Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 140-159)


29 MARCH 2010

  Q140  Mr Love: How will that be effective? 60% of our imports go to the EU, the EU economy is struggling; that is the best you can say. How will that affect that growth in export figures?

  Mr Ramsden: To the extent one can draw conclusions about very recent data, Ireland is a major trading partner of ours, 6.5% of goods and services go to Ireland, and Ireland is going through a very, very big adjustment. We have taken account of that in terms of our forecast for the near term but the broader euro area, particularly the core economies which we trade strongly with, will see a pick up in growth compared with their current weakness. Also we are growing our exports very significantly to new export markets, it is just that we have quite a traditional pattern of trade at present. So just as it is the reason why we revise down our growth forecast for 2011, I would recognise it as a risk.

  Q141  Mr Love: Is not the very problem the one you have just highlighted about Ireland, where the priority is on deficit reduction? If you look across Europe, this is becoming much, much more of a theme and are we not in danger of threatening the recovery of the euro zone and therefore threatening our export-led recovery?

  Mr Ramsden: It is really important that all economies have credible consolidation plans and see those through, and that includes Ireland. I am just trying to find the numbers.

  Q142  Mr Love: It is not only Ireland which is going through deficit reduction—they may be the most extreme example but it is not the only one which is going through deficit reduction. Is there not an issue here at European level, for us to at least discuss the issue of whether the timing of deficit reduction is incredibly important?

  Mr Ramsden: I would agree there is a really important issue within Europe, as there is more generally in terms of global patterns for rebalancing. That means that just as economies like Ireland and the UK which have been hit with very significant increases in their deficits have to consolidate, so other countries which tend to spend less in terms of domestic demand need to see the supply side reforms so their demand will increase. This is not about asking Germany to spend more, but as the OECD said on Friday, I think it is reasonable to say that economies like Germany need to carry on the supply side reforms, open up their product markets, that will make them a stronger market for our exports, for example business services, and that would be conducive to our trade pattern and trade future.

  Q143  Mr Love: I wish you well with that discussion. Can I come on to consumption because in your figures produced in the Budget you are assuming consumption growth of 2.5 to 3% in 2011-12. Are we not getting back to the bad old days where growth is heavily dependent on consumption?

  Mr Ramsden: We had this discussion after the PBR and your report I thought was very valuable on this issue. Consumption, as set out in Table B4 on page 162, is a very big part of demand in the UK, just as it is in other economies; I think in the UK it accounts for about 63% or so of GDP. It will make a significant contribution once the recovery really gets going next year. What we have done is to mark down our consumption forecasts, both for next year and the year after, so the growth contribution is now less than 2%. We think as part of the rebalancing which we think will come from very supportive macro conditions continuing, particularly on the monetary policy side from the depreciation in the exchange rate, from an assumption that the world economy will continue to recover, we have more of a contribution from business investment and net trade. This is a judgment we have made which we will have to keep revisiting, but one thing which gives me some confidence in it is the fact we were expecting the savings ratio to pick up significantly and it has done. We think that will contribute to bearing down on consumption in the short term, but as people get more confident about what is going to happen to the labour market for example—again consistent with our forecasts and our judgments—then the need for precautionary saving will decline. Consumption can play a part in the recovery but it is not a disproportionate part and indeed we have got rebalancing.

  Q144  Mr Love: I do not want to pursue the rebalancing, other than to say that other witnesses who have come before us, particularly the Governor of the Bank of England, is very hot on the need for rebalancing. The question I wanted to ask was, the sceptics are saying in relation to these particular set of figures that higher levels of consumption expenditure, so the historical experience tells us, will suck in a greater degree of imports. That is what has happened in the past, that is the assumption even with the depreciation, yet your figures do not show that. How do you respond to that criticism?

  Mr Ramsden: The big years for imports in the 1990s were 1996, 1997 and consumption grew by 3.9% in 1996, 3.8% in 1997. We are assuming that consumption grows by just under 3% and that is why our imports forecasts are not as strong as they were in the mid years of the 1990s. I think now we will see significant substitution away from imports. I do think last year's figures were affected by some of the temporary stimulus measures, such as the VAT cut and car scrappage, but this is the kind of judgment we will have to keep under review, as with all our forecast judgments, and you would expect me or any economist to say this after what we have had to deal with over the last few years. We have to recognise the fact that our models do not give us cast iron answers on these kind of questions, we have to reflect uncertainties and keep coming back to our judgments.

  Q145  Nick Ainger: Can I ask one more question, Chairman? I am sure Mr Hudson was in the room when Professor Talbot raised the issue of the claimed efficiency savings within the National Health Service. He referred to page 90, paragraph 6.14, where it says that the Budget confirms that the NHS will deliver annual efficiency savings of £15 to £20 billion by 2013-14. That is around 20% of the current annual budget. Is that a cumulative figure or is that a saving which will be made in 2013-14? The rest of the paragraph, the way I add it up, amounts to savings which could be achieved—it does not say over what period—of £9.7 billion, but the final paragraph, 6.15, says, "As an interim step, £10 billion of value for money and quality improvements will be delivered by 2012-13." Could we have an explanation of that particular paragraph because it does seem these are incredible efficiency savings and why are they not being achieved today in some form?

