Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 180-199)


30 MARCH 2010

  Q180  Jim Cousins: Chancellor, if Labour wins the election the Prime Minister has made it clear that your job is secure for the next five years. Congratulations, and I think you deserve it, but how many other workers will be able to say the same?

  Mr Darling: I was going to say that I think all of us ought to be more bothered about other people's jobs rather than anyone sitting round this table. To give you an example, when I was Secretary of State for Work and Pensions we took out about 30,000 jobs in middle management posts and most of those people were able to get employment elsewhere, some elsewhere in the public sector but some would have gone into the private sector. One of the reasons that I think this process has to start as recovery is established is that the big problem we have just now is that private sector investment has been rather muted, for obvious reasons. It will take time to come back and what you ideally want to be doing is reducing the size of the public sector as the private sector is starting to grow. If people just become unemployed not only is it very bad for them, it is costly because they are not paying tax and they are drawing benefit. This is a process you need to manage carefully, which is why I part company with those who want to wield the machete almost as a matter of idealism. I think that is a stupid position to be in. This is going to be difficult but it is doable, and that is what I think collectively we need to turn our minds to.

  Q181  John Mann: You are cutting debt faster than any of the G20 countries other than Argentina. Is there not a danger that you are going too fast and you will take us back into recession?

  Mr Darling: No, I do not, and I do think in relation to borrowing halving the borrowing over a four-year total is sensible and doable. Debt levels will rise during the forecast period but they will then stabilise and start to fall. Because of the size of our banking and financial sector and the effect that the recession had on it, and because of the fact that stamp duty is driven by the housing market and though it is recovering it has been pretty flat in the last 18 months or so, our borrowing has been higher than we want but I think that was justified because if we had started cutting before that it would have been difficult. I really do think we need to reduce borrowing at a sensible rate and I think halving it over a four-year period is a sensible way to go.

  Q182  John Mann: Yesterday I asked our four eminent independent economists if any of them could name any of the eurozone economies that were better prepared and positioned at the moment than we are for tackling the recession and they could not name any. Considering this relative weakness of all the eurozone economies, is there not a danger of a eurozone drag down on our economy in the next year or two?

  Mr Darling: I did say in the Budget that I am very concerned that in Europe, unless governments start to address some of the structural problems in the labour market there, for example, if they do not address the present problems with the same zeal as they were prepared to do 12 months ago, there is a risk that we will see very low growth in the euro area for a number of years. One of the things I am concerned about is that even in the good times the growth in the euro area was not as good as you might have expected, and that suggests to me that we do not give up on this. Far from it; the European Union has signed up to its 2020 growth document, but it needs to have a better fate than the Lisbon Treaty has had so far, where everybody says, "Yes, yes, we must make all these reforms, we must make all these changes, but not quite yet". It is not enough for Europe to rest on its laurels of being a very large economic bloc. I have long believed, and all my experience of the last two years tells me, that you cannot just sit back and leave these things to chance. If reforms are necessary you make them wherever it is necessary, and if it means Government taking a more active part in trying to get growth then you do it.

  Q183  John Mann: Individual congressional districts in the United States have had higher repossessions during the last year than the entirety of the United Kingdom. You have prided yourself on the flexibility of the labour market. Is there a danger of inflexibility in the housing market?

  Mr Darling: There are two separate issues here. On repossessions, again, they are running at about the half rate that we saw in previous times and I think that is testament to a number of things: a more sensible attitude to it from lenders, the courts taking a more sensible view and also individual support that we have put in place. In relation to housing, what I would say is this: if we were having this hearing three or four years ago everybody would have said the real problem was spiralling house prices and people accept that unless we do something to redress the imbalance between supply and demand it will get worse. We have parked that issue for two years because, of course, house prices fell, but it is going to come back. The problem still in this country is that there are more people wanting houses than there are houses, which will put pressure on them. That is one of the reasons our housing market never collapsed in the way the United States housing market collapsed. The argument we have been having over the last few years has not gone away. We do need to do more to address this imbalance. We do need more houses.

  Q184  John Mann: Finally, you have reached agreement with Lichtenstein, with Belize, with Dominica, with Guyana as well. Do you intend as a priority to reach such agreements with UK dependencies that have become tax havens for tax dodgers?

  Mr Darling: Yes. We asked Michael Foot, who used to work at the Bank of England, to look at the whole question of avoidance and evasion of tax, and he particularly addressed the question of the British dependencies, but ideally I would like to reach agreement with as many countries as possible on this because, especially at a time like this but even in good times, it is not fair if people are in this country enjoying the fruits of public expenditure but are not prepared to make their fair contribution to it. It does not matter whether they live in Lichtenstein, a British dependency, Belize, wherever; everybody ought to play by the rules.

  Q185  Mr Love: Why is net trade not making a larger contribution considering that the trade-weighted exchange rate has declined by 25%?

