To be published as HC 625

House of COMMONS



Treasury Sub-Committee

HM Treasury Annual Report and Accounts

Tuesday 3 September 2013

Sir Nicholas Macpherson and Kirstin Baker

Evidence heard in Public Questions 1 - 101



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Oral Evidence

Taken before the Treasury Sub-Committee

on Tuesday 3 September 2013

Members present:

Mr George Mudie (Chair)

Mark Garnier

Stewart Hosie

Andrea Leadsom

Mr Andrew Love

John Mann

Mr Brooks Newmark

Jesse Norman

John Thurso

Mr Andrew Tyrie


Examination of Witnesses

Witnesses: Sir Nicholas Macpherson, Permanent Secretary, HM Treasury, and Kirstin Baker, Finance and Commercial Director, HM Treasury.

Chair: Thank you for coming in a shade early. We want to finish for question time, you will be pleased to hear. I had thought it was at half-past 2, but they tell me it is at half-past 11.

Sir Nicholas and Ms Baker, good morning. The person to start asking the questions is the learned John Thurso.

Q1 John Thurso: Thank you very much, Chairman, and welcome back. Sir Nicholas, I begin by asking you about the Treasury board, its sub-committees and the non-execs. Are you satisfied with the arrangements for corporate governance in the Treasury?

Sir Nicholas Macpherson: Yes. I think that the new arrangements work well. We are very fortunate in the quality of our non-executive directors. Sarah Hogg, who plays an active role as the lead non-executive director, has huge experience and knowledge and a lot to offer.

Inevitably, ministerial input into the governance of the Treasury is going to be limited. That is mainly because Ministers are incredibly busy, and their diaries are always shifting. The Treasury is primarily a strategic policy-making Department. It does not have huge operational responsibilities. The model that was developed by the incoming Government in 2010, where the Secretary of State would chair a board that would meet regularly, does not really fit the way that the Treasury operates.

Q2 John Thurso: Just to put some flesh on that, in your report it says, "The Board is scheduled to meet quarterly." It met once two years ago. How did it do last year?

Sir Nicholas Macpherson: We met two times last year, and we aim to do even better this year.

Q3 John Thurso: I would have difficulty answering a question on satisfaction with a "yes" if a board that was meant to meet four times a year met once in one year, twice in the next year and had some aspirations for the third year.

Sir Nicholas Macpherson: Put in those terms, if you focus on the form, rather than the substance, I recognise that the Treasury’s board does not come up to the ambitions of meeting very regularly but, on the substance, the Treasury is a small Department. I see the Chancellor of the Exchequer very regularly. Sarah Hogg, the lead NED, sees the Chancellor regularly. There are lots of opportunities to discuss how the Department is performing without calling the full board. The other point that I would make is-

Q4 John Thurso: Can I press you on that? You have constructed a formal structure or form, as you put it, which does not work and cannot work because of ministerial diaries or whatever, but it does not matter because, substantially, you do it another way anyway. Is that roughly what you are saying?

Sir Nicholas Macpherson: What I am saying is that this framework was created to be applied to every single Whitehall department. Inevitably, departments differ. We have tried to apply it in as sensible a way as possible. What the Chancellor has done has been to delegate more of his role to Sarah Hogg, who chairs what is termed the sub-committee of the board, which is basically officials plus the non-executive directors. It is that body that meets more often, and which, in my view, is operating effectively.

Q5 John Thurso: Let us come on to that, then. In any other organisation, if the chair of RBS was sitting where you are sitting and they said, "We hope to have a certain number of meetings and we managed to do a quarter of them, but it doesn’t matter, because it all looked all right on the night," you would imagine that we might not be overly satisfied with that as a reply.

Sir Nicholas Macpherson: I can imagine that, but you have to take into account that the accountabilities of the Treasury work differently from RBS. RBS’s board is directly accountable to the shareholders of RBS. In the case of the Treasury, the Chancellor of the Exchequer is directly accountable to the House of Commons, namely you.

Q6 John Thurso: The inevitable question must be asked, is this not a pointless board if it is masquerading as doing something that it cannot do? The construct ought to be one that works. What you are telling me is that the sub-committee, which is the non-execs and the officials, is the bit that works.

Sir Nicholas Macpherson: It is certainly the bit that has the time to engage on detailed issues around the staffing of the Treasury. My personal view, having worked for a large number of Chancellors, is that, on the whole, Chancellors are there to determine the Government’s economic and financial strategy. Very rarely do they have time to interfere in every nook and cranny of the Treasury, and it would be a waste of their time if they did. It may be that I have a slightly old-fashioned view of these matters.

Q7 John Thurso: The point that I think we are probably agreeing on, although it might be hard to work it out from the language used, is the fact that it is not the Chancellor’s place to cheer a board, and it is not particularly helpful to have a board full of Ministers, officials and non-executives. What is important is the non-executive input, with the officials in the actual managing of the operation, rather than in the strategic side, which is what the Treasury board is presumably meant to be doing.

Sir Nicholas Macpherson: I would be inclined to agree with that. What the Chancellor needs is assurance that the Treasury is being well-managed. He does not have to do it himself.

Q8 John Thurso: You, as accounting officer, are effectively chief executive for the purposes of management, and it is you that needs the assurance of an audit committee and non-executives, and their participation, in being able to give that assurance to the Chancellor.

Sir Nicholas Macpherson: Yes, although I would just pause on the chief executive point. Yes, I am responsible, as accounting officer, for running the Department. The Chancellor obviously wants governance that gives him reassurance that I have got a grip.

I emphasise the role of the lead non-executive. Sarah Hogg chairs that sub-committee to give an extra degree of assurance. If Sarah concluded that I was hopeless and had to go, she is empowered to go and talk to the Chancellor and say, "Look, this guy Macpherson has had his day." That is quite a useful mechanism.

Q9 John Thurso: I suggest to you that it would be worthwhile-anything that has an aspiration to do things that it will never do is fundamentally flawed from day 1. What you are describing, the Treasury board sub-committee, is the bit that works and is useful. If you had a written-down construct and governance that was followed through that committee, it would be a lot more helpful, rather than constructing a bunch of committees that never get round to meeting terribly much. I give you that observation.

Sir Nicholas Macpherson: Thank you.

Q10 John Thurso: The second point that I want to ask about is the audit committee. I am tempted to ask whether you are satisfied with the operation of the audit committee, but I am sure that you would say yes. What do you do to ensure that the audit committee effectively scrutinises the work and gives you the assurance, as accounting officer, that you need?

Sir Nicholas Macpherson: The audit committee is the part of the governance which, in many ways, has been most useful in recent years, partly because of the extraordinary expansion of the Treasury’s balance sheet. Some of the external members of the audit committee have huge experience in relation to accounting and risk management more generally. We have gone out of our way to ensure that these individuals have sight of all our interventions. For example, Mike Ashley, who has had huge experience as an auditor at KPMG, got actively involved when we were setting up the Asset Protection Agency.

We tried to utilise the expertise on individual issues while continuing to bring before the committee the big operational risks of the Treasury. That audit committee meets very regularly. I always attend it, as does Kirstin, the finance director. Their probing is very useful, in my view.

Q11 Mr Tyrie: While we are talking about non-execs, do you think that non-execs should set the Permanent Secretary’s pay?

