Treasury Committee - HM Treasury’s Annual Report and Accounts 2010–11 - Minutes of EvidenceHC 1854

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House of commons



Treasury Sub-Committee

HM Treasury's Annual Report and Accounts 2010-11

Wednesday 22 February 2012

Sir Nicholas Macpherson KCB and Julian Kelly

Evidence heard in Public Questions 1 - 93


1. This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2. The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Treasury Sub-Committee

on Wednesday 22 February 2012

Members present:

Mr George Mudie (Chair)

Michael Fallon

Mark Garnier

Stewart Hosie

Mr Andrew Love

Mr Pat McFadden

Teresa Pearce

Mr David Ruffley

John Thurso

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Sir Nicholas Macpherson KCB, Permanent Secretary, and Julian Kelly, Finance and Commercial Director, HM Treasury, gave evidence.

Q1 Chair: Sir Nicholas, thank you for coming-and Mr Kelly, who, I suppose, is soon to be Sir Julian. It depends on how well you do today, I suppose. Thank you very much. We will get straight to it. Teresa wishes to begin.

Teresa Pearce: I want to ask you some questions about the staffing of your Department. There have been some surveys done-obviously the people surveys-and I notice that the Treasury results are above average in some parts, yet HMRC’s results are much lower, and they are very integral to you delivering. Do you have concerns about HMRC’s results?

Sir Nicholas Macpherson: I think it is worth explaining why the results are different. I would like to think that it is because the Treasury is well managed and it is all down to me, but sadly it reflects the fact that the Treasury is a lot smaller and has a different grade mix. On the whole, these surveys reveal that the more senior you are in the Civil Service, the more motivated you are. Running HMRC, because it is such a large organisation, is a much bigger challenge, but obviously we have an interest in a motivated HMRC. It has been through some difficult times in recent years. It is under new management, and I remain optimistic.

Q2 Teresa Pearce: That brings me on to the Treasury. We have seen that there has been a fall in full-time employees. Which areas of the Treasury are the hardest hit, do you think? Being a small team, it must be-

Sir Nicholas Macpherson: Our Spending Review settlement requires us to get down to 1,000 by 2014; we peaked, during the financial crisis, at about 1,400 in late 2009. We are most of the way there and, unlike any other Department, we have not had to have a generalised redundancy programme, which reflects that we are more market-facing than most Departments and, therefore, have a higher staff turnover rate.

In terms of the reductions, we have tried to prioritise certain areas. We spent several months in 2010 reviewing the Treasury structure. There are a number of things going on. First, inevitably the number of people working on financial services has come down a bit. That is partly because at the peak of the financial crisis we had tens if not 100 people setting up schemes like the Asset Protection Scheme. We have also chosen to concentrate on our core functions. What is the Treasury about? The Treasury is ultimately about taxing and spending and, for historical reasons, it is also responsible for financial services. It has an international function, but we have tended to pull back from some of the areas that were quite reasonably the priority of the previous Government. The previous Government was particularly interested in things like overseas aid, child poverty and regional policy. We tend to pull back from those areas, not necessarily because we are de-prioritising them; I think we perhaps have a stronger relationship with the relevant Departments, so even if overseas aid remains a priority, our view is that we can rely on the Department for International Development to deliver that programme. There are a number of pressures that we-

Q3 Teresa Pearce: Are you saying that rather than having fewer staff and doing more, you have actually stopped doing some things?

Sir Nicholas Macpherson: We have stopped doing some things. A recent example of that is that the Prime Minister’s Delivery Unit used to be in the Treasury. The rump of that unit has just moved over to the Cabinet Office, but the money associated with the unit has stayed at the Treasury, and that has enabled us to use that to prioritise things like the eurozone crisis and the public finances.

Q4 Teresa Pearce: It has been reported, anecdotally, that the Treasury has a higher turnover than McDonald’s. Does staff turnover concern you, and have you put anything in place as a result of the survey in which 30% of people said they were looking to leave within a year?

Sir Nicholas Macpherson: It does concern me. There was a point last year when turnover was running at an annual rate of 30%. I think that is too high. There are reasons why the Treasury would tend to have higher turnover than other Departments. One is that we rely on a lot of loans and secondments from other Departments-that is just the way the Treasury has always worked-and people tend to go back to their Departments, so you would expect that to be happening.

Because of the business model of the Treasury, it tends to rely on quite young people-people who come and work in the Treasury for a few years, get it on their CV, and then use the brand to go and make money elsewhere. Indeed, I joined the Treasury totally by accident in my mid-twenties and assumed I would go and make money elsewhere. For some reason, 26 years on, I am still there, but I am the exception rather than the rule.

You have those forces at work, but what has happened over the last couple of years is that resignation rates have increased. If I am honest about what is causing that, I think there were two things going on. One was we had the most challenging Spending Review since the 1920s. People in the Treasury are quite good at understanding numbers, and they look to their promotion prospects, so they all concluded that because the Treasury was getting a lot smaller, their promotion prospects would deteriorate, so some people just voted with their feet.

There is also an issue about pay. You mentioned HMRC; one of the interesting things is that HMRC pays a lot more for the job than the Treasury, which is ironic given the satisfaction and morale points you raised. Possibly, with the benefit of hindsight, the Treasury has got too out of line with other Departments, but there is also an issue in relation to the rest of the public sector and the private sector. The Treasury can never compete with investment banks. If someone wants to go and work in an investment bank, they are going to go and work in an investment bank. Actually, I lost one of our quite good members of the senior Civil Service the other week because she has chosen to take that course. The thing I find slightly dispiriting is when people leave for other parts of the public sector. I lost another person on the financial services side who has recently got a job at the Bank of England, and the Debt Management Office has lost people in their IT function to the Bank of England. Again, there is not much I can do about that.

One of the problems for the Treasury is that, historically, it has tended to put its own medicine into practice. I think some other Departments are rather cleverer at avoiding living by the rules. Almost as an existential part of being the hair-shirt Department, we do implement the rules, and that is taking its toll. It is something we have to keep quite a close eye on.

On the plus side, over the last few months the turnover rate has come down. It is no longer at 30%; it is at something like 28%. That is still too high. If it got back to 15% to 20%, then that would be a rate I could live with, and it would be quite good. You want to have some ventilation in a Department like the Treasury. If you contrast the Treasury with, say, the Ministry of Justice, we have hugely more turnover, but it is quite positive. It is a positive force; you get new people coming in with new ideas and new enthusiasm. That vibrancy of the Treasury is central to our effectiveness.

Q5 Teresa Pearce: It is interesting that you talk about people coming in, learning what they can and then moving on and taking their skills with them. I am concerned about your skills base. You are recruiting fewer people and the turnover is high, but there is a concern about the skill base. Do you ever use personal service companies to bring in the correct skills?

Sir Nicholas Macpherson: Not on the whole. We have just recruited about 60 people in January. We just used our direct brand name and advertised in the newspapers; 1,500 people applied-really good-quality people, actually, mainly graduates-and 60 joined in January. Obviously, there are some more specialist areas where you have to use slightly more niche ways of recruiting people. We do not have trouble attracting people to the Treasury; the challenge is retaining them. Often in the past we have just looked at the recruitment angle, whereas at the moment we are trying to be more effective at retention, anticipating particularly problem areas. Your point about skills is absolutely fundamental, and it relates to our financial service capability. I can go and get a few people off the street, but it is going to take several months before they become effective.

Q6 Teresa Pearce: Do you have to use contractors?

Sir Nicholas Macpherson: Less than we did. If any good thing has come out of the financial crisis-and I expect this is a very small one indeed-it is that a lot of people accumulated quite big skills, quite quickly. Some of them have left and cashed in, but fortunately-and presumably you have the same issue, being public servants-there are enough people still who value public service and are prepared to do the job for lower sums of money. We have retained some really good people. If we were to lose them, that would be a problem. I am thinking of someone like Tom Scholar, who is the Second Permanent Secretary to the Treasury, who played the absolutely critical role in the interface with the banks during the crisis; if we lost him, that would be quite a big blow to the Department. So far we have managed to retain him, but most weeks the head of the Civil Service is ringing me up saying, "Can’t he come and be Permanent Secretary of this Department or that Department?"

