Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 161-179)


30 MARCH 2010

  Q161 Chair: Chancellor, good morning to you and one of your colleagues! Can you introduce yourselves for the shorthand writer, please?

Mr Darling: Dave Ramsden is the Chief Economic Adviser, who you know. Andrew Hudson and Mark Bowman are coming through security at the moment because you have started five minutes early. They will be here very presently. They were both here last night so you will be able to renew your acquaintance with them. Is this microphone okay?

  Q162  Mr Fallon: Have you got delays to announce?

  Mr Darling: I am going to announce that everything is running on time. This reminds me of my old transport days.

  Q163  Chair: Here they come.

  Mr Darling: Thanks to my delaying tactic I will now announce that we have got the full team here with Mark Bowman and Andrew Hudson.

  Q164  Chair: Chancellor, thank you and welcome. Yesterday we were talking with your officials and others about the issue of the tax system and the need for radical change to end the bias that tax deductibility of interest creates toward debt finance rather than equity. Could we have your views on that and are you discussing that at international level?

  Mr Darling: Yes, it is something that we look at all the time. The Treasury officials may have said to you last night that this is something we have discussed with business. Obviously, if you have a business that is funded by debt you would quite like a system where you can allow that for tax purposes. Equally, if you are more equity biased you would like to see something more there. It is something that we keep under review. I think I would want to be sure that if I made any proposals I understood what the consequences might be, particularly in relation to investment. There is nothing per se wrong with debt finance. It is a question of making sure you have the right balance between your debt finance and equity finance, and one thing might be appropriate for one project and not appropriate for another, but it is certainly something we will keep under review.

  Q165  Chair: In your Budget statement you spoke in favour of a systemic risk tax on banks, but cautioned against "going it alone". When we met Paul Volcker a month or so back in New York he was saying that he hoped the US and the UK could work together because in his opinion that would give a lead to other countries. Do you believe if we did that that would be tantamount to going it alone?

  Mr Darling: No, I certainly think you would have to have the United States and ourselves onboard for obvious reasons; our financial centres are by far the biggest in the world, but that in itself would not be enough. What I would say to you, Chair, is that I am more optimistic now that we can get an international levy or tax than I was six months ago. You will recall that when the Prime Minister announced our intention at the St Andrews meeting of the G20 finance ministers last autumn there was a fair amount of hostile comment. When the finance ministers of the G7 met in Canada at the beginning of February we were able to devote quite a lot of time to discussing this and I was encouraged by the fact that governments that had hitherto been either sceptical or silent on the subject said, "Look, this is a real problem for all of us. As banks become far more global and international and ever more adept at conducting their operations in areas where they can pay less tax there is a problem for countries like ours in that we have the potential of meeting the liabilities if these banks get into trouble but we are not always getting the revenues to compensate for that", so I think you will find that finance ministers, not just in the States and here, are far more amenable now to looking at seeing if we can put in place a system that works. It will be discussed at the spring meeting of the IMF in Washington in April. I hope we can make further progress there. I am very sure though that if you do not have a genuine international agreement the obvious thing that will happen is people will just go offshore, and that would be the worst possible option, that if we lose the employment, if we lose the revenues, someone else picks them up and we lose both ways, so I do think there has to be an international agreement. I am encouraged that there has been more progress made, more than many people would have thought, but this is something on which, by its very nature, more discussion is needed.

  Q166  Mr Todd: Most people have felt that the economy must rebalance in two ways. One is away from a consumer-led economy, and the second is to recognise the smaller scale of the finance sector which is likely to emerge from this recession. What signs are there that that rebalancing is happening?

