UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 350-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

JUNE 2010 BUDGET

Thursday 15 July 2010

RT HON GEORGE OSBORNE MP, SIR NICHOLAS MACPHERSON

and MR MARK BOWMAN

Evidence heard in Public Questions 196 - 324

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Treasury Committee

on Thursday 15 July 2010

Members present

Mr Andrew Tyrie, in the Chair

Michael Fallon

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Jesse Norman

David Rutley

John Thurso

Mr Chuka Umunna

________________

Witnesses: Rt Hon George Osborne MP, Chancellor of the Exchequer, Sir Nicholas Macpherson, Permanent Secretary, and Mr Mark Bowman, Budget and Tax, HM Treasury, gave evidence.

Q196 Chair: Chancellor, thank you very much for coming. You have brought Mark Bowman and the Permanent Secretary, Sir Nicholas, along as well. This is our first opportunity to cross-examine the Chancellor. As I say, we are grateful to you for coming along. I would like to get straight into the questions. We are intending to run this until 12.20, if that is agreeable to you, so that you have time to get away to business of the House this afternoon. I would like to ask you about the fairness agenda aspect to the Budget. In constructing this why were you content to allow your measures to hit the bottom 10% harder than most of the rest of the income scale, apart from the top 20%?

Mr Osborne: My overall objective, of course, was to create a set of measures that were broadly progressive. The challenge when you are doing fiscal consolidation is that there is inevitably a focus of public expenditure, like welfare spending, towards lower deciles. I did everything I could to mitigate the impact of that by increasing, for example, the child tax credit. The bottom 10% of incomes includes groups of people such as students who have irregular income patterns so the figures for the bottom 10% are somewhat distorted.

Q197 Chair: Are you saying they are dodgy and we cannot rely on them?

Mr Osborne: No, I am just saying that in any income distribution in the bottom 10% there are always going to be categories of people who have low incomes but, for example, relatively high expenditure. That is why among the tables we produced we also produced the impact of the changes in indirect taxes on incomes as assessed by expenditure.

Q198 Chair: Chancellor, there is a group here between 16,900 net income and 38,400, that is the middle seven deciles, they are paying proportionately less than the bottom decile. Is that fair?

Mr Osborne: First of all I would make a broader point which is the thing that is most unfair to the lowest paid in our society and the most vulnerable in our society is when a country loses control of its public finances. The whole purpose of the Budget is to get back control of the public finances. It has been a point made by politicians across the political spectrum in Britain over the last 15 years that a loss of control of the public finances impacts those at the lowest end highest. I have sought to mitigate the impact of that by taking specific measures. Obviously certain measures that I was able to take, for example increasing the income tax thresholds for people on the basic rate, do not impact on the bottom 10% because these tend to be people who are not paying direct taxes. That is why deciles two, three, four, five and so on benefit from the income tax changes.

Q199 Chair: The point that I am making, Chancellor, and I am very grateful to you for publishing chart A2 and that is a great step forward, is the fact is that on the basis of your own data you are forcing the poorest decile to take the strain more than the middle seven deciles and the whole of the middle income band in Britain. That does not strike me as fair. That strikes me as unfair. Does it not to you? These are people in work with reasonably good jobs, many of them, and they are finding they are taking less of the strain than the bottom decile, than the poorest, who you said you were going to protect.

Mr Osborne: As I say, Chairman, the bottom 10% includes categories of people who have low incomes but would not necessarily be regarded generally as the poorest in our society, such as students who have relatively high expenditure but low incomes and, therefore, they feature in that bottom decile and the impact of the indirect taxes is clearly relatively high on them because of their propensity to spend more. That is why we have included another table over the page. If you break the population up by expenditure distribution you can see that the impact of indirect taxes is very clearly progressive and the lowest decile pay the lowest.

Q200 Chair: Is it not also the case that table A2 excludes a lot of things that are going on in the Budget, such as cuts in housing benefit, cuts in disability living allowance and in-year changes to tax credits? All of those will also hit lower income groups hardest will they not, Chancellor, and therefore does not chart A2 understate the impact on the poorest?

Mr Osborne: It does not include a number of things, I accept that, for example measures to freeze the council tax, measures on the pensions tax, which hit people at the top end of the income distribution. There are a number of measures not included. What we have sought to do, and this is the first time any Chancellor has ever published a table like this, is to the best of our ability use the measures that can be modelled most effectively across the income distribution to produce this table. I accept it does not include every measure but there are measures, as I say, that affect people right at the top end of the income distribution that I have not included as well. Of course, there might have been a political temptation for me to do so in order to advance my argument but I resisted that temptation.

Q201 Chair: I hope you agree it would be helpful, although it would be difficult and I agree it is not an easy piece of work to do, if you could come back to us with that chart amended as best you can with a number of assumptions to take account of the effects of HB, disability living allowance, tax credits and any other area that you think needs to be taken account of so we can get a more considered view about what the impact of these measures really is. Would you be prepared to do that? At the same time would you be prepared to tell us what proportion of the bottom decile - not now but in writing - are students in that category where you said that bottom decile was a distorted figure?

Mr Osborne: Of course I am very happy to consider these things. I would make the observation that I did consider them in quite some detail before the publication of the Budget. Mr Bowman has drawn my attention to the evidence that Mr Chote gave to your Committee in which he said: "It is very difficult to allocate to specific households the impact of things like cuts to housing benefit, disability living allowance and in-year changes to tax credits". Our approach has been almost identical to the approach of the Institute for Fiscal Studies. Really what I have been seeking to do anyway is get the Government to a place where it is publishing the kind of information which is available the very next day for the Institute of Fiscal Studies. This was already considered but I am very happy to consider it again.

Q202 Chair: Thank you. Is that a commitment to have another go at sending us another table, Chancellor?

Mr Osborne: I am making a commitment to consider again whether it is possible to allocate to specific households some of the benefit changes and, indeed, what the impact of ---

Q203 Chair: Consideration is something short of a commitment.

Mr Osborne: I do not want to commit to something which it may not be possible to do.

Q204 Chair: Okay. If it is not possible you can write to us and explain why. I have in front of me Mr Chote’s evidence, the evidence you have just referred to. He goes on to say as a matter of fact that the measures taking all of these facts into account are regressive, not progressive as you suggested in your evidence just now and as you have said repeatedly.

Mr Osborne: Mr Chote ---

Q205 Chair: In fact, he emphasised. I said, "Just to clarify, are they regressive?" and he replied, "Regressive, that is right".

Mr Osborne: There is a difference of opinion here. I have included things that I am going to ask the House of Commons to vote on, so I have not unreasonably made the assumption that as Chancellor the things I am going to ask the House of Commons to legislate on are the things that I am responsible for and if you take those as a collective package it is progressive across the income distribution.

Q206 Chair: Could I ask you briefly about the row over the OBR. Do you agree with Sir Alan Budd that the Prime Minister’s use of these employment statistics at Prime Minister’s Questions was inappropriate?

Mr Osborne: I am not exactly clear that Alan Budd put it like that.

Q207 Chair: I have got what he said in front of me here if you want me to read it out. Anyway, do carry on.

Mr Osborne: The point I would make is that the Prime Minister was, like everyone else that day, reading out the information produced by the Office for Budget Responsibility and, of course, subsequently they produced further information this week. I do not think you can fault the Prime Minister for reading out published statistics.

Q208 Chair: When did he get them?

Mr Osborne: He received them when they were published, when they were made public.

Q209 Chair: Did you or the Treasury have any contact with Number 10 about these statistics since we now know they were in the Treasury five days earlier?

Mr Osborne: First of all, on Friday I was aware that the OBR wanted to publish these numbers. I made absolutely clear to my officials that it was up to the OBR to publish what they wanted to publish and up to the OBR to determine the timing of the publication. I note that, again, Sir Alan in his evidence to you absolutely refutes any suggestion that there was any pressure put on him over the publication of these numbers. I might further add that the very idea that a government publishes these numbers is in itself pretty revolutionary. These numbers existed for the previous government but are not publishable unless members of the previous administration would like them to be published. No pressure was put on him, it was entirely his decision when to publish them. Once we were aware of Sir Alan Budd’s decision of course we informed Number 10 that there was going to be information coming out.

Q210 Chair: Did the Prime Minister have that information beforehand? Had you briefed him of it or had the Treasury briefed him of it, or had officials briefed Number 10 of it?

Mr Osborne: To my recollection he did not have the information as published until it was published.

Q211 Chair: Did he have the substance of that information in order to prepare for Prime Minister’s Questions?

Mr Osborne: He was aware once the OBR had made their decision that they were going to be releasing this data that they were going to be releasing this data. At the time there was a lot of speculation, I remember, because of the leak of inaccurate Treasury material.

Q212 Chair: The reason I ask these questions is this has thrown into question the independence of the OBR which has been drawn into what has been perceived to be a party political dispute at a time when perhaps you should have been bolstering its credibility.

