Budget 2011 - Treasury Contents

Examination of Witnesses (Questions 417-529)

Q417 Chair: Thank you very much for coming before us this afternoon, Chancellor. I know you have to go on later to a meeting in China so you have a plane to catch. We will try and make sure the session finishes by 5.00pm although we have a lot of ground to cover.

George Osborne: The French President is giving me a lift so that I could meet the Select Committee this afternoon so we have plenty of time. This is the entente cordiale that is breaking out in domestic and foreign policy.

Q418 Chair: I would like to start by looking at the growth plan and in particular one of the proposals you have put forward which is the introduction of a moratorium exempting micro- and start-up businesses from new domestic regulation for three years.

  What regulations are going to be exempted?

George Osborne: The first thing I would say is that it stops things that weren't coming in anyway, that we can't foresee at the moment. I see its principle purpose as being to stop things that have not yet been conceived but Government of all colours have a habit of conceiving and therefore it acts as a break on that. Then I have some specific measures like, for example, the extension of the right to request time off for training which will not now be applied to smaller businesses.

Q419 Chair: Perhaps I should ask the question in a slightly different way. The possible new regulations of which bodies will be waived? Health and safety? The Food Standards Agency? Which are the ones which these new businesses do not need to worry about?

George Osborne: What we have done is we have created a general moratorium and there are certain specific measures like the right to request time off for training which are not going to be applied as a result.

  Explained in this document, there is a get-out clause for things like the asset freezing of Libyan money or essential food safety regulation or if one could imagine a situation where one would have to take financial regulatory steps to protect broader economic stability. So there are exemptions but in order for those exemptions to take effect it has to be passed by two cabinet committees, the Regulatory Reform Committee and the Economic Affairs Committee. The Secretary of State for Business, Vince Cable, chairs one; I chair the other. Certainly speaking for myself, I would only ever sign an exemption to the moratorium if I absolutely felt that public health was at risk or there was some grave danger to financial stability or that our foreign policy goals in dealing with a regime like Libya were compromised or whatever. There is a get-out clause, but it is a very difficult clause to activate.

Q420 Chair: What I am trying to get at is if you are a small business and you want to know whether this or that regulation is going to apply to you, how are going to find out? What are you going to do? Are you going to be able to look up a list of those from which you are exempted or can you assume if it is new it is exempted unless you are otherwise told?

George Osborne: I think we would make it very clear at the time if we were to introduce regulations on other businesses and I should say that I would like to keep that to a minimum as well, but if the Government were to introduce regulations on other businesses then we would alert small business as to whether they were or were not in within the scope of this. But as I say there is quite a lock on any exemption to this.

Q421 Chair: Let's take a specific example. You have a new corner shop opening up. There are plans to introduce further restrictions on tobacco advertising. Are they going to be exempt from those?

George Osborne: In fact that regulation has been determined before the moratorium was announced. However, in the way that we are now proceeding with that regulation, something the Government has inherited from its predecessor, we are giving a much longer lead-time—many, many years—to smaller corner shops precisely to help them adjust to the impact of this. So you could argue that, although it was announced before the budget, nevertheless it is an example of a moratorium coming into effect.

Q422 Chair: If it is safe to exempt a business for three years from these regulations, why not five years or indefinitely?

George Osborne: I think we had to take a decision on what was a sensible length of time in which to put in place this blanket moratorium. Of course, after three years we will consider whether it needs extending; whether it needs modifying in some form. Obviously the intention of this measure and some of the other measures in the Growth Review is to either slow down or stop the flow of regulation, particularly as it damages small businesses and loads costs on small businesses.

  I should say there is unfortunately one area, I would argue as a Parliament as well as a Government we need to do a great deal more to tackle, which is the imposition of regulation from the European Union and there I think we are just beginning to make the argument as a country more effectively that Europe is pricing itself out of the world economy if it is not careful. So I am very clear, and I wish there were greater powers available to me to not apply some European regulation, but there I think we have to go and make our argument in the Councils of Europe.

Q423 Chair: There are also some exemptions planned for enterprise zones, aren't there? So we are going to have a system running for enterprise zones; a system running for new business start-ups within them; and then another system of regulation for the rest of the business community.

George Osborne: I think for start-ups and for small businesses the burden of regulation—and often, of course, they are one in the same thing—but for start-ups and small businesses there is a particular burden that comes from additional regulation. The reason why we chose 10 employees as a cut-off point was because the evidence is that once you have 10 employees or more you start to have one person at least doing a part-time personnel function, which makes it a little bit easier to cope with.

With enterprise zones, yes, we are looking at regulatory exemptions but the main regulatory relaxation that we are seeking from local authorities or local enterprise partnerships that want enterprise zones is, when it comes to planning regulation where the quid pro quo, Mr Tyrie, in return for the tax advantages that we are prepared to give and indeed the stream of income that we are prepared to give to a local authorities or the local authorise in an LEP, we would expect very light planning controls and that is the deal we are prepared to cut with local authorities.

Q424 Chair: I am sure you are aware that the Work Foundation has described enterprise zones as gimmicks and there is a good deal of evidence to suggest they do not work. Maybe the one in London did but elsewhere probably the evidence is controversial to say the least. Why do you think that you are going to be able to make them work?

George Osborne: To be honest, when it comes to enterprise zones opinion is very divided and I don't think it particularly follows, by the way, on an ideological spectrum either. You get some people who are very enthusiastic about them; other people who are more cynical about them. The evidence from when they were tried in Britain in the 1980s—and also they are tried in many other countries in Europe at the moment; France makes great use of them—is that if you are able to do it with local authority support and co-operation rather than just imposing the zone from on high, then you have a much greater chance of success. Looking at what did and did not work in the 1980s and early 1990s, one of the lessons we have drawn from it is that if you are from the beginning in lockstep with the local authority, or in this case a local enterprise partnership, so a collection of authorities, then you have a much greater chance of success. My view looking at whether we should go ahead with this policy was that I did not see how it could do any harm and I could see how it could do quite a lot of positive good in a number of areas. I think the enthusiasm with which quite a lot of authorities, many of which are not of my party's political persuasion, have embraced the idea, and either gone ahead with it—if it is one of the 10 that I have already announced—or are now applying to be one of the next 10, shows that there certainly is a lot of local support for the idea.

Q425 Chair: Just to pick up one more of your schemes, the First Buy scheme, this is where first-time buyers will be provided with subsidised finance to buy new build homes: unless we have more houses built, that is just going to put house prices up, isn't it?

George Osborne: First of all, of course, I agree with you what we want to increase the supply of new homes being built and there are quite a lot of planning changes here in the Growth Review which are aimed to help that happen. Equally, it didn't get much attention on the day, but there is a change to the stamp duty land tax for residential property investors which we hope will increase the supply. This has been a long-standing problem for the British economy. What I was looking for, particularly when mortgage finance is under such pressure as it is at the moment and when deposits have risen to levels not really seen since the late 1960s or early 1970s, the deposit required, what I was looking for as well as these medium to long-term changes to the housing supply and incentives for the industry was something that we could really get going immediately and the idea of shared equity schemes for first-time buyers in new-build properties—and this is a crucial additional feature of this policy that partly addresses your point, Mr Tyrie, about new build—was something that we could basically get out the door from the beginning of the new financial year without having to spend months or years designing some new scheme and consulting on it and so on. This is something we can move very quickly on. It addresses a particular feature of the credit crunch, which has been that people who do not have a parental contribution to their deposit have been frozen out of the housing market.

Q426 Chair: My question was that unless you do get some new build you are going to put house prices up and you are agreeing that that is what the effect of the scheme would be.

George Osborne: Except the shared equity product is explicitly linked to a new property so you can't get it unless there is a new property.

Q427 Chair: I have understood that there always is. The question is, is there additional property on top of the new build that would have taken place in any case?

George Osborne: I think for the last two or three years new builds have been at such a low level—I think the lowest since the 1920s in the last three years—I am not saying that this is some kind of a silver bullet that is going to cure all the problems with the UK housing market, but I think it is something that we can activate quickly that we know is likely to work for those who use the product. The reason, by the way, that we identified 10,000 as a reasonable number was that was the number that the industry told us was the capacity that they were able to deal with. I could have provided more money if I had been able to make other choices in the budget but the industry themselves were clear about their capacity constraints.

Q428 Chair: I will just make that point again. If those 10,000 houses were going to be built anyway and are not coming as a result of your new planning laws, then you are going to increase house prices. So therefore the key question must be, how many new houses do you think you are going to get? What is your estimate of the extra houses that are going to come directly as a consequence of your rules on the planning—

George Osborne: We are pretty confident that almost all of that 10,000 will be additional housing.

Q429 Chair: Housing additional to the amount—

George Osborne: To what would have happened otherwise

Q430 Mr Ruffley: Chancellor, the chief economist of the Bank of England said last week, "The risks from continuing global price pressures and the effects of the prolonged period of above-target inflation meant that the level of demand consistent with achieving the inflation target had probably fallen". He was talking about a supply shock. Do you think he is right?

George Osborne: I do broadly agree with the analysis expressed by the bank, not just its chief economist but its Governor as well in his recent speech, about the causes and impact of inflation in the UK and one high degree of caution in the OBR's forecast has been the rather low levels of consumption growth through the period compared historically to the past.

Q431 Mr Ruffley: There seems to be an opposition amongst commentators. They would argue the OBR is talking about a demand shock which will allow you to have faster growth after 2015 whereas Spencer Dale is saying something different, isn't he?

George Osborne: You would have to get Mr Dale here to answer the questions about what he said. The way I see it is that the UK faces two particular economic challenges at the moment. One is the higher than expected inflation which as the OBR confirm is largely driven by rises in commodity prices. The second is the European sovereign debt crisis. These are two particular headwinds that we have to deal with as an economy at the moment. Clearly, as is clear throughout this document, the higher than expected inflation has had an impact on many of the forecasts that they made in November.

Q432 Mr Ruffley: What do see as the major risks in the economy for the next three years?

George Osborne: I would say those are the two that immediately stand out. The rise in commodity prices has clearly had an impact and of course in the UK exacerbated by the very sharp devaluation which is part of the rebalancing of the British economy but nevertheless has increased the inflationary pressure. Then you have the European sovereign debt problems, which Portugal is the current live example. We have to negotiate our way between those twin threats.

