June 2010 Budget - Treasury Contents

Examination of Witnesses (Questions 133-195)


13 JULY 2010

  Q133 Chair: Thank you very much for coming in. We do not have very much time. It is all rather curtailed compared to previous years. We would like to finish as near as possible to 12.30 although we might run on just a little. I would like to begin by asking you, Mr Ramsden, what measures, if any, in this Budget enhance the supply side of the economy and overall trend growth?

  Mr Ramsden: Thank you for that question. I will not go through the usual introductions for the shorthand writer.

  Q134  Chair: I have never understood the purpose of those. Maybe I will be told off but they have always seemed a waste of time to me since your names are up in front of you.

  Mr Ramsden: So long as you know what we do that is fine. To answer your first question, the OBR has made an assumption that there will be no impact of the Budget on trend output. It sets that out in its chapter of the Budget document. This was something we thought about quite seriously, as you would expect us to, in advising the Chancellor on the Budget measures, whether it be on the tax side with Edward or the spending side with Andrew. There was some discussion of this in the document. The reductions in the main rate of corporation tax over a sustained period will have potential implications for the supply side. The increase in VAT, moving VAT to 20%, will contribute to rebalancing the economy, and you see that indeed in the OBR's forecast. Whilst the OBR's assumption is that there is no impact, overall this is an assumption. I think this is an area that over the months ahead requires a lot more work from within the Treasury and with the OBR as they become more established to assess both the individual impacts of these measures and the overall impact on the UK economy. As you are probably aware, the OBR has made the decision to revise down the estimates of trend growth compared with the estimates that were decided on by the previous government, so it is 2.35% out to the medium term and then I think it comes down further in the final year for demographic reasons. That is quite a significant revision down. As policy is implemented and as the economy evolves that is a judgment that the OBR will want to return to and it is also a judgment that the Treasury as an economics ministry will want to do more work on.

  Q135  Chair: Do you agree with Robert Chote's conclusion that the NICs changes are complex and may be too complicated to offer best value for money?

  Mr Ramsden: If I may I will ask Edward, who led on those measures, to answer that question.

  Mr Troup: I was interested in Mr Chote's comments. Inevitably any measure which attempts to target has a degree of complexity about it. Although we have not published the details of these they are going to be designed in a light-touch way, it is going to be fairly straightforward, effectively self-certification, and it is going to operate quite simply by new businesses not having to pay the NICs for their first 10 employees for the first year. It is not as straightforward as a simple NICs cut but I think it will work quite smoothly.

  Q136  Chair: Do you think it is going to have any supply side impact?

  Mr Troup: What is clear and if you look at what is said in the Budget is that it is going to encourage new businesses. It is £5,000. Talking in the billions that we normally talk about here it is easy to regard anything less than a few million as insignificant but for small new businesses it is a significant amount of money. We do hear from businesses going from the stage of being the self-employed individual to taking on employees that the burden of PAYE and NICs is a significant threshold, so we do expect businesses to be encouraged and respond.

  Q137  Chair: Is this more than a gesture then?

  Mr Troup: Definitely so.

  Q138  Chair: Robert Chote is wrong on that as well?

  Mr Troup: I am not quite sure what the word "gesture" means. It is certainly something which gives effect to a commitment made in the coalition agreement and in the manifesto and it will benefit 400,000 businesses and about 800,000 employees.

  Q139  Andrea Leadsom: I just wanted to ask a particular question about that. I have met a number of small business people who say that this measure will simply encourage them to keep recycling their business to take advantage of it. What consideration have you given to the unintended consequences of this type of gaming?

  Mr Troup: I am afraid my excellent colleagues in HMRC are on to that one. There will be provisions in the legislation to stop simply recycling, so stopping your business, packing up for a week and then pretending you have got a new business. I cannot say there will not be any avoidance because unfortunately there seems to be avoidance of absolutely every tax there is, but I think we are fairly confident that it will go to the businesses who are genuinely new businesses and this will not be something where people spend their time closing down their businesses and reopening them to get the benefit.

  Q140  Chair: For those of us who have been on the circuit a while it sounds like another case of triumph of hope over experience if I may say so.

  Mr Troup: I look forward to sitting here in a year or two's time and seeing how it has gone.

  Q141  Mr Love: Mr Ramsden, the OBR has made some heroic forecasts about improvements in net trade. What work is the Department doing to help that process to rebalance the economy? I am thinking here in particular about improving exports to those areas of the world economy where perhaps we are not as well represented as we should be.