Q7 Mr Love: Sir Nicholas, the Treasury has signed up to a reduction in resource from around £200 million in this financial year to £150 million in 2014-15. The other day, the Financial Times said there has been an exodus of top staff from the Treasury, and in a debate in the House a couple of days ago the Chancellor said, "the Treasury took the fatal decision to run down its financial services division". How are you going to cope over the next few years?

Sir Nicholas Macpherson: We are going to cope by becoming more efficient. It is easier to talk about efficiency, and more difficult to pull it off. We have put a lot of time and effort into thinking about how we deploy our staff and use more flexible structures, building, in effect-

Q8 Mr Love: Can I just interrupt you there and ask: are you expecting this Committee to believe that you will have at least a 25% increase in efficiency to address these matters? When, in effect, you have to go to the Chancellor at some point and say, "Chancellor, if you want us to address the demands for Treasury services"-and we all know the reasons: the Financial Services Bill, European regulation, and all the other demands being made on the Treasury at the moment-you expect us to believe that you can address it with these stresses and strains in your budget?

Sir Nicholas Macpherson: Up to a point. There are some things we can do quite simply that can increase efficiency considerably. For example, we have squeezed the whole of the Treasury on to two and a half floors. In the past, the Treasury has been criticised for how much space it utilised. We are renting out two floors to the Cabinet Office. How much money is that making us-£10 million or something?

Julian Kelly: It would be about £10 million a year.

Sir Nicholas Macpherson: £10 million. Okay, so it is a bit more like a sardine can, and I have done my bit in the open plan and squeezed up my space. It is a minor irritant, but you get used to it, and if I look at our space allocation compared to, say, an investment bank in the heart of the City of London, I don’t think we do too badly. That is an obvious efficiency improvement. I think there are things you can do around how you deploy staff and so on. To come back to your point-I think this is an important point-if there was a serious resumption of financial instability, we would have to look again at our resourcing. I have an understanding with the Chancellor, which reflected the Spending Review, that if we return to crisis conditions, we would be able to crank up resources. One of the lessons of 2007, again with the benefit of hindsight, was probably that we did not crank up resources quickly enough. We have to be sensitive to that, but so far-

Q9 Mr Love: I am assuming that you are saying to us now that you do not need to. You are not signalling through this Committee?

Sir Nicholas Macpherson: No, I am not signalling through this Committee. Last autumn, there were periods when you would not bet on the euro surviving too long, and I began to think, "Do we need to do something radical on resourcing?" In the event, we are underspending at the moment, so it is not a money problem we have; it is potentially a people problem, but we have managed to cope, and I think we have coped quite well.

Q10 Mr Love: Let us come on to those people, because one of the reviews that you are carrying out is to what extent civil servants are channelling salaries into tax-efficient private firms. How widespread is this? That was agreed on 2 February.

Sir Nicholas Macpherson: There has been some intensive contact with Departments. I do not think it is hugely widespread, but clearly it has been going on.

Q11 Mr Love: It has been reported there are 25 people in the Department of Health. Would you deny that that was an accurate figure, or at least a minimum figure?

Sir Nicholas Macpherson: I do not have the figure in front of me, but-

Q12 Mr Love: But is it widespread?

Sir Nicholas Macpherson: Given what we have uncovered, it does not come as a surprise. You will be pleased to hear-and I think the Finance Director next to me can confirm this-that the Treasury does not itself employ anybody on that basis.

Julian Kelly: Yes, that is right.

Q13 Mr Love: So it is not a Treasury phenomenon?

Sir Nicholas Macpherson: Just to reassure the Committee, the Treasury has had longstanding rules that Departments should not be in the business of tax planning, because what you gain on one front you are losing on another for the Exchequer.

Mr Love: The Chief Secretary made it absolutely clear, when he was asked an emergency question, that this should not be happening.

Sir Nicholas Macpherson: No, it should not be happening.

Q14 Mr Love: However, it is happening. There are concerns that it is not only to the benefit of the particular employee, but tax-efficient for the Department. You are right that others may lose out, but for that particular Department, that particular person, it is tax-efficient. That wouldn’t be a mechanism by which they can attract staff whom it would be difficult to attract just on Civil Service salaries, would it?

Sir Nicholas Macpherson: For all I know, the margin might make all the difference, but I would be surprised. In my experience with recruiting people, you can either attract them at the wage or you can’t, but you really should not be getting into the business of trying to think up tax fiddles on the side. It does not do anybody any good, and it certainly does not do the reputation of the Departments involved any good.

Q15 Mr Love: Let me come on to the issue of bonuses, because that has been of some concern. How widespread would you say the practice of providing bonuses is, and is this a mechanism to attract? It has been commented that you have lost quite a number of senior employees in recent months. Would this be a mechanism by which the Treasury could attract people of sufficient quality and experience from the private sector?

Sir Nicholas Macpherson: Bonuses do have a role to play in recruiting and retaining staff. I am going to tread carefully here. The view taken, and it probably goes back to the Government in power in the mid-1990s-then the Labour Government followed the policy through to its conclusion-is that performance-related pay in the Civil Service does make a difference. People are not in it for the money, but having a system that gives someone a reasonably small reward has a very positive effect, in terms of that individual feeling valued by the organisation. So over time-and the Treasury encouraged this-we basically encouraged a variable component of pay, also known as a bonus. It is worth remembering that those were introduced as part of a general pay increase, so if the Treasury received a 3% pay increase in a given year and chose to channel it through bonuses, that meant there was a far smaller pay increase across the board. At the moment we do pay bonuses to 25% of our top performers. I would be very concerned if that right to pay a bonus was withdrawn. They are not big. In my own case, reflecting the public mood, I have forgone a bonus for many years, and I have no problem with that; I do not need a bonus. But you have people who are very talented, have a lot of skills-

Mr Love: I think you have made the case, and I am not sure that this Committee is arguing with you.

Sir Nicholas Macpherson: Good. Sorry.

Q16 Mr Love: There is a point, though, in relation to transparency. This has not always been as transparent. What is the Treasury doing to ensure-not only in the Treasury but across the Civil Service-that we are completely transparent about these arrangements?

Sir Nicholas Macpherson: Following pressure-well, not pressure, but I remember this Committee saying several years ago, "Why don’t you publish your bonuses of your senior staff?" While it annoyed a lot of other Departments at the time, I thought that was the right thing to do. We published our bonuses. They are in this Annual Report. My pay is a matter of public record and I am totally relaxed about it. I am all for transparency, and I think we do publish the pay of all our senior civil servants.

Julian Kelly: We now publish across-Government pay arrangements, including the aggregate amounts paid in bonuses of various kinds, so I think it is a matter of public record now, for the Treasury, how much has been paid in bonuses in 2011-12, for example.

Q17 Mr Love: That may well be the case for the Treasury, but I am thinking about the wider Civil Service. Some people may come on to ask you about Whole of Government Accounts, and it could be that a note attached to those accounts could give an overall view of the level of payments, bonuses and special arrangements-global numbers, without being very specific. That would help us to understand better how we are coping with some of the pressures here.

Sir Nicholas Macpherson: I am very supportive of that agenda. The more data we can give out, the better. Ironically, in terms of managing people, all this transparency has made life more difficult, because when my Chief Economic Adviser sees that he is paid a lot less than another colleague whom I recruited from the private sector, he tends to go on about the unfairness and the anomaly, but we have a good relationship and he is getting over it.

Mr Love: Transparency has a very salutary effect for Members of Parliament, so it will do no harm for civil servants.

Julian Kelly: No, absolutely.

Q18 Mr Love: Let me ask you one final question. Jonathan Baume, the FDA Secretary, said about all these arrangements-paid bonuses, whether or not they were tax-efficient, and so on-that they were "a shambles". Would you agree, or would you agree that we need to sort it out?

Sir Nicholas Macpherson: It is not a term I would use, but I think we can achieve a better system.

Q19 Chair: Can I just take you back to this question of taxation-avoiding practices? It is not the accepted practice; is it policy that we do not do this?