Mr Osborne: Can I just say something about that? First of all, of course it is a matter of regret to me that anyone has questioned the independence of the Office for Budget Responsibility. The evidence that Sir Alan gave to this Committee I hope goes some way to putting to rest the conspiracy theories that some people have wanted to cook up in this area. If one takes a step back and asks oneself is it likely that a government would want this kind of information to be produced for its own political benefit the answer is no, we are doing this in the interests of transparency and there is a reason why the previous government kept this information secret. For me, the whole purpose of creating the Office for Budget Responsibility has been to give confidence in the statistics produced by the Government and for the Office for Budget Responsibility to have complete independence about what numbers it publishes and when it publishes them. My purpose now is to put this on a statutory footing. I do not know if it is appropriate for me to say something about my thoughts in this direction, or would you like me to do that later?

Q213 Chair: It would be helpful if you put that in writing, Chancellor, because we are taking evidence on that subject next week.

Mr Osborne: There is one time sensitive issue which I would just like to draw to the Committee’s attention which is that tomorrow we will be advertising for a permanent head of the Office for Budget Responsibility, and indeed from now the job application will go up on the Treasury’s website and will appear in The Economist magazine tomorrow and we hope to have applications by the middle of August. What I would propose to do, of course subject to your approval, is to give this Select Committee a veto on the person nominated by the Chancellor of the day. I think this will be the first time that any select committee has ever had a veto on an appointment. Obviously it is entirely up to you whether you will want to take up that offer, and if you deem it appropriate it will be put in the statute which I propose to present to Parliament later this autumn because I want there to be absolutely no doubt that this is an independent body, that this person has the support and approval of the Treasury Select Committee in undertaking that work, that they come here to give evidence. I also agree with Sir Alan’s recommendations that the Office, now it is going to be put on a permanent footing, moves out of the Treasury - it was simply not possible to do that in the first couple of weeks of a new government - and has a core secretariat that enables it to question any figure put to it by the Treasury.

Q214 Chair: That is a very helpful announcement and we will consider it carefully. I would expect my Committee to treat it favourably.

Mr Osborne: I would be rather disappointed if you did not.

Chair: We will do our best, Chancellor.

Q215 Mr Love: You have just ruined the first three questions I was about to ask you!

Mr Osborne: You can ask them anyway!

Q216 Mr Love: Chancellor, are you a gambler? On Tuesday the OBR confirmed that it was more likely rather than less likely that your Budget would cause a double-dip recession. Do you acknowledge that you are taking an enormous risk with the British economy?

Mr Osborne: No, I do not acknowledge that. I would say I am reducing the risk faced by the British economy. When I became Chancellor of the Exchequer the country had the highest budget deficit in the G20, the second highest in the European Union after Ireland, the credit rating agencies of the world had raised serious questions about Britain’s credit rating and our market interest rates were similar to those of Spain. In the last eight or nine weeks there has been a general view around the world that Britain has taken decisive action to deal with its budget deficit. Of course, some people are now waiting to see whether these measures actually take effect, and it is perfectly reasonable for people to ask that question but the fact that we passed the VAT measure through Parliament this week is a strong sign that we can deliver on this. I think it is worth drawing the Committee’s attention to what has happened to market interest rates for the United Kingdom since the March Budget. Ours have fallen by half a per cent and Spain’s have increased by half a per cent. That is a very significant monetary stimulus to the economy and also has helped to deal with the tail risk which the OBR draws everyone’s attention to in its report but says it is not possible to put in its growth forecast.

Q217 Mr Love: There has been a great deal of concern that you are going too far and too fast, especially since you are trying to rebalance the economy from the public sector to the private sector. Do you accept those concerns? Are you not worried that the private sector will not take up the challenge as quickly as necessary?

Mr Osborne: The first point I make, Mr Love, is that the growth forecast that I have published, the OBR’s growth forecast, is significantly less optimistic than the one produced in the March Budget. The OBR is forecasting a sustained and stable recovery. It is forecasting a rebalancing of this economy away from the public sector more towards the private sector and I think that is very necessary when the public sector is currently consuming almost half of national income. We also want to create over the longer term an economy that is not so dependent on household debt, overleveraged banks, over indebted government, but where we invest more and we export more, and I think that is going to be a more stable economic model for this country going forward.

Q218 Mr Love: I do not think anyone is arguing against the need to rebalance the economy for the private sector to take up, I think the question is the heroic assumptions that the OBR are making first of all about the increase in net exports but also about the increase in business investment. It would seem that as the economy and certainly the international environment in which we are operating gets more and more gloomy by the day it gets harder and harder to deliver on these assumptions.

Mr Osborne: As I say, first of all I think we have reflected the economic realities of the world better, and indeed the economic realities of the UK better in the growth forecast that this new Government has published rather than the 3¼% growth that the previous government was forecasting. Indeed, there have been some issues raised today about whether that was indeed the previous Chancellor’s forecast at all. Second, on investment and exports, and these are the OBR’s forecasts so ultimately it is for them to justify them - my responsibility is to make sure that I believe they are a credible and appropriate basis upon which to base a Budget, and I believe they are - the export growth is in fact forecast to be less than was the case coming out of the previous recession in the early 1990s and the investment growth was certainly exceeded in some of the middle years of the last decade. It is also the case that plenty of companies in the UK, and this is a good thing, have built up strong reserves on their balance sheet, so I think there could be some domestically driven export growth.

Q219 Mr Love: Let me probe into that a little. Recent figures from the United States’ economy, one of our biggest trading partners, have become more gloomy and employment and various other issues show the American economy appears to be slowing down at the present time. We all know and have talked at great length about the difficulties in the euro economy and the devaluation of the pound that we hoped would lead to increased exports may not be as great as once assumed. Are you not concerned not just that we will not get the increase in exports but more importantly, perhaps, that we will not get the increase in exports in time for the very strict Budget that you have imposed today?

Mr Osborne: I would say that the biggest external factor out there has been concern about sovereign debt sustainability. Again, I am very conscious that the United Kingdom has the second largest budget deficit in the EU and that when I go with the Prime Minister to the G20 we represent a country with the largest budget deficit around the table. The Budget has gone quite a long way to reassuring people that we are serious about dealing with this very large budget deficit and I think that has been reflected in the market interest rates that the United Kingdom and, more to the point, United Kingdom businesses enjoy. It has always been my view that monetary stimulus is the most powerful tool available to stimulating growth. It is striking, and I am sorry to repeat myself, that the interest rates for UK businesses are a full 1% lower than they are for Spanish businesses and that was not the case at the time of the March Budget. There is a stimulating effect that is driven by confidence that the UK is able to deal with its fiscal problems.

Q220 Mr Love: Will that be quick enough is the real question that we are asking. Let us take the issue of fiscal consolidation. We have seen fiscal consolidation not just in those countries where it is absolutely necessary in southern Europe but we have also seen it in Germany, one of our major trading partners. Is there not a real danger that these combined fiscal consolidations will lead to a slump in demand that will inevitably lead to slowing in growth worldwide and there will be an impact on the United Kingdom? In those circumstances, should that happen, do you have a Plan B?

Mr Osborne: The first thing I would say is that surplus countries, of course, can do more to contribute to global demand and we welcome the decision that China has made on its currency. To be fair to Germany, particularly given the long history of that country and its concern for its fiscal sustainability, they have a relatively moderate pace of fiscal consolidation. Ours is broadly similar for the first few years to the pace of consolidation being undertaken in the United States. I would say that there are other potential stimulating forces out there in the world that we could draw on. For example, further progress on a trade deal would be enormously helpful. I come back to what is the biggest risk sitting out there at the moment and it is the sovereign debt risk, a concern that people previously had about the liquidity and solvency of banks transferred to a concern about some of the countries that stand behind those banks. In the United Kingdom we have taken the measures necessary to reassure people that we can deal with these problems. I would also draw people’s attention, indeed it was on the radio this morning talking to the Secretary General of the OECD, who has that broader picture that looks at all the different countries, Mr Gurría was making the point that the response in different countries is different and the growth forecast for the UK produced by the OBR is pretty consistent with the forecast produced by the IMF, the European Union and various others for the UK, which was not the case when I came into office, there was quite a considerable difference between the growth forecast which the Treasury was adhering to and the one that most people thought was appropriate for the UK.

Q221 Mr Love: But you do not have a Plan B?

Mr Osborne: The plan is to have confidence in the British economy and its ability to pay its way in the world. Of course, if you look at the fiscal mandate that I have set it is based on an assessment of the structural deficit to allow automatic stabilisers to operate. I have also built a degree of caution into the fiscal mandate by seeking to achieve it a year earlier. I was absolutely clear, and indeed this was the external advice I was receiving as well and the British public were receiving from the Governor of the Bank, that the first and most pressing issue to deal with was to produce a credible plan for the budget deficit. I would also draw the Committee’s attention to the fact that the measures I announced are staggered over three or four years. I think people have assumed they all come into effect in July 2010 and of course they do not, the VAT rise is next year and some of the welfare measures take effect in 2012 and 2013, so it is also a plan not just for this year but a plan for this Parliament.

Q222 John Thurso: I want to follow on from Andy Love’s question regarding investment and growth, but can I first ask you a more parochial question. The Red Book on page 26 at paragraph 122 contains the welcome news that the Government are going to look at a fuel duty discount, which you may recall I have been pressing for nine years. My question is what confidence can I have that the same officials who had been advising the last government that was not possible for nine years will now advise you it is possible?

Mr Osborne: I think the confidence could perhaps stem from the fact that my Chief Secretary represents a seat, and I do not know whether it neighbours yours ---

Q223 John Thurso: Nearly.