  Mr Darling: Just as we were talking about in relation to Europe, 60% of our trade is with Europe and Europe as a whole has seen fairly flat growth. If you take Germany, where we do export to, Germany's GDP in the fourth quarter was flat. Italy and Spain are markets of ours and they have difficulties, as you know. Ireland is a big market of ours. I think it will take time for this to come back. The depreciation of the pound has certainly helped people, but we cannot blame everything on the sluggishness of our export markets. There will be questions as to just how much our exporters have been willing to take advantage of the fall in the price of sterling to drop their prices to make their products more acceptable. It seems to me that now is a very good time for British exporters to get their foot in a door that might hitherto have been closed because somebody else was in there.

  Q186  Mr Love: You have just mentioned Germany, that there was no growth in the last quarter, Italy is back in a recession, Ireland's output has declined by 10%, yet all of these countries are undertaking deficit reduction programmes. Are you concerned about that, that they may tip into a double-dip recession and that will prejudice our ability to trade our way out of difficulty?

  Mr Darling: I think we all have to be vigilant about this. That was a question that John Mann was asking, and there is no scientific answer to this. You just have to exercise a judgment as to how much you can reduce your borrowing and get your debt down as against if you do this prematurely what is the risk to the economy. The circumstances in all the countries you refer to differ for varying reasons. In relation to Ireland, it had to do some pretty tough things because of the nature of the Irish economy. Just today, as you know, they are announcing new measures in relation to their banks. They have to do what they think is appropriate and I think the Irish Government is confident that if it can get through this it will get back to a situation where things are improving, but their economy needs rebalancing just as other economies need rebalancing. They were very heavily dependent on construction, for example, with all the building that was going on, and that is now fairly subdued.

  Q187  Mr Love: You mentioned reform and the Lisbon Agenda and that Europe needs to take this up, but, of course, that is going to take quite some time to bring forward results. Do you not think there may be a need for European-wide action to ensure that we do not tip back into recession at the European level and we ensure that our economies go forward rather than the risks that are obviously current at the present time?

  Mr Darling: Yes, I am frustrated at times at the lack of progress being made in Europe. I remember when the Lisbon Treaty was signed there was a great fanfare of trumpets and this was all going to make a big change. Ten years on and it would be wrong to say there has been no change but in places it has been sclerotic and I think that has held Europe back. I am struck by the fact that 12 months ago—and it is only 12 months ago—when we had the G20 meeting here in London the sense of urgency, the sense of fear that if people did not act literally countries would fall off the edge, drove them to do things that it would have taken years to do otherwise, but they did them within a matter of months and it has made a difference; it has averted what could have been a catastrophic descent into a depression. I think Europe needs to get the same sense of urgency in the reforms it needs to be made for the financial services industry as well as the labour market reforms and others in relation to countries continuing to do what is necessary to get their economies to grow. There has been a big debate going on in Europe about the position with regard to various countries in Europe, the surplus and deficit problem that needs to be sorted out, and these problems will not go away. It is not a question of blaming one country or another, it is just accepting that if Europe is going to work and if it has any aspirations of being a highly successful economic model it has to understand that you cannot leave these things to chance. You do need governments which are prepared to roll up their sleeves and if there are problems to sort them out. I think that would be good for Britain and it would be good for the rest of the world as well.

  Q188  Mr Love: In your Budget statement you announced that you were reducing the growth forecast for 2011-12 as a result of net exports not coming up because of the problem at a European level. Looking at it now, do you think we can be as confident as you are that Europe will continue to grow and that the growth forecasts we have for 2011-12 can be sustained?

  Mr Darling: Yes, I do. The Budget is less than a week old and my judgment has not changed. The reason I decided that I would bring the forecast down, and it is in line with what the Bank said, as I said in my Budget speech last week is because I am concerned that the position in Europe is not as strong as I would like it to be. On the encouraging side, when I speak to my counterparts in the European Union I think they recognise that more needs to be done and I very much hope that more will be done, especially as the eurozone in particular has taken action to help Greece. Let us turn our attention to the equally important problem of making sure that collectively we do more to make sure we have got better growth in Europe. Europe has got tremendous potential. That is why we support the concept of the European Union and that is why we are an active partner in it, but it is like everything else, there are times in any organisation when you can get very frustrated. I think we need to make faster progress than we are making.

  Q189  Mr Fallon: Chancellor, yesterday your officials hedged with us on the impact of the National Insurance increase on jobs. Were you provided with an estimate of the impact on jobs?

  Mr Darling: Which we took into account in our estimates of employment when these proposals were first published. My initial proposal, you remember, was in December 2008.

  Q190  Mr Fallon: Absolutely, but what was the estimate of the impact on jobs?

  Mr Darling: They are built into the forecasts that we have placed before the House of Commons. They are in both the Budget documentation of last year and this year.

  Q191  Mr Fallon: Can you give me the figure?