Sir Nicholas Macpherson: It is policy. The Treasury sets the rules for public spending-what is acceptable. We have someone called the Treasury Officer of Accounts and she writes letters from time to time setting out the rules, precisely on issues such as this. This has always been the case. The Treasury has always made clear that Departments should not seek to avoid tax, or enter into aggressive tax planning arrangements, and we have just reiterated that view. It is a matter of concern to me that people were not implementing those rules. If I was being charitable I would say that sometimes it is quite difficult to tell. It is a bit like those PFI contracts, where when the music stops you find the ultimate owner is based in Bermuda. It is not easy seeing through the various vehicles, but in this case it does seem the Department had very clearly entered into an arrangement that was all about avoiding tax, and that to me is neither right nor consistent with the rules.

Q20 Chair: Who has the responsibility for ensuring that this policy is kept to? Is it the Treasury?

Sir Nicholas Macpherson: The Treasury is a small Department.

Chair: No, I don’t mean that.

Sir Nicholas Macpherson: No, I know. The problem we have is we cannot be over every single Department checking, like the proverbial rash, but you would expect that Departments’ internal audit functions, for example, would be looking at this. You would expect that a finance director who knew what they were doing would be on top of this. I am slightly disappointed that this practice is prevalent, and we need to-

Q21 Chair: I am still coming back, Sir Nicholas, to get some clarity on this. Is the Treasury responsible for this policy being implemented? It does not matter that Departments have not implemented it, but then who is supervising this?

Sir Nicholas Macpherson: Look, I think the Treasury should take its fair share of the blame if there is a systemic failure in relation to a Treasury policy. It is the responsibility of Departments to live by the Treasury rules, but if it turns out that there is wholesale abuse, then I think we should have picked that up. In this case, let us assume that the Department of Health numbers are right at 25. That is a big organisation. My guess is that the aggregate number is certainly not thousands; it is perhaps the odd hundred. That is too high, but it does not seem to me an example of systemic abuse, given that there are 500,000-odd civil servants and 5 million public sector employees.

Q22 Chair: You are the Treasurer responsible. I understand what you mean about the "systemic" issue, but does this policy extend to related bodies, as you describe your responsibilities, and outside bodies? You would hope there is more chance of it happening in outside bodies than in Whitehall. Are you responsible for those? Are you monitoring those?

Julian Kelly: The current review that is going on is extended to public bodies. I think public corporations are currently outside the scope.

Q23 Chair: What does that mean for, say, hospital trusts, the BBC, and local government?

Julian Kelly: Local government is not part of the current scope, but it is being asked at least to review its arrangements and make sure there is nothing that is untoward, though it is outside the direct scope of the current review. The BBC is outside the scope of the review. I apologise, but I cannot remember whether NHS trusts are.

Q24 Chair: What is the line that puts you outside? When it was raised, everybody, including the Minister, was upset about it, but then he is asked, "Is the health service going to be looked at in this way?" and, yes, there is a decision taken on that. I have asked local government, and I have asked the BBC. What is the line that determines whether they are caught by this policy?

Sir Nicholas Macpherson: In each case it is ultimately a matter for the Accounting Officer of that Department. I am the Accounting Officer of the Treasury, but what you are highlighting-

Q25 Chair: It was the Accounting Officer who was responsible. He was the fellow who was looking at his own arrangements, wasn’t he, in student loans?

Sir Nicholas Macpherson: Yes, but in his case his responsibility had been devolved from the ultimate Accounting Officer of the Department itself. To give a good example, Robert Stheeman is the Accounting Officer of the Debt Management Office, but I appoint him. If I discovered-which I certainly have not-that there were problems in the DMO, if that was a function of just sloppy management within the DMO, then that is rightly the Accounting Officer of the DMO who is held responsible, but if it reflected a badly specified relationship, memorandum of understanding, or contract between the two organisations or whatever, then I think it is the Accounting Officer of the Department who should be responsible.

The problem that you are highlighting is all to do with the boundaries of individual parts of the public sector. When it comes to the Civil Service, it is very simple: I have complete control over civil servants who work in the Treasury and I am responsible for their employment. When it comes to the Bank of England-a subject of great interest to this Committee-we own the Bank of England. It is on our balance sheet. It is a nationalised industry-it was nationalised in 1946-and they are public sector workers, but I have, no doubt rightly, limited locus in what goes on there.

Q26 Chair: You have still not defined a policy line for me. For example, all your related bodies-they are not civil servants but they are part of your responsibility. You said to Mr Love, "nobody in the Treasury", but what about your devolved bodies?

Sir Nicholas Macpherson: Julian, do you want to take us through our devolved bodies?

Julian Kelly: With our devolved bodies, for the purposes of the work we are doing to make sure that there are not these arrangements in place, all our devolved bodies are included, including the Debt Management Office. The Asset Protection Agency is a principal, too.

Q27 Chair: You are clear on your devolved bodies?

Julian Kelly: Yes. For our Department we are clear on our devolved bodies.

Chair: Lovely.

Sir Nicholas Macpherson: It is fiendishly difficult; public corporations merge into other bodies. There is the health service, local government-I would be happy to provide a note on how the accountabilities work.

Q28 Chair: You cannot be expected to follow every turn and corner in every part of the public service-the Civil Service, fine, but as another Permanent Secretary, for example in Education, is looking after this quango and that quango, if there is a policy line, the people who should pick it up are the National Audit Office. They audit the Departments, and that should be one of the questions that they are putting to each Accounting Officer. If the National Audit Office put that question to Education, would you expect Education to regard the quangos that they run as being outwith this policy?

Sir Nicholas Macpherson: It would depend on the constitution of the quangos. There was a reference earlier to Whole of Government Accounts, and increasingly these organisations are being consolidated within Departments’ accounts. This is actually flushing out precisely the issue you are raising about how much power you have over some of these bodies. On your point that there are some slightly distant parts of the public sector that appear to be a rule unto themselves, I do not think it is prevalent to a large degree, but my guess is that there is a bit of this going on.

Q29 Chair: Okay. Does that not mean, Sir Nicholas, that to end it all, somewhere we need a policy paper produced, which is quite clear, and which can be scrutinised, so that people know where they are and where the lines extend to?

Sir Nicholas Macpherson: Absolutely. Yes. Every Department that has any quango should have a paper like that. Obviously, it needs to be updated from time to time, but there needs to be absolute clarity. Where there are accounting requirements-in this case, the requirement not to use tax planning-it is very important that they understand those rules.

Q30 Mr Tyrie: Are you up to speed with the status of, and debate about, the National Fund?

Sir Nicholas Macpherson: The National Fund?

Mr Tyrie: You do not know about the National Fund? There have been some press reports about the National Fund, which I actually dimly remember from my days in the Treasury. It was a fund created in the 1920s to pay off the national debt, with a very small sum put in it, which now has £300 million in it. Indeed, the Chancellor is one of the commissioners of this body. You are the Permanent Secretary and the Accounting Officer, but you are not aware of it? Okay.

Sir Nicholas Macpherson: Mr Tyrie, I am aware, now you have described it. It was just the term, "National Fund".

Q31 Mr Tyrie: I am only giving it its title in the annual accounts. I was not sure whether you would know about it, but I have noticed, though you have not, that there have been press reports about how this money might be better used than sitting there as a dormant fund with £300 million in it. It might be helpful if you got up to speed on it and maybe came back to us on what the state of play is, with your accounting hat on. I would also be grateful if you could tell us whether it would be the view of the Treasury-and you might want to discuss this with the Chancellor-that any change of use of this fund should trigger consultation with Parliament and with this Committee.

Sir Nicholas Macpherson: I would be very happy to come back to you on the specifics of the fund. In so far as people are alleged to be considering ways of using it, that is not uncommon. People quite often identify potential sources of money.

Mr Tyrie: I do not want to waste more time. Can you-

Sir Nicholas Macpherson: But the point I am making, Mr Tyrie, is that if there is money sitting there in a fund, it is not sitting there idly; it is actually netting off the national debt, and if it were to be released, that would involve public spending. That would be something that-

Q32 Mr Tyrie: You have just said it is netting off the national debt.

