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Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 80-99)


29 MARCH 2010

  Q80 Chair: Good afternoon and welcome, Mr Ramsden. Could you introduce yourself and your colleagues for the shorthand writer, please.

  Mr Ramsden: Thank you, Chairman. On my left is Andrew Hudson, Managing Director of Public Services and Growth Directorate, and on my right is Edward Troup, Managing Director of Budget, Tax and Welfare Directorate. I am the Chief Economic Adviser to the Treasury.

  Q81  Chair: We were asking other panels about the bias in the tax system regarding the deductibility of interest towards debt finance rather than equity. Is it time for a change in that now?

  Mr Ramsden: I might let Edward answer that question.

  Mr Troup: The distinction is a longstanding distinction between the treatment of debt and equity and it reflects both international norms in taxation but also the fact that companies draw up their own results and measure their own profits for the purposes of their shareholders having taken account of the interest they paid on their debt. There are constraints on consistency with shareholders' treatment and also consistency with international norms. Having said that, we have done quite a lot of work over previous years looking at the taxation of international profits where the question of the allowability of debt has been discussed. When we were looking at the foreign profits reform two years ago we did float the suggestion that UK businesses should be denied deduction for interest related to the earning of profits overseas and their overseas investment so-called interest allocation. That was not met with overwhelming support from business and at that time the Government said that it was not going to proceed with an interest allocation rule and move towards the taxation of foreign profits reforms which we announced a year or two ago.

  Q82  Chair: Your growth figures are at the optimistic end. Given that you have been consistently overoptimistic for the past few years with your growth figures, what credibility should we invest in these figures?

  Mr Ramsden: A year ago you said that our growth figures for growth resuming in 2009 Q4 were optimistic and at that point we were above the consensus for 2010. As I recall, the IMF were forecasting negative growth for 2010 a year ago. Since then the consensus has moved in line with us for 2010 and we have seen growth resume in Q4, so a year on that suggests to me our judgments on the movement into recovery have been born out so far. Looking ahead, this year we have got 1-1½% growth and the midpoint of that is exactly in line with the consensus. Next year we have got growth strengthening significantly in line with what we have seen happen to growth in the UK in previous recovery phases. Our forecast for next year, as I am sure you know, is 3-3½% growth and 3%, which is what we run the public finances off, is in line with the Bank of England's mean forecast. I feel as if we are in decent company there in terms of our growth forecast for next year. There is a big range for next year. There is still a lot of uncertainty, as you have stressed, so you have got Goldman Sachs up at 3½% and most people below our growth forecast, but we have set out very clearly those differences where our forecast is coming from in the document. So far our judgments have been born out. Obviously there is still a lot of uncertainty but I am very happy to explain more around our growth forecasts for this year and next.

  Q83  Jim Cousins: Mr Ramsden, what do you think the employment impact of the public sector efficiency savings will be?

  Mr Ramsden: As I think you will recall, in terms of labour market forecast up until the last PBR we did not publish any projections at all. Now we publish a projection for claimant count unemployment and that projection takes account of all announced government policies and factors in all the assumptions we have taken account of in the public finances forecast. That projection shows claimant count unemployment falling from a peak of around 1.75 million down to 1 million in 2014-15. That fully takes account of the Government's announced public spending plans for this year and then assumptions for future years.

  Q84  Jim Cousins: I really must press you on that because if overall unemployment is going to fall over that period of time that will be produced by quite a complex mix of flows in various directions in various sectors of the economy. What I am asking you is what increase in unemployment and decrease in employment will be caused by the public sector efficiency programme? I do not want it washed through into a much bigger figure that has got all sorts of more complicated things in it, I just want you to identify that.

  Mr Ramsden: I would not call it washing through. Our claimant count unemployment forecast—

  Q85  Jim Cousins: Can you identify the impact on employment and unemployment of the public sector efficiency programme, please?

  Mr Ramsden: What I have said to you is that we put together our forecast by taking account of—

  Q86  Jim Cousins: How many jobs will be lost as a result of the public sector efficiency programme?

  Mr Ramsden: I do not know if my colleague, Mr Hudson, would like to answer. If I cannot answer your question satisfactorily he may wish to add something.

  Mr Hudson: It is impossible to say what the net impact will be of the efficiency programmes. Quite a bit of the efficiency drive will be through better procurement, for instance, which will not have implications for employment in the public sector. Where we have had efficiency programmes in the past some people at least have been redeployed and this is a wide-ranging programme affecting all departments so it is not possible to put a single figure on the employment implications of the efficiency drive.

  Q87  Jim Cousins: Let us be clear about this. You have got this very large programme, public sector efficiency programmes, and you have not got an indication of what job losses that will cause although plainly it will cause some.

  Mr Ramsden: I am saying that we have not put a figure, and I do not think it is feasible to, on the employment implications of a programme like this which is so wide-ranging and multi-faceted because of the sheer number of things that different departments will be doing to deliver the efficiency savings necessary.

  Q88  Jim Cousins: But if overall unemployment—this is claimant count unemployment—is going to go down by 750,000 over a period of four to five years and there is some job loss in the public sector then that does suggest that there is going to be a very considerable growth in employment in the non-public sector. Mr Ramsden, could you have a go at that? What would that figure be?

