Budget 2010 - Treasury Contents

Examination of Witnesses (Question Numbers 220-239)


30 MARCH 2010

  Q220  Ms Keeble: Also, Robert Chote told us yesterday that the biggest unprotected budget was schools. In terms of the public making their decision, like Andrew Tyrie and Michael Fallon said, people need to know what is going to happen to their services, such as, for example, schools, and if it is going to be managed cuts or it is going to be catastrophic cuts. That is the kind of thing that they will make their decisions on, including what happens to their children's schools, so what do your cuts look like and then what do they plus an extra £6 billion look like?

  Mr Darling: First, we have said that we want to protect the schools budget, but I have quite deliberately not got myself into a position of making a promise of a reduction in National Insurance contributions, and nor would I unless I was absolutely sure that I could afford it. Otherwise you get yourself into a situation where you either have to put up another tax, and it would probably be one of the big taxes to get that sort of money in and the big tax raisers are VAT and income tax, or you have got to find your £6.6 billion elsewhere. I make no bones about it: I want to protect frontline services in the way I have described but I am equally determined to get our borrowing down. I think people in this country, people who look at our country, everyone has agreed you have to get your borrowing down and you cannot take risks with that, and that is why I find that particular proposal so difficult.

  Q221  Ms Keeble: Do you think the extra £6 billion is possible through efficiency savings given the questions we have had about the existing proposals? Do you think the proposal that that can be got through efficiency savings is plausible?

  Mr Darling: It is tempting to say your questions should be better addressed to those who think they have found them, but all I would say is that if you look at the £6 billion that Mr Osborne was referring to yesterday, they include, for example, relocation of offices. That is already factored into the figures that we have previously announced, so that is not new money, and in relation to cancelling some IT projects we have done some of that as well. I think there is a risk of double counting, but I think it would be a big mistake to rely on getting money when, by their own admission, they do not know where it is coming from. They cannot even allocate it between departments. If you have already spent it you have a binding commitment but if you have not got the income to pay for it then it is rather like any other organisation, you have got shortfall and you have got to make it up somewhere else unless you completely do a cartwheel and say, "I am not so bothered about borrowing". I think that would be a big mistake.

  Q222  Ms Keeble: You referred just now to the attitude other people have towards our country and towards the programme for fiscal consolidation. If the markets were to begin to charge a higher premium on UK debt would you then look at more substantial cuts with the resulting possible risk to economic growth?

  Mr Darling: I have made my forecast on the basis of my proposals, so I am just talking about my proposals now, not anybody else's. One of the encouraging things is, if you look at what we are paying in debt interest at the moment, it is less than we thought we were going to be paying, and indeed yields have come down slightly. They are around about 4% at the moment, which is historically a lot lower than they were. I think most people looking at us will say, "Britain has gone through a very difficult period", most people say that the strategy we have followed was the right one and most people, I think, know that we have got to get our borrowing down and we have to get it down at a rate which is manageable. To give you an illustration, if you wanted to do this over a three-year period, you would have to take another £26 billion out of it or, if you wanted to eliminate the structural deficit altogether in the next Parliament, I think it is another £48 billion you would have to find. If someone wants to do that, that is fine, but you actually have to spell out where you are going to do and that rather reduces your room for manoeuvre on anything where you have not got proper funding. In relation to debt interest, one of the reasons I would like to get borrowing down and then debt down is I have always believed that, if you have got money to spend, it would be better to spend it either on services that people depend upon or perhaps reducing taxes, especially for people who are low-paid. Servicing debt is not really where you want to be spending your money.

  Q223  Ms Keeble: In the middle of this, and clearly there are some big challenges ahead around managing the budget, there is also the need to hold to some of the political priorities which the Government has, in particular, the targets on child poverty. What is your view about the feasibility of that? We heard yesterday that the Commission will actually produce a strategy and that will be carried through, but what realistically are your projections about that, and will the Government ensure that that strategy is maintained and put into effect?

  Mr Darling: We were the first Government ever to say that we wanted to eradicate child poverty. We have made progress and the measures we have announced and are already in place or did announce will take one million children out of poverty. It is not just money as well, it is the whole question of education, and Sure Start centres are all part of what we are trying to do. As far as I am concerned, it is a commitment that we signed up to and a commitment over a 20-year period, and we are not departing from it.

  Q224  Ms Keeble: So the Department is going to continue to focus on that?

  Mr Darling: Yes.

  Q225  Ms Keeble: Because in some of the previous sessions there have been some concerns raised by officials about the fact that there were conflicting priorities.