Sir Nicholas Macpherson: Yes. If there is a liquid asset in this fund, my guess is it is probably more like the National Insurance Fund; that is, a notional fund-

Mr Tyrie: I think it might be a good idea not to do any more guessing, because it is not netting off the national debt; it is sitting there unable to be used for the purpose of netting off the national debt. Indeed, that is one of the problems with it-the terms under which it was created. I am not particularly perturbed that you do not know about it; you have other things to think about. I am mildly surprised you do not know, bearing in mind that there have been press reports on it, and I am very clear that it is something that you should be paying attention to, and if you could come back to us on it, I would be grateful, with respect to the two points I have raised.

Sir Nicholas Macpherson: I will be very happy to.

Chair: Mr Fallon wants to come in.

Q33 Michael Fallon: I want to come back to this issue of limited locus over other Departments that might be indulging in personal service company payments and so on. I do not quite understand why your locus would be so limited when the Government has a pay policy, a pay freeze, that the Treasury presumably has been in charge of implementing. It would be fairly disturbing if there had been an increase in the use of these tax arrangements as a way of getting around the freeze. If that was what was happening, presumably the Treasury would have known about it and done something about it.

Sir Nicholas Macpherson: Obviously Departments are responsible for implementing the pay freeze. Again, that is another good example where there are clear and established rules, and Departments are expected to abide by them. Thanks to the reporting process, it is a matter of record what the aggregate wage bill is, so there are good ways of checking on that.

My point is simply that it is the responsibility of Accounting Officers to implement the relevant rules. It is set out in a sort of bible for Accounting Officers called Managing Public Money. It is up to the National Audit Office to audit Departments on the principles set out in Managing Public Money; indeed, Accounting Officers have to make a statement of internal control. It is important that spending teams, for example in the Treasury, are making random checks to make sure that Departments are doing what they are supposed to do, but there are limits to how much detail you can get into.

Q34 Michael Fallon: Yes, I understand all that. You are slightly missing my point. When you say they have to go by the rules, it is your rule. It is a Treasury rule that there should be a pay freeze. If Departments are using these personal tax arrangements to get round the pay freeze for senior staff, then it is surely something the Treasury should be taking an interest in. It is your rule.

Sir Nicholas Macpherson: It is our rule, and it is a matter of concern. My guess is that, in terms of the pay freeze, this is having a minimal effect but, nevertheless, we have an interest in sorting it out.

Q35 Mark Garnier: Good afternoon. Turning to the OBR, what impact has its establishment had on the work of the Treasury?

Sir Nicholas Macpherson: It has had quite a big impact. It has considerably changed the way Budgets and, indeed, Autumn Statements are put together, and it has changed policy making.

Q36 Mark Garnier: Do you want to expand on both those points?

Sir Nicholas Macpherson: For many years, I can remember the issue of the forecast being a matter of debate, both between officials and Ministers within the Treasury and perhaps, more importantly, an issue of debate between No. 11 and No. 10. In the run-up to a Budget, there tended to be more of an argument about the forecast than the actual policies contained therein. The good thing about having an external forecast is that it is taken as given, and it means that all the debate in the run-up to a Budget is about the policy, and that is good for the Treasury and, I would argue, good for Government.

In terms of just how the process works, obviously Robert Chote and others were recruited externally. Some of the people who worked for them effectively transferred from the Treasury’s forecasting operation to the OBR. One of my concerns at the point that it was set up would be that the Treasury would lose all its macro-economic capacity. I am glad to say that we have retained enough to be able to carry out our own simulations of policy and, indeed, do analysis between Budgets on issues that matter. So far-and it could always change-I think the OBR has bedded down well. It is not resulting in excessive duplication; it is not some massive bureaucracy. It is quite a lean operation, but it is making a difference.

Q37 Mark Garnier: Good; that is a very positive thing. There was a slight problem with the last Budget: on the infrastructure plan, the OBR told us they had not seen the infrastructure plan document with the £250 billion of total expenditure. We were told there was no conspiracy theory going on, keeping the stuff from the OBR, but it is quite an important point. The OBR do need all the facts in order to make a sound judgment. How does that relationship work?

Sir Nicholas Macpherson: You mention that, and we need to learn the lessons from that, because it was not a conspiracy. It is a very open relationship. There is considerable trust between the organisations, and there is recognition within the Treasury that the OBR is independent-is at arm’s length. I think the Commissioners of the OBR have established a good reputation on the basis of the first 18 months of the operation. It is important that we continue to work at that relationship, because even when you are dealing with-

Q38 Mark Garnier: Do you have a formal process whereby information is amassed ready to give to them, or is it done on an ad hoc basis?

Sir Nicholas Macpherson: It is pretty formal. There is an agreed timetable where information is exchanged, but I think for the relationship to work you also need an informal element. For example, when discussing policy costings, it is important that you do not drop some policy change on the OBR out of the blue. Sometimes that may be inevitable, but as much as possible, there should be a common understanding of what policy changes will cost.

Q39 Mark Garnier: Give us an example. We have a Budget coming up in about a month’s time. At what point would all the final information be passed over to the OBR for them to do an assessment?

Sir Nicholas Macpherson: You get various iterations. They give us their provisional economic forecast. They gave that to us about a month ago now. Then a week later they gave us their provisional fiscal forecast. Those will be firmed up in the coming weeks. Similarly, we are talking them through the potential policy measures. They satisfy themselves on the costings of those measures through interrogating colleagues at HMRC, the Department for Work and Pensions and so on, so there is that degree of iteration. What the system does require you to do is close down the Budget process earlier. I can remember in the old days-indeed I can remember being next door with the then Chancellor Kenneth Clarke in the 1990s-there were still questions of whether we should change the Budget. I think this is the famous night of the VAT vote, which followed on the vote on Maastricht in 1994 or some such time. There were issues right to the wire about whether you should change things. I think in this system the Budget has to be closed down earlier.

Q40 Mark Garnier: How do you assess the performance of the OBR?

Sir Nicholas Macpherson: The OBR have to produce a report on their forecasting record every year. That is part of the remit. We obviously follow their forecasting record closely. You do, too. It will be interesting to see, for example, whether their forecast in the March Budget is significantly different from the one in the autumn, whether it is on track, and so on. Forecasting is an impossible job. I would not wish it on anybody; you are just always wrong. In that respect, it is a comfort to me that the Treasury is no longer directly in the firing line.

Q41 Mark Garnier: One final question, on the evaluation of the effectiveness of organisations. The Office of Tax Simplification is obviously under way and trying to sort out the spaghetti that is the tax codes. How are you going to evaluate the effectiveness of the work of the Office of Tax Simplification?

Sir Nicholas Macpherson: I think-

Mark Garnier: A very long pause.

Sir Nicholas Macpherson: It will take a bit of time before we will know for certain how that body has performed, partly because the proof of the pudding will be: is the tax system simpler? Does it look simpler? Does it feel simpler? It is still very early days, but we will certainly be reviewing its effectiveness, and I would hope this Committee would take an interest in it too.

Mark Garnier: I am sure it will. Thank you.

Q42 Mark Garnier: There probably isn’t a Member around this table who has not been getting letters about Equitable Life. Obviously there was the promised payout-I think it was a £1.5 billion promised payout-and there was an expectation that it was going to be moved on quite quickly. According to The Independent, on 6 February this year, of the £1.5 billion, apparently less than £1 million-worth of payments have been made, which is quite something, with just 3,000 former policyholders receiving payment. Apparently the Treasury argues, "This latest figure shows that decent progress is finally being made", which is slightly surprising. How are you getting on?

Sir Nicholas Macpherson: The Financial Secretary published a progress report at the end of January. At the end of January, the scheme had made payments to 95,601 policyholders, totalling £70.7 million.

Mark Garnier: £70.7 million?

Sir Nicholas Macpherson: £70.7 million. That is the end of January.