  Mr Darling: Rebalancing inevitably takes time. As I said in the Budget, I think it is encouraging that some of our non-financial sector companies, despite the fact that we have had a recession here and in other parts of the world, are in a lot stronger position than they were, say, after the recession of the 1980s. If you look at advanced manufacturing, for example, in the last couple of weeks we have seen a vote of confidence in British engineering by Nissan with their battery powered car. If you look at the new creative industries, we have a very good story to tell. I announced a further measure to help the computing games industry, not because of computing games in themselves but because all that technology has applications elsewhere. There are many signs of where these companies are doing well and they can do a lot better. The key thing is that Government has to play its part, not taking their decisions and standing in their shoes, but it has to play its part. I would say one thing about the financial services sector. Everybody agrees that regulation and supervision need to be toughened up but it would be a big mistake not to recognise that this is a sector that not only generates a million jobs here at home but also provides services that people rely on in different parts of the world.

  Q167  Mr Todd: But few would expect it to return to the level of employment or GDP contribution before the recession. You may be alone in thinking that, I think.

  Mr Darling: No, I am not alone in saying that it will come back from where it is at the moment. I do not think any of us wants to see a return to the excesses that we have seen in the past. All I am saying is that if you were in any capital other than London you would like to do your level best to get this business off us, which is one of the reasons I sometimes have difficulty with our colleagues across the Channel, because I do think London is a very important centre, not just for us but for the world, and I am determined that we keep it as an important centre. However, I do accept the premise that in any economy putting all your eggs in one basket is not a terribly sensible way of proceeding. That is why in the Budget I announced a number of measures to help the non-financial sector.

  Q168  Mr Todd: Too many of our eggs were in that basket.

  Mr Ramsden: Can I just add that as part of our assumption that there is a permanent impact from the financial crisis on the economy, just over 5% permanent loss, a proportion of that, around 1%, as we discussed at the PBR hearings, is an assumption that the financial sector is permanently a bit smaller, but that does not mean it does not resume the kinds of growth rates and contribution that the Chancellor was referring to.

  Q169  Mr Todd: We have to find that growth from somewhere else; that is what I am saying. If one looks at the projections for GDP growth which are in the Budget, we appear to be returning to the same old story of a consumer-led recovery. Is that a reasonable interpretation of table B4?

  Mr Darling: Increased consumption will play a part but it is not the only thing, there is a whole range of matters which go into calculating what our GDP is. If you look at what has been happening in the last year, I think consumer spending has been higher in the last year than many people thought 12 months ago. In fact, considering we have been in recession, it has been remarkably resilient. In relation to your general premise on rebalancing the economy, it is a process and it is certainly a process that Government has to play a part in.

  Mr Ramsden: Consumption is making a smaller contribution to growth in the recovery than it did in the PBR forecasts. I think it was 2% in 2011 and 2012, and it is—

  Q170  Mr Todd: It is now 1.75%.

  Mr Ramsden: As I was saying yesterday, it is the biggest share of spending, so it will make a significant contribution. Business investment, which is a much smaller share, is making a disproportionately larger contribution.

  Q171  Mr Todd: Okay, but you would also be assuming, I would have thought, that much of that private consumption will lead to a sucking in of imports because that has certainly been the history of consumer-led growth in this country in recent years. Is that right?

  Mr Darling: It depends on what they buy, of course. Inevitably, in a country like ours we do import although I think I am right in saying that the Budget's assumption on imports is rather less than at the PBR.

  Mr Ramsden: That is right. In terms of imports, if you look at table B7, there is growth, but we are assuming quite a significant rebalancing away from imports and, as I was saying yesterday, that is a judgment.

  Q172  Mr Todd: Chancellor, when you made a remark about not making decisions for businesses themselves, of course the Budget does suggest one initiative where the Government will be making some decisions for business, which is the setting up of the Green Business Bank. I am old enough to remember the more corporate world of the 1970s where governments did second-guess what the market required. Is that the world we are returning to?

  Mr Darling: No, it is not. I think I am old enough at least to have observed that world from the sidelines, but in terms of the idea that Government can decide what is going to grow and what is not or what is a good idea to be developed and what is not I do not think you can go back to the corporate approach of the 1960s and 1970s. I do not think anybody is arguing that. What I do think is necessary is to recognise that Government can make a difference. For example, the research and development tax credits, which have been around for ten years now, if you talk to companies like Rolls-Royce and other engineering companies, have been tremendously helpful. That is an example where Government thinks it is a good idea that there should be research and development but the research and development is done by the particular companies.