  Mr Darling: It is not just a good social policy, it is not just that it is the right thing to do, but it is a very good economic policy as well because there is quite a high correlation between poverty, lack of educational skills and, therefore, low income because of lack of work. Indeed, one of the central parts of what we have tried to do in the last 13 years, and it was the central plank of our 1997 Manifesto, was getting people into work because work is one of the best ways of beating poverty. There are other things you need to do, like the tax credits, which is why I do not want to cut them, and raising people's aspirations, which is why the Child Trust Fund is an important element of that, and giving people a stake in the future. I think there are a number of things that you need to do. Obviously, there are some years when you can do more than in others and I think people understand that. In the last year, our priority has clearly been to keep people in work because, once people go out of work, incomes drop and then you have a big, big problem, and that is what I have been trying to avoid.

  Q226  John Thurso: Chancellor, if I may, I want to ask you a bit more about the efficiency savings, but can I just first ask a factual question regarding personal allowances. These have all been frozen for the forthcoming year. Does that mean that everybody in real terms will have an albeit modest reduction?

  Mr Darling: Let me explain what I did. Firstly, the policy of freezing the allowances was announced in the Pre-Budget Report on the floor of the House of Commons. I know that some of us who are MPs sometimes feel that we want to say something confidentially and there is no better place than the floor of the House of Commons! A lot of us have this problem that it is a very good way of keeping a secret, but that is where it was announced. As you know, your personal allowances and the indexation are driven off the September RPI. Last September, for the first time in ages, it was negative, so, in theory, the allowances would have come down which would have meant that people were paying more tax, which I did not think was a very good idea. That is why I said I would freeze them, because indexation under the normal rules which successive governments have followed for years would have meant that they would have come down, so that is what I did.

  Q227  John Thurso: But for the year coming forward, in real terms, we will have a minor reduction?

  Mr Darling: What would have happened is they would have come down and you would have had to pay more tax. That is why I froze them and that is why I did something similar in the Budget. I am told that this has been the case since 1977.

  Q228  John Thurso: But the straight fact is that in the year ahead, coming forward, whatever you would have done in the past, we will actually be, to a modest degree, slightly worse off.

  Mr Darling: Or the alternative would have been to reduce it. In real terms, therefore, what we tried to do was to maintain things.

  Q229  John Thurso: I am just trying to get a straight answer to a straight question.

  Mr Darling: You are right, it was suggested in some quarters that we should have increased the allowances in the Budget last week and that would have cost another £2 billion more, which at the moment would have been impossible to have done but, given that inflation is coming down this year, when people look at their income as a whole, I think that is helpful. The reason, I will explain what I have done and why I did it.

  Q230  John Thurso: Will you do the same as you did for pensions and so forth, which is to claw back the 1.5% this September coming?

  Mr Darling: If you recall, and this was in the Pre-Budget Report, what I did was to make sure that people got an increase over the two years.

  Q231  John Thurso: You put them up by £1.1 billion.

  Mr Darling: It was one of these funny calculations people were doing. We were not taking money away from people, we were saying, "Look, rather than give you nothing now and wait until two years' time", we were saying have a bit now and the rest of it in the next year. That, I think, was a more sensible way of proceeding.

  Q232  John Thurso: But what your Minister confirmed on the Statutory Instrument was that, if inflation is 1.5% this September, there is a 1.5% disregard, so it will be zero.

  Mr Darling: But the alternative would have been to say, "You get no increase this year, you can wait for it".

  Q233  John Thurso: We agree on the facts.

  Mr Darling: Given that pensioners generally do not have high incomes, I would have thought that it would have been a bit churlish to have done that.

  Q234  John Thurso: I think we agree on the facts. Can I ask you about the efficiency savings. I think it is paragraph 2.57 on page 30 which sets out that, in respect of expenditure, you are looking for something over £20 billion of reductions, of which £11 billion is from operational efficiencies and other cost-cuttings, £5 billion from targeting and prioritised spending and the rest from restraint on public sector pay. Given that the National Audit Office has still not agreed the numbers on the last round, is it really wise to count on this for actual cash reductions in the deficit?

  Mr Darling: Yes, because I think this is something that we can achieve. Para 2.57 is the one that you were referring to, and in relation to public sector pay and in relation to public sector pensions we can see how much that can be achieved. I think the other sums referred to, efficiencies if you like, I believe this is something that we can deliver. We did deliver about £26.5 billion following the 2005 election and, yes, of course we want the NAO to be able to confirm these things, but I do not think you could hang around waiting until you do that. I think it is better that you keep having to set demanding targets, and I think they are deliverable.