I think there is a broader challenge for everyone involved in economic policy making which is how do we rebalance the British economy in a more convincing way than has been achieved in the past so that it is less dependent on essentially debt-fuelled consumption and is more like an economy that invests more and exports more. That is an explicit objective now of the British Government. The days when the Treasury could be entirely neutral, which was true under both the previous Labour Government and the previous Conservative Government, about the structure of the economy probably are gone and we became unbalanced, overly dependent on one industry—financial services—and overly dependent on one factor of growth—consumption. We need to have more investment, more exports. We need to have a more balanced economy. We need other sectors to do better and other regions to also do better. Achieving that is not going to be easy and I am certainly not under any illusions that the Chancellor of the Exchequer or, dare I say it, even the Permanent Secretary, can sit in their offices and pull levers and everything happens exactly according to plan. The world is not like that and I don't believe in that sense in centrally planned economies. But I do think that Government can do more to encourage this rebalancing than it has does in recent years.

Q433 Mr Ruffley: Would you say an overestimation of the output gap is the biggest risk to you not meeting your fiscal rules?

George Osborne: I would say that is what the OBR have identified as perhaps the central risk to their own forecast, but they are independent.

Q434 Mr Ruffley: Do you agree with them?

George Osborne: I am very careful to have a regard to their independence and I am not going to try and second guess their estimate of the output gap but they very clearly early on in this document identify their estimate of the output gap as being one of the central risks to their own forecast.

By the way, if I can just remark that the fact that is now an established part of British policy making, in the space of just 10 months, I think it is a very good thing.

Q435 Mr Ruffley: I think you are to be congratulated on creation of the OBR for the reason you have just given, Chancellor.

  Would you like to put a probability on the output gap being much more significant—

George Osborne: No. Not really. No, I wouldn't no.

  I guess future Chancellors will have to approach this in their own particular ways. Obviously I am the first Chancellor operating now with an independent forecasting body and as the body establishes itself, I have taken, basically, a vow of silence on what my view is of the different forecasts and the components of that the forecast that they have made. This thing has only been on a statutory footing for a week. If I start saying that I think they have got the output gap wrong or whatever, then I think that would be an unhealthy clash that would potentially damage the independence of the body.

Q436 Mr Ruffley: Final question, Chair. Why is there so much policy emphasis being placed on the output gap? Everything seems to rest on it. It is an unobservable economic variable, isn't it? Huge policy emphasis is placed on it when it comes to meeting your fiscal rules. Does that worry you at all?

George Osborne Again the Governor of the bank is also at times quite sceptical about this.

  Speaking from my own point of view, the reason is this. We are trying to construct a fiscal mandate, a debt target, and so on, that will bring the public finances to health. When it comes to the fiscal mandate, I think it is important to recognise that there is an economic cycle and that there is a structural element to your deficit and that there is a cyclical element. You need the output gap to enable you to calculate the structural deficit. There is often a sort of black and white debate about John Maynard Keynes at the moment, but one of Keynes' important insights was of the role of automatic stabilisers and that is where we are in a very different place from the 1930s as a country and as a Government. I want the automatic stabilisers to operate while at the same time having a fiscal deficit which does not undermine our credibility in bond markets. So that is why the fiscal mandate is a cyclical one and if you want a cyclical one, then you need to have an idea of what the output gap is.

  Mr Ruffley: Thank you, Chancellor.

Q437 John Thurso: Chancellor, can I turn to a new stabiliser, the Fair Fuel Stabiliser. You achieved a welcome reduction in fuel duty but by a slightly surprising increase in the oil and gas taxation. What assessment have you made of the likely impact on investment in the North Sea, going forward?

George Osborne: Our expectation is that it will not damage investment and that what would damage investment is if we were to maintain the new higher rate of tax with a falling oil price, i.e. once the oil price had sustained a fall and taken it down to the kind of levels that we saw a few years ago, and was the amount that many oil companies made their investment decisions on, which is why I have made a very explicit promise to Parliament and in the budget, that should the oil price fall for a sustained period below around $75—and we are going to consult on the exact number—we will reintroduce the fuel-duty escalator and reduce the supplementary oil tax that we have introduced. So I think what will damage investment is if we had a lower oil price and the current tax regime which is why I have set it up as I have. With the current oil price the prospects are for increased investment.

Q438 John Thurso: When we talked to the OBR this morning they basically said, "We accept the Treasury's assumptions in this matter" but they did also say that they thought there was a great deal of uncertainty and they would want to do more work on this.

  Your officials this morning said they had given pretty categoric advice that if you looked at the past, there did not appear to be a lack of investment following a move like this although they are just accepting the evidence that they have from what has happened there. I put to them that exploration West of Shetland may be very different. If that were not to go ahead as a result of this, would you consider extending the new-field regime to enable that production to take place?

George Osborne: In the document there is an explicit commitment given to look at new-field analysis. I think, and this is true of the previous Government as well, the truth is that we have not cracked West of Shetland yet. It is an extremely difficult environment in which to extract oil. So certainly new-field allowances, which were only introduced in 2009, so they are a relatively new feature of the regime, we are actively looking at. I certainly want to encourage new exploration in West of Shetland.

The most recent evidence of what happens when you have a higher oil price and an increase in the supplementary corporation tax charge is when Gordon Brown in late 2005, early 2006, increased the tax, by 10% I think, investment increased after that. Of course the industry does not like additional taxes. That is not surprising. But I think it is perfectly legitimate for us to look at the price of oil at the moment, and indeed the increase in the gas price as well, to say that the industry is making profits which they were not forecasting to make from this oil and gas, and that in a fiscally neutral budget where I am trying to help other people as well—in this case motorists—it is perfectly reasonable to look to the oil and gas industry for additional taxation. Many other oil and gas tax regimes in the world have a regulated return, a regulated profit, so that when the oil price goes up they automatically pay more tax. We do not have that system in the UK. To be fair, they do not have it in the US either. We do not have it in the UK and so therefore you have to take, as Gordon Brown did and as I have now, one off measures to deal with that situation. Interestingly we would look at the US where the President is talking about removing some of the reliefs that exist for the oil and gas industry there as well because of the high oil price. I don't think we are unique in the world in looking at this industry at the moment and the returns it is getting.

Q439 John Thurso: The headline in the most important daily newspaper in my part of the world, The Preston Journal, this morning was the cancellation by Statoil of their investment. I think one of my colleagues may press you further on that. I wanted to look specifically at gas. Centrica have issued a statement that says, "All our North Sea projects, including those given the go-ahead very recently when we believed the investment climate to be stable, are being re-evaluated. Projects that are no longer viable will be cancelled". They also make the point that the economics for oil and gas are completely different in that oil has a single world price whereas gas has a multiplicity of prices and is a much more diffuse market. They also claim that there will be therefore a much bigger impact on domestic inflation and the cost of heating and so forth.

  Have you looked at that side, the difference between gas and oil?

George Osborne: First of all, I know the Committee were interested in what Statoil have said. They have not cancelled it. They want to talk to us about their investment plans. They are a Norwegian oil company and they have the vast majority of their oil production in Norway. The current rate, with my increase, for the UK is going to be 62%. In Norway the tax rate is currently 78%. So they are certainly used to dealing in high-tax regimes. Of course oil and gas have become somewhat decoupled, I think that is a reasonable observation. However, the gas price has also substantially increased. For example, last March it was 30 pence per therm. It is now 55 pence per therm. That is a big increase. Again it is perfectly reasonable when looking in a fiscally neutral budget for where you can help some people and who are in a better position to help, to look at the oil and gas industry. I am very happy to talk to Centrica about projects like Morecambe Bay but Morecambe Bay is already designed to be shut off in the summer when it is cheaper to import gas so they already have quite a lot of flexibility around that project. Maybe you would want to speak to Centrica but it would be interesting to know what the cost per therm is of production from Morecambe Bay and what they are selling it for.

Q440 John Thurso: I would be prompted to point out that Norway runs a depletion policy, which we do not, if I understood what that meant but I am very grateful for the inspiration I have received.

  On the point of gas, given, as you have admitted, that there is a difference between the two, will you undertake to look carefully at what is being put forward by the gas industry and to at least make sure that the assumptions that are being made are correct and that if what we are being told by some of these companies proves to have validity that we look to mitigate that?

George Osborne: As I said, certainly in designing this tax, we were aware of the issue around gas. That is why we have explicitly identified that we might be in a position to introduce new-field allowances, that one of them might be marginal gas fields, to explicitly recognise that point. However, we did also investigate what had happened to the price of gas recently and it has quite substantially gone up and a lot of investment decisions made for gas—and obviously quite often in the UK, oil and gas are brought out of the same field—were made when the gas price was lower. As I say, it is a reasonable additional cost to ask these producers to bear. It is worth bearing in mind that this oil and gas is not theirs. It is ours, as a nation. So when the oil and gas prices go up substantially, I think we are at least entitled as a Parliament and a Government to ask if we are getting our fair share of that. Explicitly, what I am really doing is rebalancing hydrocarbon taxation here and reducing it or stopping it going up for motorists and businesses.

Q441 Stewart Hosie: The increase in the supplementary charge is a 60% hike. That makes the basic rate of tax in the industry 62% and 81% marginal rate in the mature fields. Coupled with the high cost of development in very deep water, how can you be so certain, as you said earlier, that the prospect is for increased investment?

George Osborne: Given the high price of oil and the increase in the gas price it is still very profitable to invest and exploit these resources.

The profits on a barrel of oil are going to be higher in the next five years than they were in the last five years. Just to give the Committee the actual numbers, the companies were making £12.02 profit on a barrel of oil for the last five years. They are forecast to make £12.31 on the next five years on that barrel of oil, with the new tax. At the moment they are making £13.28. So their profits are going up even with the additional tax and I think you would have a very strong complaint against me if you said that I had made no allowance for the fact that the oil price might fall and that might then damage investment. But I have made a very explicit allowance for the fact that the oil price, and indeed the gas price, might fall. Given the judgements I had to make about who to help in the economy, I think it was a reasonable one.

Q442 Stewart Hosie: The criticism you have suggested is not one I would make. If you are arguing that tax needs to be sensitive to profit levels, I would agree. But investment decisions are also sensitive not just to tax rates but the combination of tax rates and other costs and you do recognise capital, people, machinery can move around in this sector? There are very real dangers to investment, as the sector, the industry themselves have said over the past 24 hours.