Sir Nicholas Macpherson: I think they should certainly have a role in setting permanent secretarial pay.

Q12 Mr Tyrie: That was the longest pause that I can remember from Sir Nicholas. How much role?

Sir Nicholas Macpherson: They have an opportunity to see permanent secretaries in action. They engage with them at a number of levels. If they are doing their job, they should be able to take a view about, "Is this department fit for purpose? Is it operating effectively?" I think they should have an input. Should they have the sole input? I do not know-I had not thought about it in great detail.

Mr Tyrie: Had you not?

Sir Nicholas Macpherson: Since this regime has been in place, I do not recall having a pay rise, or indeed accepting a bonus. It has been academic.

Q13 Mr Tyrie: If I may say so, all those parts of the reply are somewhat extraneous to the question, which is whether you think, in principle-

Sir Nicholas Macpherson: In principle, they should have a role.

Q14 Mr Tyrie: But not a decisive role.

Sir Nicholas Macpherson: That is the issue that I have not considered. I do not think that you should set individual permanent secretarial pay on a departmental basis. This is only something that you can do by looking at permanent secretaries across the board.

Q15 Mr Tyrie: That sounds like a powerful point. Have you discussed this at all with the Cabinet Secretary?

Sir Nicholas Macpherson: Yes, I have. I am on the pay committee for permanent secretaries.

Q16 Mr Tyrie: So you have thought about it a bit.

Sir Nicholas Macpherson: Yes, I have thought about it.

Mr Tyrie: You said a moment ago that you had not, but you have.

Sir Nicholas Macpherson: I have. I am on the committee. Part of the input into that process is the view of the lead non-executive. The reason I pause is that, having observed the permanent secretary pay committee, there is a slight risk of what I think is called Stockholm syndrome, where the lead non-executive-

Mr Tyrie: We are familiar with it.

Sir Nicholas Macpherson: It is where the lead non-executive begins to have an excessively favourable view of the permanent secretary. Needless to say, in my case, I am very confident that Baroness Hogg-

Mr Tyrie: Does not have a favourable view.

Sir Nicholas Macpherson: No-that she can look at my performance in a detached way. I worry that, over a period of time, non-executives think, is it their role to promote the interests of the individual permanent secretary?

Q17 Mr Tyrie: I note that only 10% of Treasury staff who responded to the survey thought that the Department is doing a good job at retaining its most talented people. Would you agree with my assertion that, for the most part, it is not pay but proximity to and deep involvement in key decisions that motivate Treasury officials?

Sir Nicholas Macpherson: I would agree with your assertion. What you have identified is an important point. Treasury staff on the whole are less happy about their pay than people in other departments. That is reflected in high turnover and so on. People do not join the Treasury, any more than they would join the House of Commons, for the money. They join it because this is a fascinating, absorbing job, where you feel you are working on really important issues that affect the public interest. The quality of the work is fantastic. I am biased. I joined the Treasury in 1985 and I have now been there for 28 years. I am all too aware that this is the best job I will ever do, and that is the case for many people who work at the Treasury.

Q18 Mr Tyrie: So you did agree with the assertion that job satisfaction could be summarised in one word: morale, in a sense. Morale, or job satisfaction, has gone up and down over the years.

Sir Nicholas Macpherson: Morale is very high in the Treasury. If you look at all the scores-

Q19 Mr Tyrie: Has it always been high-say, over the last 15 years?

Sir Nicholas Macpherson: It ebbs and flows.

Q20 Mr Tyrie: Give us the ebb, roughly, and the flow.

Sir Nicholas Macpherson: I do not have the statistics in front of me-I would like to approach it in a scientific way. We have discussed it in the past-and the Treasury has done some analysis of it. There have been periods when the Treasury has struggled more with the agenda that it faces than on other occasions. In recent years we have been on a reasonably positive roll.

Q21 Mr Tyrie: I am sorry to interrupt, Sir Nicholas, but does it not have more to do with the relationship between the top of the civil service and, in particular, the top of the Treasury and Ministers-that ebb and flow?

Sir Nicholas Macpherson: The relationship with Ministers is very important for people who work at a senior level, probably less so at more junior levels.

Q22 Mr Tyrie: Is it not true that Alistair Darling got on much better with senior officials, on the whole, than his predecessor?

Sir Nicholas Macpherson: I would not recognise that. I worked extensively with Gordon Brown. It is fair to say that the Alistair Darling era created an extraordinary sort of cohesion within the Treasury, partly because we were right up against it. We were going through the biggest economic and financial crisis in a generation. How Alistair Darling responded to that and how he interacted with officials in the Department created a sense of unity, which has been sustained well into the current era.

Q23 Mr Tyrie: So you would not recognise the view that has been put to me by a good number of your colleagues that the Treasury got hollowed out and fragmented, and that some of its best people left prior to Alistair Darling taking over, and that he engaged in a reconstruction, albeit what became an emergency reconstruction shortly after he took over, and that that process is still going on, in order to maintain the institutional memory, which has always been a crucial part of the Treasury’s authority in Whitehall.

Sir Nicholas Macpherson: There are cycles in the Treasury. A number of people left round about the late 1990s. That was partly because there were a number of people, of the Nigel Wicks, Terry Burns and Alan Budd variety, who were coming up to retirement. There was also the issue in 2007, when a number of people went to number 10 with Mr Brown: Jon Cunliffe, Michael Ellam, Tom Scholar and so on. We discussed this with the Committee before.

When the financial crisis struck in 2007, it is fair to say that the number of people who had been through a recession before was fairly limited. What has really changed over the last few years is, first, the experience of the senior team. Whatever you say about us, you cannot say that we are not experienced. I have recently entered my ninth year as Permanent Secretary. John Kingman, who, admittedly, went off to Rothschild for a couple of years, has done his job for six years, Tom Scholar for five years and Dave Ramsden for six years.

Chair: I think that we have got the point.

Sir Nicholas Macpherson: These people-

Chair: It will be the caretaker next.

Sir Nicholas Macpherson: Whatever you say about us, you can say that we are hopeless, but you cannot say that we have not been around and worked through the financial crisis. One of the most important challenges for senior management now is to retain enough of that expertise and to manage the workforce in a way that ensures that, if anything like what has happened in recent years happens again, we are ready for it.

Q24 Mr Tyrie: It is nearly 30 years ago that we first met in the Treasury. We were working in an institution with vastly more authority and responsibility in a formal sense than the current body. A large proportion, perhaps the majority, of the Treasury’s responsibilities have been handed to others: the OBR on forecasting; almost all of monetary policy has gone to the Bank of England, and so on. Do you think, in view of that, that a powerful central Department that is, after all, the formal name of the Treasury, is still desirable or essential? If so, what implications does the transfer of power to those outside bodies and decision making have on the way in which the Treasury operates?

Chair: Can you be fairly brief? That was quite a long question.

Sir Nicholas Macpherson: It is worth remembering that when you and I worked together, Mr Tyrie, the Treasury was still responsible for the civil service catering organisation. You had this very big Department with some quite extraneous roles. It is now far smaller and, I would like to think, more focused.

It is more important than ever that there is a strong central economics and finance ministry. It is the Treasury that sets the frameworks under which the Bank of England, the OBR, the DMO and other bodies operate. You have to have people who are intelligent interlocutors. The Treasury is small and it travels light, but the only way you can make up for that is by having really high-quality staff. Personally, I think that we can still attract those people, but it is really important that we continue to do so.

