions. The document does also
include an effort to say how you would make more progress to the
2020 target and it is probably not its intention but that suggests
how much more there is that still needs to be done. There are
some quite optimistic assumptions in there about the impact of
the increases in employment, et cetera. It does look like there
is an awfully large gap left that is not going to be achieved
without further increases in the generosity of payments to those
families. The idea that this can all be done by increasing lone
parent employment rates is not plausible. In a sense, both sets
of forecasts for 2010 and 2020 are even a bit more pessimistic
than the ones I have talked about when speaking to you in the
Q74 Chair: Is there a case for radical
change to the tax system to end the bias towards debt finance
rather than equity?
Mr Whiting: I think there is a
case for it, yes. It is certainly something that deserves to be
looked at because at the moment there is a bias in favour of debt
simply because interest is tax deductible and dividends are not.
It is wrong to run away with the idea that there is complete freedom
for debt because obviously there are considerable anti-avoidance
measures around thin capitalisation and transfer pricing, but
I would say it is something that is well worth studying. It is
certainly something that would not be good to move precipitately
on. But to look at it particularly in an international context,
and Mr Chairman I am sure that is the basis of your question,
would be very sensible and to try and see whether perhaps we can,
dare I say, achieve some simplification. Could we move to a more
territorial system that allows us to get rid of quite considerable
rafts of anti-avoidance legislation around things like controlled
foreign companies? But I reiterate, it is not something in my
view that should be gone at in a hurry.
Ms Lagerberg: I totally agree
with that. I think there are simplifications to be got out of
that. The balance does not feel right at the moment, it does not
seem to work in the way you would expect. It warrants a lot of
attention and it does warrant giving time to as well. I do not
think you can switch from the system we are in at the moment to
another system without really thinking through the law of unintended
consequences that will come with it. It is not a short-term fix
but it definitely deserves being given some more time and attention.
Mr McCafferty: There is an incontrovertible
case for levelling the playing field, that we should equalise
the treatment for the raising of equity with the raising of debt,
which is clearly not the case at the moment. We need to recognise
two things. One is that the costs of debt, as with the costs of
equity, are legitimate business expenses and, therefore, under
nearly all tax treatment are deductible before tax is levied and
moving away from that principle is very difficult. Secondly, we
need to recognise that for many small businesses the only available
finance to allow them to grow at all is a form of debt and, therefore,
taking away tax relief completely from debt simply will hamstring
the smaller firms sector from growing their businesses.
Q75 Chair: Talking about the smaller
business sector, Lord Mandelson told your boss to "get real".
Is he getting real?
Mr McCafferty: He stands by his
Q76 Chair: Are you going to give
Mr McCafferty: Who am I giving
support to, Chairman?
Q77 Chair: Your boss.
Mr McCafferty: Of course I am
giving support to my boss, I know which side my bread is buttered!
Q78 Chair: What should we keep in
mind for the Chancellor tomorrow morning, starting with Francesca?
Ms Lagerberg: I think if you are
looking at it today and sitting there as a businessman or an individual
you want to know what is going to happen and you know that probably
tax is going to go up or change in some shape or form. What people
want to know is what is coming round the corner. I would ask the
Chancellor over the last ten years how much change has he brought
in and would he still do it if he were looking back now, has he
given people the consistency that they want. Looking forward in
turbulent times, how much consistency can he provide in the coming
Mr McCafferty: I would ask where
is the strategy and the clarity on reduction of the deficit. It
is clear from all of the evidence from both the European Commission
and the OECD that there are significant differences in impacts
on growth whether you are cutting current expenditure, government
capital expenditure or raising taxes. It is clear that cutting
government capital expenditure and raising taxes are more damaging
to growth than cutting current expenditure, and we do not have
the clarity as to where there is the strategy nor on how those
current expenditure cuts will be made.
Mr Chote: On a related point to
that, in both the Pre-Budget Report of last year and the Budget
of this year the Chancellor has been able to announce that the
hole in the public finances is smaller and he has also announced
net tax increases, but in both cases he has not used it to ease
the squeeze on public sector capital investment, he has used it
to ease the squeeze on public sector current expenditure. Why,
given all the rhetoric about investment versus cuts, the Golden
Rule being designed to stop investment being clobbered when the
belt needs to be tightened, is he now relying for more of a fiscal
tightening on a squeeze from capital than he was a year ago?
Mr Whiting: I would also be talking
about strategy:- where is the strategy for our tax system, what
is happening. I would also be probing about the measures that
are apparently going to raise some money and whether they are
being done as efficiently as possible, for example the pensions
tax restrictions which are absurdly complex. There have to be
simpler ways of doing that and, indeed, a number of the other
things in here.
Professor Talbot: Given how critical
the efficiency programme is to this whole package from the Chancellor's
perspective, I think the Committee ought to be asking for some
more detailed explanations. In my judgment there is less explanation
in here at the moment of how these targets are going to be achieved
which are more challenging than the Gershon targets in 2004. As
I just pointed out in relation to the NHS, for example, if you
took that seriously that is 20% of the NHS budget to be saved
in the next four years through productivity and other changes.
I just cannot see how that is going to be achieved and there is
not enough in here to explain how it is going to be achieved.
Q79 Chair: We will certainly ask
him that. Given that you are such a loyal employee, Mr McCafferty,
we will give you the employee of the month award, which is the
last question. What do you think of the 20% VAT increase suggested
in the last session?
Mr McCafferty: I would have to
ask in what context. Is this designed to pay for something else
not to go up or is this in absolute isolation? Clearly, as I said
earlier, cuts in public expenditure on the current expenditure
budget are less damaging to growth than either increases in taxes
or cuts in public investment, and to that extent I would rather
see the deficit cut through greater use of the public expenditure
lever if we take the points about efficiencies and drive those
a lot further in order to reduce the deficit rather than increasing
taxation that damages growth even more.
Mr Whiting: If that is on the
cards then I would be looking to see if some of it is going to
be paid back in help for the less well-off.
Chair: Can I thank you for your evidence.
We look forward to putting your questions to the Chancellor tomorrow.