  Mr Ramsden: Just on the OBR, it is worth stressing that what underlies all the OBR's forecasts is its commitment to transparency. I have been working on forecasting in the Treasury and the economy for 20 years and I think the OBR has made more progress on transparency in the last eight weeks than in my experience of 20 years working on forecasting and the transparency that goes with it. They have set out very clearly their assumptions and their judgments on the forecast and on the degree of rebalancing that they judge there will be. If you compare it with the last forecast that I was responsible for, the March Budget forecast, where I was responsible for advising the Chancellor on the decisions he made on that forecast, there was quite a lot of rebalancing already in that forecast. I remember we had discussions then and it is good to be back to have discussions with you again now. All forecasters when looking at the big picture of what is going on in the global economy are very conscious of the fact that the UK experienced a very significant depreciation in sterling through to the beginning of last year, 2009. Sterling has been more stable since then. Also, the kind of big trends in the world economy, which the UK is very open and exposed to, has been a fact that in the recovery phase since this time last year it is the emerging markets that have been growing more strongly than the developed world. Obviously the UK has a trade pattern which is very significantly determined by history. For example, that means one of our biggest trading partners is Ireland given our very close links with Ireland over centuries. It is a feature of the UK economy, which was something I was quite struck by when I was analysing the data, that in terms of shares of trade our share of trade with the rapidly growing and emerging economics, the BRICs—Brazil, Russia, India and China—is about 5% or 6% whereas it is about three times that with the euro periphery economies. I have mentioned Ireland but we also have strong trade links with others. That share with the emerging market economies has grown very significantly in recent years. I think it has doubled compared with 2000 when it was 2.5% and it is now just over 5%. Government policy is very much focused on looking for the opportunities, and this is something that the Treasury as an economics ministry is very focused on thinking about, how can we encourage stronger growth both in terms of macro policy settings but also whether there are any micro policy interventions.

  Q142  Mr Love: Do you accept that you need to do more? You mentioned the previous work that was done under the last government at the beginning of the year, but since that time the economy in the United States, if I can put it this way, seems to have tailed off and there have been some quite negative figures emerging recently in terms of employment and other factors. Of course we have also had the emergence of the debt crisis in most of the southern European countries and the widespread austerity programmes that have been introduced, particularly in Ireland if I may say so. Does that lead you to question the assumptions on which the OBR have delivered their figures? Is there anything we can do with those other Third World, BRIC countries that you were talking about that could give us an opportunity to at least improve our export performance?

  Mr Ramsden: On your point about the OBR's forecast, I am very comfortable with the forecast and that was why I was making the point about the last Budget forecast I was responsible for, a forecast that does assume a significant rebalancing. I think that is the experience of the UK. For example, in the 1990s it took time to come through after the very significant depreciation of sterling that we saw after the UK left the ERM but net trade started to make a significant positive contribution and made a marginally positive one in 1993 and a significantly positive one in 1994. As Geoffrey Dicks was saying to you this morning, it can take time for these effects to come through for the supply side, for the rebalancing to respond to the signals in terms of price. I have no issues at all with the OBR's assumptions and they have been very clear about the uncertainties around their forecast. Just on the policy point, if I may, the Foreign Secretary stressed very recently how we saw the UK's diplomatic effort very much through an economic prism and that is something the Treasury would strongly support. That explains our engagement in the G20.

  Chair: We have to move on in a moment because we have a lot of people who want to come in on this section.

  Q143  Mr Love: Just a final question. I would have to say that is not the first speech by a Foreign Secretary to highlight the need for the economy to be central to our operations in other countries. Are there any discussions ongoing about the fiscal consolidation occurring worldwide and whether or not that is in the best interests of growth in the world economy?

  Mr Ramsden: It is very clear that the world economy needs to rebalance. If you look at G20 communications from June in South Korea and other communications there is a recognition by international policymakers, including in the UK, that countries with serious fiscal challenges have to go through a serious fiscal consolidation. That applies to Ireland and it applies to the UK, but it is also a recognition that does not apply to all economies. The IMF has done analysis that shows if the world economy can go through this adjustment and can rebalance it can reach a higher growth path. I think that would be very positive for the UK. You were asking are there doubts that we are going to see this export performance. This is something that we monitor, as we have been doing, from one month to the next and one year to the next. Experience in the UK shows that it takes time for the volumes to adjust, but they do adjust and the UK has adjusted in the past and moved on to a stronger export trajectory.

  Q144  John Thurso: I was going to ask you whether you thought the OBR was an irritating imposition but you have clearly fallen in love with it because they have done in eight weeks what you could not do in 20 years. Are they really that good?

  Mr Ramsden: You have to go back to the principles underlying effective fiscal policymaking and quite a few people in this Committee past and present, and also a lot of commentators, have put an emphasis on transparency. It is also mentioned when you look in the context of countries that have had problems with sovereign debt or you look at the banking areas where concerns are raised. Often it comes back to transparency. The overriding commitment of the OBR to transparency is a hugely powerful force for good. It is something that successive governments did make some incremental progress on, but I remember this Committee putting me through the wringer because I was not able to give you figures of AME forecasts beyond 2010-11 that you knew were available. Also in the early 1990s when I was working for a different government there were issues around the transparency of the forecasts. This is an issue that has been going on for 20 years. This is a step change in transparency. I am a strong champion of it and certainly do not see it as an imposition. It has changed my job but we all have to deal with change.