Q25 Mr Tyrie: And the interaction with the Bank of England?

Sir Nicholas Macpherson: Again, that is really important.

Chair: Okay-it is very important. We have got that.

Q26 Jesse Norman: Sir Nicholas, can we go back to the issue of leadership at the Treasury? You talked about your senior team. Could you tell me who is in it? You ran through some of its members.

Sir Nicholas Macpherson: The structure basically works like this. I am the Permanent Secretary. There are two second permanent secretaries, Tom Scholar and John Kingman. John Kingman looks after the economics ministry side, and Tom the finance ministry side. Then, there are a series of director generals. Sharon White is responsible for public spending, Indra Morris for tax and Michael Ellam for international finance. We have a finance director, Kirstin Baker. Have I forgotten anyone? There is also Charles Roxburgh, a very fine man, who we have recently recruited from McKinsey, who works on financial services.

Q27 Jesse Norman: You are what, Sir Nicholas-55?

Sir Nicholas Macpherson: I am 54.

Q28 Jesse Norman: You are 54, so you got your job at the age of 45, if you have been there for nine years.

Sir Nicholas Macpherson: Correct.

Q29 Jesse Norman: How old are Messrs Kingman and Scholar?

Sir Nicholas Macpherson: They would be in their early to mid-40s.

Q30 Jesse Norman: How long have they been in their jobs? You said six or seven years or something.

Sir Nicholas Macpherson: Yes, but before that, for example, Tom was our executive director at the IMF for six years. John has moved in and out of the public sector. He has worked for BP, the FT and so on.

Q31 Jesse Norman: They would have been in their late 30s or early 40s when they got their jobs.

Sir Nicholas Macpherson: Yes.

Q32 Jesse Norman: Can you see why there might be a concern about the contrast in the senior team’s actual breadth of experience, with a Terry Burns and a Nigel Wicks, going back through the rivalries and the figures of the 1980s and 1990s?

Sir Nicholas Macpherson: I can see that. Terry was incredibly young when he got his job. He came in as chief economic adviser in his mid-30s. In terms of breadth of experience, people like John and Tom would have had as much as Terry.

It may be that the career path of civil servants is evolving. First, there is far more interchange between the public and private sectors. Charles Roxburgh, who was a very senior partner at McKinsey, specialising in banking, who is roughly my age, has come in at this point in his mid-50s, having no doubt made a reasonable amount of money at McKinsey and wanting to put something back into public life. I was very struck, when we appointed him, that a whole lot of people got in touch with me to say what a fantastic appointment this was. Similarly, Indra Morris went off and became a partner at Accenture.

No doubt it is true of Parliament, too. With wage differentials increasing between the public sector and the private sector, we are going to see more movement. We have to be more flexible about who we recruit and employ. We have to go out into the market. Another good example from recent years, although he has now gone to HM Revenue and Customs, is Edward Troup, who was an incredibly successful tax lawyer. He joined the Treasury in middle age and has now gone off to HMRC.

I do not agree with this view that there was a golden age of Treasury officials. Some journalists always claim that there was, but if you look at all the disasters around the ERM and so on, things have always gone wrong. It is difficult to argue that about the modern Treasury. Everybody always thinks, "It was better in my day." I think that the Treasury is not in a bad place.

Q33 Jesse Norman: I suppose that the difference is that it is not a question of whether things go wrong, because we know that they will; it is whether or not you are bringing in and nurturing enough people with enough breadth of experience to be able to deal with the situation that you have. What you have said implies that, unless the next Permanent Secretary-heaven forfend-is Charles Roxburgh, it is going to be someone who is in his 40s if it is taken from the current senior team. I wonder whether it is a good thing for the most powerful department of the Government of this country to be run by someone in their 40s. Inevitably, they lack the experience and depth that that job is going to require, it seems to me.

Sir Nicholas Macpherson: I would not get too hung up on age-although your point is a good one. Looking back in time, most Permanent Secretaries of the Treasury became Permanent Secretary in their mid-40s. That is certainly true of Gus O’Donnell. It is certainly true of Terry Burns. Even Douglas Wass, who did the job for a good length of time, would have been only just over 50.

I will not be involved in appointing my successor, but I would hope that whoever is appointed has a serious amount of experience and is a high-quality person. Whether they are 45 or 50 does not make a huge amount of difference.

Politics is becoming a lot younger, too. I am working for a Chancellor of the Exchequer who I think was the youngest Chancellor since Randolph Churchill.

Q34 Jesse Norman: Do you think there are any areas in which the Treasury lacks sufficient depth of talent at the top?

Sir Nicholas Macpherson: We have done a lot to rectify gaps in recent years. I would argue that we certainly cannot be complacent. Retaining real expertise around financial services and banking is perhaps the biggest challenge, not least because that is an area where people are constantly being recruited. I got back from holiday only to find that some member of staff is going off to work on money laundering for Standard Chartered, I think.

Jesse Norman: Doing it or not doing it?

Sir Nicholas Macpherson: Trying to prevent it, I think you will find.

That is an area where you have to run quite hard to stand still. You need quite a proactive programme of secondments, career planning and so on.

Q35 Jesse Norman: But you do not think that you are short of what you might call hard-core economics expertise at the top or hard-core commercial skills.

Sir Nicholas Macpherson: I think that we are in a better place than we have been for many years.

Jesse Norman: That is not an answer to the question. Let us be perfectly clear.

Sir Nicholas Macpherson: No, but my point is this. What tends to happen is that you think that you have a really good team, and then someone goes, so you have to continually look at the commercial skills, the banking skills and the accounting skills. Those are, in my view, the areas that you have to continue to look at. You do not have to lose many people to become exposed. This is a small Department with a small number of people. Some people are absolutely critical.

Q36 Jesse Norman: One of the issues is that, 30 years ago, the Treasury might have been able to say to one of its brightest young sparks, "Go and do this hideous job, which really requires a talented person, because we will look after you with your next promotion." You cannot do that now, because every job has to be opened up to full competition. Does that mean that you have a group of people who are lily-padding their way from one decent job to another, rather than getting stuck into the difficult parts? Is that a problem if so?

Sir Nicholas Macpherson: It is a problem in the sense that the labour market in the civil service works far more in favour of the individual than the manager compared with the old days. In the old days, I was summoned up to the second floor and told where I was going to go next. I can remember discussing this with Mr Tyrie. I was quite annoyed from time to time, because I was told that I had to go and work on EMU when I wanted to go and be the private secretary to the Chief Secretary. As it turned out, working on monetary union at the time of Maastricht was far better than working for the Chief Secretary, however good he may have been.

The labour market works in favour of the individual. In the Treasury, we have been trying to manage that labour market more. You can do that in a number of ways, by having active conversations with individuals to say, "You are doing really well. You are part of the future of the Treasury, and we are going to see you right." To use a good recent example-I will not mention the name-we recently seconded someone to the Independent Commission on Banking. He wanted to come back earlier. That banking commission went on for several more months than originally planned-and rightly so. We had an active conversation with that individual to say that it would be in his interests to carry on working on it. We put far more emphasis on people management than we used to. You can use financial incentives at the margin, but people are not mainly motivated by money; they are motivated by whether they are going to progress in the organisation and whether they have a future there. If you enter into a real dialogue about that, it can often encourage people to stay.

