Examination of Witnesses (Question Numbers
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 unemploymentthis
is claimant count unemploymentis 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
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
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
Q95 Mr Fallon: So it is not telling
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
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
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.