  Q145  John Thurso: What I want to ask you about is their suggestion that business investment will be a positive component of growth and particularly their statement that they expect it to be between 8% and 11%. When I was asking them about growth basically they said there were not particular factors it was just the application of the formulae. Surely there need to be some factors. What is in this Budget that will actually help increase business investment by those levels?

  Mr Ramsden: Just look at what is in the economic environment that once there is less uncertainty and once confidence returns will help business investment. We have very, very low interest rates both at the short end and the long end which businesses can borrow at. As I think you heard earlier, large businesses have rebuilt their cash positions and they are in a good position financially. I must stress that this is not to underplay the significance of the issues for small businesses, which I am very conscious about, but it tends to be larger businesses that contribute to the macro aggregates of business investment that the OBR is forecasting. There is a supportive economic environment with the surveys suggesting that quite a lot of investment is being held back because of lack of confidence about the future. That is not surprising when you think of the crisis that the UK and world economies have been through. It was a crisis of confidence through the winter of 2008 and early 2009 and businesses have been affected by that. When you look against that kind of backdrop and those kinds of drivers in 1995 UK business investment grew by 7.8%, in 1996 by 10.4% and in 1997 by 10%. You get significant growth rates in business investment for a number of years because after a shock like we have had, and which the economy saw to a lesser extent in the early 1990s, there is a need to rebuild the capital stock, there is a need to invest and if the environment is there to do it with low cost of capital it can do it. Also the Budget on top of that with the certainty it provided about the business investment regime over the whole period of this Parliament and four years of cuts in the main rate of corporation tax. One thing we get back very strongly from businesses when we discuss with them is that they want stability and certainty in this kind of regime. I think that the corporation tax reforms are strategic, have given them that certainty and macro conditions stay supportive. The OBR's business investment forecasts could well be borne out. They look to me like a fair best estimate.

  Q146  John Thurso: One of the risks to that must be if you look at the Coalition Government's programme a lot of it is around investment in green technologies, renewable energy and so forth, and a great many of those are still at the stage that requires quite substantial government commitment or investment to actually get them going. To what extent is investment of that kind, and it is quite a big chunk of growth, at risk from the current programme of cuts, or is there government spending that must be preserved in order to achieve that growth?

  Mr Ramsden: At the macro level the Government has committed itself on public sector net investment very much to maintaining the levels that were assumed by the previous government, so as a share of GDP. Obviously the issue will be when it comes to the Spending Review going through individual public spending. We have made clear that economic returns will be a key driver. I do not know if Andrew wants to come in on more detail on that and Edward might want to say something more about the environment.

  John Thurso: We are a little short of time unless it is very small.

  Q147  Chair: If you have something you want to add could you put it on a piece of paper and come back.

  Mr Hudson: Very briefly, Chairman, I would add that the creation of Infrastructure UK as a body—which looks at infrastructure needs—and is spending quite a bit of time on the issues you are talking about is looking not just at public sector investment but how to leverage and how best to work with the private sector on all this, adds to our effort in this area.

  Chair: We have seven people wanting to chip in and rather less than half an hour.

  Q148  John Mann: What are the significant differences in assumptions that you have made in setting the Budget and the OBR has made?

  Mr Ramsden: This may help you and the Committee, Mr Mann. One thing which is clear, and which surprised a number of commentators when the Government announced the setting up of the OBR, is that the OBR is responsible for the official forecast and all the judgments that go into that forecast. I think a lot of people expected that the OBR might have more of a monitoring role of Treasury forecasts, but there are not two forecasts or two sets of assumptions about the forecasts, there is one official forecast. I think this is why the OBR has been so widely welcomed internationally because it is quite a radical departure.

  Q149  John Mann: So there are no differences?

  Mr Ramsden: Sorry, I am conscious of time. I just wanted you to understand that because I was at a Commission seminar last week and there was some misunderstanding of that. When it comes to the detailed assumptions that go into policy costings the OBR have set out in their chapter of the Budget that they have been able to certify the Treasury's policy costings. A whole process was run under my and Edward's teams whereby we would say to the OBR this was what we had assumed were going to be the economic and other impacts of policies and the OBR had to decide as part of factoring those into their forecasts whether they were comfortable with those. The outcome of this was they said in their document that they had certified them. I do not know if Edward can throw more light on the detail.

  Mr Troup: Only to say that if you have not had a chance to look at the policy costings document, picking up on one of Dave's previous points, this is very much about the transparency of what we have done and what Dave has described in terms of the way the costings themselves are drawn and that is set out very clearly.