Q37 John Mann: How many people are you going to be losing up to March next year?

Sir Nicholas Macpherson: As of this moment, we are at about 1,033. We are probably going to lose another 30. I would be very surprised if that requires redundancies. This is an organisation where a good 200 people leave every year, so it is relatively easy to hit those sorts of targets.

Q38 John Mann: There is a danger, you said, of losing too many people and becoming exposed. With the increasing demands on the Treasury, and the demands when there is a change of Government in 2015, when priorities will alter, how is the Treasury going to cope with that?

Sir Nicholas Macpherson: It needs to be prepared. The critical thing is to hang on to the right people. Also, it is around how we manage the resources that we have. One of the things that we have been trying to do in recent years is, as well as having a whole lot of core staff, to have, in effect, a consultancy arm within the organisation so that you can move resources to where they need to be. Although there are a whole lot of areas where, at the current time, we are having to put more resources in-at the moment, there is a lot of work going on on the Royal Bank of Scotland, for example, and we have had to move staff into that-there are other areas where the pressure is perhaps declining. As of this month, the eurozone looks in a much better place than it looked six or 12 months ago. You can move people at the margin.

Q39 John Mann: So you are planning the future Treasury based on short-term events, rather than for the medium-term. That is what you are saying.

Sir Nicholas Macpherson: You try and do both. You have to deal with the short-term events-they are not going to go away.

Q40 John Mann: The question is about the resource, not about how you deal with such things-although that is a very important issue of course. The issue that we are discussing here is resource. You cannot alter resource in a coherent organisation that is going to succeed based on events over the next few months and how you perceive them. You can shift resources around, of course but, in terms of the core resource that you have, that is not a personnel strategy.

Sir Nicholas Macpherson: The core resource is planned on the basis of the medium-term challenges that the Treasury faces. To use a current example, we have just had a spending review and there is not going to be another spending review in this Parliament, but the one thing that we know is that, whoever wins the next election, there will be a spending review in 2015, and the Treasury needs to be ready for that. That is nothing to do with party politics; it is just to do with understanding what the trade-offs will be.

The spending review is out of the way, but we are not suddenly shifting hundreds of people away from public spending. What I would hope is that the 200 to 300 people who are involved in public spending in the Treasury will be spending the next 18 months doing some strategic R and D work to understand what the issues are so that whoever comes in in 2015 can get the best advice we can give.

Q41 John Mann: The thing that seems to categorise current politicians of all flavours in this generation in power, or potentially in power, is a desire to make bigger changes in expenditure than their predecessors ever did-they might say than they ever dared do. Regardless of whether that is good or bad, in terms of the critical function that the Treasury provides, that means that demand for your services is not going to decline whoever is in power. That is the one certainty, it seems to me, in politics. Therefore, cutting back is going to create a problem for whoever is in power.

Sir Nicholas Macpherson: My view, which I have told this Committee before, is that there is a critical mass in the Treasury, which you need. I have worked in a Treasury of 900 people, briefly, back in 2001 or so. I would be quite nervous approaching some of the challenges that you have described. Whoever is in power, the public spending challenge is a massive one with a Treasury of less than 900 people, say.

Q42 John Mann: Perhaps I misheard, but I think you mentioned internal consultancy. One of the signs that I always look for when the public sector is cutting back, to see whether it is doing it well, is to see what the increase in external consultancy is. I see that you have managed to double it in the last year.

Sir Nicholas Macpherson: Kirstin will correct me, but my recollection is that quite a lot of that was to do with redesigning the building so that we could let out a lot more space, and we charge that back to the Cabinet Office. Kirstin, can you remember what the consultancy spread was on?

Kirstin Baker: I am not sure what number are you are looking at. Core Treasury expenditure on "consultancy and professional services", if you look at note 7.1 to the accounts-

Q43 John Mann: It is £13,371,000, up from £6,182,000. That is on page 134 of the accounts. You have doubled the consultancy. My question-that is a fact; it is down there in your accounts on page 134-is, is that not a sign of poor management of cost reduction, because you are having to bring in external consultants?

Kirstin Baker: That is looking at the group. That will include the FSCS and MAS. The details of their spending are in their own accounts. That is classified as programme expenditure. If you look at core Treasury, the spending on consultancy and professional services last year reduced. This current year, we probably will be spending more, because we are doing a lot of work on some of the banking interventions, and that inevitably means that we have to hire legal and financial advisers.

Q44 John Mann: When you joined the Treasury, Sir Nicholas, it was the done thing for economists. It was a high-prestige job, and people fought to get in there. That tradition of some of the brightest brains being recruited because of their academic prowess and, doubtless, other skills that were identified, was critical to the culture within the Treasury. People would choose to go down that route. Are you attracting that range of top brains-young people in their early or mid-20s, as the Treasury has traditionally done, moulding them into Treasury thinking, or are we about to lose that?

Sir Nicholas Macpherson: We still have a very strong brand. We recruit directly using the Treasury’s brand. The last time we recruited we attracted a really good field. We had thousands of applicants for about 30 jobs. As far as I am concerned, the people who join the Treasury are as good as they have ever been. The challenge is to hang on to them. Once they get into their mid or late 20s, they begin to look around, and it is often at that point where our pay becomes less competitive. However, I still think that the Treasury has very high-quality people.

Q45 John Mann: In a sense, that was always the case. You did not disappear off, and there has been that Treasury tradition. Are we entering an era now in terms of the personnel planning of the Treasury when the expectation is that we will not be getting more people like you in 20 or 30 years’ time who have had that career within the Treasury, but instead we will have a model of people jumping in and out, and of external recruitment? Is that the model that you are planning on in terms of personnel?

Sir Nicholas Macpherson: No, I am planning on a bit of both. There will be some people who, I really hope, will stay throughout their careers. I hope that they will go outside the Department from time to time, perhaps going to the IMF, or into the City or another department. I also hope that we can ventilate the organisation by recruiting people directly at different stages in their career. So far, we continue to be successful in doing that. There is greater diversity in the Treasury than when I joined it, and that is a good thing.

Q46 Mr Love: You said earlier in a reply to Mr Mann that you were nervous if the staffing complement at the Treasury went down below 900. Is that your bottom line?

Sir Nicholas Macpherson: No, it is not my bottom line; it is just a description of my nervous state.

Q47 Mr Love: Let me remind you. There has been a lot of talk about what the Treasury has to do. I am quoting here from a National Audit Office brief. You have got to deliver banking reform, implementation of the spending review, management of public sector deficit, spending controls across central Government, stimulating economic growth and reacting to developments in the eurozone and wider economies. That is apart from all the short-term events that you must cope with. You are doing that on roughly 1,000 staff, as I understand it, at the end of this year. Where is the bottom line? How can you be as effective as you need to be on behalf of the Government?

Sir Nicholas Macpherson: I always welcome support from any organisation when it comes to arguing for the Treasury’s budget being protected. Equally, we always have to lead by example, by showing that it can be done and that you can get smaller, which is why we have moved to things like desk sharing and so on.