  Mr Hudson: It is certainly an ambitious programme but there is a lot of work going on within the NHS already to deliver this by 2013-14, and there is a press notice from the Department of Health which went out on Budget day which gives some more detail of the approach and how the figures fit together. Some of the items are operational type efficiencies, some are more to do with savings at the front line which will be recycled for the benefit of patient care.

  Q146  Nick Ainger: I am correct that on the current expenditure on the NHS, these savings will amount to between 15 and 20% of the total spend?

  Mr Hudson: In broad terms, yes.

  Q147  Nick Ainger: That is certainly ambitious, is it absolutely realistic?

  Mr Hudson: To quote the Secretary of State, we have already challenged the NHS to deliver efficiency savings of £15 to £20 billion by 2013-14.

  Chair: This is what is perplexing us.

  Q148  Jim Cousins: I really think we need to clarify what we mean here. Are we talking about a programme of efficiency savings which accumulate by the year mentioned in the Budget to £15 and £20 billion?

  Mr Hudson: Yes.

  Q149  Jim Cousins: Or do we mean annual savings of £15 to £20 billion compared with the current budget?

  Mr Hudson: It means by 2013-14 there will be £15 to £20 billion available, so far as it is within the patient care budget, releasing that amount of money to help continue progress in improving services on top of the real terms protection of 95% of the NHS which the Government has given.

  Q150  Nick Ainger: So I am clear, in terms of public expenditure therefore, because it will remain within the NHS, this is not a contribution to reducing the budget deficit?

  Mr Hudson: That is absolutely right. What the Government has said is that there will be protection for 95% of the health budget going up in line with inflation—that is 95% of funding which directly supports patient care will rise in line with inflation in 2011-12 and 2012-13—that is the commitment in the PBR underlined in the Budget. In order to deal with the pressures on the health service, again to quote the Secretary of State, "by making tough efficiency savings, this will mean we can continue to increase real terms resources available for patient care year by year".

  Q151  Chair: So you are going to have efficiency savings of 15 to 20% of the whole budget, and you are going to protect front line services, and you are going to have even extra investment in certain areas?

  Mr Hudson: What this is saying is that the examples, which are in the press release and also in the Budget document, will enable the NHS to meet the rising pressures by improving staff productivity, by best practice in care planning for people with long term conditions, by more effective commissioning, and then we get into the more operational stuff going on to savings in management.

  Q152  Mr Fallon: Does that assume therefore any further freeze on pay?

  Mr Hudson: Where there are not three year deals in place, the approach to pay is as set out, to look to hold pay to a limit of 1% in 2011-12 and 2012-13.

  Q153  Jim Cousins: Of the £15 to £20 billion annualised savings, how much of that is what you call "recycled" back into spending and how much remains as an actual spending reduction?

  Mr Hudson: The vast majority will be recycled.

  Q154  Jim Cousins: How much of that £15 to £20 billion annualised is recycled?

  Mr Hudson: What I can say is that of the cost cutting savings, of the £4.35 billion, that are part of the Government's wider commitment of the £11 billion savings which were announced at the PBR and broken down into more detail at the Budget, of that £4.35 billion, which is part of the £15 to £20 billion overall ask, there will be that which is within the 95% that relates to patient care which will be recycled into patient care, savings which relate to administrative matters, will be part of reducing the deficit.

  Q155  Chair: We will take this up with the Chancellor tomorrow but before we go could I quote to you from the press release from the Department of Health, Budget 2010. It says, "We have already challenged the NHS to deliver efficiency savings of £15 to £20 billion by 2013-14" and that appears to be a cumulative figure according to the press release. But if we go to Budget 2010, page 90, paragraph 6.14, in red it says, "Budget 2010 confirms that the NHS will deliver annual efficiency savings of £15 to £20 billion by 2013-14". So is it cumulative or is it annual?

  Mr Hudson: As the Budget document says, the plan is that the NHS will deliver annual efficiency savings of £15 to £20 billion by 2013-14, so that with the funding that the Government has announced protected—

  Q156  Chair: The point I am getting at—forget the rhetoric—just look at that press release from the Department of Health. Is it a cumulative figure or is it an annual figure?

  Mr Hudson: The press release is intended to be consistent with the Budget document. I am sorry, the press release is consistent with the Budget document.

  Q157  Chair: The press release?

  Mr Hudson: The press release is on the same basis as the Budget document.

  Q158  Chair: So it is an annual one?

  Mr Hudson: It is an annual one.

  Q159  Chair: So why did it not say that in the press release from the Department of Health?

  Mr Hudson: There is no difference between us on this.

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