  Q150  John Mann: I have read them. I am asking are there any significant differences in assumptions?

  Mr Ramsden: Given that the OBR has certified all our analysis on the detailed policy costings and given that the OBR is responsible for all the key assumptions that go into the forecasts, I am not aware of any. We can go through every single moving part in the Budget, of which there are a lot. All I can tell you is I am not aware of any.

  Q151  John Mann: How many public sector jobs over this Parliament are going to be net lost and how many private sector jobs net created?

  Mr Ramsden: The OBR published forecasts for total employment at the time of the Budget.

  Q152  John Mann: I am asking you as the Chief Economist to the Treasury.

  Mr Ramsden: I am the Chief Economist to the Treasury but I am no longer responsible for forecasting. I can elucidate on what the OBR's judgments and forecasts are if that would be helpful.

  Q153  John Mann: So you do not have a view then of how many new public sector jobs there are going to be or how many new private sector jobs?

  Mr Ramsden: I had a responsibility for advising the Chancellor on this up until the new Government, but now what I have is responsibility for my analysts, just as Andrew does for his analysts, who help the OBR reach their judgments.

  Q154  John Mann: Let me make it easier. You collect income tax. Are the OBR's assumptions in relation to the income tax take accurate? Is that how much income tax you project will be coming in to the Exchequer?

  Mr Ramsden: They are now the official forecasts for income tax.

  Q155  John Mann: Yes, but do you agree with them?

  Mr Ramsden: They have very similar drivers to them as in the last forecasts I was responsible for for the March Budget. They assume, for example, an element of fiscal drag because earnings tend to go up more quickly than inflation so they will have, I imagine, a rising profile for the income tax to GDP ratio and also because of the measures that have been introduced. I have not got the numbers in front of me but I would imagine that is what they show.

  Q156  John Mann: Does the Treasury agree with those forecasts on income tax take that you are taking in as the Exchequer?

  Mr Ramsden: The Treasury very much agrees with them because the Chancellor has said that he is using them as his official forecasts.

  Q157  John Mann: So this is what we can expect to come in?

  Mr Ramsden: These are the forecasts which are the basis for the Budget judgments and the Budget policy decisions.

  Q158  John Mann: That is what we can expect to come in?

  Mr Ramsden: Yes.

  Q159  John Mann: What are the average earnings in the public sector and private sector at the moment, approximately?

  Mr Ramsden: If you will let me look at some data I can tell you. If you will not I will have to guess.

  Q160  John Mann: As a reasonably accurate guess.

  Mr Ramsden: I am just getting the statistics that came out last month. Average earnings at the moment, total pay including bonuses, in the whole economy 4.2% and excluding bonuses 1.9%. Private sector was 1.2% and public sector excluding financial institutions, for obvious reasons, was 2.7%. That may be just for the month of April so they may not be comparable with the previous numbers.

  Q161  John Mann: Average public sector earnings are higher than average private sector across the economy and in most regions.

  Mr Ramsden: If you take out bonuses.

  Q162  John Mann: There are bigger regional disparities in some regions. The new private sector jobs that are created, how many are going to be migrant workers?

  Mr Ramsden: The OBR produces a macroeconomic forecast and it has produced a huge amount of detail to underpin that including, for the first time last Wednesday, details of—

  Q163  John Mann: I am asking you, not the OBR. I am interested in how much you as the Exchequer are getting in income tax.

  Mr Ramsden: If I can find the table of income tax I can tell you what we are forecasting to get for income tax and that is the forecast.

  Q164  John Mann: 145 billion this year up to 199 billion in 2014-15.

  Mr Ramsden: 195.2 billion. Table C11.

  John Mann: What I am asking is—

  Chair: John, this will have to be your last question.

  Q165  John Mann: I am trying to get an answer and I have not got one yet. How many of these new jobs are going to be migrant workers?

  Mr Ramsden: When I was doing the forecast and when the OBR is now doing the forecast, a macro level forecast, you would never have a detailed forecast within there of gross flows in and out of the labour force and how many were migrant workers. As you may know, we always run our forecasts off stylised projections on migration which are produced by the ONS. We had one when we produced forecasts up until the March Budget and the OBR has one for now. We do not have detail in our macro forecasts. However, I am very confident that as part of the Spending Review the implications of population projections and changes in the composition of the population will be one of the economic factors that will be taken into account.

  John Mann: This is about income tax that you are responsible for.

  Q166  Chair: Come back to us in writing if you have more you want to say on this subject, but I do not think you do.

  Mr Ramsden: I am very comfortable to be responsible for the macro level income tax forecast which has framed the Government's fiscal policy decisions.

  Q167  David Rutley: I just wanted to come on to an issue that I know Jesse raised in the earlier session and I raised with Sir Alan Budd, and that is the 80/20 rule of thumb which is a vital part of the philosophy and the direction of the Budget. Why do you believe that is the optimal ratio?