You have identified a really difficult issue. The fact is that the economic and fiscal challenges facing this country remain as big as they have ever been. Equally, Government is trying to get smaller. It is difficult for the Treasury’s credibility if it argues that it is somehow different. What I would hope in future spending reviews-

Q48 Mr Love: Let me ask you this, Sir Nicholas. You said "lead by example". Leading by example, as I understand it, has been that the reductions in the Treasury have been greater than those of other departments overall. Is that sensible in these circumstances where the Treasury stands at the centre of central Government?

Sir Nicholas Macpherson: It has been sensible hitherto. If, in 2015, it is decided that the Treasury needs another 30% cut in its staff, you will have a very different Treasury. It will have to do its job very differently. It will be operating at a far more general level. That is for the democratically elected Government of the day to decide. If I have the privilege of still being around in 2015, I will set out what I think the arguments around that are. I personally think that another 30% cut in Treasury staff would be very risky indeed.

Q49 John Mann: You mentioned earlier that there will be a comprehensive spending review regardless after the general election. Will you make that recommendation to whoever comes into power?

Sir Nicholas Macpherson: The convention is that I do not tell you what advice I give, but I hope that I have given you enough clues.

Q50 Andrea Leadsom: Sir Nicholas, you have effectively said that you have been cut to the bare bones. I want to go back to the issue of expertise and focus on the job that you are required to do, particularly with regard to infrastructure. The Treasury Select Committee had a hearing on private finance in March this year with a professor of accountancy from the University of Aberdeen and the global head of infrastructure at PWC, who were quite scathing about the fact that the markets saw the Treasury coming on "private finance 1", and the reason that we have ended up in the dire situation that we have, where the private sector has completely legged over the public sector on so many private finance deals is a simple mismatch between the expertise on the two sides, in particular the failure of the central public sector organisations to learn from other mistakes and to share best practice.

I would like you, first of all, to comment on the question, where private finance is concerned, have lessons been learned, and is that something where, with PF2, the Treasury would be much more aware of the potential pitfalls?

Sir Nicholas Macpherson: I am very happy to answer that. Private finance has evolved in a way that, looking back on it, could have been far more effective. I remember, when the Treasury first started making a big push towards private finance in the early 1990s, there was the hope that private finance would result in more efficient spending rather than less efficient spending. The pity was that, increasingly, it became an accounting trick at a time when capital resources were very constrained

Left to my own devices, I would very much like it all to be on balance sheet. Then, people could take decisions on the basis of what is the right thing, rather than being influenced by accounting. In theory, you should not be taking into account the balance-sheet treatment but, at the margin, people have done. What are we doing about it? First, there have been some policy reforms with PF2, which I would hope will get things on to a better course. Secondly, bringing together in-house expertise in the Treasury in one place to create a bit of critical mass, which we sought to do through Infrastructure UK, and which will ensure that there is better central support from the Treasury to departments at the point when they are contemplating which procurement route to select, should be beneficial.

I cannot promise anything, and it is important that the Parliament continues to probe PFI, but we have learned some lessons.

Q51 Andrea Leadsom: You have just made an interesting point that, if you had your choice, you would have had it all on balance sheet. What else would you have on balance sheet? Specifically, the coupons on the asset purchase facility, for example, are effectively being given back to the Treasury. Do you feel that that money should be offset against the national debt, or do you think that that is a circular argument, and that it should be fully disclosed and admitted?

Sir Nicholas Macpherson: This is one of those extraordinary public sector anomalies. The Bank of England, as far as I am concerned, is a nationalised industry. On any sensible basis, its operations should be on the nation’s balance sheet. However, international statisticians, in their wisdom, treat central banks slightly differently. The result is that, when money is sitting in some fund in the bank, it does not net off the national debt. You move it across the boundary to Treasury, and it does.

There was a good reason for repatriating the money to the Treasury. If you do net it off the national debt, you then have to go out into the market to fund that bit of money, which was sitting on the bank’s balance sheet.

Q52 Andrea Leadsom: We are very clear about that, but what do you feel is the right treatment from a transparency and actual reality perspective?

Sir Nicholas Macpherson: I am not a statistician, and there may be very important principles that I have missed out on, but I was slightly surprised by the original decision on the accounting within the Bank of England. I fully accept the convention of money market operations. If you put all that on the Government’s balance sheet you will get strange things happening to it, and that will make it more opaque, rather than less.

The nature of the asset purchase regime was that these are so obviously assets with an income stream, and you would hope that they would net out across the accounts.

Q53 Andrea Leadsom: Moving back to infrastructure, can you give us two minutes on the Green Book, I think it is called, the bible that tells you what is value for money in an infrastructure project, how happy you are with how it reflects current true value to the taxpayer and how often you review it?

Sir Nicholas Macpherson: I am happy to tell you about the Green Book, because my first job in the Treasury was doing investment appraisals, where I made use of the Green Book. In those days, you had to look at the Forestry Commission’s investment appraisal. That was my first job. This is a book with-

Chair: Could you perhaps give us a very brief-

Sir Nicholas Macpherson: We seek to continue to revise the Green Book as necessary, with new techniques and new principles insofar as they make sense. We will no doubt be looking at it again soon. If people have views on how it can be improved, we would certainly listen to them.

Q54 Andrea Leadsom: When was it last reviewed?

Sir Nicholas Macpherson: I cannot tell you offhand, but-

Andrea Leadsom: Ten years? Five years?

Sir Nicholas Macpherson: No, it was more recently than that. I should think within the last three years or so.

Q55 Andrea Leadsom: Would the Treasury welcome a review by the Treasury Select Committee into how the Green Book is calculated and assessed?

Sir Nicholas Macpherson: I wish you luck. We always welcome scrutiny.

Q56 Andrea Leadsom: Turning to the new infrastructure guarantee as announced by the Government in July 2012, up to £40 billion of guarantees are going to be offered in aggregate, as you know. According to HM Treasury’s annual report, "The scheme has been welcomed by the market with over 110 enquiries received." Is the Treasury up to the job of assessing those infrastructure projects, or are we looking at a future Treasury Select Committee in 10 years’ time regretting the fact that the market saw you coming?

Sir Nicholas Macpherson: That is an absolutely critical question. We are doing all we can to assess them. We have created a risk committee, which Kirstin sits on, which looks at all the guarantees. It is one reason why the Treasury is always quite cautious about these things. They always seem a very good idea at the time, and they have a nasty way of coming back and biting you. However, we are doing all we can to ensure that they are sensible and value for money.

Q57 Andrea Leadsom: Do you have people such as genuine project financiers, who have experience of long-term projects, the sale and lease-back aspects and so on, looking at these projects?

Sir Nicholas Macpherson: Very much so. Infrastructure UK was designed to bring a cluster of experienced people with those project skills. Geoffrey Spence, who runs it, has long experience of the sector. We are in a reasonable place. Again, that is an area where attracting the right people at the price that we can pay will always be a challenge when they can command far more in the market.

Q58 Andrea Leadsom: Turning to the specific, where HS2 is concerned, when it was first announced that that project was going ahead, the Chamber was told that there was a 30% optimism bias in the original £17 billion figure, which is now being absorbed into core expenditure. There is a further additional incremental 30% contingency, which is not called an optimism bias but, as far as I am aware, those are one and the same thing. Can you explain to us what has happened in the interim period that means that the 30% optimism bias is now therefore completely spent, and that a further 30% contingency is required on the project?

Sir Nicholas Macpherson: I would be happy to write to you on that. This is quite a complex matter, and I do not want to say something that I regret. Would you mind if I write a letter to the Committee, setting out what has happened?