  Q173  Mr Todd: On a specific project basis, then?

  Mr Darling: This is different. This is recognising that we have a huge task ahead of us, for example, to replace our power stations for the generation of electricity. We have a huge task ahead of us in relation to ensuring that our transport infrastructure is up to scratch. What it builds on is a recognition that the public sector will probably have a role to play here. We want these decisions to be made on a commercial basis. The Green Investment Bank will not be run from inside a Whitehall department with ministers picking winners, if you like. It has to be run on a commercial basis.

  Q174  Mr Todd: Have you published the governance model of this?

  Mr Darling: No. We have published the summary of what it does in the Red Book. We will want to publish more details as it works up, but we have made it clear that the bank itself will be run on a commercial basis. Its object, if you like, is to make sure it can act as a catalyst (we are thinking about equity funding) to make sure that projects that would not otherwise happen do happen.

  Q175  Mr Todd: Is there a reason why government finance is required at all in this? These are attractive opportunities which should be fundable through the normal market, should they not?

  Mr Darling: It would be nice to think that would happen but, if you recall, we set up in the last Budget a body called Infrastructure UK to advise us, and the advice we are getting is that there is going to have to be some public sector contribution. Take offshore, for example. There is no way that we would now be doing so well in relation to offshore wind generation if the Government had not intervened. That is what the Renewables Obligation does. Equally, if you look at the announcement made earlier this week by Siemens that they were going to bring manufacturing to this country, that is as a result of extra funding we are making available to change port facilities and so on. I am not necessarily talking about we will build half a power station and they will build the other half. If you take something like transport, I think I am right in saying that if you look at every major railway initiative or project built by the Victorians the companies went bust either building it or very shortly afterwards. It was certainly the case on the London Underground. I know from my own experience as Secretary of State there that the private sector can do some things, it can run the franchise operations, for example, but when it comes to large-scale building like the high-speed link between the Channel and St Pancras, it really took quite a sizeable public sector intervention there. I do think this is an example of where, post-crisis, if you like, you have to recognise that Government does have a role but, as I said earlier, that does not mean you are going back to the interventionism of the 1970s. I think that would be a profound mistake and there are comparatively few people calling for such a thing. I do not think that is right; I do think you have to recognise that Government does have a role.

  Q176  Jim Cousins: Chancellor, we are obviously having a great debate about the timing and size of public expenditure cuts, but this Committee was told yesterday that in fact the largest public expenditure cut of all was the withdrawal of the fiscal stimulus of 2009 and not replacing it in any form in 2010. Is that correct?

  Mr Darling: It is correct that not every measure but some of the measures that I announced in November 2008 at the Pre-Budget Report are being withdrawn. The biggest single stimulus was the VAT cut, and I said explicitly that was going to run for 13 months and I believe that my decision was right. The Committee will no doubt be aware that the figures published at 9.30 this morning show that the fourth quarter growth was 0.4% of GDP; it has been revised up slightly. Part of that was due to the fact that expenditure was brought forward into 2009, which is what I wanted to do. Had that run on further than that, not only would there have been a loss to our revenues but it would not have had the same effect. The car scrappage scheme, which is another scheme which has been very successful in boosting the motor industry, was time-limited as well. Remember also that we are quite deliberately maintaining our public expenditure plans for 2010-11, which puts about £30 billion into the economy. I have always been clear that you had to have a stimulus, a jolt to the system, to stop recession turning into depression, and I think that judgment was absolutely right, but I am also clear that a lot of these things were time-limited. Part of my strategy has been to maintain public expenditure. I do not know what was said to you by the experts last night because I have not had a chance to look at the transcript as I was otherwise engaged yesterday evening, but I think they would have told you—or most of them would have told you—that maintaining the support for the economy in this extra year is very important for the overall strategy.