  George Osborne: Well, no industry is going to welcome with open arms a tax rise on it, and I would be very surprised if they had. But I would suggest that, as I say, the current oil price—and indeed the forecast oil price—certainly makes it very profitable to invest in the North Sea. Of course, there is a lower tax rate on new fields rather than existing older fields, and that is the new rate of 62%. The previous Government introduced new field allowances, they have only just got going. We are prepared to look at whether there are new field allowances for new types of field, like marginal gas fields, which would further help exploration and we are very keen to engage with the industry on how to encourage that. But I think it is—by the way, the industry also loses out when there's a very high price. That's all passed on to the motorist, and they find a much faster transition than they had hoped to a less oil-using economy.

Q443 Stewart Hosie: That may be true, and I would want to see some numbers that evidence that. But just to go back to the investment, the Statoil announcement that you spoke about, and in that Mariner field development, £3 billion investment, it has halted for the time being. It does put a question mark over the Bressay development. The industry don't appear to be joking when they are talking about 40,000 new and existing jobs under threat, and we saw Valiant Petroleum lose £30 million off their stock price. It doesn't do much for growth, even if it is only perception—and I suspect it is real—that we are seeing investment stopped or postponed, business value is decreased and jobs under threat.

  George Osborne: Well, as I say, we are going to be speaking to Statoil. They have not cancelled their decision. They want to talk to us and we're happy to talk to them. But I would just make a broader point, which is in the end, a budget is a series of judgements, and I would not have been able to find the money to stop the fuel duty increase which was due to take place this week and to indeed cut duty by one penny if I had not found substantial resources elsewhere, and I looked to the oil companies, given the big increase in the oil price, for those resources. So again, it is a perfectly fair line of argument to say, "You shouldn't have increased these taxes on the North Sea and you shouldn't have changed the plans for the fuel duty increases" but you can't have your cake and eat it. If you want one, you have to have the other. One thing that has been very clearly established over the last 10 months—and the OBR does it again in its document here—is it is not possible to design, if I put it like this, an automatic stabiliser based on the fact simply that revenues, increased revenues come in from North Sea oil taxation anyway when the price goes up, because as they say on page 111, "The overall effect on the public finances is broadly neutral over an increase in the oil price". So in order to make a stabiliser work, I had to look to an additional tax charge on North Sea oil.

Q444 Stewart Hosie: Well, there is an argument to be had over that, because there was a windfall from the North Sea for last year with the rising cost of fuel. Now, you said that Statoil now want to speak to you, and that is good, but it isn't just Statoil. I mean, the Scotsman were clear that it is several companies are now days away from cancelling or postponing major investment projects. Have any of the other oil companies now been in touch, and would it not have been so much better if there had been proper dialogue with the sector in advance of this decision, a 60% hike in the supplementary charge?

  George Osborne: Well, I don't think it is possible to actively consult a business sector on a tax rise in a budget. I think that would have been very, very difficult to undertake and the previous Government—which I know you are no fan of either—but the previous Government also took a similar view and didn't consult on its very similar increase in the supplementary charge. We are engaged, but it is an industry we know a great deal about. There is a dedicated part of the Treasury to it, there is obviously, because we run a very specific tax regime for it. We are constantly engaged in discussions with these companies. We know quite a lot about the industry, as I say, and its investment decisions, and I thought it was a reasonable thing to ask of the oil companies, given the very high price of oil.

  As I say, the stabiliser is clear, and it's not particularly easy for a democratically elected politician to get up and say, "You know what, I'm going put the fuel duty escalator back on and cut taxes for oil companies if the oil price falls, and I make this promise" and I don't know when that will happen. It could happen next year, it could happen in three or four years' time. But I have done that—I did that—not because it was the easy thing to do, but because it was the right thing to do to protect investment in the North Sea.

Q445 Mr Umunna: Good afternoon, Chancellor. You said in answer to Mr Ruffley, I think you said, "We need to be less dependent on debt-fuelled consumption" and I think that accords with the remark that you made in your Mais lecture last year, when you said we need to move away from an economic model that in part was based on unsustainable private debt. What, according to the OBR, was total household debt in 2010?

  George Osborne: Well, it is at the beginning of that document. I don't have the number right in front of me, but—

  Mr Umunna: Okay. Well, they say that in 2010 it was £1,560 billion, so that is—

  George Osborne: It is going to increase. I can anticipate your next question.

Q446 Mr Umunna: You anticipate well, Chancellor. What is the OBR projecting total household debt to be at the end of this Parliament in 2015?

  George Osborne: Well, again, you can tell me the number.

Q447 Mr Umunna: Yes. So in 2015, they say it is going to £2,126 billion, so over £2.1 trillion. So in essence, if the Prime Minister keeps you in situ, you will be presiding over a £566 billion increase in personal household debt, which is a rise of about 36%. Can you remember what the OBR was projecting household debt to be at the end of the Parliament in its June emergency budget forecast? Right. Well, they were saying—

  George Osborne: If you give me the numbers, then I will answer the question.

Q448 Mr Umunna: Sure, okay. So they were saying then that it was going to be £1,823 billion, so they revised up their projection of what personal household debt would be by the end of the Parliament by £303 billion, compared to June. So why are households going to be forced to borrow well over £550 billion while you are Chancellor?

  George Osborne: The short answer is that we are coming out of an incredibly difficult situation, where we have been through the deepest recession of our lifetimes, the biggest banking crisis in our history. We have an exceptionally large budget deficit, much larger than anyone else in the G20—who I am about to go and meet in China—and as a result, there is—combine that with the higher than expected inflation and there is a squeeze on disposable household income. I mean, that is clearly forecast by the OBR, and that makes life difficult for households. That is fairly straightforward. What I am trying to do is achieve a medium-term rebalancing the British economy. I think it is worth, when you look at debt levels in the economy, looking at the private sector debt levels across the whole economy, not just for households, and they are improving. So there is a rebalancing taking place, but unfortunately I can't achieve this change in the space of a year or a couple of years. It is going to take time.

Q449 Mr Umunna: But even if you inflation adjust the figures, it doesn't explain the massive expansion, and if you look at the 2010 pre-budget forecast of the OBR, they had household debt falling as a percentage of household disposable income from 150% to 143% between 2010 and 2014. But the figures that came out last week showed it increasing from 160% to 170% over the same period. How would you explain that? So you have a downward trend as you enter Government, but you have an upward trend as you enter.

  George Osborne: First of all, I am reminded by one of my colleagues here, the debt to income level was 174% in 2008, so it was substantially higher at the end of that prolonged period of economic expansion, but unfortunately, as I say, higher than expected inflation, driven by higher than expected rises in commodity prices, are one of the principal causes of the squeeze on household incomes, and that is reflected unfortunately in the household borrowing numbers, which is unfortunately one of those immutable things. But I think the—

Q450 Mr Umunna: Can the change perhaps be explained by the fact that if you compare the figures from June to now, obviously the full force of the effect of your policy is clear to the OBR, we have the CSR and more information as to the course that you are pursuing.

  George Osborne: I will ask first of all the Permanent Secretary, then I will make an observation.

  Sir Nicholas Macpherson: Well, can I just point out the data published this morning in relation to, I think, the third release on GDP has shown quite a substantial upward revision to the household savings ratio. So in the fourth quarter, it is at 5.4%. Up until now, the view was it had fallen to 3.5%. So I think the latest data, which obviously the OBR didn't have access to—neither did we at the time of the budget—suggests that saving is holding up reasonably well. Now, that doesn't mean it is necessarily going to happen in the future, but the idea that the savings ratio has somehow fallen over the last six months just isn't borne out by the data.

Q451 Mr Umunna: I am glad you brought up those ONS figures, because some might think that the increase in household debt was linked to income, and of course the figures that were released today also showed household disposable income falling by 0.5% in the fourth quarter of last year, following a rise of 0.5% in the third quarter, and they have shown the first annual drop there since 1981. Chancellor, I suppose the thing that my constituents and everyone else's constituents around this—

  George Osborne: You have to remember the OBR. First of all, ask the OBR why. You asked me why the OBR have changed their forecast. You should ask them. They are very clear that the principal reason for the change in the forecast generally has not been some reassessment of Government measures. It has been the change in the inflation numbers and the change from it, and of course when the OBR made their forecast both in the autumn and at the time of the budget, they were aware of the consolidation. That was built into—and including, for example, the VAT rise—their forecast in June, in November, and that has not changed. The big thing that has changed in the world and also changed in the UK has been the increase in commodity prices and the higher than expected inflation.

Q452 Mr Umunna: But there are many independent forecasters who might take issue with what you are saying, Chancellor, because you seem to be seeking to blame it all on inflation, and you don't seem to accept much responsibility yourself. But what I was going to go on to ask was I suppose what people will want to know is what exactly you are going to do to help households reduce their debts, and what will you do in relation to falling disposable income? You said in answer to Mr Ruffley earlier that Government can do more to address all of this, but it seems, accounting for many of your measures, household debt is going to increase and disposable incomes are falling. So what going forward are you going to do?

  George Osborne: Well, I think there are a number of things that Governments can do to help families in a very difficult time. It is not just British families, but British families bear the particular burden of this very high budget deficit and the devaluation which has added to the inflation pressures in the UK. Obviously, quite a lot of measures in this budget—as well as in the previous budget—were designed to try and help, so for example, the freeze in council tax, the increase in the personal tax allowance, the changes to fuel duty, which we've just been discussing, are all measures targeted at working people to try and help them with the pressures that they face.

  But the truth, which is spelt out by the OBR, which is widely acknowledged around the world, is that the UK is coming out of a particularly difficult situation with this particularly sharp fall in output, with this particularly severe banking crisis, and the only countries that had larger banking industries as a proportion of their national income and had similar problems are Ireland and Iceland and so on, and we have seen what has happened to them. As I say, we have this budget deficit, and that is unfortunately the inheritance which I have had to deal with, but I believe the plans we have put in place, endorsed by not just international organisations, pretty much every international organisation, but all the business community as well, are the right ones to encourage the growth and investment in jobs which will help families with their incomes and help them with the cost of living pressures.