Mr Osborne: ---which is a very large rural seat in Scotland and so also has his own particular interests in this direction to make sure that the work is properly carried through and there is a proper analysis of the options.

Q224 John Thurso: Can I urge that that happen quickly because with the VAT increase of 2.6p per litre, which will come through as a result of VAT and we are already paying a premium, this measure is about the only thing that can alleviate that.

Mr Osborne: We absolutely take this commitment seriously. It was mentioned in the coalition agreement and it is mentioned here in the Red Book. We will return, no doubt, to this Committee to explain our decision.

Q225 John Thurso: Coming back to the Budget, history will judge the success or failure of this Budget on whether or not the growth comes in from the private sector which has already been touched on. What measures are there in the Budget that will bring about that increase in the private sector and what measures in other departments that will aid growth in the private sector?

Mr Osborne: There are a whole series of measures which for perfectly understandable reasons did not get the same amount of public attention as some of the measures designed to reduce the deficit. There are a whole string of measures. For example, there is a reduction in the headline rate of corporation tax from 28 pence to 24 pence, a penny a year across the Parliament. There is a reduction in the small companies’ tax rate that was set to increase under the plans I inherited and I am reducing it to 20 pence. There is an innovative proposal, which I freely admit has not been tried before by government but we hope it works and will see if it works, and that is to have regional National Insurance rebates for new businesses created in parts of the country outside the south-east and eastern area. There are a series of measures. Alongside those we are publishing a paper on credit conditions later this month. The Green Investment Bank is a very important tool for stimulating investment in a low carbon economy. My colleague, Jeremy Hunt, is looking at increasing the broadband capacity of the United Kingdom. There is a whole suite of policies designed to stimulate investment and send a sign that Britain is open for business. That headline reduction of corporation tax, which would give us the fifth lowest corporation tax rate in the G20 and maintain our position as having the lowest rate in the G7 as other countries reduce theirs, which would not have been the case if we had stood still, those things have been noticed and picked up around the world and I hope they encourage investment into this country.

Q226 John Thurso: In his evidence to us on Tuesday Mr Dicks made the point that 80% of investment will come from 20% of companies - the other 80% of companies, of course, being largely SMEs - yet any study of lasting growth suggests that it is the SMEs that need to grow and invest. Ultimately the projections for net investment, private sector investment, are based on the mathematical application of the formula by the economists, which is that if you take it away from the public side the resource will go to the private side. My concern is that we need the SMEs to grow and that will only happen with affirmative action through BIS. Have we really got sufficient resource available to BIS to make that happen?

Mr Osborne: We have taken the measures on the small companies’ tax rate, which I think were helpful. As I have already said, we have taken measures to say to any new business setting up outside the greater south-east of England that the first ten jobs they create will have up to £5,000 less National Insurance paid on them. We are taking some measures through the tax system but my and your colleague, Vince Cable, is also working on further supply side reforms, for example on the regulatory burden, that will precisely encourage the small business sector. I certainly agree with the premise of your question which is that a strong and vibrant and innovative and growing small business sector is a very important part of the economic model we want to create for the future. Whilst it is the case that the largest companies are going to undertake the largest investment projects for employment and the stability of the economy going forward, we also want a vibrant entrepreneurial small business sector.

Q227 Andrea Leadsom: Chancellor, just following on from what John has been asking you, capital gains tax is obviously an optional tax in that people can take steps to avoid it by not selling or whatever. Since we do need a recovery primarily in the SME sector in order to rebuild our economy, CGT is now completely changed again and businesses are saying to me that they desperately need clarity, security of tenure and certainty for the future. These are long-term investment decisions. Could you talk to us a bit about how you came to the conclusion that 28% was the right rate? Secondly, is this now going to be a permanent feature or is there going to be some sort of review and, if so, when and what will trigger that?

Mr Osborne: I certainly regard it as permanent as any tax change a Chancellor can make. I am not planning to revisit this decision in this Parliament. I faced a situation when I took office that the capital gains tax regime was being abused, that the 18% rate that I inherited was so much lower than income tax rates of 40% or 50% that a multitude of schemes had been created and were being created to shift income that there was a hole in the tax system that needed to be plugged. I also felt, as indeed did other members of the Government, for reasons of equity an 18% capital gains tax rate was quite difficult to justify when we were going to be asking from other parts of the population, other parts of the income distribution, for people to make a contribution to closing the deficit that it was appropriate to look to increase capital gains. I then faced a series of options which were do I completely redesign the system, do I try and introduce indexation, do I try and introduce the taper again, and I took the view for precisely the reasons you talk of in order to give a greater sense of stability to take the existing system and make some changes to the rates. For example, of course, the 18% rate for higher rate taxpayers went up to 28% and I kept the 18% rate for basic rate taxpayers, and that is about half the people who pay CGT. I also increased the entrepreneurial allowance to £5 million which, in answer to Mr Thurso’s questions, encourages entrepreneurial activity, and I kept the annual allowance. I kept the shape of the regime but I changed the rates and I thought that was the best approach to the problem that I inherited.

Q228 Andrea Leadsom: Do you feel that it will be necessary to measure the impact on new entrepreneurial activity because clearly that is a disincentive to some people in their consideration about where to take their business and so on? There have been a lot of representations that 28% is already a big disincentive to do just what we are trying to achieve.

Mr Osborne: The first point I make is that the entrepreneurial relief is a very considerable one, so it is only people who are going to be making more than £5 million of lifetime gains in creating a business who would face the 28% rate whereas, for example, someone selling a second home will now face the 28% rate. After all, it was 24% just a couple of years ago so I do not think there will be many people whose fundamental life planning would have been thrown entirely off course by this. I accept it is a tax increase and no one likes a tax increase. With the higher entrepreneurial relief I have taken into account the concerns that you have expressed.

Q229 Andrea Leadsom: What about short-term gains? Surely there would have been an argument to introduce a 12 month or even longer rate similar to the marginal tax rate for the individual?

Mr Osborne: I looked at a taper and, of course, the last but one Chancellor of the Exchequer introduced a taper and, to be frank, it was abused. From memory, but I am happy to correct this if I have got this wrong, around 80% of the tax ended up being paid at the taper because people just rolled forward their gains. Of course the policy objective of stopping people shifting their income in the short-term is a good one. When I actually looked at the practicalities of reintroducing the taper, which the previous government had introduced and then abolished, it struck me as (a) introducing a degree of complexity which was unnecessary and (b) not likely to achieve the policy objective which you express.

Q230 Andrea Leadsom: Thank you. Would the Committee be able to see the work that supported the decision to stick at a 28% capital gains tax rate? You said in your Budget speech that was the magic figure at which revenues were maximised. Would it be possible to see that research?

Mr Osborne: I can certainly provide the Committee with a note and also in greater detail my explanation for why I decided not to proceed with indexation allowances or with taper.

Q231 Andrea Leadsom: Very quickly coming on to bank credit, which again is another area that is incredibly important to SMEs and the area where credit is not getting through, could you tell us quickly what more can you do to encourage bank lending to SMEs specifically? Secondly, would you be considering doing something with the state-owned, currently taxpayer-owned banks to force through better credit for SMEs?

Mr Osborne: You are absolutely right that this is a very considerable concern, not just in this country but in a number of Western democracies at the moment. I do not think there is a silver bullet. I do not think there is one thing we can do that is going to suddenly ease up credit conditions. There are a number of measures we can take and I will be setting these out in more detail and other proposals we have in this Green Paper. First of all there are government schemes that can be expanded. In the Budget I expanded the Enterprise Finance Guarantee Scheme by £200 million that is targeted at small businesses who cannot get access to credit. Second, and I know the Select Committee is going to be looking more broadly at the structure of UK banking, we want to encourage more competition in the UK banking sector which was consolidated and has become a hell of a lot more consolidated as a result of the last two years. I welcome new entrants provided they are appropriate for a banking licence. I think we should be encouraging new entrants. I have said that when we come to dispose of the government shares in the Royal Bank of Scotland and Lloyds that we should have broader considerations, and I think this is a point that the Chairman of the Select Committee has made as well, and that is why I have established the Independent Banking Commission, which is also looking at competition issues in the sector. The final point I make is that the regulatory uncertainty at an international level about the kind of capital, liquidity and leverage requirements that the G20 and the Financial Stability Board are going to ask about is not helping matters, which is why the UK has worked very hard in the G20 to say, "Let’s tell the world what these requirements are going to be this autumn" even though there is quite a long transition to those requirements so that banks have no excuse for hoarding capital.

Q232 Andrea Leadsom: How important is global coordination of changes to bank regulation?

Mr Osborne: I think it is incredibly important to avoid regulatory arbitrage. In other words, people moving banks to different jurisdictions to try and avoid these capital requirements which I regard as the most important but also the liquidity and leverage requirements. Having made a decision in the G20 last year to produce these things what we have tried to do at the G20 meetings I have attended in South Korea and in Canada is get a move on, get an agreement at the Seoul Summit for what they should be and then have an appropriate transition but understanding that you cannot expect everyone to meet those requirements overnight.

Andrea Leadsom: Thank you.