  Q177  Jim Cousins: If the biggest cut of all is taking away the fiscal stimulus and that cut is going to be in place next year, next year will not be a year of stability. It will be a year in which we deal with the effects of the greatest single public expenditure cut, the withdrawal of the fiscal stimulus. Are you confident that recovery will be sustained?

  Mr Darling: Yes, I am. I am not sure I would accept the underlying premise of the question which you put in that we are putting £30 billion into the economy starting from later this week which will run during the course of this financial year. In addition, some of the other measures, like the time-to-pay scheme and various others, will remain in place. My argument has always been that you had to do something extra, something special, in 2009 to avert what could have been a catastrophic situation. I know that did not have universal agreement here; there were party-political divisions about that, but I think that was right. I also think that to take money away prematurely this year would risk derailing the recovery. If you look at the figures we have published, if you look at what we have done, I think the decision I have taken to maintain that public spending will result in our being confident that we will get growth this year. It is modest growth, which is why I think you do have to be careful about what you do, but it is growth nonetheless.

  Q178  Jim Cousins: That fiscal stimulus has given us a situation where unemployment has grown a lot less than a lot of people forecast and where hidden unemployment (people who simply take themselves out of the labour market), although it has grown, has not grown nearly as rapidly as a lot of people forecast. Are you confident that in the absence of continuing some form of fiscal stimulus unemployment will not grow and that hidden unemployment, which perhaps is the worst unemployment of all, also will not grow?

  Mr Darling: First, I agree with you that as a result of our support for the economy, also as a result of the £5 billion extra we have put into the Jobcentre Plus network, unemployment did not grow to the levels that we forecast a year ago. In fact, the figure today is roughly what it was in 1997 and I think that is very encouraging. What is also encouraging is that following ten years' worth of reforming the benefits system what has not happened is that people have come out of work and gone onto incapacity benefit. This is the sort of thing that happened in the 1980s and 1990s. Where I think there is reason to give greater attention is the very people you refer to who are not signing on, if you like, and who are not students because they appear in some financial surveys but if they are studying that is a good thing, it is people who are out of the labour market just now, they are the people that you want to get back into work if you possibly can. I think what we have done in relation to support in the economy generally will make it more likely that people like that will find work, but this is a task that is not yet completed. To take away support now would be disastrous in my view, which is why I think we need to support the economy in the way I have described. Of course, from next year we need to take significant action to reduce the amount of borrowing we are carrying, for reasons that we have discussed on many occasions.

  Q179  Jim Cousins: You have referred to the television show last night that you took part in, and at the end of it the spokespeople for all the big political parties were asked did we have to face public expenditure cuts greater than any of those under Margaret Thatcher. The answer in every case was yes. Do you not think that low paid workers, the hidden unemployed and workers in parts of the economy where employment is irregular and fragile and not secure, when they realise what they are being told, will feel a real sense of political let-down and failed political leadership from all three parties?

  Mr Darling: No. I think what is self-evident and most people would accept is that, whilst you can carry a higher level of borrowing than you would normally do during a time of crisis such as the one we have just come through, you do have to get that borrowing down. There are three elements to getting the borrowing down. One is tax, one is public spending, and, of course, the third element is measures to get growth back into the economy which will generate jobs. In relation to public spending, we want to reduce our borrowing by half over a four-year period. I think to go further and faster than that, as some want, would run the risk of seriously damaging both the economic and, I suspect, the social fabric of this country. Because we are protecting some spending, like health and schools and so on, it does mean there is more concentration on other departments, but I hope we can do this in a way that is fair and manageable; indeed, I am confident we can do it in a way that is fair and manageable. How much we spend on public services going forward will have to be something for the spending review, but, in relation to people on low pay, in relation to the minimum wage and tax credits, I think I said in the Budget that over 450,000 people are getting something like £38 a week more, that has been a very good way of helping people who have gone on to short time in both the public and the private sectors. Fairness and a sense of public service have been very much the characteristics of what we as a Government believe in. I think people recognise that we have to get that borrowing down but they also recognise that we have to do it in a way that is sensible and fair.

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