  Mr Darling: Yes. I will get Mr Ramsden here to point out where you will find them. You will find them in box C2 on page 198 in this year's Red Book.

  Q192  Mr Fallon: But that does not give the specific impact of the National Insurance increase. That is what I asked you. You are being evasive.

  Mr Darling: No. What we do is we take into account everything that is happening in the economy, not one particular thing. You ask a perfectly fair question and I dare say a similar consideration was made when National Insurance was put up in the early 1990s when the then Government had to make sure it was able to collect its finances. I had a choice. I could have put VAT up instead, because if you are looking at raising the sums of money that were necessary to help get our borrowing down that is the choice that you make. We said in this Budget or the last Budget that we think the impact is manageable. It will be limited because you have to take into account everything else that is going on in the economy at the same time.

  Q193  Mr Fallon: I understand that, but what I am looking for is the figure because when I asked Mr Ramsden, "So there is no estimate of the impact of the National Insurance increase on jobs?", he said, "I did not say that". Is there an estimate of the specific tax increase? Is there an estimate of the impact on jobs or not?

  Mr Darling: Because when we forecast what is happening in jobs, employment/unemployment, we take into account, as you would expect, everything that is happening.

  Q194  Mr Fallon: But when you decide whether to put the National Insurance up by £6 billion or £7 billion or £10 billion, there must be some evidence that you have of the actual likely impact on jobs.

  Mr Darling: Yes, but I take into account everything that we are doing and, as you know, we publish our forecasts in relation to employment. There is also an element of judgment. It is not just that; it is a question of fairness. I looked at whether to put VAT up, which I know some people might want to do, or was it better to spread the burden, making sure that people who were earning £20,000 or less were not affected, and my judgment was that this was the better way of doing it. Of course, I am aware in relation to any tax that you have to look at its implications, but I also have to take into account what is happening in the wider economy. Taking all these things into account, which drives our forecasts, I think my judgment on that is right. Equally, for the sake of completeness, there is not a chancellor in the world who would not want to be reducing taxes if they could, particularly for people on moderate incomes, but you really do need to be sure you have got the money to do that before you make the announcement, and I had some difficulty with that proposal.

  Q195  Mr Fallon: But when you say the impact on jobs was manageable you mean it was negative?

  Mr Darling: The reason that unemployment was rising this year was because of the recession. Remember the National Insurance increase does not come in for another 12 months when we expect the economy to be growing, and I hope we will then see jobs increase.

  Q196  Mr Fallon: You promised this Committee back in December that you would give us more information on the public spending total, the two constituent totals that make up total managed expenditure, that is the total for annual managed expenditure and the total for departmental limits, and you said you would consider how you would give us more information, but you have not given us any more information.

  Mr Darling: What I said at the Select Committee was that I wanted to reflect on what further information could be given, and the view I have come to is that it is far better to do these things at the time of a spending review, and I will tell you why. You could, if you like, be publishing estimates on a monthly or weekly basis, but to do so would be misleading because the figures change so much. If you take unemployment, for example, a year ago we thought there would be about a million more people who were unemployed than there were, therefore the amount of money we would be spending on unemployment benefit would have been far greater and that would have an impact on how much you might spend in the future. Equally, in relation to debt interest we thought the numbers would be higher than they have proved to be. I think it is far better, in terms of people drawing conclusions about whether you can and cannot afford what you are doing, to publish these numbers in the context of a spending review when you can see what you are getting in and see what you are prepared to spend. I know that others will have a different view from that but I think that is a better way of proceeding.

  Q197  Mr Fallon: It is more convenient for the Government, is it not, to hide the depth of the cuts you are planning in spending or the likely impact on benefit and pensions?

  Mr Darling: No, I think it is better to publish the numbers you are working with rather than what the forecast happens to be on any particular day. The Select Committee hearing I think was in January of this year when we last discussed this. If I had been giving you then an estimate of what I thought we would spend on unemployment benefit it would have been higher than what I think today. These numbers are going to be published. They are of great academic interest but they do not tell you what the Government is proposing to spend or the judgment it makes when it decides to fix its spending total. In relation to how much we can spend, and we have been touching on this this morning, I do not think there can be anyone in the land who is not aware that there will have to be some pretty difficult decisions taken. I do not think anyone is pretending that somehow it is not going to matter and there is nothing to worry about. It will be difficult, but that is the judgment I have reached and that is where it is.

  Q198  Mr Fallon: Does not your failure to publish the total on the benefits side show that you are not ruling out stopping automatic increases in future for various benefits or pensions?

  Mr Darling: It is nothing of the sort.

  Q199  Mr Fallon: So are you ruling that out or not?

  Mr Darling: We have made absolutely no proposal on that at all. Indeed, you may recall with the negative RPI figures last year that I went to some length to make sure that people on benefits did not lose out. I do think that when we come to make these difficult decisions we have to be very conscious of the fact that there are some people in this country living on pretty modest means and I think it would be wrong to penalise them.

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