Q233 David Rutley: Unemployment is one of the key areas of focus in the Budget and what we can do to create jobs. Sir Nicholas, I am keen to understand what is the basis for your confidence in achieving the growth in employment that has been set out in the coalition plans.

Sir Nicholas Macpherson: I think it has been set out in the Budget document and by the OBR. The economy is now recovering and employment, as the figures released yesterday confirmed, is rising and the conditions look pretty good for the labour market. There are good grounds for confidence.

Q234 David Rutley: If you start looking at the figures in more detail, and maybe the Chancellor can comment on this as well, and you look at the shape of it you will see that the growth in employment is very much focused on part-time jobs. If I am not mistaken the number of part-time workers who would like a full-time job has now increased by 39% in Q4. What confidence can we have from the proposals that have been set out in the Budget that are going to address that so that we have long lasting, enduring and sustainable jobs that are created?

Sir Nicholas Macpherson: I will allow Sir Nicholas to comment. By the way, to the day it is the 25th anniversary of his arrival in the Treasury so we should congratulate the Permanent Secretary.

Q235 David Rutley: I remember working with him!

Mr Osborne: He has seen quite a lot of things. A feature of any recession is that people move on to part-time work and partly that is a reflection of labour market flexibility. Of course, coming out of recession into recovery you want people who are working part-time who want to be able to work full-time, and of course there are people who want to stay working part-time, to have the opportunity to do that. One of the measures which I have not mentioned so far, but essentially one of the largest items that we had in the budget, is an increase in the employers’ National Insurance threshold by £21 which will make it cheaper to employ people earning less than £20,000 than it is today and, indeed, cheaper across the income spectrum compared to the plans that I inherited from the previous government. We are making it easier for employers to take people on and reducing the burdens on employment and as we come out of recession into recovery we want to see people who want to to move into full-time work. Again, the Office for Budget Responsibility does forecast falling unemployment from 8% to 6% over the period, which is a welcome forecast.

Sir Nicholas Macpherson: I think one of the really striking things looking back over the last 25 years is how under successive governments the labour market has become more flexible and with each passing recession the speed of adjustment in the labour market has increased. As I say, that reflects measures under successive governments.

Q236 David Rutley: I suppose the challenge now is one of the segments of the employment market that has been most hard-hit through the recession into this fragile recovery is the young men and women in the country. As you have had a chance to reflect since the Budget took place, and having viewed the comments from various external commentators, are there any other steps that you think should be taken to tackle the particular issue of youth unemployment?

Mr Osborne: Yes, I do, Mr Rutley. The big policy change here is a more effective welfare system. My colleagues in the Department for Work and Pensions are working on the Work Programme which we believe will provide more effective help than existing schemes have to help in particular young people get into sustainable jobs, in other words not to find themselves constantly recycled through government training programmes and possibly hold work for 13 weeks only to drop back into unemployment in the 14th or 15th week. Using the plan that was originally developed by Lord Freud for the previous government, but not implemented, and being less theological about the division between DEL and AME, and by increasing the diversity of providers for Welfare to Work schemes and increasing the incentives on them, I think we will have better targeted and more effective support for younger people who are currently unemployed. You are quite right to draw everyone’s attention to them because we have one of the highest youth unemployment rates in Europe.

Q237 David Rutley: Just picking them more strategically and building on some of the comments from other colleagues about what we can do on the supply side and focusing on the open for business element of the Budget, one of the elements of your speech was about what we can do to build on the proposals from James Dyson. Clearly as we think about the long-term strategic aims of our competitiveness we have got to get into the higher tech end of the spectrum and focus on the knowledge base. Again, can you give any further details about what is going to happen and what links are going to be going on with BIS to make this agenda really come alive?

Mr Osborne: James Dyson’s specific proposals are now under examination within the Government and in particular his ideas around the research and development tax credit and how to make that more focused on smaller and medium-sized business and the higher end of the value chain. The Green Investment Bank and the broadband changes we are working on will help as well. I think we also have to go out and sell ourselves a bit more. The Prime Minister is leading a large delegation to India, an incredibly important export market for the future, in order to try and kick-start a better trade relationship with India. I think it is a striking fact about the British economy that we export more to Ireland than we do to Brazil, India, China and Russia put together. There is certainly scope as the world grows and these emerging economies become larger and become nations of consumers for British exports to those markets.

Q238 David Rutley: I think there is more to be done and one of the fundamental barriers to our success as a country is looking at what is going on with the labour market, particularly new entrants coming in from schools, from university. You are probably aware with AstraZeneca having major facilities in both of our constituencies that the biggest concern they have got is getting bright young talent that is interested in science and engineering and it is just not there. Too many of our children are focusing on wanting to be celebrities and footballers, but when you go to China they find that people want to do science and engineering, that is their love. Have we really got the policies in place under the coalition to make that happen?

Mr Osborne: Well, Mr Rutley, you are the Member of Parliament for Wayne Rooney so you need to be a little bit careful about slagging off footballers!

Q239 David Rutley: I was not slagging off footballers, I was talking about aspiration, Chancellor.

Mr Osborne: Lots of people aspire to be a successful England footballer, including potentially the England football team! You make a very good point about how we need to invest. I think it is accepted across all political parties that we need to be more aggressive about promoting certain parts of the economy and certain skills in the economy, and so on. If I could be allowed a one minute general observation. I think born out of the industrial failure of the 1970s came a view that we could be entirely neutral about the structure of the British economy and this was initially a Conservative Government view, it was embraced by the previous Labour Government wholeheartedly, and now there is a recognition that we cannot be entirely neutral, that we want an economy that is based on more investment and exports and where we move up the value chain. Particular industries like the pharmaceutical industry, which employs very large numbers of people in both our constituencies, is an important strategic industry for the UK, so we are not necessarily picking one company but we are understanding that sector is important and there is a whole set of things you can do around the tax treatment of intellectual property, the physical infrastructure of the country and access to markets, and so on, and export promotion that would help that industry. Let us be frank, when the chief exec of Goldman Sachs used to turn up in this country he would go and see the Chancellor of the Exchequer within 24 hours of arriving in the country, whoever was the Chancellor, but the head of a big pharmaceutical company would turn up and they would go and see the junior health minister who did not necessarily have the same economic clout in the government. I am trying to change that and understand that there are big sectors, like pharmaceuticals, aerospace, creative industries, which are really important for this country where we already have a comparative advantage, so we are not starting from scratch, which we should be seeking to promote without doling out large sums of money and getting back to some of those mistakes that were made in the past, but nevertheless taking the appropriate tax and regulatory changes that can help support those sectors.

Q240 John Mann: Chancellor, over this Parliament with your assumptions on the economy what is going to be the net increase in the numbers of people working in the private sector?

Mr Osborne: The Office for Budget Responsibility forecast, I think, a 1.6 million increase in private sector employment. Net of changes to the public sector that is a 1.1 million increase. That is their forecast.

Q241 John Mann: 1.6 million net increase in the private sector?

Mr Osborne: Yes.

Q242 John Mann: People working in the private sector.

Mr Osborne: Yes.

Q243 John Mann: What is the net reduction in the numbers of people in this Parliament who will be working in the public sector on your assumptions?

Mr Osborne: The Office for Budget Responsibility forecast is half a million.

Q244 John Mann: You agreed with those in terms of the assumptions you have made within this Budget?

Mr Osborne: Those are macro assumptions and, of course, the Spending Review is still to happen. Tomorrow I am going to be receiving the first tranche of submissions from the government departments and it is clear there are measures we can take that can mitigate job losses. For example, the Office for Budget Responsibility have found that the two year pay freeze that I have proposed for the public sector for those earning more than £21,000 is the equivalent of 70,000 jobs. I think there is going to be a set of decisions for us as a country that will need to be taken this autumn.

Q245 John Mann: The Chartered Institute for Personnel and Development’s economist, John Philpott, is estimating that the job losses annually from increased productivity in the private sector will be about half a million a year. What is your assumption in terms of job losses from productivity within this Parliament?

Mr Osborne: I rest on the overall forecast. I am not going to disaggregate.

Q246 John Mann: No, you do not because you have built in increases in productivity in terms of your income tax take, particularly in the latter end 2013-14.

Mr Osborne: And earnings growth across both. I think this was the subject of some questioning earlier on in the week.

Q247 John Mann: As your officials said two days ago, earnings growth is more than double projected inflation so productivity growth is significant. What is the assumption on the reduction in jobs that you have built into your estimate through productivity growth?

Mr Osborne: If that figure is available I am very happy to write to you.

Q248 John Mann: So you do not know?

Sir Nicholas Macpherson: Obviously it is the OBR who forecast these things, but in a dynamic labour market productivity increases generally are a resource of growth in employment over time.

Q249 John Mann: Let me ask the Chancellor something the OBR has not got a view on and that is the half a million job losses. The average earnings of those people you have an estimate on and the new 1.6 million jobs, they are new jobs in the private sector, are going to be relatively low paid jobs. What is the gap per person on the income tax take that you have assumed between the loss in the public sector job and the new private sector job?

Mr Osborne: I do not think we have made that assumption because I think you are misunderstanding the forecasts. The forecasts are macro forecasts and the income tax receipts were not disaggregated between the private sector and the public sector.

Q250 John Mann: So you have not built that into your income take forecast?