Mark Garnier: So £1.4 billion and-

Sir Nicholas Macpherson: Yes. Just by way of background, the scheme is moving along a lot quicker. Why is that? It is a massive logistical task, making these payments. We were very concerned that it should be effective from the start, by which I mean having looked at it from other letters you get, the capacity for mass mail shots ending up at the wrong addresses, going to dead people, and generally irritating everybody is great. We put a lot of emphasis on ensuring that money went to the right people. We got it right first time, in effect. That has required a huge amount of checking about people’s addresses. In one sense, you would think that most beneficiaries of Equitable Life schemes would actually not have moved address very often, but it is surprising how many have done. So we have put a lot of emphasis on that, and we did not want to start-

Q43 Mark Garnier: They have lost all their savings, of course, so they presumably have had to downscale, which is why it is actually quite an urgent thing to deal with.

Sir Nicholas Macpherson: It is. We want to get the money to the people. Initially, precisely because we wanted to test the systems, it started as a clerical operation. Through the autumn, it has now turned into a mechanical operation, and thousands of payments are now going out of the door every week. I am confident that the number by the end of this financial year will be significantly in excess of that £70 million.

Julian Kelly: It will be somewhere in the order of £200 million to £300 million by the end of the financial year.

Mark Garnier: £200 million to £300 million?

Julian Kelly: Yes.

Q44 Mark Garnier: You did make an estimate that the vast majority would have been compensated by the summer; are you still on target for that?

Sir Nicholas Macpherson: We are confident that large amounts will be out by the summer. The positive thing is that people who are getting the money are responding positively. They are banking the money and moving on. For example, traffic in the call centre is quite low. Only 0.1% of policyholders have queried their payment from the scheme. I know you could argue that it is late in the day, but finally people seem reasonably satisfied with the treatment they are getting. But I recognise the urgency, and the people that are doing this are giving weekly reports to Mark Hoban, the Financial Secretary, and we are taking it very seriously.

Q45 Mark Garnier: That is good. The main estimate forecast for the cost of doing this was £4 million. How are you compared with that?

Julian Kelly: I didn’t catch that.

Mark Garnier: The main estimate forecast cost-the actual administrative cost of doing this-was £4 million. How are you doing compared to that?

Sir Nicholas Macpherson: I do not think it is as low as £4 million. I seem to remember it being more like £40 million.

Julian Kelly: It is more like £45 million for the total cost of delivering the scheme over the four-year period. That is set-up cost plus the actual operating cost; that is the original estimate, and we are on track.

Mark Garnier: You are on track-that is fine. I think that is it; thank you very much.

Q46 Michael Fallon: You list in your Structural Reform Plan your overall three priorities. In your report, you put various timetables that have been missed or whatever-publication of this, that and the other. How do we assess whether those three priorities have been met?

Sir Nicholas Macpherson: We are publishing regular data on a quarterly basis, aren’t we, Julian?

Julian Kelly: Yes.

Q47 Michael Fallon: The first one, for example, is that you are reducing the deficit in a responsible way. How do we assess that you are doing it in a more responsible way?

Sir Nicholas Macpherson: I am always a bit suspicious of adjectives like that, but the critical thing is the Government set out a mandate. It is very clear what the fiscal target is, and I would hope that anybody, month by month, could look at the ONS data, but we will be formally publishing the relevant data quarterly on our website.

Q48 Michael Fallon: So it is for us to assess it, is it, not you?

Sir Nicholas Macpherson: I would hope that you would judge our performance. I think we will tell you if we are off track, but so far we are on track, and the critical thing is that the Government are continuing to take the relevant measures in successive Budgets and Autumn Statements to ensure that the deficit does come in, in line with the mandate.

Q49 Michael Fallon: Your second priority is to have an economy balanced between public and private sectors. What is the appropriate balance?

Sir Nicholas Macpherson: That is a-

Michael Fallon: A good question.

Sir Nicholas Macpherson: That is a good question. If I look at the size of the state, historically Governments have found it quite difficult to get the state much below 40% of GDP, but things tend to go wrong when it starts moving much above 42%. The state at its peak reached something like 48% or 49%, which is almost the same as when we went to the IMF in 1976, when I think it did reach 50%. It is on a downward track. I think it is due to come down to 41%. I would defer to Parliament’s view beyond that as to what is a sensible size for the state.

Q50 Michael Fallon: You see the difficulty here: you set yourself a priority of securing an economy that is balanced between public and private, but you won’t define it. How do we know whether you have that?

Sir Nicholas Macpherson: The overarching priority, as far as I am concerned, is the deficit. You can measure the deficit. You know what it is, and the Treasury’s success will hinge on whether it can deliver it. In sorting out the deficit, I would expect the balance between public and private to be resolved. With the benefit of hindsight, what is clear is that-largely reflecting wider economic conditions, not necessarily profligate public spending-the state got too big around about the late 2000s.

Q51 Michael Fallon: Your Plan for Growth is assessed against a number of "measurable benchmarks". Your own Annual Report contains a number of "impact indicators". How do we fit the two together and which is the more important?

Sir Nicholas Macpherson: Julian, you are an expert on these things; do you want to-

Chair: The art of delegation, that.

Julian Kelly: Ultimately, it will be GDP. GDP per capita.

Michael Fallon: Can you speak up a little?

Julian Kelly: I said that ultimately, in the impact indicators, it is GDP per capita and the employment rate. Actually, the number of people with jobs and whether the economy is growing seems like a pretty good indicator of whether the plan is on track. It specifically does not set a target; it sets an indicator. That was the decision the Government made when they came into power, I suppose partly so that you did not force yourself to hit a target and miss the point, as you understood it, in the direction of travel that you were aiming for.

Q52 Michael Fallon: You are slightly confusing us here. The Plan for Growth is the one that has the measurable benchmarks. Your Annual Report has the impact indicators. Which is the more important? What should we be focusing on?

Sir Nicholas Macpherson: I think you should be focusing on both. On the one hand, you want to know that we are doing what we said we would do, and if you have a number of measures you should hold us to account on whether we have actually done them, but the impact indicators are also important because they reflect the underlying things, which we are trying to change. In the long run, I would be a bit disappointed if you did everything in your growth plan and you found that GDP per head was as flat as a pancake. That to me suggests that there is a disconnect, so I think you have to look at both of these things, but in the long run, it is the impact indicators that tell you whether your economic strategy is working or not.

Q53 Michael Fallon: The Plan for Growth has been signed by the Chancellor and the Secretary of State for Business. On responsibility for the targets, is this a joint venture between the two, or does the Treasury have primary responsibility for these targets?

Sir Nicholas Macpherson: It is a joint operation. It goes beyond Treasury and the Department for Business. It will involve other economic Departments, like the Department for Transport, but this is a partnership. The Treasury has always worked in partnership with the Department for Business, and we have a good relationship with the Department for Business.

Michael Fallon: Who has overall responsibility in this joint partnership for the targets being met?

Sir Nicholas Macpherson: I suppose the Treasury always tends to have. Partly because it has a view of Whitehall as a whole, it will tend to take the lead in these matters, but it is a joint responsibility.

Q54 Chair: In your new devolved structure, which director is responsible for the growth aspect of the economy?

Sir Nicholas Macpherson: The growth is led by Peter Schofield, who I think is director. I am trying to find the relevant-

Julian Kelly: The Enterprise and Growth Group.

Sir Nicholas Macpherson: The Enterprise and Growth Group, but he works very closely with Dave Ramsden, the Chief Economic Adviser.

Q55 Chair: I don’t see him on the structure. Is he a director?

Sir Nicholas Macpherson: Peter Schofield is a director-page 15.

Chair: It is a different kind of structure. Okay, I will find that out, but Mr McFadden wishes to pursue a matter.

Q56 Mr McFadden: One of the Treasury’s stated objectives in the Plan for Growth is to encourage investment and exports as a route to a more balanced economy. It also talks of increasing private sector employment in regions, especially outside London and the South-East, and talks of securing an economy that is more resilient, and balanced between public and private sectors and between regions. Sir Nicholas, in response to an earlier question from Teresa Pearce, you said that the Treasury had cut back its staff working on regional work. If securing a better balance in between regions outside London and the South-East is an important objective and you have cut back work on that, who is monitoring that? Who is making sure that happens?

Sir Nicholas Macpherson: We will still be monitoring the employment rate across the regions. Indeed, every month I have a very good look at the trends. I suppose central to our staffing plan is not duplicating what other Departments are doing.