Q453 Mr Umunna: Just my final question: what do you say to those who have suggested that what you are seeing here is a transfer by you of public debt to private and to households, that you are seeing a shifting of that over time by the—

  George Osborne: Well, it is our nation's debt. Unfortunately, you know, as citizens of this country, we all shoulder the national debt and we shoulder the budget deficit and unfortunately, when you run up an 11.5% budget deficit, you know, considerably higher than at any point in our peacetime history, at some point—and I think this was at least acknowledged by my immediate predecessor as Chancellor—you have to take some difficult decisions, and unfortunately the public have to bear the burden of those.

Q454 Mr Umunna: But you are not reducing their tax, are you?

  George Osborne: Yes, I think it was him exactly a year ago who acknowledged that under his plans, the squeeze was going to be tougher than in the 1980s, and this was under his plans. You know, as I say, he acknowledged this truth. We acknowledge that these are difficult decisions we have had to take.

  It is an opportunity for me to say to Mr Tyrie, we have last night received a letter from the OECD specifically on the budget, which I propose to—and I've sought their permission—release to the Committee and put on our website, which says this, "While this budget includes hard measures, we are convinced that they are unavoidable in the short term to pave the way for a stronger recovery. By sticking to the fiscal consolidation plans set out last year, the United Kingdom will continue along the road to stability. This becomes doubly relevant, given recent events in some countries in Europe".

  

Q455 Mr Umunna: So forcing households to borrow is unavoidable?

  George Osborne: No, what is unavoidable is dealing with a very large budget deficit. Now, every credible organisation in the world virtually has acknowledged that.

  

Q456 Mr Umunna: But you are not reducing private debt.

  George Osborne: Every employer organisation that represents the people who are going to create jobs in this economy recognises that, and much as I would love to have inherited a budget surplus, which might have been possible after a sustained period of economic growth, unfortunately I didn't. I inherited the largest budget deficit in the G20.

  Chair: It sounds an interesting letter from the OECD and we look forward to reading it. It would be very helpful if we could have a sight of these things on the morning of your appearances, rather than find out about them during them.

Q457 Andrea Leadsom: Chancellor, obviously a private sector-led recovery is key to turning around our fortunes and that is largely going to come from the SME sector. I think that is pretty universally accepted. Do you think that Project Merlin is going to deliver enough bank finance to be able to support that private sector-led recovery?

  George Osborne: The short answer is I hope it will. That's what it is designed to do, and I have taken a judgement, which is the principal thing which I am asking now of the banking industry in this deal is an increase in small business lending. Now, there are other things I am asking, more transparency about pay, a greater contribution to society and community projects and the like, but the thing I've really asked for and secured in the deal— but now have to secure in practice—is an increase in small business lending, and there is a substantial 15% increase.

Q458 Andrea Leadsom: Could you comment on why it is a gross lending target, not a net lending target, because obviously for a lot of companies, they are finding that it is the rollover of debt that is extremely difficult, they are finding banks are calling in loans, they are finding they are being offered refinancing at unaffordable rates, they can't go to a new provider very easily. So in some ways, a net lending target might have been better on the ground. Why wasn't it?

  George Osborne: Well, we very closely examined the case for a net lending target. The previous Government tried a net lending target in 2009/10, I think, from memory, and this was only for the nationalised banks—this is with all with the semi-nationalised banks—so these are the ones they had a greater degree of control over, and those targets were grossly missed—if I can mix my gross and my net—but the net targets were very badly missed, and looking at that experience, it seemed to me that you cannot control the deleveraging. There is deleveraging happening, that is partly again one of the fallouts of the over-leveraged economy, and so therefore the thing you are in greater control of is the new commitments to lend. So we thought gross targets were better, and we'd had some success with—although these were put in place right at the end of the last Government, most of the time involved happened under the new Government—the gross lending targets for RBS and Lloyds were successfully met, and we confirmed that in the budget last week. So the industry are very clear that I expect these to be met. We will monitor them carefully. The Bank of England is also going to be involved in that to provide a sort of independent verification as well, and it is something for a very large bank with operations around the world, putting the foot down a bit on the accelerator on British small business lending is something they're able to do within their business plans.

Q459 Andrea Leadsom: To what extent does the penalty vis-à-vis the remuneration of a chief executive have real teeth? In other words, if they do not meet the target, will they be penalised in their own personal remuneration?

  George Osborne: Well, again, that is what they have committed to. Now, I perfectly accept that the Committee will want to see the proof in the pudding, but that is an additional check, if you like, that we have devised and we have the commitment of the bank boards to that. So there is an additional personal incentive on the chief executives, and certainly having spoken to a couple of them since the Merlin deal, they are very focused on it. They know this has achieved a lot of attention. By the way, I think this is something, if I could suggest it, Mr Tyrie, that the Committee themselves will want to keep an eye on as well over the coming year.

Q460 Andrea Leadsom: Absolutely. Can I ask you, Chancellor, are you concerned about the concentration of up to 90% of all SME lending being in the hands of the five biggest banks?

  George Osborne: Again, one consequence of the banking crisis has been a conglomeration of the industry, and partly that was—I wouldn't say unavoidable, but that was due to decisions taken at the time to rescue certain institutions.

  Andrea Leadsom: But, equally, it has been happening over 15 years.

  George Osborne: Yes, but I was about to say, it has been. This is an accelerated longer-term trend. People are very focused when it comes to the Independent Banking Commission on their work on the structure of universal banks, but they also have a very important task in looking at the structure of the retail banking industry and issues around competition and consolidation. So I very explicitly asked them to look at this issue. They received an interim report in April, a final report in September and we will see what they have to say about this point.

Q461 Andrea Leadsom: Okay, thank you. My killer question: UKFI obviously has very large shareholdings in some of the British banks. Is there any consideration being given to, via some massive corporate action, restructuring those banks perhaps into five or six medium-sized banks at a stroke to create new competition in the UK, perhaps selling them to big retail names that might be interested in suddenly having a UK banking presence? Is there any consideration of achieving more competition via some radical route like that?

  George Osborne: I am particularly here referring to RBS and Lloyds, both banks have—

  Andrea Leadsom: Well, and Northern Rock and Bradford & Bingley, of course.

  George Osborne: —and Northern Rock, but these are the two largest players. They both have business plans. I think I would cause minor panic in the markets if I said we were tearing up those business brands, which we are not. But obviously we await the findings of the Independent Banking Commission, which is explicitly looking at the competition in the retail banking sector and both these banks are very large players in that.

Q462 Andrea Leadsom: But could you then confirm that UKFI will not divest itself of our shareholdings in those banks prior to the Vickers Commission final report, because clearly that could have a—

  George Osborne: I think that is pretty unlikely, put it like that.

  Andrea Leadsom: Right, thank you.

Q463 Chair: You will take competition fully into account, as defined and described by the Vickers Commission?

  George Osborne: Well, I have always said, look, we are still some way off being able to divest or sell the shares in the banks. If we did so—you know, in a sort of theoretical world where you could suddenly sell them all today, we as a country would make a loss. But I've said of course we want to get value for money, that is obviously a key consideration, but we also have to have a regard to competition, I have said that for the last couple of years. I am sure there is going to be a very healthy debate—which I notice has already started—about what we do with the proceeds of these divestments as and when that happens.

Q464 Chair: It would be helpful just to have clarification that you are going to collect the data required to give yourself confidence that the bonuses and the lending are connected in the way that you thought the Merlin agreement required banks to do.

  George Osborne: No, we are absolutely on top of monitoring the implementation of the deal.

  Chair: That information that you will collect, I have no doubt aspects of it might be commercially confidential.

  George Osborne: Well, I am sure I could—

  Chair: I think I should put down a marker now to say that we would like you to provide it to us in a form that will enable us to put as much as possible of it into the public domain.

  George Osborne: I am very happy to look at that, and I repeat my suggestion that having the Committee as well helping to hold the feet to the fire—

  Chair: I heard what you have said, Chancellor.

  George Osborne: —for these banks would be a good thing.

  Chair: Well, we have not been inactive on the subject.

Q465 Mr Love: Chancellor, in answer to a number of questions this afternoon, you have expressed your concern about the impact of inflation, and indeed, in the budget, you reaffirmed the target of 2%. But you will be very well aware that inflation is well above that and has been for some considerable time, and indeed will be, we suspect, for some time into the future. Yet in your correspondence or the exchange of the correspondence with the Governor of the Bank of England, you have not expressed that concern, at least not directly, and you have not asked him to address the issue of bringing down inflation any faster than currently he has projected to do. Why?

  George Osborne: First of all, in the exchange of letters that I have had with him on various—probably too many—occasions, but certainly I—

  Mr Love: There will be many more.

  George Osborne: I am not going to make a forecast, but I suspect you might be right. I have made it very clear that we are absolutely committed as a Government, working with the independent MPC, to maintaining a strong anti-inflation stance. My personal view is that the Governor's speech earlier this year in which he set out the causes, as he saw it, of inflation and how the bank should respond, was a very good one, and I shared that analysis. I know not everyone does, but I did and do share that analysis, and it is worth noting that the OBR forecast on inflation, CPR inflation, is for it to come back to 2% in the medium term, and of course what they are tasked with doing—and this was obviously a regime set up before I arrived in the job—is hitting the target in the medium term, not tomorrow. The OBR forecast, not just the bank forecast, bears out that they are on course to do that.

  

Q466 Mr Love: I understand the OBR forecast—and indeed, the bank itself, its own forecast—says two years, but then it has been saying two years for some considerable time, and we have not arrived there. I just wonder, we took evidence from a group of economists, and they were unanimous in their view that fiscal policy was too tight and monetary policy too loose, and I wondered whether you had given any consideration to the optimal level of that interaction between fiscal and monetary policy, because you seem to—according to your last letter to the Governor—take the opposite view.

  George Osborne: I don't know which economists you spoke to, and it is not the view, as I understand it, of the IMF, the OECD, the European Commission, the G20, all the main business organisations in Britain. But I think if we were to loosen fiscal policy now—of course this would be a judgement for the independent MPC, but I think, in all other things being equal—there would be a monetary response almost immediately with a tightening of monetary policy and an increase in interest rates. Now, I don't see how that would particularly help the economy, if that was the direct trade. What I am able to do, by providing a credible plan to deal with the budget deficit that has earned that credibility in the market, is give the space to the MPC to make the decisions that it needs to make. I know I have made this point before on appearances before this Committee, but it is worth noting today the UK market interest rates are 3.6%. In Germany, they are 3.3%, so we have very similar market interest rates to Germany, but in Spain, they are 5%, Portugal they are 8%, Ireland they are 10%. That is the monetary stimulus that a credible fiscal policy can provide.