Mr Osborne: The income tax forecast, as has been the case in previous Budgets although, of course, they were done internally to the Treasury, are based on overall assumptions about earnings growth in the economy, not trying to disaggregate between the public and private sectors.

Q251 John Mann: So nowhere within the projections on income tax take and other tax take, but income tax take in particular, have you built in any assumption on the average earnings of the public sector job that goes and the average earnings of the new private sector job that is created?

Mr Osborne: Ultimately the forecast questions should be directed at the independent Office for Budget Responsibility, which is the whole point of creating one.

Q252 John Mann: You are the one who is forecasting income tax take. It is your job.

Mr Osborne: The point I would make is that the income tax forecast is based, as it has always been, on an assumption about earnings growth across the whole economy.

Q253 John Mann: You have not done that. That makes your figures on income tax take less credible then. I will not ask if you agree.

Mr Osborne: Less credible than whose ---

Q254 John Mann: If they are not made ---

Mr Osborne: --- since they are done on the same basis that they have always been done?

Q255 John Mann: You are presuming in the past people have not reduced large numbers of higher paid public sector jobs. You are presuming that private sector jobs will be the same earnings as public sector jobs.

Mr Osborne: The March Budget, produced by my predecessor, had built into it an assumption of a very substantial reduction of public sector jobs. There is a big difference: he did not publish it and I have.

Q256 John Mann: I am asking you about your Budget.

Mr Osborne: Indeed. The only reason you are able to ask me these questions is because we made these statistics public.

Q257 John Mann: No, the reason I am able to ask you questions is because ---

Mr Osborne: You are trying to say that somehow what I have done is not comparable with previous Chancellors. The previous Chancellor had an assumption for public sector job losses that was ---

Q258 John Mann: Let me ask you another question and see if you can answer this. What is going to be the net migration into this country in the five years in terms of new jobs?

Mr Osborne: The Office for Budget Responsibility is using the current ONS estimate, which I think is 140,000, for net migration into the country annually.

Q259 John Mann: So a 700,000 net increase?

Mr Osborne: Obviously government measures taken by this new Government to try and restrict the flow of economic migration will have an impact on that number.

Q260 John Mann: You have used demographics as a key base of your budget assumptions and on the ONS statistics, and I have studied them in some detail, if you take the base population net of any migration changes there is no increase in the working population over this Parliament. You are assuming 700,000 net new migrants working in the British economy, which is pretty much the same as under the 13 years of the last government, in your assumptions?

Mr Osborne: I think it is perfectly reasonable, unless one wants to turn the Office for Budget Responsibility into the entire Office for National Statistics, that instead of it going off and making its own immigration forecasts it relies on the immigration forecasts produced by the Office for National Statistics. Of course, this Government, unlike the previous government, has a plan to put a cap on economic migration.

Q261 John Mann: This is a critical point, Chancellor. Included in the tax take is it not the case that if you do not have a net increase in migration of 700,000 in this Parliament your figures in terms of reducing the budget deficit disappear into the ether because you are relying on the income tax take from these new migrants who are built into the new job statistics that you have because unemployment only comes down by half a million? Built into the statistics you are relying on your assumptions on budget deficit on a net increase as projected, as confirmed by the Chief Economist, of 700,000 net new migrants working in the British economy.

Mr Osborne: Maybe I am more optimistic than you are about the ability to get some of the five million Britons who are on out of work benefits into work rather than relying on immigration for all of our job creation. That was one of the imbalances of the economy that I inherited.

Q262 John Mann: But you have no control over European Union migration at all, no control whatsoever.

Mr Osborne: That is a matter for regret since my party proposed derogations, but we have to deal with the situation as we inherited it.

Q263 John Mann: We are dealing with your Budget. 700,000 is the projection of net migration, new people working in the British economy in this Parliament, which is comparable to the net migration over the last 13 years. That is the stimulant for growth that you are basing your projections on and that is the basis on which you are making your projections on reducing the budget deficit. Is that not correct?

Mr Osborne: What I am working on the assumption of is that our Welfare to Work reforms will increase the incentives to work in this economy, will get people off out of work benefits, on which too many people sit permanently, and ensure there are British people of the skills and ability to take on some of the jobs that previously went to people who came as economic migrants to this country.

John Mann: That is your hope, but critically that is not your economic assumption within this Budget. Thank you, Chairman.

Q264 Mark Garnier: Chancellor, a bit earlier you answered Mr Thurso’s question when he was talking about tax rates and the reduction of the corporation tax. You said that you hope that will encourage direct inward investment into the UK from overseas. I would like to ask you to expand a bit more on that in terms of how you anticipate, as a Government, going out and attracting direct investment? Secondly, also quite crucially, do you see this as being active investment in terms of bringing jobs or do you see this as being passive investment in terms of things like property and investment in equity markets?

Mr Osborne: I would hope it is both. The headline rate of corporation tax has become something of an advert for countries around the world, as Ireland demonstrated when it had its very low corporation tax rate of 12½%. It is not possible and was not possible in this Budget to get us to a 12½% corporation tax, but I think by setting out a path from 28% to 24% and doing it a penny a year we hope to crowd in some investment early on on the expectation of the lower rates. I think it is a good thing and a straightforward message to sell to the world that we are cutting our corporation tax rate rather than increasing our business taxes. There is also an effort required to roll up your sleeves, get out there, sell the country and attract investment. There is no doubt that certain countries, often quite small countries like Ireland and Singapore, have been very effective at targeted efforts to attract particular inward investment into their economy. Whether, as you put it, it is passive or active investment I think we want to attract both sorts and make this a place where people want to come and do business.

Q265 Mark Garnier: One of the problems with Ireland is that it has been attracting a lot of financial services and when the bubble blew up on the financial services sector that caused great problems for Ireland, so that is a short-term fix if you like. Singapore had a slightly different type of economy which started off in manufacturing and had a book, a paper written about how to create a city state and Lee Kuan Yew developed it from that and it has been a great success story, but Great Britain is a much bigger area. What do you think are the great selling points that this country has that will attract people to set up businesses that will employ people?

Mr Osborne: I think there are some great selling points we have. We are an open trading economy. It is agreed across the political parties of this country that we are not protectionist and that is a massive advantage we have over many other European and Western economies. The rule of law here is strong and people feel confident that they are not going to be discriminated against simply because they are a foreign investor. We have a flexible labour market. We have universities which we want to make even stronger, but it is a good thing that ten of the top 100 universities in the world are located in this country. There are lots of things we can sell about the UK. Obviously there are big challenges but we are addressing those. The quality of secondary education is something we are seeking to address with education reform. The endemic problems with low skills in our economy we are seeking to address as well. There are the questions over the public finances, which we have spent a lot of time talking about. There are obviously problems but we have got some big selling points and that is partly reflected in the way the markets are looking at the United Kingdom at the moment.

Q266 Mark Garnier: On top of the negatives we have got the burden of regulation which is quite heavy in this country.

Mr Osborne: Indeed, and it has risen very considerably. That is why my colleague, Vince Cable, is proposing this ‘one-in, one-out’ regulatory rule. We are seeking to reduce the burdens of unnecessary regulation on small businesses, for example. I think there is a broader point here which may be a lesson we can all learn from the financial crisis, which is it is not the quantity of regulation that is the issue, it is the quality of regulation. Financial services were a very heavily regulated sector, probably more regulated than almost any other with the possible exception of pharmaceuticals. There was a lot of regulation, even if it was applied with a light touch, the problem was no one was exercising any judgment in the system. It is not something we are talking about today but my proposed changes to financial regulation to put the Bank of England in charge of prudential banking regulation is so there is more judgment and less box ticking.

Q267 Mark Garnier: Can I change the subject slightly to financing the budget deficit and the gilt market. I was asking questions of Mr Ramsden earlier this week about the rating agencies and how important they are. One thing he said which I found absolutely extraordinary was that the credit rating agencies tend to follow rather than lead the markets overall which has slightly changed things round from where they used to be originally. This seems to be the tail wagging the dog. Which side of this equation do you think is more important? With the messages that you are delivering are you trying to satisfy the credit rating agencies or are you trying to satisfy the credit market?

Mr Osborne: What I am trying to do is make sure that British businesses and families can borrow at reasonable market rates and competitive market rates and obviously I want to finance the government debt. Those things are both made easier by keeping the country’s AAA credit rating which, as we know, has been put under question. The good news is that two of the three credit rating agencies responded very positively to the Budget and the third wanted to see whether this Parliament had the stomach to actually implement the measures. Things are looking quite favourable. From our point of view there was a very good announcement yesterday that the largest bond investor in the world, PIMCO, having previously put itself on instruction to sell gilts this year, has now changed that instruction and is going to be investing in gilts, and that is a good thing when you have got 149 billion of them to get away.

Q268 Mark Garnier: It is indeed. Professor Blanchflower said that the main danger to the UK’s credibility is when ministers spread fear in the markets and talk down the economy. Clearly the interest rates on gilt yields are now around the 330/340 basis point level which is lower than it was in January, but I would like you to comment on that.

Mr Osborne: It is worth looking at what has happened to the UK economy versus a whole host of other European economies, like Spain, Portugal and Italy, over the last few months when it was the case, for example, that with Italy we had identical market rates at the time of the March Budget and virtually the same was the case with Spain, but they moved in a different direction from us, so I think this new set of ministers has been instilling confidence in the UK and reassuring people that we have got a credible plan.