  Mr Ramsden: One should not get over precise about these things. What is clear from the empirical evidence of successful fiscal consolidations in the past, and when I say successful I mean consolidations that both achieve sustainable public finances and also growth, is that those more successful fiscal consolidations have had a proportion which is a much higher proportion of the consolidation that is spending than tax. In some of the literature it is 80/20, but if it is 75/25 or 80/20 the big picture is that you want a high proportion of it to be spending reductions because typically tax driven consolidations, depending on the choice of tax instrument, the empirical literature, the experience of other countries, shows that it tends to not be growth enhancing. We set out in the Budget document what were the previous government's plans in terms of our assumptions about those and then the current Government's plans and for the current Government the ratio gets up to 80/20 by the end of the consolidation period because although the tax measures are quite early on in the consolidation, particularly the increase in VAT, spending builds up over time in a phased way with spending reductions.

  Q168  David Rutley: So why is that ratio more relevant now than when we were working on these issues in the 1990s?

  Mr Ramsden: A lot of the literature relates to consolidations in the 1990s. The Scandinavian countries did their consolidation in the 1990s. The empirical literature by people like Alesina and others draws on that experience as well as drawing on the UK in the 1990s where on those criteria of achieving fiscal sustainability and also seeing significant growth outcomes, because there was a strong recovery through the 1990s, the UK would also have been a feature of that analysis.

  Q169  Mark Garnier: Can I turn to borrowing now and obviously we have a requirement to continue to borrow through the gilt market. There is a huge amount of emphasis that is put on credit rating agencies and obviously in the past they have had a somewhat chequered track record. Those people who invested in Iceland, for example, will obviously have a dubious view on what they have to say. Given their flawed business models and bad record, why do you put so much emphasis on the credit ratings themselves?

  Mr Ramsden: As I have said to this Committee before, the credit rating agencies tend overall to follow rather than lead the markets. In the vast majority of cases a rating agency action will reflect what the markets have already concluded. However, where I think rating agencies can be useful, along with international organisations, is in the surveillance that they provide on an economy. For example, when we were looking at the UK's profile for debt interest payments we took seriously when Moody's said that debt interest payments as a percentage of receipts risked going above 10% as a share into the territory where your AAA rating might be at risk. I personally found that a useful metric. For me, the fact that under the current Budget that metric peaks at something around 9% suggests that we have moved to a more sustainable fiscal position where debt interest payments are less of a share of the economy or of receipts. Different rating agencies have different approaches. Standard and Poors, who made some commentary on the UK yesterday, analysed what they thought were the gross costs of our financial interventions last May when they put us on negative outlook and they concluded that the gross fiscal costs might be in the region of £100 billion to £140 billion. That was one of the factors that added to their gross debt ratio forecast going up to 100%. Personally I thought that was a less useful piece of analysis because our analysis was that the fiscal cost of financial interventions was going to be much lower than that. I have discussed these issues with both Standard and Poors and Moody's, so I think they can make a contribution in terms of their analysis, but overall their rating actions in most cases follow developments which are already in the markets. When you look at the UK now we have got 10 year bond yields down at 3.35% and they have come down significantly through this year. That has been recognised in Moody's and Fitch's and to some extent Standard and Poors' reactions to our numbers.

  Q170  Mark Garnier: That is quite a fascinating thing to say because the whole point about the rating agencies is to predict what the problems are going to be rather than assess them in retrospect. That is the tail wagging the dog at this point. The other point which the markets are going to be looking at, and this is incredibly important going forward depending on what is going to happen to gilt yields, is whether the proposed Budget cuts are going to be implemented in a strong way or in the way they have been suggested in the Budget. If that does not happen then the likelihood is that the markets are going to turn round and start charging a greater amount for UK debt and so as we are issuing more debt it is going to cost us more and more. Can you comment on that?

  Mr Ramsden: My experience is that the markets do tend to judge governments on their actions rather than on their words. I think the markets have responded. If you look at the differential over German Bunds, the UK gilts differential over Bunds, it has narrowed since the March Budget. In a sense we have moved towards one of the benchmark economies which is seen in the AAA space as being very, very strong. As long as the policies that have been announced are implemented, whether that is the increase in VAT or the announcements that will be in the Spending Review on 20 October, that keep us on that consolidation path I would expect the markets would take that into account, but what they do not like, and Greece last year is relevant on lack of transparency. Greece had to revise its numbers for 2009 four times in-year and that can really affect your credibility. Similarly, a lack of follow-through, having said you are going to do something on policy and not doing it, usually undermines your credibility.

  Mr Hudson: I would just add on the spending side that the £6.2 billion of in-year savings which were implemented very early in the life of the Government were an example of the sort of action that Dave Ramsden has been talking about saying that this will take place and then following through in very short order to announce and implement it.