  Mr Ramsden: As I said, up until the last PBR we did not publish any figures at all on labour market projections and that had been the practice for many years. In response to being pressed by this Committee we could see the case for publishing a claimant count figure. That claimant count figure summarises on one metric a hugely dynamic labour market. As we have said, 2 million people have moved off the claimant count just over the last six months, there are massive inflows and outflows, we have a very flexible labour market. We have incorporated judgments as to how the private sector will recover through the recovery phase consistent with what is going to be a significant consolidation in the public sector, but neither myself nor Mr Hudson can give you a number today because there are no numbers in the Budget documentation that we can refer you to for this.

  Q89  Jim Cousins: Mr Ramsden, with great confidence you produced a figure of claimant count unemployment going down by three-quarters of a million over four years. When we ask you please could you tell us what increases or decreases in employment and unemployment in the public and private sector produce that figure, which you say has been well worked through and about which you are extremely confident, the answer is a lemon.

  Mr Ramsden: Can I just qualify your characterisation of what I said. What I actually described and read out was the claimant count forecast. We have tried to set out consistently throughout the document there are risks to that forecast and there are very significant uncertainties around that forecast, just to make that clear.

  Mr Hudson: What I can add, Mr Cousins, is that the efficiency programmes do not include a headcount target. Unlike the Gershon programme from the 2004 review, which did have a headcount target for savings, these programmes do not on the basis there are a number of ways in which departments will seek to deliver them.

  Chair: You look perplexed, Jim, are you? We will move on.

  Jim Cousins: Yes, please.

  Q90  Mr Fallon: Mr Ramsden, coming back to your growth forecast, given the average independent forecast is 2%, I think that is the summary you have produced, and you are using 3%, what is the gain that gives you for the public finance numbers in 2011?

  Mr Ramsden: We have published ready reckoners because we want people to be able to look at alternative scenarios, just as we do, but we have also been very clear when presenting our forecasts that you cannot just use those ready reckoners in a mechanistic way because we make a number of assumptions which are designed to build in caution, and we have seen that caution born out over the last year. We had growth turning out to be weaker than we expected and yet the deficit has turned out to be lower than we were forecasting a year ago. I cannot give you a headline answer to that question because there will be lots of other things going on. For example, the consensus average growth forecast might be more tax rich than our 3% forecast.

  Q91  Mr Fallon: So you cannot estimate that? If it turned out to be 2% rather than your 3%, you cannot estimate the difference it would make to the public spending numbers? Have a stab at it.

  Mr Ramsden: I can refer you to the ready reckoners. Back to what I was saying in answer to the Chairman, our track record has been that after a number of years where we were underestimating the size of the deficit at least in 2009-10 we have made progress, the sign on the error is the other way round. In particular, we did have weaker growth last year than we were forecasting this time a year ago, particularly Q1 was weaker, and yet the deficit has come in lower. I think that a year on our track record gives me some confidence in saying that the kind of mechanistic calculation that you are trying to do will not necessarily be born out by what we see happening in a year's time.

  Q92  Mr Fallon: It was you I was asking to do it, not me. Why, given the current spread of bond yields, has it been more expensive in the last few weeks for us to service our debt than it has been for the Italians to service theirs?

  Mr Ramsden: If you look at what has happened in the last few weeks 10 year bond yields, the UK benchmark, have averaged pretty much 4%. They move up one day, move down another day and the markets look at that, but overall historically they have stayed very low at 4%. If you look at the auctions that we have had in the last few weeks, indeed since the end of QE was announced, those have been very successful both in terms of the cover and the tails. I do not recognise your comparison.

  Q93  Mr Fallon: You can see what the Italian figure is and you can see what ours is. Why should the Italians find it easier to service their borrowing than we find it here? Why are they doing better than we are?

  Mr Ramsden: Lots of countries experience different—

  Q94  Mr Fallon: Why are the Italians doing better than we are?

  Mr Ramsden: Just to give you an example: Australia is Triple-A and currently its 10 year is about 5½%, they are in a different position. We and Italy are in different positions. I would argue you cannot just compare a 10 year bond yield over a few weeks and say that is telling you something about those two economies without looking at all the underlying factors.

  Q95  Mr Fallon: So it is not telling us anything?

  Mr Ramsden: I think our historically low 4% is telling us that in the UK's case it is still able to finance its debt at very low levels and, as I was saying, the demand in recent auctions has been very solid which is consistent with what I said to you my expectation for demand was during the PBR hearings.

  Q96  Mr Fallon: What is the impact on GDP of your overall National Insurance increase?

  Mr Ramsden: We have published growth forecasts that fully take account of all the tax and spending measures that have been announced. We have factored in the impact from the Government's announced policies on National Insurance. I do not know if Edward wants to give you more detail.

  Q97  Mr Fallon: I just want the estimate. What is the impact?

  Mr Troup: I will just repeat what Mr Ramsden said.

  Q98  Mr Fallon: You must have done an estimate.

  Mr Troup: The counterfactual to that question is what else would you have done. If we had not raised National Insurance then—

  Q99  Mr Fallon: Mr Troup, you are raising National Insurance. You must have done some estimate otherwise you would have raised it much higher. You must have done some estimate of the impact on GDP.

  Mr Troup: As Dave has said, we estimate GDP taking all changes into account, taking all the spending and tax and other circumstances into account, and that gives you the GDP figures. If we had not raised National Insurance either debt would have been higher, there would have been lower spending or some other tax rises would have been announced and that would have been a different set of circumstances which might or might not have given a different growth figure. I do not think you can unpick one tax increase and say what does that do to GDP.

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