  Mr Hudson: Just to clarify, the NAO Report, which I am assuming is being referred to, was midway through the delivery of the Gershon savings and a good deal of work was done subsequently to deliver the overall total of £26.5 billion savings that the Chancellor has just referred to, which is an over-achievement on the savings target there and where we also over-achieved on the headcount reduction target, which was part of that saving, so there is evidence of over-achievement there once the process was complete, which was after the NAO published that report.

  Q235  John Thurso: Chancellor, nobody would dispute that in any organisation there are savings to be had. Anybody who has ever run a business knows that at any moment it is a dynamic and you can always find a saving. There is a lot of scepticism from people in the business community about these savings because, first of all, they are resource rather than money and some of them are non-cash, secondly, efficiency is usually linked to productivity, whereas you were talking about the NHS earlier, which is of course ring-fenced, so it will not be used for this, but productivity over the period of the efficiency gains has gone down, not up, so you have this curious conundrum of theoretically going through efficiency with actually lower productivity. Most people understand the balance sheet of profit and loss and a cashflow and are really pretty bamboozled as to whether these are real or not. How can you reassure them that these are actually cash numbers that can be put aside and put in the bank to reduce the deficit rather than resource accounting with no cash involved?

  Mr Darling: I was just going to make the point that the total amount of money that we will be spending this year and departments are spending is about £350 billion. I do not think it is impossible to say in this particular case, "You can save £20 billion". As you say, every organisation can do it. I suppose there are two ways you can do it. You can either say to a department, "Well, that's your total, you've got that minus X. Find your X in whatever way you want, but you're not getting it", or you can do it by saying, "Look, these are areas where I think you can be more efficient, whether it's your premises, whether it's your IT, or doing more things with less people", but there is a variety of ways of doing it. I would just make a point about productivity. Productivity is always difficult within the terms. If you take the NHS, for example, if you have got more doctors and nurses because you are treating people more intensively, if you like, that does have some influence on how you might measure productivity and you cannot really compare that with a factory that is making metal boxes or whatever where you can do it with ever-decreasing numbers of people. I honestly do think that these are efficiencies that we can get out of the system or, to put it another way, we need to get them out of the system because we cannot just go on spending more and more money, people would not expect us to do that.

  Q236  John Thurso: Really, you are putting your finger on the point. A lot of people say, "Fine, we know we've got to reduce spending", and that is called a `cut', but everybody is doing their damnedest not to call it a `cut' and they are trying to call it an `efficiency gain'. Do you not think everybody would just be a bit more respectful of all of us if we said honestly, "We are going to cut something. It is not actually about efficiency, it is just about reducing expenditure"? Is the country not grown-up enough to be able to take that on board?

  Mr Darling: I do not think anyone is afraid of saying that they are going to cut something, whether it is because they do not want to do it, because they can think of a better way of doing something or simply because it is going to have to be put off. I do not think there is any problem with that. If you look at it this way, and let us go back to the NHS because we have been talking about that, what matters to people is the outcome: can they see a consultant within a couple of weeks if they are suspected of having cancer, is there better health screening, the MOTs for men over the age of 40, and the treatment you get if you go to your GP practice or the hospital. Most people will accept people are involved in that, the services and so on, but they would expect the organisation to provide that as efficiently and effectively as possible. Indeed, the NHS itself will tell you that, if it took a sample of 100 hospitals, some will be more efficient than others. I think that is rather different from if you, say, for example, decided to cut Sure Start, which I am not proposing, and some people might, but I am not, but that is a cut and an efficiency, if you like.

  Q237  John Thurso: The NHS, you have told us, will become more efficient and will get money, but that money will be redeployed, so it is a movement of resource from an inefficient outcome to an efficient outcome; you will not actually be taking money out of their budget.

  Mr Darling: Yes, in the protected part.

  Q238  John Thurso: So, as far as reducing the deficit is concerned, the NHS is actually irrelevant because no cash is coming out of that, but there are other efficiency savings which will be used as part of the deficit reduction?

  Mr Darling: Yes.

  Q239  John Thurso: And those are the ones which need to be in cash.

  Mr Darling: Yes.

  Mr Hudson: And there is more detail in the departmental press releases than certainly I can recall at this stage of the process, given that these are savings to be delivered in full by 2012-13. There is a substantial body of work in the Operational Efficiency Programme, which reported a year ago, on at least some of the ways by which departments can deliver these programmes, so those are the reasons for confidence that these can be real efficiencies.

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