Q59 Andrea Leadsom: Okay, but may I ask you a different question? Are you confident that HS2 Ltd has the competence to deliver this extraordinarily expensive project on time and on budget? Are you confident that they are not being overly naive in terms of the complexity of bringing in such a scheme?

Sir Nicholas Macpherson: You always have to be quite cautious about very large, long-term projects.

Q60 Andrea Leadsom: But it is not just any old very large long-term project, is it? It is the most expensive-

Sir Nicholas Macpherson: It is a very big, very expensive project. The previous Government originally announced it, and this Government-

Q61 Chair: It is a specific question-yes or no, or you do not care to answer it because it is so difficult.

Sir Nicholas Macpherson: I am somewhere near the last point.

Chair: That is fine-unless you wish to pursue it, Andrea.

Q62 Andrea Leadsom: I do want to pursue it. It is all very well to say, "I don’t want to be mean to HS2 Ltd," but here we have a project that is not yet even gone to a Bill committee. It has only had a second reading of the paving Bill. Not that much money has been spent yet. Already, what was a £17 billion bill, which rose to £30 billion, has become £42 billion, excluding rolling stock. Already, in the very early days of the project, we are massively over budget, and you are saying that you do not want to be mean to HS2 Ltd.

Sir Nicholas Macpherson: No, I am not saying that I do not want to be mean to them. Let me tell you what the Treasury will be doing through this period. The Treasury is a key part of something called a major projects review group. Sharon White, our director general of public spending, chairs that. That group will continually be probing and assessing whether sensible plans are in place. We will be using serious corporate finance expertise to test whether the project is well managed and on track. If our conclusion is that improvements can be made, we will be communicating that very clearly to the relevant people.

It is difficult for me to set out what is going on in public, because there are some things that you can make more progress on behind closed doors.

Q63 Andrea Leadsom: But, so far, the Major Projects Authority have now got it on a red traffic light, which means that they think it is extraordinarily unlikely to be delivered on time and on budget. You also have a position where there are very considerable concerns about the finances of it by various independent commentators. At what point and by what process do you decide that this project is not going to work, or are we just going to stick with it whatever and just tinker at the edges?

Sir Nicholas Macpherson: If problems emerge we are not going to tinker at the edges. There will be a lot of opportunities for the Government to review the policy. Most of the expenditure happens way into the future. The big financial risks are also quite a long time into the future. There will be opportunities to reassess it. We have not signed a blank cheque.

Andrea Leadsom: But-

Chair: No-that is wonderful. Stewart is next. Sorry, Andrea.

Q64 Stewart Hosie: Sir Nicholas, the National Audit Office has said that "The Treasury needs to provide more effective central leadership" with respect to financial management across government. I take it you would agree with that.

Sir Nicholas Macpherson: I certainly agree that financial management is an important priority, and I am quite sure that there is always scope for improvement.

Q65 Stewart Hosie: In terms of the questions that Jesse Norman and Andrew Tyrie asked about the central core nature of the Treasury, and indeed the way that you described it yourself, as a strategic organisation, with few operational responsibilities, this request or comment by the NAO, that the Treasury itself needs to provide that "effective central leadership", do you believe that that is happening?

Sir Nicholas Macpherson: I think the Treasury has provided some good leadership on public expenditure and financial management in recent years, which is one reason why the deficit is beginning to fall and public spending is under control.

The issue you raise is the relative role of the Treasury on financial management and departments. There are all sorts of different models. In France they have some departments attached to the French Treasury with 40,000 staff, who sign all the cheques, and they basically have a very centralised model. Britain has tended to have quite a delegated one, going back to the 19th century. I would be worried about introducing any reform that reduces the accountability of departments. It is really important that departments cannot turn round and say, "It wasn’t me, it was the Treasury’s fault." You need real clarity of responsibility.

We are currently conducting a review of financial management, led by Sharon White and Richard Douglas, who is head of profession. It may be that, in the light of that, we introduce some changes. I am quite cautious about having a very centralised model.

Q66 Stewart Hosie: I am cautious about a centralised model as well. I like the way that the Treasury is getting its defence in first, that you do not want to be responsible if something goes wrong, but the NAO have said that you need to "provide more effective central leadership". That might be in the form of advice. It might not necessarily be a 40,000-strong cheque-signing department. What are you doing to offer that central leadership to make things more effective?

Sir Nicholas Macpherson: The first thing that we have done-we have invested quite a lot in our central financial information systems in recent years, so that we can have better financial information quicker. That is yielding benefits. We have a far better understanding of what money is spent on than we did a decade or so ago. There is more that we can do, however. The point that you raise is around how we develop the financial profession in government. We have moved to far greater professionalisation in recent years. We insist on our finance directors being financially qualified-and indeed Kirstin is an accountant. She learned her trade in Scotland, you will be glad to hear. There may be more we can do to support the profession, both in terms of who we recruit and how many accountants we train and develop and so on. I am convinced that there is always more that you can do. Whether I would agree 100% with the NAO’s judgment is another matter.

Q67 Stewart Hosie: There was a review by the Government Office for Science. It recommended that "the Treasury needs to think systematically about when, where and how it should conduct proactive analyses on its own initiative as a means of challenging departments". For this central Department, with its strategic responsibility, that is very sensible. The question is, how far can the Treasury rely on other departments, rather than your own resources, to ask those departments the challenging questions of themselves?

Sir Nicholas Macpherson: The Treasury has various instruments at its disposal. It can insist, as part of giving a department money, that a particular area is reviewed or further analysis takes place. Coming back to the basic model of the Treasury, which successive Governments have endorsed, the Treasury is quite a small Department, and there are limits to what it can do in house. There are limits to what it can commission itself. I do not think that that is a particularly big problem. I would be worried if the Treasury had hundreds of staff interfering in everything in other departments. There is a balance to be struck.

Q68 Stewart Hosie: There are of course areas where there are joint responsibilities, and where it is the role of the Treasury to do certain things. There is joint responsibility with the Cabinet Office on areas such as integration, severance payments and financial management. How does that work? How do you decide on the allocation of responsibilities between the Treasury and the Cabinet Office?

Sir Nicholas Macpherson: It works best when it is organic. All departments have pressure on their budgets at the moment. It really makes sense, whether it is on the building, IT or internal audit, to share resources where you can. That tends to reflect individual departmental negotiations. Sometimes it is a central initiative. At the moment, the Cabinet Office have a big plan to centralise HR functions more. These things can be helpful in reducing cost. They are not the holy grail, but they can make a difference.

Q69 Stewart Hosie: They are not the holy grail, but if you get them wrong, it can cause all sorts of difficulties.

Sir Nicholas Macpherson: Absolutely-and some departments have got them wrong.

Q70 Stewart Hosie: This is what I am trying to get an understanding of. You have joint responsibility with the Cabinet Office on the areas that I describe, such as integration and severance payments. There are also issues such as civil service reform more generally. In the answer that you gave to John Thurso, you said that each department is different and that departments operate differently. How does the central function of the Treasury, working with the Cabinet Office, drive integration, civil service reform and policy on severance payments across all these diverse and differently operating departments? How do you go about it, and is it effective?