Q467 Mr Love: Well, it was put to us that the Monetary Policy Committee has an accommodative stance in terms of its monetary policy, because of the particular fiscal retrenchment plan that you have instituted. How do you respond to that? While I accept there would be consequences for you loosening your fiscal stance, many people think that that would overall, in an optimal sense, be the best way forward for the British economy.

George Osborne: I certainly do not want to speak for the Governor, but in the Mansion House speech he gave last year he acknowledged that there was a trade-off. I think he made this complaint to this Committee but it might have been the parallel committee in the House of Lords, that the problem last year was the absence of a plan A. There is now a plan A, all other things being equal, that enables the MPC to keep the rates lower than they would otherwise be and I am paraphrasing his speech to the Mansion House. Now I think, given the very, very high budget deficit, 11.5% which we are now bringing down, having a credible fiscal policy so you do not lose the confidence of the markets, you keep the country's credit rating, you do what has to be done anyway in eliminating a structural deficit. You can spend the whole Parliament getting it down by half, as the previous Chancellor wanted to do, but what do you have to do in the next Parliament? You have to get the next half down, this is a structural deficit, this is the bit that does not go away when the economy bounces back. So you can either spend eight years doing this or I think what I have done is provide that credible policy, secured our credit rating, kept the market interest rates low and enabled the MPC, all other things being equal, to keep interest rates lower for longer.

Q468 Mr Love: That brings me neatly to the second part of my question, because we recently interviewed the Court of the Bank of England and it was put to them that the Governor, whether inadvertently or not, had been sucked into political controversy and the Chairman of the Court said, "I think it was unfortunate the way he was commented upon and quoted by the politicians of the time." Do you accept any responsibility for dragging the Governor into political issues?

George Osborne: I think the Governor is an extremely independent-minded individual who I note was appointed by Gordon Brown and Ed Balls, reappointed by Alistair Darling, Ed Balls and Gordon Brown, so I do not think anyone can claim that somehow I had a hand in his appointment, and expresses himself in a robust and independent way and is not partisan at all.

Q469 Mr Love: That was not really the question I was asking you and the comments that you made—

George Osborne: He is very careful about how he expresses his opinions, he does so in carefully choreographed speeches that he thinks about a great deal in advance. The idea that he is somehow dragged into a debate he does not want to be dragged into, I think as you well know, Mr Love, having interviewed him several times before this Committee, he is pretty robust in his independent views.

Q470 Mr Love: It was not anything that the Governor had said and indeed that never arose in the conversation with the Court. It was about the perception out there, the perception in the media and among the public about what had been said and how it was used or misused by politicians.

George Osborne: Yes. The only person I have ever seen in public who vociferously made that point is my opposite number so perhaps you should get him to appear here and ask him questions.

Q471 Mr Love: Maybe we will do that. Can I move on to a completely different issue and this is—

Chair: If you could just briefly, Andy.

  Mr Love: I will do it all in one. It is about the flagship policy, National Insurance Contributions holiday for small companies and other parts of the country than the south east and London. Treasury officials told us this morning that after six months the new jobs that had been created could be measured in the thousands. Is it back to the drawing board, Chancellor?

George Osborne: Well, what I want to do is to encourage a much greater take-up. I mean the problem with this policy at the moment is that not enough businesses are applying for it. Now that we think partly might be a timing issue, in other words it only applies to new businesses, so these are new businesses by definition and sometimes it takes time for a new business to take on its first employee and it may take time also for them to complete the—but what we have discovered from the work that we have done is we want to encourage greater take-up of it, but also when businesses are aware of it and as I say many have said it is a timing issue, they have not yet hired their first employee, but when businesses are aware of it they are very enthusiastic about it. So the issue here is not to change the policy or abandon it, it is to encourage its take-up.

Q472 Mr Love: If I may say so, job losses in the public sector at the present time are running at something like 30,000 a quarter. This policy was originally intended to create opportunities for upwards of 400,000 people over I think it was a four-year timescale. That has now been revised massively. Is this not a mountain to climb for you in terms of getting this policy to address that claim that was made at the time of the election, that any loss of the public sector jobs would be made up in private sector jobs?

George Osborne: Well, first of all it was certainly not the only policy designed to encourage a private sector recovery and private sector job creation. I do want to see an increase in its take-up and we are taking steps to encourage that, but it is worth bearing in mind this economy created 428,000 private sector jobs in the last year, so there is private sector job creation taking place. Not that I mentioned it in the budget speech, but the OBR have revised down their forecast for the total number of public sector jobs and posts that are going to be removed, and what we need to see as an economy, given that we cannot afford at the moment to go on having half of all our national income consumed by the state, far higher than what was under Governments of either persuasion was ever regarded as acceptable, is we have to get the private sector going. The good news about the budget is that the private sector representative organisations and investors in the British economy, including longstanding Labour supporters, so it was not a partisan thing, have all said the budget has encouraged investment, will help create growth and jobs and so on. So there has been a very, very positive reaction from the organisations and the people and the businesses that are going to create the jobs.

Q473 Mr Love: Final question—

  Chair: I think we will move on. We really must, Andy, if you do not mind. Mark Garnier.

Q474 Mark Garnier: Good afternoon, Chancellor. My question is slightly more philosophical I think and it is really to do with the cuts and how they have been distributed. I think all but the financially illiterate would agree that spending cuts were inevitable and there is nothing we can do about that, but there are very large sections of society who feel that they are perhaps being unfairly targeted and perhaps I can give you a couple of examples. One being a group of police who came to my surgery on Friday who felt very strongly about their pensions and pay, and perhaps another being a group of Women's Institute marching on Saturday about library cuts. How are you going to persuade the nation that you are trying to spread the cuts as thinly and evenly as possible and that no sort of single group of people are going to be more unfairly treated?

George Osborne: Obviously that is the great challenge and what I have tried to do is make sure that the burden is spread. I think the distribution tables, which is interesting this year did not get as much attention, show that it is pretty evenly distributed across the income deciles with the richest quintile paying the most. When it comes to public sector pensions, there I went out of my way to get a former Labour Work and Pensions Secretary to do a report on what was a fair future settlement, to make it clear that we should not be cherry picking on either side, in other words there were things that were of a benefit in the sort of narrow sense of the Exchequer and other things that were of benefit in a narrow sense to public sector employees, but we should accept the whole package. More broadly I think one of the biggest challenges we have had has been the tension between trying to micro-manage everything from the centre and allowing, when it comes to the local authorities, and after all they distribute a quarter of all Government spending, for them to make their own decisions about their priorities and choices. Again it would have been extremely tempting to be a complete control freak and ring-fence everything, but what we have sought to do is to allow local authorities to make their own decisions about how they want to distribute things.

  Sorry, that is a long answer, but what I am trying to say is that of course these are the judgements that I live with every day and I try to bring together on big events like the Spending Review, like this year's budget. But I am certainly seeking to spread the burden fairly. If you look at who in the narrow sense are the losers from the budget, the people who have to pay more tax, if you like, are people who have avoided tax, and there is a big tax avoidance package, polluters, oil companies, and indeed there has been an increase in the bank levy as well. So I have tried to take some decisions that would be broadly seen as fair.

Q475 Mark Garnier: Fantastic. My second question is also sort of slightly philosophical. Critics of the Government say that the Big Society is a way of making Government cuts, if you like by another name, by passing down responsibility of certain functions to communities rather than having it in the Government. How would you respond to that?

George Osborne: I think again I will give you a rather philosophical answer, which is it depends how you think our country should be run. Personally I happen to think the attempt to run the entire thing from the centre was not a great success and we should trust local councillors and others to do what they are elected to do and make decisions for their own local community. It is quite striking if you look at it how different local authorities have gone about very similar reductions in their budget. I am an MP in the north west and if you just look at the different councils of Greater Manchester they have had some remarkably different results with very similar reductions in their grant in terms of public sector job losses, for example with Trafford Council minimising that and Manchester City Council next door maximising it.

Q476 Mark Garnier: My final question, back to the budget again, one of the things that seems to have received remarkably little comment in the press is the philanthropic measures which you have introduced which just looking at these tables are looking as if they are going to contribute £535 million to charities over the next period of this Parliament. Do you think the fact that there has been very little coverage on this is a reflection of the fact that we are not really a philanthropic nation or do you see philanthropy working alongside organisations such as the Big Society Bank and also Sir Ronald Cohen's Social Impact Bonds. Do you think this will create a new sort of socially conscious society?

George Osborne: Well, I think it is more a reflection that people are more interested in the price of a litre of petrol than many other things, so that bit of my budget did not get the headlines that other parts of the budget received the next day. I think we spent quite a lot of time working out the philanthropy package, it has been many months in the gestation and I think it will have a big impact. Not just the changes for the biggest givers, the high-end, the richest givers if I can put it like that, where we have made I think some important changes in the Inheritance Tax, so if you give 10% or more of your estate to charity you get a 10% cut in your Inheritance Tax bill. That does not benefit any children or beneficiaries to that estate, it only benefits the charities and the only loser, if you can put it like that, is the Exchequer who foregoes tax. But also I think the Gift Aid change will make a real difference. The bucket collections in the streets of your constituency for a local charity will now be Gift Aidable and that will be a huge boost, I hope, to much smaller charities and much smaller donations. So what I want to do is establish, and it is not just me, I know that this is something I know that No. 10 are passionately interested in as are other parts of the Government, but we want to establish a new norm where people give more of their income to charity, particularly the wealthy but also those on much lower incomes, and I hope these tax changes, they are not by themselves going to achieve that but they are, if I can use a fashionable word, going to help nudge it in the right direction.

Q477 John Mann: I know you like to answers questions directly, Chancellor.

George Osborne: It depends what they are, I guess.

  John Mann: Well, I think we will do petrol prices, then. Unleaded is £1.30 at the moment average. Of that £1.30 how much is taken by the taxman?