Q57 Mr McFadden: Which other Department do you think is taking responsibility for growth?

Sir Nicholas Macpherson: I thought of two Departments that have an interest in this. One is the Department for Business and the other is the Department for Communities. Both of those Departments have an interest.

Mr McFadden: If three of you are doing this, how would you reflect on performance, given the employment figures over the last year or so?

Sir Nicholas Macpherson: The first point I would make is that this is a notoriously difficult area. You are dealing with forces, some of which have been at work for 100 years or so, if you look at the peak in the North-East, which was probably before the First World War. From a Treasury perspective, I guess one thing I am aware of is just the sheer difficulty of understanding and acting on the transmission mechanism between what happens in Whitehall and what happens on the ground in the North-East, Scotland, and North-West or whatever. In some ways, there have been quite interesting trends across the United Kingdom. One of the things about the last recession has been that there is a smaller divergence between the regions compared to previous recessions. If you look at, say, Scotland and Northern Ireland, they have significantly lower unemployment rates than they did when I started working on this in the early 1980s, so there are wider forces at work.

The most important thing that the Treasury can do is just ensure that the instruments that it has under its control go with the grain of encouraging employment and do not distort the economy too much between the regions. This Government has implemented new policies-policies on employment, enterprise zones, and regional capital funds and so on-and the last Government had a number of other instruments. There is always intrinsic scepticism in the Treasury about how much of an impact policy can make in this field. It does not mean that you should not try it, but you do not want to get too carried away in terms of your expectations.

Q58 Mr McFadden: I am curious about this, because it is a big stated aim of the Government to "rebalance the economy", and my understanding of the Government’s meaning of that is a rebalancing between finance and other sectors in a sectoral sense, but also spatially between growth driven largely by London and the South-East and the rest of the economy, yet you seem a bit detached from trying to make that happen.

Sir Nicholas Macpherson: No, I am not detached. I am not detached, and probably one of the most important things there has been the exchange rate. If you look at how employment has performed in the West Midlands over the last 18 months or so, clearly there has been some rebalancing, and manufacturing on the whole has had a better run over the last couple of years than the service economy.

Q59 Mr McFadden: I represent a West Midlands constituency where unemployment has gone up by about 400 in the last year, so I am not sure it is a particularly healthy picture.

Sir Nicholas Macpherson: I am not in any way complacent about it, but I think it is fair to say, if you look in aggregate in relation to the West Midlands over the recent past, it got hit very badly early on in the recession-

Mr McFadden: It certainly did.

Sir Nicholas Macpherson: It has moved back more towards the mean. I recognise that is not of huge consolation to the 400 people affected in your constituency, but it is a sign of some rebalancing. The traded goods sector has done better within the economy, but the plain fact is that the economy has not been growing at a rate that is going to have an impact on unemployment across the board. One of the challenges for all Government Departments through this period is at least to try to do things that are supportive of growth and of employment, but these things are ultimately driven by international forces. Britain is a very open economy and that is often to our advantage, but at times like this it can be to our disadvantage.

Q60 Mr McFadden: I have asked you about the spatial aspect of this, but can I finish by asking you about the sectoral aspect, or what drives future employment growth? Again, the Government have been very explicit: they see a rebalancing to some degree away from finance and towards manufacturing and exports. Can you tell us how the Treasury arms the Chancellor policy-wise for that, or would it be more accurate to say that the Treasury is institutionally sceptical that Government can really do anything about that?

Sir Nicholas Macpherson: The Treasury does its best to arm the Chancellor with the relevant information and policy proposals. As I said earlier, partly because you see policies come and go, there is a degree of scepticism in the organisation, but there are things that can make a difference. This Government, indeed following on from the last Government, has been taking quite a lot of measures to try to ensure that, for example, the banking sector is put on a more sustainable footing. That probably means a smaller banking sector.

Q61 Mr McFadden: But I am asking what policy work is going on in the Treasury to support the Government’s stated aim of more manufacturing, and more export of goods and services.

Sir Nicholas Macpherson: A good example is tax policy, where the Government has taken measures in relation to the R and D tax credit and the patent box to support high-value manufacturing.

Q62 Mr McFadden: Manufacturing was the last Government’s policy.

Sir Nicholas Macpherson: This Government has developed it further, so it shows a degree of continuity, and I would argue that the continuity has been facilitated by the Treasury.

Q63 Mr McFadden: Is that it-carrying on the patent box?

Sir Nicholas Macpherson: No, no. Look, I am using that as an example of a tax policy that can make a difference for a certain sector. There is a balance to be struck there. Similarly, there is a capital levy on the banks that no doubt provides a disincentive to banks to grow their balance sheets in a certain way, just as the previous Government had a policy, I remember implementing the taxation of bonuses. There are things you can do through the tax system that can influence the balance of the economy. This comes back to the scepticism: I think you have to be quite careful, with tax policy, about the extent to which you try to rig the system to encourage people to channel resources in one area compared to another, partly because people will end up coming up with bogus schemes that get the benefit of the tax relief without doing the "good thing" in question. That is why, as a matter of principle, the Treasury has always tended to favour a broader tax base, rather than trying to find endless new reliefs, but I fully recognise there is a balance to be struck there.

Q64 Chair: One of the things that could have affected employment and manufacturing in the regions is if the Chancellor and the Treasury had persuaded the Bank of England to follow the remit given on quantitative easing, and not confined it to gilts. Is that fight still continuing, or have you given up the ghost?

Sir Nicholas Macpherson: The Bank of England is independent. The Monetary Policy Committee has chosen to pursue quantitative easing in that way. You will recall that the Chancellor announced a policy of credit easing in the Autumn Statement. That will go live very soon.

Q65 Chair: But is that not just because he cannot persuade the Bank of England to accept Alistair Darling’s remit, followed by George Osborne’s remit, on two occasions now?

Sir Nicholas Macpherson: We did give the Bank of England the opportunity to buy private assets. They did buy some, and the Governor argues with some force that this was all about getting the bond market back to normality, that it achieved its goal and, therefore, that the Bank should not get any further involved in this activity. One of the prices you pay with an independent central bank-and I am in favour of one, I hasten to add-is that sometimes you have to accept the choices they make. It is then incumbent on the finance ministry, in this case the Treasury, to think through how to pursue the policy aim by other means.

Chair: Yes, okay. I will stop being mischievous.

Q66 Stewart Hosie: Sir Nicholas, the report talks about the Chancellor announcing the sales process for Northern Rock. Since then, we know £1.4 billion has been put into it; that has been written down to £1.19 billion. That is different from the £27 billion put into NRAM, but it is nonetheless a significant sum of money. It has been sold for £747 million, which may rise to £1 billion. Should the sale have been delayed to allow the economy to strengthen and a bid to come in that might have recouped more of the cash?

Sir Nicholas Macpherson: That was the question that we had to address. Why, as an Accounting Officer, did I think this sale represented value for money for the taxpayer? Partly because there is something corrosive about being in the public sector if you are running a business, particularly if it is a bank, for all sorts of reasons that I expect this Committee is all too aware of, and Northern Rock in the public sector was not making a profit. It was due to continue to make losses. I did not see any obvious sign that just hanging on would make a lot of difference. I have been involved with Northern Rock-

Chair: Sir Nicholas, it made £410 million before tax in 2010.

Sir Nicholas Macpherson: I am talking about the good bank of Northern Rock.

Chair: Yes, the good bank. It made £410 million profit; it is here in your report.

Julian Kelly: Northern Rock Asset Management.

Chair: No, no, we are not talking about that. That is the bad bank.

Sir Nicholas Macpherson: The irony was it was the bad bank that was making the money; it is the good bank that is losing the money.

Q67 Mr Love: So why don’t we sell the bad bank?

Sir Nicholas Macpherson: That is an interesting question.

Q68 Stewart Hosie: Was the Virgin Money bid the best bid in cash terms? Was it the highest offer?

Sir Nicholas Macpherson: My recollection is that it was the highest offer. The Treasury is going to publish some greater information around the sale of Northern Rock in the next week or two, which will set out in some detail why this was by far and away the best deal compared to the other offers on the table.