  Q171  Stewart Hosie: Can I move on to the bank levy. It is not a one-off cost to banks, it is part of a package of costs they have or burdens they bear, if you like, additional capital requirements, paid for external lending insurance, paid for intra-banking insurance and some of the banks are contributing to the Asset Protection Scheme. Is it sensible to take an extra 2.5 billion a year from the banks in the form of this levy just now when we are looking to get economic growth and lending is a driver to that?

  Mr Ramsden: I will make a macro point and then hand over to Edward. I think for any government you have to balance the different risks and a key lesson from the crisis is the need to find a way of curbing the potentially very strong pro-cyclicality of the financial sector. The kind of levy and the way it has been designed does contribute. All policy is about risk management, whether it is macro or micro, and that is a specific policy intervention which will contribute. You mentioned a lot of other factors that are in the landscape and that comes back to a point about the OBR's forecasts, if you like. The OBR is forecasting what is a pretty modest recovery by historical standards. As the Budget document highlights, coming out of this recession there is a lot of indebtedness about still and there is a lot of adjustment that has to be gone through, a lot of rebalancing, including in the financial sector. That is why in the OBR's forecasts you are not seeing any growth rates of 3%, which is typically what you see in UK recoveries.

  Q172  Stewart Hosie: I agree with you in terms of the dangers of pro-cyclicality, I absolutely agree, but we have the potential of the EBA Stability Fund and the European Consumer Protection Fund in addition to the levy and in addition to the other insurances. Does there come a time in terms of banking when we are doing so much to protect and mitigate against risk that really we are beginning to squeeze the potential for all of this cash to underpin lending?

  Mr Ramsden: I think we have to see how these various things that you are talking about both domestically and internationally are implemented both in terms of the tax regime and also the regulatory regime.

  Mr Troup: I really echo Dave's point about balance. First of all, we do think that so far as the banks are concerned this is affordable. It is set broadly at £2.5 billion a year. As you will have seen, this is broadly being used to fund the corporation tax package which itself has, as Dave has explained, positive effects on investment through lowering the cost of capital to businesses. There is a balance here. The other thing to note about the bank levy is because it is based on short-term funding it is hopefully going to encourage the banks to move to a less risky funding profile. There are a number of things which have been balanced out.

  Q173  Stewart Hosie: I understand that. The reason I have gone down this route of questioning is because it is not just about banks, it is about the financial sector generally. When you add into that mix Solvency II for the insurance sector and in this Budget the addition of the insurance premium tax, I am trying to get an understanding from the Treasury as to when enough would be enough and the draws on capital would be so great that they would have to ease up in that counter-cyclical manner. I just wonder if you could comment on the whole package and where we might end up. When will enough be enough in that regard?

  Mr Ramsden: What I can comment on is that the crisis has revealed just how many risks were latent in banking, in shadow banking and in the financial system more generally as the excellent work of this Committee in this past has drawn attention to. What the Budget set out is a set of measures which, along with measures which are not the responsibility directly of the Treasury, are a kind of coherent approach to managing these risks in a way which will get us a steady recovery but also over time we will have to remain very vigilant to this risk. One thing we have not talked about today is the announcement the Chancellor made in the Mansion House speech as to the new environment for thinking about some of these risks, macro prudential and beyond. That is all going to have to be put in place and implemented led by the Bank but working with the Treasury and with the FSA in the years to come.

  Q174  Michael Fallon: Mr Troup, if we can turn to capital gains tax. In reforming capital gains tax why did you choose to penalise people who were in employee share ownership schemes by excluding them from the entrepreneurial relief regime?

  Mr Troup: I do not think I would describe it as penalising.

  Q175  Michael Fallon: The tax has gone up.

  Mr Troup: The tax has gone up from 18% to 28% for higher-rate taxpayers in employee schemes as for all capital gains holders. This was part of the package to arrive at a simple, straightforward capital gains tax system which imposed a sensible and fair rate across the piece with some relief, as you know, for entrepreneurs through the entrepreneurial relief.

  Q176  Michael Fallon: These are people who cannot control when they realise their assets. They cannot sell at a time to reduce their CGT liability. Did you not consider the position of employee share ownership?

  Mr Troup: We did consider the position. As you will have been aware from the debate in the public, consideration was given to a wide range of rates from 40/50% down to a lower rate. If we had settled on a 40% or 50% capital gains tax rate I think the point about employee share schemes would probably have been more of a factor. As it was, at 28% there was no need to make a specific exemption for employee share schemes.

  Q177  Michael Fallon: So they have got to take the hit. What would have been the cost of including them in the entrepreneurial relief regime?

  Mr Troup: I do not have a figure for that, but if we had sought to include them in the entrepreneurial relief it would have made the definitions considerably more difficult and would also have given rise to a significant amount of forestalling because we would not have been able to introduce that straightaway. The advantage of using the existing relief is that we are able to piggyback straight on to the same definition and introduce the changes immediately.

