Examination of Witnesses (Questions 133-195)
MR DAVE
RAMSDEN, MR
ANDREW HUDSON
AND MR
EDWARD TROUP
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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