Q69 Stewart Hosie: That would be helpful, because part of the funds to buy it were £250 million of Northern Rock’s own money-how is it described? "Excess capital". Then there was £150 million out of Virgin Money itself, which reduces the capital ratios in the new combined bank. Did that offer the Treasury any cause for concern?

Julian Kelly: What, the reduced capital in Virgin Money?

Stewart Hosie: In terms of the combined bank and reducing the capital.

Julian Kelly: This went through all the regulatory approvals, so it had to be cleared and approved by the FSA, taking account of exactly what would be the balance sheet of the merged entity. Yes, we posed the question, and that is why it had to go through all the right regulatory approvals.

Q70 Stewart Hosie: That is helpful. On a slightly different note, but related, there is a lot in the report about the intervention to the financial sector generally in large chunks of billions, and there are constant reports about what might happen to RBS. In particular, one of the schemes suggested last year was that the stock is effectively given away, with a floor price to make sure the taxpayer does not lose out at the end of the day. Is there active consideration being given to such a scheme?

Sir Nicholas Macpherson: From my perspective as Accounting Officer, the taxpayer getting a decent return is very important indeed. There may be wider economic benefits to certain sorts of sale, but the bottom line seems to me very important indeed. Obviously, we will look at any scheme that people suggest. If people want to buy some of RBS, we would certainly obviously consider it, but I am acutely aware that when the time comes-and I very much hope the time will come when RBS returns to the private sector-I know Parliament will be looking at every single detail of it, and rightly so. Getting a decent return, given the amount of money we have put into it, is fundamental.

Coming back to your earlier point about Northern Rock, another reason why I thought selling Northern Rock now made a degree of sense is we have this big portfolio of banks. I do not want the state to be in the banking business too long, because the state is not very good at it. That is not to say that the private sector has proved particularly good at it, either. One reason why I think it seemed sensible to sell Northern Rock now is that you want to diversify your holdings. You have RBS, you have Lloyds, we have these asset management things, so you want to hedge a bit, and selling Northern Rock now seemed to me a good deal.

Q71 Stewart Hosie: I understand that, but you just said that when the time comes to sell RBS-and certainly there is a list of all the bank assets available for sale right now in your report; it is very clear, and you seem to put great stock by the taxpayer getting their money back-that would not rule out one of these mass giveaway nationalisation schemes with a floor price put in place. It would not necessarily have to be a direct sale, would it, in order to achieve the objective?

Sir Nicholas Macpherson: No, and that is why you would want to look at the scheme in the round. There were various schemes in Russia, and I understand some of the oligarchs got rich on the back of shares being handed out to individuals; the oligarchs would hoover up the sales of the shares at a discount. I would not want to see that happening in the UK. By all means, give shares to people, but make sure that, looking at taxpayers in the round, they are getting a decent deal. The thing that always slightly worries me about elements of those schemes is the more sophisticated make the money, the less sophisticated taxpayer gets taken for a ride. We will need to look at it in the round. If it is good value for money for the taxpayer, as Accounting Officer-and I am just an official; it will be a political decision-I would be happy.

Q72 Mr Love: When the Chancellor was pressed on why he was selling Northern Rock at the present time, he prayed in aid some secret agreement reached with the European Union by his predecessor that they had to sell at least 50% within five years. You never mentioned that at all in your response to the questions from Mr Hosie. Does such an agreement exist? Would the European Union have insisted on such an agreement, and was there a possibility that if the Government had chosen to do so, they could have gone and negotiated a longer term-agreement in relation to that?

Sir Nicholas Macpherson: There was. That was part of the state aid agreement by which we acquired Northern Rock in the first place. Of course, there is always scope to try to renegotiate state aid agreements.

Q73 Mr Love: It has been done in the past.

Sir Nicholas Macpherson: In my experience, it usually happens at a price. The Commission strike quite a hard bargain, so this clearly was a relevant consideration.

Q74 Mr Love: I will not press you on that. You mentioned that documents will be made available to the public in the next week or two. I assume that these are the documents related to the investigation being carried out by the National Audit Office into whether this is value for money. Of course, there is much wider debate and discussion around advice given by Deutsche Bank and various others, and I wondered whether you could confirm that all of the documentation relating to Northern Rock will be made public at that time.

Sir Nicholas Macpherson: I have not discussed it with the National Audit Office, but my understanding is their report is several months away. No doubt in due course I will have to discuss it with the Public Accounts Committee, and I look forward to that. My understanding is that the documents we are going to publish relate to the advice we received and, subject to protecting commercial confidentiality, we will compare the bid we received to other options on the table, including mutualisation.

Q75 Chair: Is it a secret, or was there another bank interested?

Julian Kelly: There were a number of other financial institutions.

Q76 Chair: When the decision was taken, was there a tender process, or was it just pretty much-

Julian Kelly: There was, absolutely.

Chair: So there was a tender process?

Julian Kelly: There was a tender process.

Q77 Chair: Was it done on price then?

Sir Nicholas Macpherson: A complete formal process. UKFI, who advised us, could basically value each of the bids, because inevitably the bids involved different vehicles and so on, but Virgin was by far and away the best offer on the table.

Q78 Chair: Taking Stewart Hosie’s point, were the other bidders aware of the ability to add to their price the £250 million from-

Sir Nicholas Macpherson: It was open, and indeed they did set out all sorts of issues around funding, yes.

Chair: You see, there is a situation now in Scotland-I do not wish you to comment on it-where Rangers were bought for £18 million, and the person who bought it, it is alleged, sold the season tickets for the next four years for £20 million, and so therefore he bought the firm with the firm’s own money, albeit future money. That is being looked at by the police, and it is stated publicly that the regulators will not accept this. Here is a situation where someone won a bid and I think, Stewart, a third of the money was taken from the coffers of Northern Rock itself, the £250 million.

Julian Kelly: In the process there is complete transparency about the capital structure of Northern Rock, and the situation of the bank. In the discussions that were had with all interested parties, who considered a variety of options by way of thinking about what they might do, one of the things that they all would have known is, "Well, what is the capital structure you end up with?"

Chair: We will come back on this. We will cover that. All right, the very patient John Thurso.

Q79 John Thurso: Thank you, Chairman. Can I ask you about Whole of Government Accounts? They were 10 years in gestation, and took 20 months to produce; are you going to be able to do it annually?

Sir Nicholas Macpherson: Yes, and I would hope we can get quicker at producing them.

Q80 John Thurso: When will the next set be available?

Sir Nicholas Macpherson: This autumn.

Q81 John Thurso: So they are going to come out in November, in line with the last ones last November?

Sir Nicholas Macpherson: A bit earlier, I would hope. It is a monumental task producing these accounts. You have to consolidate a huge number of organisations. The accounts were qualified, although actually I am quite proud of the achievement of producing them at all. We can definitely get better both in the quality of the accounts and the speed with which we turn them around, so this one will be earlier. It will be earlier.

Q82 John Thurso: You have brought me to the obvious question: is it worth it and does it deliver a good that is worth having?

Sir Nicholas Macpherson: I think it does. It does reveal information that is useful and I think putting it in one place is useful. If with the passage of time it was concluded that it did not, then maybe we should try something else, but I think it is of value to Parliament. I had a very good session with the Public Accounts Committee on it, where there was a genuine dialogue around things like provisions and the pensions liability and so on.

Q83 John Thurso: Is it not worth putting in Network Rail, your assets in UKFI or UKAR, or whatever it is called, and so on? Shouldn’t these all go in as well?

Sir Nicholas Macpherson: Network Rail is a much contested area. We chose when we went down this route to follow the Office for National Statistics’ definition of the public sector, and for various reasons Network Rail is not, on their definition, on the balance sheet. In the view of the NAO, it should be on the balance sheet, and it may be that at some point this Government chooses to change the structure of Network Rail, in which case it could come on our balance sheet. Until that happens, I think we just have to carry on as we are.

The banks were a really interesting case in point, because there is a case. If we think we are going to own them for the next decade, then I think we probably should start consolidating them.

Q84 John Thurso: Looks like a fair bet at the moment, doesn’t it?