  Q178  Michael Fallon: Given that they cannot control when they sell their assets how could they have forestalled the tax increase?

  Mr Troup: Probably fairly limited, but that is where we have got to.

  Q179  Michael Fallon: Can you let me have a note of the amount?

  Mr Troup: Can I just be clear what you would like a note of.

  Q180  Michael Fallon: I asked you about the cost. Had they been included what would the cost have been? Just on the National Insurance Contribution, I think you described a system of self-certification. If a business does split or somebody leaves a particular small business and sets up next door, his or her employees are then free for the whole of the next period. Have you measured the anti-competitive effect of that?

  Mr Troup: Sorry, can you describe the facts again?

  Q181  Michael Fallon: If you are running a print shop or a wine bar, whatever it is, in one of these particular areas and you happen to fire one of your senior colleagues, he is then able to set up completely next door and have all his employees free for the next period.

  Mr Troup: He does not get his employees for free, he has to pay for the employees. He will have to pay income tax and other costs.

  Q182  Michael Fallon: But he gets a subsidy.

  Mr Troup: He gets a subsidy for a new business, yes, and it would be a genuinely new business and it is right that it should apply to him. I do not think we could go back and look and say, "Actually you were in the business next door" if it is a genuinely new business. The point I made earlier was we have got to be very careful to avoid just straightforward recycling where the same person sets up, but there is no reason why if someone leaves a business and sets up a new enterprise they should not benefit.

  Q183  Michael Fallon: You do not see this as anti-competitive?

  Mr Troup: I certainly do not agree with the comment the Chairman made that this was a gesture. You have to recognise that £5,000 is a significant amount for a small business but it is unlikely to determine the viability of a given business except in the most extreme cases.

  Q184  Mr Umunna: One of the things that we have not really touched on is the raft of changes to housing benefit in the Budget. One thing that caught my eye was the provision that said that if you have been on JSA for more than a year you would see a 10% cut in your housing benefit. If you have done everything that you need to do to comply with the JSA requirement for finding a job, what is the rationale for applying what can only be described as a pretty inhumane sanction with this 10% cut?

  Mr Troup: The first thing to say is this particular feature of the housing benefit reforms is about sharpening work incentives and that is about creating greater incentives to get out and find a job. To describe it as "pretty inhumane" is quite strong because—

  Q185  Mr Umunna: Let me put it this way: Mr Troup, have you ever been on housing benefit? Have you ever lived on housing benefit?

  Mr Troup: No, I have not.

  Q186  Mr Umunna: I accept what you are saying, we want people to try and find work, but if somebody in my constituency, or any constituency, is doing absolutely everything they can to find work but for whatever reason, and there are many cases where I live, are unable to find work, what is the justification for applying this sanction if they have done everything? They are making their best effort to find a job.

  Mr Troup: I think it goes to the wider question of what is the right package of support for those people who are out of work and how long should that support continue. It goes to the point that the cost of housing benefit has increased by 50% over the last 10 years and there is a need to impose some degree of control over it. I think it goes to the point that even at the end of these reforms, and we recognise that there are some quite difficult aspects of these reforms, we are still going to see in real terms housing benefit running at the same level that it was in 2008-09.

  Q187  Mr Umunna: So this is actually less to do with incentivising people who have been out of work and are struggling to find work after 12 months and more about reducing the housing benefit bill?

  Mr Troup: The housing benefit package is about making housing benefit more affordable to make sure that those people who do need support for their housing are not significantly advantaged compared to their working peers. It is about trying to do the reforms in ways which actually sharpen work incentives and are fairer to everybody.

  Q188  Mr Umunna: Mr Troup, let me just repeat my question. This is more to do with reducing the housing benefit bill than it is about incentivising people to find work when looking at people who are doing absolutely everything they can do already to find work.

  Mr Troup: No, this specific element is more about work incentives. The package as a whole is quite clearly trying to make sure that—

  Q189  Mr Umunna: I am not talking about the package as a whole, I am looking at this particular measure. What I do not understand is how reducing housing benefit by 10% for people in my constituency who have been struggling to find work for more than 12 months is going to incentivise them when they are doing absolutely everything they can already.

  Mr Troup: I am not sure what I can say in response to that point. I can give you some facts about the number of vacancies that exist and that there are jobs available.

  Q190  Mr Umunna: You do not buy any story which says that people who are out of work for more than 12 months are actually doing a hell of a lot already to try and find work and because of economic circumstances or whatever their personal circumstances may be it is all about them?

  Mr Troup: I do accept there are people who try extremely hard to find work and I do accept that individually there are some difficult cases but overall this will improve work incentives, this will encourage people to get back to work and it will ultimately ensure that the savings on the housing benefit bill and the package of welfare reforms, of which this is part, are encouraging people to take responsibility to get jobs and make sure the housing benefit costs themselves are not significantly advantaging people who are on housing benefit compared to their working peers.