Q269 Mark Garnier: One final question. Have you ruled out a further round of quantitative easing?

Mr Osborne: That is a decision for the Monetary Policy Committee. The arrangements under which quantitative easing can take place were put in place by my predecessor, Alistair Darling, and I am not proposing to change that.

Q270 Stewart Hosie: In the evidence session earlier in the week the Chief Economic Adviser said: "A key lesson from the economic crisis is the need to find a way of curbing the potentially very strong pro-cyclicality of the financial sector". He said that the kind of levy, the bank levy, and the way it has been designed does contribute to curbing that potentially strong pro-cyclicality. I can understand if the levy takes 2.5 billion that is 2.5 billion less the banks have to underpin lending and if we were going to go for a counter-cyclic approach that would work if it required credit to be tightened, but I am at a loss to see how the levy taking 2.5 billion would work in a counter-cyclic way if we required to loosen credit from the banks. Would the rules on the levy be changed? Would the amount it was due to take be changed? How would that work if it was to work in a counter-cyclic way?

Mr Osborne: The most effective counter-cyclical tool available is capital ratios. The bank levy is designed to do two things. The first is to ensure there is a price paid for the implicit insurance that we all offer as taxpayers for the wholesale funding of banks, which became pretty explicit in the middle of the crisis. That is why, for example, insured deposits are not included in the tax base for the bank levy. It is, in effect, a tax on wholesale funding. One of the things we have learnt from the crisis is you do not want banks with very large exposures to wholesale markets, they need a more stable basis for funding long-term. We have stuck within exactly the parameters set out by the IMF. The IMF proposed two options for a bank tax if countries wanted to proceed with one. One was a financial activities tax, which we are looking at, and the other was this wholesale balance sheet tax. We have pursued the IMF model and, indeed, on the day of the Budget France and Germany, with us, made announcements that they were going to pursue something similar. The other reason, to be absolutely frank, was for reasons of equity. Asking the general population to accept a VAT rise, asking them to accept that there were going to be changes to welfare eligibility and the like, doing these things is a difficult thing for any government to do but I thought it would be totally inappropriate not to ask the banking sector to make a contribution as well. The position I inherited from my predecessor was that we would not introduce a bank tax unless all other countries had and I thought that was not appropriate, I thought it was perfectly reasonable to ask the UK banking sector to make a contribution for reasons of fairness and that was also why I did it.

Q271 Stewart Hosie: I understand the argument about equity and the technical issue about the levy being a tax to discourage activities in the wholesale market but, nonetheless, if a counter-cyclic approach requires the loosening of credit if the Government are not prepared to change the rules on the levy would they be prepared to look again at the funding model for the Asset Protection Scheme or the premia paid on the other paid for insurances on bank lending - intra-bank lending, commercial lending - which the banks pay at the moment?

Mr Osborne: Of course we can keep things under review, but I would make a broad observation that the most effective tool here is the capital liquidity requirements. They have a much greater effect on a bank’s ability to lend than, say, the bank levy does. That is why it is so important that we try and get an international agreement here. What is happening at the moment is the banks are hoarding capital partly in anticipation of potential future regulatory changes and the sooner we can have some certainty on that the less they are going to have to hoard capital.

Q272 Stewart Hosie: Let me move on to the issue of capital ratios. The reason I asked the first two questions was to get to this point. Would it not seem slightly incongruous if the prudential regulator said to the banks individually and collectively, "The capital adequacy ratios are now to be a little lower in order to facilitate more credit", which may be seen as counter-cyclic, but at the same time the amount of money paid towards the levy, the Asset Protection Scheme and the other insurances remain the same? Would there not be some contradiction between a counter-cyclic approach and a pro-cyclic tax base?

Mr Osborne: The argument that you advance is one that leads one to the conclusion that you should not have a tax on banks. For the reasons I have stated I think it is appropriate to have a tax on banks and I have tried to do it in a way that follows international best practice. When it is fully operational the bank levy is going to raise £2.5 billion and we made it clear that we are targeting a revenue sum rather than a particular rate because we think that is an appropriate contribution that balances fairness with the competitiveness of the UK banking sector. That sum of money, when it is put alongside some of the impacts of capital requirement changes, is relatively small. What is driving things at the moment is not so much the requirements of regulators but the requirements of the markets. The sooner we can reassure markets that the bank systems of Europe are stable, we get these stress tests which are coming on 23 July out of the way and people see them as credible and there is a plan to stand behind any banks that do not meet them, although I should say we are not expecting that to be the case at all in the UK, and the sooner we can get the G20 agreement the more the market’s expectations will come into line with regulator expectations.

Q273 Stewart Hosie: Let us move that further forward. Agreeing that the capital ratios are probably the main driver for a counter-cyclic approach if we need to get more credit into the system, additionally we have the European Banking Stability Fund coming which will be financed through direct contributions from the institutions that choose to be part of it and those contributions will be proportionate to the level of risk and their contribution to systemic risk. Could we have a situation where the prudential regulator here suggests lower capital ratios to encourage more credit into the system but the European Banking Stability Fund is insisting on higher contributions to take cognisance of risk and have two systems effectively working against each other? How would that be managed?

Mr Osborne: First of all, that is a proposal on the table, it has not been agreed. I was at Ecofin- at the beginning of this week and it was discussed there. The Council’s proposed text on the financial supervision arrangements merely says we are going to review that option rather than implement it because, of course, there are the kinds of issues about it that you correctly raise. I should also note that the Ecofin meeting welcomed the UK Budget having previously been quite critical of the UK’s position.

Q274 Stewart Hosie: So you are confident that if this proposal goes anywhere it will be managed in such a way that we will not get these explicit contradictions?

Mr Osborne: The issues you raise are very legitimate ones and would have to be answered if we were ever to head down that path.

Q275 Stewart Hosie: When are we likely to get some clarity or certainty of decision on the European Banking Stability Fund and its shape?

Mr Osborne: The current text that the European Council of Finance Ministers - Ecofin - is proposing merely has that we review the option of a European resolution fund. This text is now the subject of discussion with the European Parliament and the European Commission. We hope in September to have an agreed text and it will pass through Parliament, but I am pretty clear that the appropriate thing to do at this stage is merely to review the option than to implement it.

Q276 Jesse Norman: Chancellor, I very much welcomed your remarks on the fuel duty review earlier on, coming from a very rural constituency. Can I ask that amongst the pilot schemes you consider one in Herefordshire to go alongside the ones that are being contemplated in Scotland. My question goes to some of the remarks you were making earlier about trend growth in the economy. One of the things that is so striking is how unaffected that was over the last decade or more by the enormous wave of investment that has been made in the economy. You have talked a lot about some of the micro things that the Budget does on that. Can I move up a stage and ask about the overall level of tax finance spending and public sector productivity because both of those look like they are negative for trend growth and negative for productivity in the long run. Is that part of your economic philosophy to think in terms of trying to raise the long-term growth rate by moving towards a lower spending economy and one in which there is a higher productivity?

Mr Osborne: The Budget Red Book has an interesting mini essay on the trend growth rate on pages 20 and 21 which presents an alternative scenario to the one that was presented in the March Budget about whether there had really been an increase in the trend growth rate of the economy which then came down in the recession or, in fact, Britain had just stayed on its long-term trend growth rate. I am not assuming some spectacular improvement in the trend growth rate of the British economy. I would like to see that, of course, like everyone else on this Committee, and the ways one goes about doing that are trying to improve our education system, make our tax system competitive, make our regulatory system appropriate and so on. There are big structural reforms to the British economy which are required and which all parts of the Government are engaged in: educational reform, welfare reform and so on.

Q277 Jesse Norman: Thank you. This is a question really for Sir Nicholas. I think it is widely thought that the UK was inadequately prepared for the financial crash when it arrived and that was one of the reasons why our economic recession was as prolonged as it was and as deep as it was. Do you feel that the Treasury adequately exercised a degree of restraint over the previous Chancellor and the Prime Minister, or is it a cause of regret to you that you did not exercise more restraint?

Sir Nicholas Macpherson: I think as a matter of principle officials advise and ministers decide. I think it would be inappropriate to provide a running commentary on the private conversations between officials and ministers over the last few years. A more substantive point is I think there are huge lessons to be learnt from the economic and financial crisis and it is incumbent on all the major economic institutions in the UK to learn them.

Q278 Jesse Norman: Do you feel that the Treasury did what it could to prevent the, as it were, ramp up in public spending, consumer debt, housing bubble, those kinds of things? Do you feel you fought all the battles that were required to keep that situation under control?

Sir Nicholas Macpherson: If you are a Treasury official then fighting battles about public spending and fiscal policy is pretty ingrained. Sometimes you win and sometimes you lose. A really important point is one the which has just been made around trend growth. There is always a danger that you can delude yourself around trend growth and I saw that happening in the late 1980s and I have seen it happening again more recently. Caution and transparency should ideally inform economic policy formulation and I am very pleased to see plenty of that around at present.