George Osborne: Around 60-odd pence I think, although I do not have it in front of me.

Q478 John Mann: Around 60-odd pence? So the Chancellor of the Exchequer does not know how much tax is taken in petrol. Is that 61 pence, 69 pence?

George Osborne: Well, you are going to tell me, as you usually do.

Q479 John Mann: No, I am asking because you are the Chancellor of the Exchequer, you are responsible for petrol duties. I am asking you how much currently of a litre of petrol, taking £1.30 as an average price—

George Osborne: Okay, a little moment of relief here. It is going to fall from 58.95 pence to 57.95 pence and in January will increase to 60.97 pence.

Q480 John Mann: Wrong, because what you have forgotten, Chancellor, is that you also levy VAT on petrol, so let me ask you again, you do not know how much the levy is. Of the £1.30, I think motorists in this country want to know, that people pay on average per litre at the moment, how much goes to you in tax?

George Osborne: You are charged 28 pence VAT on top of that.

Q481 John Mann: I think history was your discipline, wasn't it? Of the £1.30, 80 pence goes to you, to the taxman, to the Exchequer. So 80 pence out of £1.30. Now of that 80 pence, you are a historian, how much was levied by Conservative Chancellors, including yourself?

George Osborne: Well, I am responsible for the 58.95 pence and it has fallen to 57.95 pence.

Q482 John Mann: Wrong again. Because you have increased VAT so you have added about 3 pence in your year as Chancellor to the tax take from petrol.

George Osborne: No, no, but on Friday—I inherited a decision which was that on Friday it was going to go up by 5 pence and I have taken it down by 1 pence, so the overall effect will be for it to be 3 pence less than it would otherwise have been, absent the VAT decision and my decision on Alistair Darling's Committee.

Q483 John Mann: When I filled up this week I want to know how much it is now and you have put it up, but to come back to my question how much of that 80 pence has been brought in by Conservative Chancellors including yourself?

George Osborne: No doubt you will tell me, Mr Mann. I looked at the situation I inherited, I was not seeking to go back over the last 30 or 40 years and see which bits—

Q484 John Mann: It was interesting to see, the answer is 56 pence so 70% of the tax on fuel in this country has been introduced by you and your Conservative predecessors. So my question is kind of a philosophical one, like Mr Garnier, why is it that Conservative Chancellors like to target the motorist so much?

George Osborne: Well, let me just deal with the situation that I am responsible for, which is now. I inherited seven increases, there were seven increases in fuel duty planned in the March budget last year. I have been able, because of the decisions we took on the North Sea oil companies, to avoid the duty increase which was due to take place later this week and to delay the RPI element of it and to delay next year's RPI increase which was also planned by my predecessor and to abolish the fuel duty escalator which had been put in place.

Q485 John Mann: So we are going to see an increase next year, we know that, and my petrol price—

George Osborne: You voted for it, Mr Mann. You voted for the budget that brought about these increases, unless you were absent.

  John Mann: My petrol under your Chancellorship has gone up by £10, £10 to fill up. But for other people, say white van men, it has gone up by £20 under your Chancellorship.

George Osborne: But if you are not prepared to take responsibility for the things you vote for and do not in any way believe that you are responsible for those decisions, so be it, but I happen to believe that as a Member of Parliament we should take collective responsibilities for the things that we vote for and we can legitimately say that we do not take responsibility for the things we vote against.

Q486 John Mann: Well, as I say I voted to reduce the VAT on petrol but that is a separate vote and a separate issue and you have chosen not to do so with your budget. I mean do you agree with Kensington and Chelsea Council who in addition to what you have done to the motorist are also putting on an additional premium on diesel in terms of parking permits, your flagship authority? I think you referred to it in your budget speech.

George Osborne: I think Kensington and Chelsea Council is much better at making decisions about Kensington and Chelsea than I am and they should be allowed to get on with it.

Q487 John Mann: But you were praising them in your budget speech, so a stealth tax there for the motorist, for the small businessman with the white van on top of the £20 to fill up that you brought in as Chancellor. Will we see under your—

George Osborne: A couple of minutes ago it was £10. It is high inflation.

John Mann: White vans are bigger than cars. I do not know if you have ever driven one. Will we see under your Chancellorship petrol going above £1.50?

George Osborne: That depends on the oil prices.

Q488 John Mann: Would you regard that as acceptable, if petrol went over £1.50 a litre?

George Osborne: What I said very clearly in my budget speech was that neither I nor any British Government can be responsible for the international oil price. What we can be responsible for is the taxes that we levy on oil and I guess as Members of Parliament we are responsible for the votes we cast about those taxes that we levy on oil.

Q489 John Mann: So will we see, under your Chancellorship, petrol going up over £1.50?

George Osborne: As I say, Mr Mann, I am not in charge of the world oil price. What I am in charge of are the taxes. I have made a decision which was to delay this year's RPI increase, cut duty by one penny and to abolish the escalator. What I can say is that petrol duty, by the end of this week, is going to be less than it would have been if your votes had carried the day.

Q490 John Mann: The small business people, who are the engine of growth, the one thing you and I agree on, are having to pay to fill up their vehicle to do their job under your Chancellorship £20 and you are not prepared to say, if that goes up another £20 that is unacceptable. How will those small businesses, the white van man, how will they contribute to the growth in the economy when you are hitting them so hard on petrol and if it goes up further you will not be prepared to commit to do anything about it?

George Osborne: Without going over the ground about the things we have respectively voted for, with fuel duty, I will just point out the duty they pay will be less than if your votes had carried the day. The second thing I would say is that for small businesses generally in this budget there are things like extending the rate holiday, the rate relief holiday, which again you voted to come to an end—

Q491 John Mann: Have you run a small business? Have you run a small business, Chancellor?

George Osborne: A couple of small companies.

  Chair: Give him a chance to finish.

George Osborne: Sorry.

  John Mann: I was asking whether you had run a small business?

George Osborne: Me personally, no, I have not.

  John Mann: Petrol prices, and diesel prices in particular, are fundamental to vast numbers of small businesses in this country. That is what is killing them at the moment.

George Osborne: That is why I have taken £2 billion out of the oil industry, which Mr Hosie is very concerned about, in order to reduce the duty and stop Mr Darling's duty rises that were coming down the line, and I have tried to rebalance hydrocarbon taxations as well as taking other measures to help small businesses, like a cut in the—

  Chair: One last question.

George Osborne: And the rate relief holiday.

Q492 John Mann: Do I take it that you are not going to do anything about the fact that under your Chancellorship, for a white van man to fill up it is already £20 more every time they fill up than when you came in and may well go up further? Do you intend to address this problem for that sector of the economy?

George Osborne: What I have done, Mr Mann, is make sure that under my Chancellorship and assuming I can carry the votes in Parliament, petrol will be 3 pence a litre less than would have been the case if your votes had carried the day.

John Mann: And 3 pence more than it was when you came in.

Q493 Jesse Norman: Thank you, Mr Chairman. Speaking for tens of thousands of people in Herefordshire I can tell you we massively welcome the action the Chancellor has taken on fuel prices, which is going to make a huge difference to people living in rural areas and I must say I deplore the tendency of the Committee to get dragged into this kind of ridiculous party political discussion when we are trying to debate issues of substance.

  John Mann: The issues of substance are what businessmen are able to do, to enable them to run their business.

  Jesse Norman: If I may ask the Chancellor, in the little time that remains, a question about the fiscal deficit which he has very interestingly and rightly targeted in his fiscal mandate. Has it not also been of some importance to you, Chancellor, to look at the stock of debt as well as the structural deficit and the overall fiscal deficit? I noticed that the public sector net debt rises even under the austerity measures that have been taken from £759 billion at the outturn of last year to somewhat over £1,300 billion at the end of the period and that obviously has a huge interest cost.

George Osborne: Yes, it does and that is why I supplemented the fiscal mandate, which is a cyclical measure, with a debt target to get debt falling as a proportion of national income, which I think is a good way to measure debt, by the end of the period, by 2015/16. So that is a supplementary target if you like and that is because I thought it would be quite extraordinary to get to the end of this Parliament and still have our national debt rising as a proportion of GDP.

Q494 Jesse Norman: On this side, the question of where growth is going to come from, we have received a lot of testimony in this Committee that essentially says that growth is really set on a five-year horizon by the policies and structure that one has inherited. There can be macro shocks, one way or the other, there can be short-term demand-lead growth which seems to be ruled out by the amount of debt that we have. Would it be fair to say that the growth plan that you developed has at least as much to rely on in the longer term as it does in the short term?

George Osborne: I think it is a combination of measures. Obviously some of these measures will take longer to come into effect, some of the planning changes are not going to transform the British economy overnight, but I think they will have quite profound effects over time and supply side changes to the economy are quite difficult to achieve, but I think are very rewarding and very long term in their effect. Tax measures can often have immediate effect, we were talking just about some of them recently, but I think if they are not accompanied by supply side improvements to the economy they will not have a lasting effect.

Q495 Jesse Norman: Turning to a hobby horse of mine, there has been great public concern about the costs and the inflexibility and the lack of transparency in the Private Finance Initiative and I note with great interest the work the Treasury has done alongside the Ministry of Defence and the Department of Health and in its own thinking about reducing costs and generating efficiencies. Could you just tell the Committee what you would like to see in terms of an ideal outcome looking backwards perhaps at what has been done and also looking forwards, given that we have an inquiry happening in this area?

George Osborne: Yes, well I think a lot of work has to be done really on PFI because an awful lot was signed up to and we are going to be paying for it for a long time. So the total cost of PFI to the Government, if you discount present values, is about £121 billion and it is quite clear that quite a lot of contracts were entered into without a high regard on the public sector side at least to value for money and the industry contractors have done pretty well out of the arrangements. We have a good test project underway with the Queen's Hospital in Romford, we have taken one contract, we are going to look at it and see if we can renegotiate it and that might open the way to further renegotiations. But I thought rather than rushing into a general renegotiation we would start with one specific project, see what we can achieve with that and then use that as a template.

Q496 Jesse Norman: But that would be, as it were, a basis for a fairly unflinching look at possible sources of value for the taxpayer?

George Osborne: Yes.