Sir Nicholas Macpherson: That rests on having a very strong relationship between the Cabinet Office and the Treasury. When the Treasury and the Cabinet Office are really well aligned, they are far more effective. There is an interesting question about the model of government, which is not really for me to determine, but for the democratically elected Government of the day, about how much you devolve, how much you decentralise and how much you delegate. Over the years, you tend to get a pendulum that swings between centralisation and devolution. Often, different approaches may be warranted in different areas. I do not think that there is one simple answer to this.

Q71 Mark Garnier: Sir Nicholas, can you bring us up to date on where we are with the sales of the Government stakes in RBS and Lloyds Banking Group?

Sir Nicholas Macpherson: Yes. The Chancellor made the position reasonably clear, I hope, at the time of his Mansion House speech in June. There is a lot of work going on on RBS, looking at whether a bad bank model is the right way to go. The ground floor of the Treasury has lots of people from BlackRock and Rothschild poring over the data. I would expect an announcement on that later in the autumn. On Lloyds, the issue of bad bank does not arise. The Chancellor has made it clear that there may come a point in the not-too-distant future where the Government might seek to sell some of its holdings.

Q72 Mark Garnier: Do you know how that will be done?

Sir Nicholas Macpherson: I think that the Chancellor will announce the precise way it will be done in due course.

Q73 Mark Garnier: The parliamentary banking commission asked specifically, at paragraph 78 of the summary document, that the Treasury get back to us with a report on the sale of RBS, or the options available, by the end of September. Are you going to hit that target?

Sir Nicholas Macpherson: Em-

Mark Garnier: It sounds not.

Sir Nicholas Macpherson: Whether we will get there precisely by the end of September, we are on track for an announcement reasonably soon. When I say autumn, I am not talking about-

Q74 Chair: The end of September is reasonably soon. Are you going past September? It looks a possibility.

Sir Nicholas Macpherson: I would not rule that out. That is not because we are somehow trying to waste your time; it is simply because some of the data challenges of getting to a conclusive, comprehensive answer mean that it may take just a little bit longer.

Q75 Mark Garnier: You will obviously have some quite clever people looking at the specific issues.

Sir Nicholas Macpherson: Whatever the Government finally decides to do, you will get a very well articulated explanation of it. Coming back to where the Treasury is putting its resources, we have some of our best people working on this, and we want to provide a definitive response, because this issue has been going on for a very long time, as you know.

Q76 Mark Garnier: Say, for example, purely hypothetically, you do not offer a good bank/bad bank split on RBS, will you then go into the reasons why you did not opt for that?

Sir Nicholas Macpherson: Whatever the Government decides, it is incumbent on us, especially given the work of the commission, to set out why it is doing it and why it concluded that it would not do something else.

Q77 Mark Garnier: One of the big debates that goes round about the sales of RBS and, less so, Lloyds Banking Group, is the sunk cost, the amount of money that has been lost on this. The debate rages on whether any sale of RBS in particular should be held back to a time when the sale proceeds will at least cover the amount of money that was put in. Do you subscribe to that, or do you take the more enlightened view of people who have experience in the investment management industry that the sunk cost fallacy is exactly that, and that the cost of selling it should not be relevant to a decision that was made a number of years ago in a completely different world?

Sir Nicholas Macpherson: Obviously it is always nice if you get a higher price than a lower price, but you have to take a decision on the wider economic issues, rather than just doing a narrow financial calculation. The Chancellor was very clear when he announced the bad bank review that we will be looking at this from a number of perspectives. It is always dangerous to get hung up on a particular price. In any case, there is a huge debate about what the sunk costs are, with various different people reaching different conclusions and so on.

Q78 Mark Garnier: That is a very reassuring answer. You mentioned BlackRock and Rothschild. Has Rothschild been appointed as the bankers to any transaction?

Sir Nicholas Macpherson: They are advising us. What is their formal role, Kirstin?

Kirstin Baker: They are advising on good bank/bad bank.

Q79 Mark Garnier: So you have not given the role of the deal, if it goes ahead-you have not allocated that deal yet.

Kirstin Baker: No.

Q80 Mark Garnier: You have not appointed-

Kirstin Baker: We are not at the point where we are about to.

Sir Nicholas Macpherson: We will come to a decision in principle. Then, no doubt, we will review who is going to take it on to the next stage. You want to keep a bit of competition among the investment banks.

Q81 Mark Garnier: They seem a very good couple. The only question I have about the Rothschild choice is that your number 2 is John Kingman, who was at Rothschild. Is there any relationship between the two?

Sir Nicholas Macpherson: No, absolutely none. We deliberately took him completely out of the process. Rothschild, in our view, were the best people for this job.

Q82 Mark Garnier: And you went through a proper tendering process.

Sir Nicholas Macpherson: Yes, we had a proper process.

Q83 Mark Garnier: When it comes to the sale at some point, hypothetically, in the future-we do not know where it is or who is going to be doing it, nor do we know how it is going to be done-have you given any consideration to the fees that will be charged on this? At some point in the future, in terms of restoring both the banks back to private ownership, the fees payable to the City will run into tens if not hundreds of millions of pounds. Have you given any consideration to trying to persuade the City that a noble and decent gesture would be to do this for free, given the fact that it was the taxpayer who saved the City, and the City might want to not only do a prestige deal, which this is, but do it in such a way that it would show gratitude?

Sir Nicholas Macpherson: I would say two things on that. Just abstracting from whether they will do something pro bono, we are far better at negotiating fees than we were. We ran up huge fees from Goldman Sachs on Northern Rock. Since then, we have managed to procure advice quite cheaply, and we got better and better at this. It comes back to skills and experience. Whether someone will step up and decide that they will do it all for free remains to be seen. For what it is worth, I am always slightly distrustful of people who say that they are going to do things for free. There is usually a price to pay down the track, but we will try and secure the best deal we can for the taxpayer.

Q84 Mark Garnier: Who ultimately makes the decision on this? Is it the Treasury or UKFI?

Sir Nicholas Macpherson: Kirstin, you are on the board of UKFI.

Kirstin Baker: A decision on?

Mark Garnier: On when it is sold, how it goes about doing it-the actual process.

Kirstin Baker: The final decision on when to sell, pressing the button on that- basically, the Treasury-

Q85 Mark Garnier: That is button number 1, if you like. The rest of the subsequent buttons that are pressed on the allocation of who does the deal and how it goes back-if you could talk about how the processes-

Kirstin Baker: The detail is with UKFI, and UKFI is doing a lot of work at the moment around how they would manage a sale process, as you would expect, and the options for that and so on. They would be engaging the advisers to do that. They have been out to the market-

Q86 Mark Garnier: To be clear, is it UKFI that has engaged BlackRock and Rothschild?

Kirstin Baker: No, those are two separate things. BlackRock and Rothschild are engaged on looking at a good bank/bad bank option for RBS. Separately, work is going on to prepare for a potential sale, as the Chancellor said. We want to be ready to be able to sell Lloyds shares in particular, if the moment arises. UKFI are doing work to put themselves into position, where they would be able to proceed with the sale as and when the Chancellor decides that the moment is right.

Q87 Mark Garnier: That is very clear.

My final question is on a slightly different subject: the failed sales of these branches. Do you have anything on which you can update us on where we are in terms of what has been happening with the branches-the Rainbow branches?