Q279 Jesse Norman: In the specific Budget proposals on capital gains tax there is some concern that it has affected employee share ownership schemes of different kinds. Is that something that you might look to address in the longer term because - I suppose this is a question for the Chancellor - the new Government has got a tremendous emphasis on mutualism and exploring alternative economic models?

Mr Osborne: I think this is a point that Mr Fallon raised earlier in the week and we have sent a memo to the Select Committee. I did not think it was appropriate to expand the entrepreneurs’ relief to include some of the tax advantage share ownership schemes. It would have detracted from the revenue raised by the measure and there are already quite generous income and National Insurance reliefs.

Q280 Jesse Norman: But it does not betoken, as it were, a resistance to employee ownership?

Mr Osborne: No.

Q281 Jesse Norman: It seems to me the doors are very much more open than they were previously.

Mr Osborne: Very much so. This comes back to the questions I was answering earlier. When I was thinking of the capital gains tax changes I was trying to keep the changes as simple as possible rather than introducing a whole new regime and a whole new definition of entrepreneurs’ relief.

Chair: I thought for a moment, Sir Nicholas, when you said that you were very glad to see plenty of caution around at present that you were actually going to transform yourself into Sir Humphrey, but you got yourself back into your own skin just in time.

Q282 Mr Umunna: Can I start by returning to some of the questions the Chairman was asking about fairness and also the issue of transparency, Chancellor? I know I am going to paraphrase slightly, but in your Budget statement you very much were putting forward the message that you would be the model of transparency when it came to disclosing figures and what have you, were you not, Chancellor?

Mr Osborne: Given that I did not want to give a speech of Gladstonian length, I thought I would touch upon and mention all the significant changes rather than leaving them out of the Budget speech as had become recent practice.

Q283 Mr Umunna: You have said that your Budget is progressive and you repeated that in answer to the question earlier. I must say this Budget is rather tabletastic. You have included quite a lot of tables in your Budget Red Book but you have not included one that shows a distributional analysis that shows the impact of your Budget measures alone detached from the Budget measures introduced in March. Why is that?

Mr Osborne: That was a point I made earlier. I take responsibility for the measures that I am going to ask the House of Commons to vote on. You are leading to a question, I suspect, or implied in your question, at least, is the issue of the National Insurance rise.

Q284 Mr Umunna: I was not actually going to pursue that.

Mr Osborne: The National Insurance rise is obviously a substantive measure that the previous government proposed and had plenty of opportunity to legislate for but never did. We have made a decision to go ahead with the employee National Insurance rise and that is a conscious decision. We have made changes, for example, to employers’ National Insurance proposals from the last government and so will be legislating in a different way than the previous government would have done if they had got round to it. Therefore, that is a conscious, active decision, and I think it is appropriate to include that measure. After all, the person who is going to have to get up and make the argument is either myself or one of my colleagues in the Treasury.

Q285 Mr Umunna: Sure. Would it not be correct when you are saying that your Budget is progressive that actually what you are saying is that elements of the last Budget taken with your measures in your Budget are progressive? It is not an issue that your Budget alone has a progressive impact.

Mr Osborne: It is the case that my Budget does not have a recordable impact on child poverty numbers, so that is another example of its progressivity and that was using exactly the same child poverty model that the previous government created.

Q286 Mr Umunna: Why have you only chosen to show the impact of your Budget up until 2012-13? You said in answer to a question earlier that in terms of putting figures out there you have been adopting a similar approach to the IFS and the IFS are into all this table business as well. They, I am sure you have seen, have produced a table showing the impact going through to 2014-15. Why have you not done the same?

Mr Osborne: I thought 2012-13 was appropriate given that there are going to be subsequent Budgets which I hope to be presenting, although that is ultimately a decision for the Prime Minister. For example, the measures that I took on the child tax credit to increase that next year and the year after, there is always the scope to do further things in those directions in subsequent Budgets. It would be an inaccurate table going forward because it would not include potential subsequent announcements in subsequent Budgets.

Q287 Mr Umunna: Is it not the case, Chancellor, that you have actually put forward an inaccurate view of the impact of your Budget generally with the selected statistics that you have put in your Red Book? Robert Chote said, and I might as well quote: "The Budget looks less progressive, indeed somewhat regressive, when you take out the effect of the measures that were inherited from the previous government, when you look further into the future than 2012-13 and when you include some of the other measures that the Treasury has chosen not to model".

Mr Osborne: I have answered different components of that. The reason for not going beyond 2012-13 is that I have got a Budget in 2011 and 2012.

Q288 Mr Umunna: I understand the reasons.

Mr Osborne: I think people understand about this coalition government that we are very clear that fairness is a very important thing. We are committed to the child poverty ---

Q289 Mr Umunna: I am slightly conscious of my time. Can I ask you, would you provide the Committee with your own version of the tables that the IFS have produced showing the distributional impact of your Budget taken with the one before going through to 2014-15 and also produce a table that disaggregates the effect of your Budget from the March 2010 one?

Mr Osborne: I will certainly see if that is possible.

Q290 Mr Umunna: Thank you. Can I go on to ask you just a bit about the deficit and the timeframe within which you are looking to eliminate the Budget, the structural deficit which is a four to five year timeframe. Many of your Ministers have presented this as an economic necessity, that we have to do this. To take what one of your backbenchers said, needs must. When I put this concept to Roger Bootle earlier this week, he said: "I think this is where the political process intervenes because what the Government wanted to do was to eliminate the structural deficit within a Parliament. In straightforward economic terms I am not sure it would make a great deal of difference if the adjustment were over a longer period". Now is it not right that actually this is not an issue of economic necessity but it is actually an issue of political judgment to do it over this four to five year term?

Mr Osborne: It is a political judgment about what is an economic necessity, I guess. The Governor of the Bank made it clear within days of my appointment that the most important thing now is for the new Government to deal with the challenge of the fiscal deficit. It was clear on arrival that no-one believed that Britain had a credible plan to deal with the Budget deficit. The G20 subsequently called for countries with serious fiscal challenges, and after all we have got the biggest budget deficit of the G20, to accelerate the pace of fiscal consolidation. The OECD in a report well worth reading yesterday said that the Budget was an essential starting point for future recovery. I think there is quite a lot of international support for the view that Britain did not have a credible plan and has introduced one.

Q291 Mr Umunna: It is a question of political judgment ultimately, is it not, Chancellor?

Mr Osborne: Of course it is a question of political judgment about what is the right economic policy to pursue. It is at least worth reflecting on that this week we have discovered that my predecessor wanted to increase VAT and cut corporation tax. There are political judgments, it is just a question of whether you could deliver those political judgments through your Prime Minister.

Q292 Mr Umunna: There is a choice, that is what I am cutting at.

Mr Osborne: Of course there is a choice.

Q293 Mr Umunna: Is not the real reason why you are not prepared to countenance, say, dealing with the structural deficit over a longer period because your political strategy is to set this up as a choice in order to cut the structural deficit of having public spending cuts in departments or having welfare cuts? Either way you achieve your political aim which is to reduce the level of state activity in the economy. Is that not the real political strategy here?

Mr Osborne: No, it is not the real political strategy as you put it. I think it is worth reflecting that the plans I inherited involved a 20% reduction in departmental spending.

Q294 Mr Umunna: I am not talking about what you inherited. I am talking about the choices that are available to a Chancellor.

Mr Osborne: You are suggesting that somehow there is a partisan political judgment involved and I am pointing out that I inherited plans for 20% reductions in government departments, that £44 billion of the consolidation in departments comes from the previous government plans, I have added £17 billion to that, but in other words the judgment that I made, and my predecessor made, was that there were going to have to be public expenditure cuts. We now know, thanks to Lord Mandelson, that actually his judgments were remarkably similar to the ones that I have come to when it came to some of the tools in order to fill in the blank spaces that I inherited, such as increasing VAT, but obviously that was not made public before the General Election.

Q295 Mr Umunna: I want to come to some of your benefit changes, and I suppose it is related because it is related to credit rating of the country. You said that we have got a new set of ministers a few moments ago instilling confidence in our economy. Your Economic Secretary in the House of Commons on 24 June described our economy as an absolute basket case of an economy. Could you tell me how that will help our credit rating?

Mr Osborne: What I would take comfort from are the ---

Q296 Mr Umunna: Do you think it is good for the Economic Secretary to describe our economy in that way?

Mr Osborne: What I would take comfort from - I am not going to take your version of what he said ---

Q297 Mr Umunna: She.

Mr Osborne: The point I would make here is that let us look at what the world markets are saying about the UK economy today. They are saying that we are a better place to invest than many of our European competitors, the market interest rates are lower and they were the same as Spain’s and Italy’s but whereas Spain’s and Italy’s have increased in the last couple of months ours has fallen. Our market interest rates are a full ½% lower than they were in the March Budget. This is not a matter of political judgment, this is the markets out there making a verdict on the credibility.

Q298 Mr Umunna: I was not talking about what the markets are saying, I was talking about what your minister has been saying. Chancellor, what is the current rate of JSA per week?

Mr Osborne: Just over £60.

Q299 Mr Umunna: Can I ask you to explain, and I asked your officials earlier this week, why you are applying a 10% reduction in housing benefit to JSA claimants who have been claiming for more than 12 months, notwithstanding the fact they may have been doing, as many people in my constituency have been doing, everything they possibly can to get a job. How can you justify that?