Q497 Jesse Norman: Thank you for that. On another final hobbyhorse of mine, in Herefordshire we have dozens of pubs which are under threat of closure at the moment and of course they are lifelines, alongside the primary school and local post office and shop, of villages. Has the Treasury ever looked at the question of rebalancing duty as between the off trade and the supermarket trade and on to the on trade or the pubs? Because I think that given the value of the pub as a place for supervised drinking, particularly for younger people, that would have tremendous social benefit as well as reviving some of our villages.

George Osborne: We have considered it and we remain open-minded and we are very happy to try and work on plans, if they could prove workable and legal. I know that France has tried something similar and it took them many years to reach a successful outcome with the European Commission.

  On duty, on alcohol duty, I have done a small rebalancing of higher taxes on super strength beers and lagers and reducing the tax on low strength beers, but otherwise I have basically stuck with Mr Darling's alcohol duty increases for the Parliament. But the small business rate relief which we have extended for another year, at quite a considerable cost, around £300 million, does help I think from memory around 14,000 pubs. So I am not claiming this is going to be the be all and end all but nevertheless that is help that we have been able to provide to pubs.

Q498 Jesse Norman: Thank you, Mr Chancellor. I have a question for Mr Nicholas, if I may, which starts from an article that appeared this morning in the Financial Times describing the Treasury's metamorphosis from a gleaming Rolls Royce into a spluttering Trabant. Is that a description you recognise at all? It is quite hard-hitting in criticisms of some of the positions that Treasury did take or did not take in the period before 2008?

Sir Nicholas Macpherson: I do not think I recognise Mr Stephens' suggestion. In this as in many other things I often focus on what the Chairman of the Treasury Select Committee says, and in a recent interview he said, "The Treasury is a great institution", and I do not disagree with that; "It needs to be clear both about the scope and the limitations of its role" and I think that is also very important too. So Mr Stephens seems unduly obsessed with the Treasury. He has been going on about Trabants and I suspect many of his readers cannot remember what a Trabant is, but this has been a recurring theme over many years.

Mr Love: It is making a comeback, the Trabant.

Sir Nicholas Macpherson: Is it? I am grateful for that.

Q499 Mr Mudie: Chancellor, in this budget how much have you factored in for the take from the 50 pence tax rate and whatever that figure is, how did you arrive at how many people are you imagining are earning over £150,000?

George Osborne: I think these days the OBR makes these estimates and audits these figures. I think they have assumed around 150,000 people are paying it. They have identified that there was potentially some forestalling of the 50 pence tax rate, so before it came into effect last April some people brought forward income into the previous financial year and that is, they think, one of the principal causes of the borrowing being slightly less than forecast, but what I said in the budget was that we would look at—basically we are not going to be properly able to answer your question until we have the self-assessment forms in and then we can assess whether the amount of money raised by the 50 pence is what was forecast and they will not come in until January.

Q500 Mr Mudie: I accept that, but that is the 2010/11 budget you are talking about. I understand until the self-assessment forms come in you cannot, but we are talking about the budget that you have put on the table today. You must have a figure in. Now the past Chancellor had I think £2.5 billion or £3 billion the following year. Are those figures that you have put into your budget?

George Osborne: They have not changed, but I should stress they are not my figures, they are the OBR's figures.

Q501 Mr Mudie: They are Mr Macpherson's figures, are they not?

George Osborne: They are the OBR's figures.

Q502 Mr Mudie: The figures I quote are Mr Macpherson's figures.

George Osborne: Before the OBR the Chancellor, my predecessor, took responsibility for the numbers. The OBR's view is that they would go with the previous estimate, since there was no evidence to suggest that that needed to be changed, and that we will await the self-assessment forms to see what the number is.

Q503 Mr Mudie: So it was £1.3 billion the year we are in, £2.5 billion the year we are going to get in on Friday and £3.3 billion the following year. That is billion, so that is a considerable amount of money. Now are you saying, Mr Macpherson, when Alistair Darling put them in with the help of you and your very good staff, you must have calculated how many people. Do you recognise the Chancellor's figure, 150,000? Is that all the people who earn above £150,000 in this country, 150,000 or do we have the figures mixed up?

Sir Nicholas Macpherson: I do not have the figures in front of me but obviously the previous forecast was the Government's forecast. The Treasury advise, Ministers decide, and it would be inappropriate for me to get into the territory of advice.

Q504 Mr Mudie: Well, that is terrible. Mr Macpherson, you are the Permanent Secretary. Are you telling the Treasury Select Committee that Gordon Brown or Alistair Darling put figures in that were not cleared by your officials, because that is a very serious charge? Let us be clear what you are saying.

Sir Nicholas Macpherson: I am not saying that at all but if I started giving you a running commentary on the advice, just as if I gave a running commentary on the advice I gave the Chancellor for this budget, I just cannot—

Q505 Mr Mudie: You have presented a budget and every pound in that budget matters. We are talking about £7 billion income in that, which is considerable. Now I am simply asking do you stand by those figures and as the Chancellor says, they were inherited from the last Government and so I ask you, you are the Permanent Secretary, so they are okay, are they not? Then I ask you how many people did you base it on? That is all I am asking. It is no major figure, no controversial figure. You anticipated in this year we are in now getting £1.3 billion from the 50 pence. Right, how many people did you anticipate were going to pay that?

Sir Nicholas Macpherson: As I say I can give you the number. I can remember there was extensive discussion with the Committee at the time about the assumptions underlying that costing and inevitably these costings are speculative. We now have an independent office for budget responsibility—

Q506 Mr Mudie: But it will not be half a dozen, will it? It will be a considerable number of people who are earning above £150,000?

Sir Nicholas Macpherson: Absolutely.

Q507 Mr Mudie: Chancellor, there is speculation from quarters in the Coalition Government from the Deputy Prime Minister and the Business Secretary that when you do your review in January you will find there is no revenue from that and that they are doing plan B for you, which is a mansion tax. Is there speculation in the Government that there will be no revenue from this tax when you do the review next year?

George Osborne: First of all, I really need to answer questions on what is in my budget rather than what is not in my budget.

  Mr Mudie: I am having a hard job with you on that, even.

George Osborne: But I stick to what I said in the budget speech about this, which is that I thought we should ask the Inland Revenue to assess, when we get the returns in, what the revenue is. Because this Committee has expressed or at least asked questions about it, the Institute of Fiscal Studies has asked questions so it is out there as a question, how much money has this raised, and there is only one way really to find out which is look at what comes in.

Q508 Mr Mudie: The reason I am asking this is avoidance, because you quite rightly said we have all got to share this burden, this burden has to be shared. Now you must have somewhere in the Treasury the number of people you anticipated, or even HMRC will give you, the number of people who earn over £150,000. Would you not share my view of real horror and quite unacceptable behaviour if those figures demonstrated that a fair number of those people had used methods of avoiding paying what they should be paying on that income?

George Osborne: First of all I agree with you that people should pay what they are asked to pay in taxes and we have not discussed this today but there is about £1 billion a year of anti-avoidance measures including for very well paid people who have used what was called disguised remuneration where they get a loan, the loan is for the rest of their life, it gets written off when they die and they do not have to pay any interest on it, and it is a way of paying people by avoiding tax. We are stopping that. When it comes to the calculation about the 50 pence tax rate, as I say we are operating, and the OBR has operated as I understand it, but you would have to ask them for confirmation, they are operating off the costing done by the previous Government. Obviously I am not privy to that because it is in the papers of the previous administration. I will certainly have a discussion with Sir Nicholas afterwards and I do not know whether we can provide a note on how that costing was arrived at—

  Mr Mudie: That would be helpful.

George Osborne: But it was not my costing, it was Alistair Darling's.

Q509 Mr Mudie: It would be simply, Chancellor, do you not agree, rather than saying the January review for a change of policy and the mansion taxes Mr Clegg wants rather than the 50 pence that you do not want for reasons that you can argue, if the take was not commensurate with the number of people who should be paying it I would have thought in the atmosphere we have now the British public would expect you to be looking very closely at how they were going to pay their full whack.

  Just finishing that, the Sunday Times did an article this Sunday that suggested one of the things in the finance drill the banks were using now as a loophole to have their heavy earners avoid paying tax. Now I know about the share side, the 50%, but the statement says they are now writing their bonuses in harder language that will allow the people to put them aside for three years and pull them back without paying this tax when you have pulled the 50 pence down. Now I would hope that you would share again my disapproval of that sort of behaviour and that you would be asking your officials to speak to the banks to make sure, and HMRC, that if we find that agreements have been reached just to avoid paying the proper tax, we take a very dim view of it.

George Osborne: We do take a dim view of people not paying their correct share of taxation and again one of the very early decisions that I took was to increase Capital Gains Tax from 18% to 28% precisely because there was a considerable degree of income shifting and with a Marginal Income Tax rate of 50% and a Capital Gains Tax rate of 18% which was what I inherited there were an awful lot of people turning their earned income into capital gain. Now 28% has helped reduce that very considerably and there are measures very specifically in this budget that raise a considerable amount of money, again audited and confirmed by the OBR, of around £700 million a year I believe, on this practice of disguised remuneration which might be what you are referring to, Mr Mudie, which has gone on for many years, which is this way of paying people through loans and basically avoiding taxes. So certainly I will take any suggestion from the Committee or from you personally, Mr Mudie, if you come across schemes that we need to shut down we will shut them down.

  Mr Mudie: A very nice offer, Chancellor.

Q510 John Cryer: Chancellor, you are planning to introduce a new price floor for carbon. I think in two years it comes in and it will start at between £12 and £16 per tonne. I have seen different figures, so do you know what the figure is for 2013?

George Osborne: It starts at £16 and increases to £30 by 2020 I believe.

Q511 John Cryer: Okay. Do you think that is likely to push up household bills?

George Osborne: Well, the forecast, and I think we were quite open about this in the consultation, is that as all green measures do it will in the short to medium term increase electricity bills and then cause them to fall, so by the latter part of this decade they are falling because of the improvements they have made to electricity generation and the shift they will have achieved in the way that electricity is generated for our country.

Q512 Chair: Sorry, can you be clear as to how we are going to get these falls in electricity prices?

George Osborne: The model shows an increase in electricity bills as the tax starts to come in, and then a fall in electricity bills some short number of years later, basically in the next Parliament, as the electricity generation sector adjusts.

Q513 Chair: It would be helpful to have a look at this.