  Chair: We have two very quick questions. The first one is from Jesse Norman.

  Jesse Norman: I should disclose that I am Chair of the All-Party Parliamentary Group on Employee Ownership so I would like to associate myself very much with Michael Fallon's comments on ESOPs. I think that was a bad decision by the Treasury. I would like to ask that in future work there will be some scope for including a geographic analysis alongside the income based analysis of the distributional effects you have. But my question is actually about long-term growth. Obviously the key part of that is productivity, and what is so staggering about UK productivity is just how bad it has been in many ways over the last 15 years, at a time when we were supposed to be enjoying an extraordinary economic boom and then a bust. What is interesting about productivity is that it has not been as bad in other countries, for example in the US. One cannot help thinking that part of this is because of the way in which resources are being expended across the economy. I just wonder if you have got any comments on that or whether there is anything that the Treasury specifically is looking to do now to assist the process of rebuilding what is an absolutely foundational block?

  Chair: I think we need a question.

  Q191  Jesse Norman: The question is what are you doing? I note how low the OBR's current prediction of long-term growth is.

  Mr Ramsden: I must admit I do not fully recognise your description of UK productivity developments up until the crisis because I think most international comparisons show that there was some convergence of UK productivity towards our peers. That is not to say, and this is recognised by the current Government just as it was by the previous government, there are not significant challenges to raising UK productivity. Where I think your question is going is how does that play into this kind of assessment of degree of rebalancing that we did. This is something that the Committee were interested in back in March, how much were the productivity improvements that we saw sustainable or how much did they rely on high productivity sectors such as the financial sector which the crisis showed was carrying a lot of latent risks even if that was not apparent in the headline data. What I was trying to stress at the outset, and what is very much an organising way of thinking for the Treasury with the Budget but also thinking about the UK economy over the next five to 10 years, is how do we go through this adjustment to this rebalanced economy in a way that can strengthen long-term growth. There are macro and micro elements to this. You want to be able to build up your adaptability as an economy. Because of policies going back 25 years under successive governments the UK is very flexible, is very adaptable, but has not always combined that with high productivity. How do you build up resilience? We have seen under this crisis the UK was hit quite hard because of our reliance on the financial sector. We want to carry on having a very strong financial sector, it is very important to the UK economy, it is a global comparative advantage sector for us, but we need to build resilience. There is a really important agenda around both micro policy interventions that might stop growth being held back, but also at the macro level what is the structure of your economy, can it adapt through time, is it resilient to shock so that it can move to a higher long-term growth path. Where we are at the moment is the OBR assumption which is that we are on a pretty muted growth path compared to what we have seen in the last decade or so. I think the challenge for policy is through the implementation of the Spending Review, other policy interventions, what we do on the financial sector more generally, can we move to a higher potential growth path.

  Q192  Chair: Thank you very much. I have got one last question. Earlier you said, almost it seemed with a sense of relief, that part of your previous responsibility had now passed to the OBR, that is the task of drawing up forecasts, which had been a central task of the Chief Economic Adviser. Does this mean that your post with its diminished responsibility will carry a lower grade and a lower salary?

  Mr Ramsden: We will have to see what the reviews are like on today's hearing, I suspect. Seriously—

  Q193  Chair: I was asking a serious question.

  Mr Ramsden: I know you were.

  Chair: We are looking for savings right across the public sector.

  Q194  Mr Love: Sacrifice!

  Mr Ramsden: The Treasury, like the whole of the public sector, is going to go through a very significant adjustment in the coming period. The Treasury is going to shrink in terms of the number of staff to meet the kind of administrative savings that Andrew with his policy hat on will ask of the Treasury. My responsibilities have changed. All the issues that we have been talking about today relate to the Treasury as a finance and economics ministry, so what the Treasury is actually engaged in at the moment is a contribution to deciding what will be the Spending Review outcome for us, a review of all of our functions, taking stock of the lessons that we learnt through the crisis. If you recall, the Treasury pre-crisis was about 1,100. We had taken on tax policy responsibility as a result of the O'Donnell review and we had taken on a lot more resources through the crisis, some of which we definitely should have had before the crisis, so as well as shrinking we will have to think about what things the Treasury should be doing.

  Q195  Chair: You have not had pay increases for all this extra work you have had over the last three years?

  Mr Ramsden: We have got frozen pay this year. It is going to be a challenging time. We are all going to have to be adaptable, like the UK economy is going to have to be adaptable.

  Chair: Thank you very much for your evidence today. Apologies to the two people flanking you, Mr Ramsden, that you did not get in quite as much airtime as you might otherwise have done. It has been very helpful. Thank you very much.

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