Mr Osborne: First of all, I have enormous sympathy for people who are looking for work, and I want to do everything I can to create an economy in which they can find work and I want to create a welfare system that helps them find work. The housing benefit budget has risen by 50% to £21 billion. This is the Treasury Select Committee and I think it should take an interest in the fact that one benefit costs more public money than the Police Service and the higher education system combined.

Q300 Mr Umunna: Have you ever been on JSA, Chancellor?

Mr Osborne: No, I have not been on JSA. The point I would make is this: we have to find savings across the Government. If you do not start looking at housing benefit then where else are you going to start looking.

Q301 Mr Umunna: You could increase taxes.

Mr Osborne: With the greatest respect, I have not checked the voting record, you voted I suspect against a £14 billion tax rise yesterday, or the day before yesterday, the VAT rise.

Q302 Mr Umunna: Which is a regressive measure.

Mr Osborne: If you would like to propose to me, because so far no-one from your party has, the kind of substantial tax rises you would rather see then I am very happy to look at them, of course. With respect, we have produced a very large tax increase - we regret having to do this - which members of your party and perhaps yourself voted against. I have also looked for expenditure savings which, again, the previous government always said it was going ---

Q303 Mr Umunna: This is about reducing the benefit bill.

Mr Osborne: It is about two things. It is about reforming housing benefit so that it is fair and it encourages people into work. Second ---

Q304 Mr Umunna: A 10% hit on your housing benefit when you are struggling to find work, that is going to incentivise you even further to go and find work, is it?

Mr Osborne: As we know, housing benefit has a particularly high taper and I think these measures will encourage people into work.

Q305 Mr Umunna: Have you done any analysis of that, Chancellor?

Mr Osborne: The answer to that is yes.

Q306 Mr Umunna: Will you publish it? Will you put it in the House of Commons Library?

Mr Osborne: I am very happy to write to you about the housing benefit proposals, but I would make this second observation which is it was not the only measure we took on housing benefit. We have capped housing benefit payments at £400 per week and, frankly, I think it is difficult to justify to the very hard working people of your constituency that there are some people currently receiving over £100,000 a year housing benefit.

Q307 Mr Umunna: How many, Chancellor?

Mr Osborne: The total number ---

Q308 Mr Umunna: How many?

Mr Osborne: The total number of people over the £400 cap is around 5,000.

Q309 Mr Umunna: How many people claim housing benefit?

Mr Osborne: It is going to save this country close to £50 million. I completely understand if you do not feel this is the appropriate cut to make or that there is some other tax increase I should have introduced but, with the greatest respect, you have not proposed any to me. Unless you have got an alternative plan I will stick with the plan ---

Q310 Mr Umunna: You are here to answer questions from us. We are not here to answer your questions. You have come here and said this is a progressive Budget, it is not going to affect the poorest. I have just demonstrated to you that it will. You have just acknowledged that it is going to be very painful for people to take this hit but they have to take it because you want to reduce the benefits bill.

Mr Osborne: No. What I am seeking to do is to help create a welfare system that encourages people into work, to help the five million people who sit on out of work benefits in this country, to help the record number of children who grew up in workless households in this country. I am trying to encourage them into work, to reform welfare. I am also trying to save money out of a welfare budget that has ballooned and in particular one benefit which has gone up by 50%, that now costs us £21 billion a year and involves some people receiving a £100,000 a year ---

Q311 Mr Umunna: It is £5,000.

Mr Osborne: --- which is equivalent to the tax paid by 16 working people in this country just to fund one person’s housing benefit. You might believe that is acceptable, I do not and I have made these changes.

Q312 Michael Fallon: Chancellor, when you arrived in the Treasury on day one, what did you find? Did you find any detailed plans to deal with the deficit or reassurance the markets?

Mr Osborne: There was no plan to identify the savings that had been pencilled into the March Budget. The 20% reductions in departments, there was not a penny, as far as I could tell, assigned to that.

Q313 Michael Fallon: No work had been done on the spending cuts at all?

Mr Osborne: There had been work done in anticipation of a Conservative government. Obviously I am not privy to the papers that are prepared in anticipation of the election of a Labour government.

Q314 Michael Fallon: Were you not shocked?

Mr Osborne: I had come to suspect that there was not going to be a plan when I arrived, which is why we had done some preparation in advance. To be fair so had our coalition partners, not that we had expected to be in government together.

Q315 Michael Fallon: Could I ask you about the AME totals that you have helpfully forecast in table 2.3. You said this morning there is not going to be a theological division between AME and DEL in years ahead. Can you tell the Committee whether the AME totals you have put, the very large increase, over £100 billion between last year and 2015, what structural reforms they include or are those all awaiting the Spending Review?

Mr Osborne: Obviously subject to the last set of questions we have made some announcements on welfare savings and they are included in this. We have, as I have made it clear, held open the door to finding further welfare savings as part of the spending review, but we are not assuming that we can find those so we have scored those against DEL. Of course one of the biggest items, and indeed probably the fastest rising and largest item of AME expenditure here, is debt interest, which is a rapidly rising bill, and we were forecast to pay as a country in the figures I have inherited £67 billion a year in debt interest which is more than three times the housing benefit budget.

Q316 Michael Fallon: We should not assume in these figures any further welfare reform?

Mr Osborne: You should not assume them, Mr Fallon, but we are looking for them.

Q317 Michael Fallon: You are looking for them.

Mr Osborne: As part of the Spending Review.

Q318 Michael Fallon: The balance between AME and DEL, you said earlier this morning the division was not theological, that can still change then, can it?

Mr Osborne: I meant that in a different context. Certainly the answer to your question is it certainly can change if we can find further welfare savings. I should clarify when I said there was not theological about the division, what I was saying was that as Lord Freud proposed one could use anticipated AME savings to fund a DEL Welfare to Work programme which the Treasury had previously found very difficult to accept.

Q319 Michael Fallon: You would score it differently?

Mr Osborne: If you can pay your welfare provider by results and anticipate those results mean a lower AME expenditure, ie that you get someone off benefit, then you should be able to pay them upfront, which is a DEL payment.

Q320 Michael Fallon: Coming back to the question on capital gains tax, how else are you going to encourage employee share ownership given the increase that you have put on of capital gains tax? It is not much of an incentive for people to set up new schemes is it?

Mr Osborne: First of all, there are very generous tax advantages to employee share ownership schemes but I am very willing - I would do this anyway off my own bat - if the mood of some Members of this Committee is to go away and look at this and perhaps come back with further thoughts on how to encourage employee share ownership schemes.

Q321 Michael Fallon: The difficulty, it seems to me, is these are people who cannot decide or control when to realise their assets. Their company happens to be taken over, that is not a point of their choosing. They cannot adjust their liability.

Mr Osborne: That is true but of course there is an annual allowance which protects them for the first £10,100 of their gains. Many people in employee share ownership schemes are already exempt from capital gains tax.

Q322 Michael Fallon: You have not closed this off, you will look at this again?

Mr Osborne: I am very happy to look at it and get back to the Committee.

Q323 Chair: Chancellor, you very interestingly opened your remarks, or quite soon after coming, with the suggestion that we be given a power of approval over the chairmanship of the OBR. We will certainly consider that and I expect it will be favourably received by the Committee. It would be very helpful if you could also consider what arrangements can be put in place to enable that to be buttressed by a mechanism which would be triggered if this Committee had lost confidence in the Chairman of the OBR. I would not expect you to comment now unless you want to, but I think it would be helpful if some thought could be given to that question.

Mr Osborne: I am very happy to give consideration to that question. I would make an initial observation. The whole purpose of creating an Office for Budget Responsibility is to create an independent observer of the activities of Government and the activities of Parliament and its impact on the public finances. The risk of giving the Committee a power to sack someone or indeed the Chancellor the power to sack someone, a bit like the Governor of the Bank of England, you gave us the power to do that, it would be that it was potentially undermining the independence. My inclination, but I am very happy to consider it, is that we have a system whereby the appointment is made by the Chancellor but subject, for the first time, as I understand it, in the history of this Parliament, to a confirmation hearing and a veto by the Treasury Select committee, this person is then, having passed those hurdles, independent and able to get on with their job and say things which may be difficult for the serving Chancellor or indeed difficult for Parliament . Then when it comes to reappointing this person - and my current thinking is they would just be reappointed for one term, serve for one five year term but then be reappointed for one further five year term – that too would involve the Treasury Select Committee and the Treasury Select Committee and the Chancellor would both in effect have a double veto. The Chancellor would have to recommend the reappointment and the Treasury Select Committee would have the veto again.

Chair: Thank you for that. These are very interesting thoughts and we will be looking at them intensively next week.

Q324 John Mann: Just a short question, just to ask whether considering the new arrangements made with select committees, which obviously we all voted for and welcomed, would you envisage, if requested, appearing before this Committee as often as the Governor of the Bank of England appears every year?

Mr Osborne: I am very happy to appear when the Chair of the Select Committee invites me. It was the only select committee vote that I absented myself from so therefore I am neutral in my view about the Chair of the Select Committee.

Chair: We asked you to come today and you came. Thank you very much indeed. It has been an excellent first evidence session from you. We look forward to seeing more of you in the future. Thank you.