Sir Nicholas Macpherson: They have different year-ends, different systems, and different accounting practices, so it would have cost us several hundred thousand pounds to do it-possibly more than that. My view, at least in the short run, is that, given all the other pressures on the Treasury’s budget, that did not seem terribly good use of public money.

Julian Kelly: I should say that we have made a commitment to bring in UK Asset Resolution, which is Bradford & Bingley and the remainder of Northern Rock-i.e. the bit that is wholly owned and which we do not have immediate plans or thoughts of selling, and we will consolidate those. It is likely to be in 2013-14, as we do a shadow year for 2012-13.

Q85 John Thurso: You have two ways of accounting for it. You can either consolidate on the basis of a wholly-owned subsidiary, or substantially owned with a minority interest, or you could take in the effect of their accounts. In other words, you could show the cost of ownership-i.e. the shares and the movement in the value of those in any given year-and you could show a contingent liability. You have two different ways to do it. The latter would be simpler.

Julian Kelly: That is what we do currently.

Sir Nicholas Macpherson: We have tried to be quite transparent. These accounts contain a very good summary of all our contingent liabilities. They do move around with the share price.

Q86 John Thurso: I was going to come on to that. First of all, I want to ask you about the details of UKAR, now Northern Rock Asset Management and Bradford & Bingley are both in there. In the years 2009-10, Northern Rock Asset Management went from negative share capital and reserves of minus £386 million to £1.109 billion, and likewise Bradford & Bingley went from £1.394 billion to £2.207 billion, which are quite healthy and large rises-£1 billion-plus in value for each, in the right direction. It is not a question for you, but it does beg the question of whether nicking those for free was the right thing, and whether there is not some residual value for the shareholders there. Does that just show up in Whole of Government Accounts as £2 billion extra?

Julian Kelly: Normally in Government accounting policy you take something and you leave it at the historic cost. We do have an exception to that with, for example, the Bank of England, where we do reflect the retained earnings in the Bank, and we are looking at whether to do the same for what will now be UK Asset Resolution, so that you would begin to see through the Treasury’s accounts and then through the Whole of Government Accounts effectively what is the ongoing taxpayers’ equity in the banks.

Q87 John Thurso: I know we are over a year out of date, and you are not far off a new set of accounts that will probably change the picture entirely, hopefully for the better on these two anyway. If you have these assets being wound down and, effectively, the picture is getting better as we go along because the worst-case scenario, which is what you have provided for, has receded to some degree, the assets are not as stinky as they were and it is improving, so you may well find out that when this process is over, at the end of 20 years, it could be £2 billion to £5 billion in today’s money of actual assets in the bank for the benefit of the taxpayer.

Julian Kelly: The publication that Nick was talking about earlier will set out the situation with Northern Rock’s sale, and at the moment it is also planned that it will set out what our evaluation is of the total picture for the wholly-owned banks, based on what has happened to date and the current business plans of those banks, so you will begin to see at least a range.

Q88 John Thurso: That would be very useful to see, whenever it comes out.

Sir Nicholas Macpherson: It is one of the reasons that I am quite optimistic about these. The so-called bad bank has turned out to be a rather good bank.

Q89 John Thurso: Yes. We should invest in a few more of them, obviously. May I come to the other side, which is not quite such a happy place-the ones that are in UKFI, which, as we know, are miles below the "in" price? My question for you, really, is: what do you do in the Treasury to monitor, control and hold to account the operations of UKFI, if anything?

Julian Kelly: I sit on the board of UKFI. I am one of its non-executive directors. The executive team have a regular, ongoing dialogue with the Second Permanent Secretary of the Treasury, the policy team for which he is responsible. The Chief Executive and Chairman, along with Nick and Tom Scholar, meet regularly with the Chancellor to discuss exactly what the strategies are for the bank. Both the Chancellor and UKFI have met regularly with, for example, the RBS Chief Executive to discuss what the strategy is, as you would expect such a large shareholder to do.

Q90 John Thurso: This is the question that occurs to me, bearing in mind that for many years this country largely owned-not entirely-an extremely successful company called BP, which had a chairman who reported to the appropriate Secretary of State in the appropriate Department, and that was more or less it. UKFI was created on the assumption that, over a relatively short space of time, this would all go well, and you just needed an institutional shareholder as a buffer between the Treasury and the companies. It now looks as if we are going to be hanging on to these things for a pretty long time. Indeed, at that point, you start to look at what is the best value for the taxpayer of holding these. What was it you called them? Somewhat corrosive assets, I think it was-or their ownership in public hands was being corrosive. That means that part of the equation will be not just financial; it will also be public policy. Is it appropriate, if you have public policy driving this as much as finance, to stick a bunch of people who are not accountable for public policy between the public policymakers and the executives of the bank? Have they not outlived their usefulness?

Sir Nicholas Macpherson: I do not think they have outlived their usefulness yet.

Q91 John Thurso: I notice the "yet".

Sir Nicholas Macpherson: The "yet" reflects the fact that, ultimately, how we run these banks must be a matter for Parliament and the Government of the day. If the Government chose to run them on a different basis for wider public policy reasons-if, for example, we just wanted to pay all the management the same as Treasury civil servants, or we wanted to make them lend on a non-commercial basis-those would be perfectly valid policy choices, but it would begin to change the nature of the bank considerably, as well as having implications for the value of our shareholding. You used the example of BP, and I think it is an interesting one. The debate about whether you should use the shareholding of a bank in more interventionist ways is an interesting one, but all I would say is I would be quite cautious about that. You could lose value very quickly.

The experience of President Mitterrand in the France of the early 1980s, where there was wholesale nationalisation of the banks, was not a particularly happy one, and I seem to remember that he ended up changing his policy along the way. I accept that if Parliament decided that we wanted to run RBS-it might be more difficult with Lloyds, because we are minority shareholders-in a different way, then there would be consequences. I do think it is helpful to have an organisation that is looking at the issue solely from the point of view of a shareholder. It is then up to Ministers and indeed the Treasury, as the servants of Ministers, to put on the table wider considerations.

Q92 John Thurso: I am sorry to push you a little bit on this, but they cost us £3 million a year or whatever to run, UKFI, and we have seen recently that when a political event comes along, they are wholly bypassed and it becomes a direct thing between the bank and the Ministers concerned. Therefore what value do they actually have? The executives and the non-executives, and so forth, of the bank are, importantly, hopefully delivering the best for that institution within the bounds of what the shareholders have said to them. The Government and Ministers are trying to do the best for the country. What is the point of the buffer?

Sir Nicholas Macpherson: I still think the buffer has a point. Yes, UKFI does cost a bit of money, but it is a genuine centre of expertise. Its arm’s length nature does mean it can influence the management of the banks as well as giving, I think, high-quality advice to the Chancellor and to Treasury officials. On your fundamental point, if we ended up in the business of owning these banks for a very long time indeed, would it mean that in 10 years’ time, UKFI would look the same as it does now? I would be quite surprised under those circumstances, and, although I think UKFI will continue to be important in the coming years, that would change if the UK Government remained in the banking business over a long period.

Q93 Chair: Before we close, I would like you to send the Committee specifically the document you referred to on the business of this tax arrangement or tax avoidance.

Sir Nicholas Macpherson: Certainly.

Chair: You mentioned a document that circulates in Whitehall that tells Accounting Officers what the policy is, so I would like a copy of that for the Committee.

Sir Nicholas Macpherson: Certainly.

Chair: I would also like a specific note from you on who you feel it applies to outside Whitehall, and the basis on which you feel it applies to them. Lastly, I would like some indication of what happens with publicly funded organisations outside Whitehall that you would feel are outside, and for what reason. We find this ridiculous; when we approach anybody, they all have different statuses, and they are able to say to us, "Oh, you can’t do that, because we have this status." It would help the public debate and it would help us in our scrutiny if we knew exactly the rules of the game; that would be very much appreciated.

Julian, you were right and I was wrong about the bad bank and the good bank. Thank you very much, both of you, for the afternoon. It has been very, very interesting. Thank you for coming, and for being so forthcoming.

Prepared 24th November 2012