Sir Nicholas Macpherson: I would say two things. First, regarding so-called Verde and Rainbow, to use the terms of art, they were supposed to have been sold by the end of this year. It looks very unlikely that they will be.

Q88 Mark Garnier: What are the implications of that? Do you have to renegotiate?

Sir Nicholas Macpherson: We will obviously need to talk again to the European Commission. We are hopeful that that should not cause too much delay.

The other thing that I should mention is that the Chancellor made it clear at Mansion House that he was asking the OFT to have another look at the two structures. The OFT should be reporting back very shortly. Once we know whether we want to amend the current size and structure of the two packages, we can then move forward to the next stage.

Q89 Mark Garnier: Having an extension is crucial, because the last thing you need to be is a forced seller. That is very disadvantageous.

Sir Nicholas Macpherson: Absolutely. You also want sustainable selling to create sustainable competition.

Q90 Mr Love: Sir Nicholas, I turn to initiatives to promote growth. Does the Treasury have a co-ordinated plan on all these various initiatives? What assessment have you made of the impact of their success?

Sir Nicholas Macpherson: We have tried to articulate a co-ordinated plan.

Q91 Mr Love: It does not feel that way.

Sir Nicholas Macpherson: Perhaps we should have another try at articulating it. I can remember that, under successive Governments, the Treasury produced some great plans-perhaps we will be producing another one. What we try to do is to evaluate all policies, particularly around issues such as lending and funding. It is difficult to separate out how each policy makes a difference, not least because the external environment is always so critical to growth. With, on the face of it, a recovery beginning to get under way, there will be further opportunities to review this.

Q92 Mr Love: Let me turn to one specific policy initiative: the help to buy scheme. There has been a lot of comment recently from all quarters that this could cause a further house price bubble. Has the Treasury made an assessment of this, and what is it?

Sir Nicholas Macpherson: In working out this policy, we have assessed that. We had good discussions with the Bank of England on the subject. All I would say is that, at this stage, the housing recovery is really very early days. Mortgage transactions may have improved slightly, but from a very low base indeed, and it is far too early to claim that there is a housing bubble going on.

Encouragingly-although I do not want to put too much emphasis on one month’s figures-this morning’s construction PMIs show that residential construction is growing at its fastest rate in a while.

Q93 Mr Love: That all sounds kind of tentative. The reality is that, in some parts of the country, house prices are already increasing. This scheme does not come in until January 2014. Funding for lending seems to have been a success, if I can put it that way. As you commented on, there is a considerable shortage of housing supply. Given all of those circumstances, is it really necessary, or are we stoking up a bubble for the future?

Sir Nicholas Macpherson: I do not think that we are stoking up a bubble. The fact is that the size of deposits that citizens up and down the country are required to pay is very high in relation to mortgages. This scheme should make it easier to take out a mortgage. I do not think that, at this stage, that is a problem. Indeed, it may help the housing market get on a better footing. The critical thing is that, down the track, the Financial Policy Committee of the Bank of England will be able to pass comment on the scheme. If a boom gets going, it will be easy to cut it off, but it is far too early to say that there is a boom going on.

Q94 Mr Love: There is some scepticism about whether the political will will be there, from anyone, to cut it off, as you suggest. However, I pass on to my final question, under instruction from the Chairman. In relation to the ending of the credit guarantee scheme and the asset protection scheme, the National Audit Office have calculated that around £5 billion of public funds has been transferred to the banking sector. Do we have any proposals to recoup those funds?

Sir Nicholas Macpherson: Successive Governments have implemented a banking levy. The banks are paying more tax than conventional companies in that sense. With the credit guarantee scheme, the point was to ensure that the credit market kept going. If that involved a bit of subsidy, I do not think that we should get too hung up about it. I totally agree with you that the banking sector should pay its proper share of tax.

Q95 Mr Love: Sir Nicholas, my constituents would be appalled at the thought that we are subsidising bankers. How can you justify that on value-for-money terms?

Sir Nicholas Macpherson: I do not think that we are-I hope that we are not subsidising bankers; I hope that what we are doing is subsidising credit. It is very important that bankers should pay tax. With the higher rates of tax brought in by the previous Government, and indeed-

Q96 Mr Love: Are you confident that, overall, with all of these schemes put together-the support that was given to the banking sector-the taxpayer will not be out of pocket?

Sir Nicholas Macpherson: Coming back to my answer to Mr Garnier, I am not obsessed with getting a profit for the taxpayer, but I hope we can.

Chair: Good. That is a good point on which we can all coalesce. Brooks Newmark is next-but thank you for that last one question, which ended up as three.

Q97 Mr Newmark: Less on the politics and more on the detail, looking at your accounts, note 19.2.1 states that, if the March 2013 discount rate had been used instead of the November 2012 rate, the provision for payments to Equitable Life policyholders would have been £106.7 million greater. How much did the discount rate change over those four months to come up with that figure?

Sir Nicholas Macpherson: Do you know the answer to that?

Kirstin Baker: I don’t.

Sir Nicholas Macpherson: Can we write to you about that?

Q98 Mr Newmark: Okay. My next question, which is on the back of that-and I suspect that it was large-is, why was there such a change in the discount rate over those four months? My next question is, do you expect the provision to rise further?

Sir Nicholas Macpherson: The discount rate is one of these really problematic issues. You see it at its greatest extent when you are calculating the public sector pension liabilities, where the liabilities can swing by literally billions of pounds. My guess is that this is to do with gilt rates. With a slightly curious gilt market in recent years, that creates even bigger problems for the accountants.

Kirstin Baker: That is right. The discount rate is linked to the gilt rate, and it is updated by Treasury centrally each year. Departments use that rate, which has been issued by the central Treasury.

Q99 Mr Newmark: My concern is that it almost creates an artificial construct with which it is very hard to judge things. I certainly know that, when I did my paper on off-balance-sheet financing, depending on where I set the discount rate and what figure I used, that showed how much was off balance sheet or not. I understand what you are saying, and I look forward to your letter. That is probably the best way to leave it.

Q100 Chair: Can I ask you a last question about this? There is some suggestion that the scheme finishes at a certain date. There are clear indications within the papers that you are not going to pay everyone by that date, some for good reason but others just because of logistics. Is this a deadline date, or is it movable? Some people out there-

Sir Nicholas Macpherson: It has proved far more difficult to track down Equitable policyholders than we expected. We thought that this was a fairly elderly, static population but, actually, it turns out that large numbers of people move around late into life.

Chair: I understand that.

Sir Nicholas Macpherson: We are about to start an advertising campaign to try and track down the final people. This is a policy decision for the Government. I would expect it to take a decision in the light of the response to that advertising campaign. We wanted to have a deadline. Otherwise, these things can go on forever, but I am quite certain-I expect the House of Commons to have quite strong views on this-that the Government will want to review that date if it thinks that sensible.

Q101 Chair: It would be useful if we flagged it up. I understand the difficulties that you are having, but there are various difficulties being experienced because of the way that it has been handled. It would be quite wrong for somebody not to get a payment that is owed to them simply because of some arbitrary date. It would be very helpful if that was lodged and put on file.

Sir Nicholas Macpherson: I certainly note your views.

Chair: Ms Baker and Sir Nicholas, thank you very much. It was a very good, positive session, and we finished within the adjusted time, which is miraculous.

Sir Nicholas Macpherson: Thank you.

Prepared 9th September 2013