Examination of Witnesses (Question Numbers
161-179)
RT HON
ALISTAIR DARLING
MP, MR DAVE
RAMSDEN, MR
MARK BOWMAN
AND MR
ANDREW HUDSON
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 youor most of
them would have told youthat 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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