George Osborne: I am very happy to send you the specific detail. I should say this was also included in our modelling on the impact of families.

Q514 John Cryer: We have a letter from EDF Energy which touches on the supposed falls in bills and that says, "It should result in lower bills in the longer term than would otherwise be the case because of the greater investment." Well, the energy industry's record on investment is not great, and so we are depending on the energy industry, which is going to have to pay more because of the carbon floor price. We are depending on them putting more money in when they are being asked to pay more.

George Osborne: What I would say on the rationale behind this policy is primarily it is an environmental policy and it is designed to try and provide some stability in the price of carbon, in other words put a floor below which it cannot fall, which will enable new industries that are trying to create low carbon forms of electricity generation, give them some certainty about future investment. I have made this argument myself on a number of occasions but certainly the green movement has also made this argument, which is if you just cap-and-trade systems you can have very sharp fluctuations in the price of carbon. It can either drop to zero or dramatically increase depending on whether quotas have been met.

  With a carbon price floor as well as the European cap-and-trade system, you are basically providing electricity or power generating companies with some kind of certainty for future investment plans and that enables them to undertake the very, very substantial investment that is required in our electricity generating sector because it is pretty old at the moment and needs replacing.

Q515 John Cryer: That is my point, that it requires enormous investment, but you say that you do modelling on it—

George Osborne: But this will help, the carbon price floor will help because if you are creating, for example, an offshore wind farm as opposed to a new coal-fired power station you know the carbon price floor will give you a competitive advantage, all things being equal, over the coal-fired power station.

Q516 John Cryer: That is a colossal investment. You said that you did some modelling which shows that the price will fall eventually.

George Osborne: Well, not just eventually, in the quite near term. I said by the end of this decade.

Q517 John Cryer: By the end of this decade, and in the shorter term what will be the price increase?

George Osborne: I will send you a note on it, I think from memory the average increase was £16 in an electricity bill.

John Cryer: For?

George Osborne: Per household.

John Cryer: Per household, okay.

George Osborne: But I should say that I think two-thirds of the cost of this is borne by businesses. I should say with this part, I was fairly or unfairly criticised for not consulting the oil industry. This has been out to consultation for a very long time and I think the previous Government were thinking along very similar lines, so this is something that is part of a broader change to our electricity market.

Q518 John Cryer: Do you worry that it might constitute a subsidy to the nuclear industry, who will not effectively be subject to it?

George Osborne: Again, it is not a question of a subsidy, I think there is an issue about low carbon electricity generation and part of our electricity market review has been to try and encourage low carbon electricity generation and this includes nuclear power, but if we are serious about—this is something we did all vote for Mr Mann, right, we all voted for reductions in UK carbon emissions over this decade, indeed a lot of it happened when the current leader of the Labour Party was the former Environment Secretary and we have voted for those things, we have committed ourselves to those things, we now have to make them happen and I personally believe that nuclear power is part of the answer, not, by any means, the whole answer, but part of the answer and, indeed, even if we were not trying to achieve a shift to a low carbon economy, our existing nuclear power generation, much of it is quite ancient now and needs replacing.

Q519 John Cryer: But nevertheless the nuclear industry has been lobbying for this like mad. Not just under this Government but under previous Governments, and it is because they see it, I suspect—I don't think they are being altruistic—effectively as a subsidy. Estimates are somewhere in the region of £2 billion.

George Osborne: What we are doing is we are pricing, externally, carbon. We are putting a price on something that currently does not have a price and we are accepting that it has an impact on people beyond just those who—the generator of it needs to bear a cost for the broader social impact or environmental impact of the carbon production.

Q520 Michael Fallon: Chancellor, when you announced your proposal to merge income tax with National Insurance, you said you would look at it, you circumscribed it by saying you weren't going to abolish the contributory principle, you weren't going to extend National Insurance to pensioners and to other types of income. Doesn't that rule out most of the potential benefits?

George Osborne: I wanted to avoid the elephant trap that Nigel Lawson helpfully reminded me of a couple of days after the budget.

Q521 Michael Fallon: But what potential benefits are then left?

George Osborne: I think there are very substantial operational benefits. I think there are two issues with running National Insurance and income tax alongside each other. The first is for the taxpayer, which is you basically have two taxes on income that are levied in different ways and at different rates and so on, and you could, if you were being completely idealistic about it, you would say the whole thing is a fantasy, let's get rid of it all, let's have a single rate of income tax. I don't think that is realistic, I think it would undermine the contributory principle, which I think is very important still in our state pension system. You might have dreams of doing this but they will never be realised.

  Nigel Lawson very explicitly looked at that in the last 1980s, as I suspect most Chancellors have at one point or another. There is a separate problem with National Insurance and income that I am trying to address, which is companies, small businesses and others, have to run two completely separate payroll systems. Now, if we can merge the operation of that so there is a single payroll but there is still a separate National Insurance and income tax, then we should be able to save for business very substantial sums of money and save for the taxpayer very substantial sums of money because we have to run two different systems in the Inland Revenue as well.

Q522 Michael Fallon: Why are you so keen to maintain the contributory principle? A lot of commentators think it is quite weak now.

George Osborne: I think as part of our state pension, and of course we also announced changes to our state pension, it is quite an important principle of our pension system, and there are other contributory benefits as well, there is a contributory job seekers allowance and employment support allowance, but particularly for our state pension I think there is a long established principle in Britain that if you work and you make contributions or indeed now if you are a mother and you look after children, you are making a contribution to your future pension and I think a Government should think long and hard before it abolished that.

Q523 Michael Fallon: You have spoken of the benefits to business in not having to run two systems but you will recall Nigel Lawson's Green Paper in 1986 that said, and I quote, "The benefits of a combined charge would be unlikely to justify the ensuing upheaval." Are you more confident than he is that this will be worth it if you can align the two systems?

George Osborne: I might turn to the Permanent Secretary who was probably working in the Treasury at the time whereas I was at school.

Michael Fallon: I was here.

George Osborne: Right. What Nigel Lawson was seeking to do, as I understand it, with NICIT was considering merging the two taxes, having a single rate of income tax at 32% or whatever it would have been at the time, and he backed away from that for all sorts of reasons. What I am looking at is merging the way these taxes are collected, looking at the periods of charge, the bases of charge and whether we can have a much, much simpler system that for the sake of a business or indeed for the sake of the Inland Revenue as a single system but not get into should pensioners pay National Insurance. No, they shouldn't. Should we levy National Insurance and other forms of income, like dividend income? No, we shouldn't. Should we get rid of the contributory principle? No, we shouldn't. I just thought that was—if I bit of all of that, even if I wanted to, I suspect we wouldn't have moved off square one.

Q524 Michael Fallon: So you are planning to harmonise the systems as best you can without the final merger?

George Osborne: Yes, basically, and that was why I was very careful in my budget speech to say that I was merging not National Insurance and income tax but merging the operation of National Insurance and income tax.

Q525 Chair: Could I just be clear on one further point, which is whether you've examined carefully distributional impact that higher inflation might have and, if so, whether you've had any material prepared for you in the Treasury?

George Osborne: We have had plenty of discussions about impact of inflation on the economy, we have not published a distributional impact of—or not that I am aware of anyway—higher inflation, higher than expected inflation, on different income deciles.

Q526 Chair: The reason I raise that is that in your correspondence with the Governor you have made it clear that you are running a tight fiscal policy to make room for the MPC to keep interest rates low, and this is has large distributional effects. You very kindly—and I think it has been extremely valuable for a wider public—published extensive distributional information about your budget measures on the fiscal side, but there is also the counterpart to this on the monetary side where the decisions you have taken in aggregate are having considerable distributional effects. I wonder whether you might be prepared to take a look at that?

George Osborne: I am very happy to take a look. The only thing I would note is that the Governor in his speech—

Chair: I am thinking about borrowers versus—

George Osborne: Yes, I know. I would say the Governor in his speech identified the causes of inflation being largely external or one off and so I think it would be, and I would say this, unfair to somehow characterise my policy as allowing higher inflation and the Governor himself asked the question if he had increased rates last year would that have had a material difference on inflation given the causes of that inflation as he identified them. So I don't think it is quite the trade-off that you present to me.

Q527 Chair: Fair enough. A last question I would just like to raise with you is this Green Book on growth can be variously characterised as an effort at simplification and freeing up business to get on with the job on the one hand, and then in other places it could be seen as the introduction of a host of micro intervention measures, which could constitute or be described as tinkering and meddling with the incentives to business. I am sure you will not want to caricature what you are doing as either one or the other of those particularly, you would want to say that you want to intervene where necessary but otherwise keep out of the way, so I won't bother to ask you the question. But it would be hugely helpful—and some of them are already costed—if you could ask officials to go through the Green Book and cost the tax foregone of the tax expenditures and add up the public spending in the Green Book. There will be some savings too. To see what the net overall effect is of the Green Book measures.

George Osborne: I will certainly undertake that, but the point I would make is what I am trying to seek here is supply side, reforms to British economy to make it more competitive, to make it more balanced and, of course, time will tell whether that succeeds.

  If I could just say one thing, Mr Tyrie also, this Committee asked me to consider, with the creation of the OBR, creating non-executive directors of that body as well. That was one of your recommendations and today we are going to advertise for two non-executive directors. Mr Chote will be involved in the selection process, but I just wanted to let you know that the advert has gone out today.

Q528 Chair: Thank you very much for that. Since you have raised that point, there is one further issue then, which is that one of our recommendations that was strongly felt around this table was that we should have a review of the way the body is working after five years and that that should be conducted by somebody who is wholly independent of the OBR and reporting to us, and able to think tabula rasa rather than just saying, "Is this okay as it is, broadly speaking?" We haven't been able to elicit that as a concession from the Government during the passage of the Bill and I am wondering whether you might be prepared to take another look at that issue.

George Osborne: Again, I don't have anything against reviewing its operation after five years. I would want to seek Mr Chote's views as well. I think our objection was putting things—unnecessarily as we felt—on to the face of the Bill.

Q529 Chair: If you are prepared to give me an oral commitment now that would be quite enough, Chancellor.

George Osborne: Provided Mr Chote is content, I would have no objection.

Chair: That is a long way forward. Thank you very much indeed for coming today, and have a pleasant flight out to China, and back again.

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Prepared 9 April 2011