Treasury Committee publishes response to pre-budget report

06 January 2010

The Treasury Committee, which today publishes its report on the 2009 Pre-Budget Report, calls for greater Government clarity on its plans to reduce the structural deficit

The Committee, which took evidence from the Chancellor and various experts and officials, has published the Report in time for the Commons debate on the Pre-Budget Report (PBR) on Thursday 7 January, following a previous Committee recommendation that the Government increase the opportunity for financial scrutiny by the House.

Fiscal consolidation

The Report acknowledges that deciding the right time for fiscal consolidation requires making a fine judgement about the resilience of the recovery. There is currently considerable uncertainty in the economic outlook; and any fiscal consolidation will have to function in that context.

It may be difficult for any current consolidation plan to command universal support. It will therefore be very important to add greater detail and clarity to the plan sooner rather than later.

The Report emphasises that a plan to restore the health of the public finances must deal with the structural deficit.

While the Treasury aims to cut the deficit from 9 per cent of GDP to 3.6 per cent of GDP in four years, the Committee notes that despite the Treasury's belief that the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, the expert witnesses it examined all criticised the document for not providing enough information about how this will be achieved.

Today’s Report also calls for future Budgets and PBRs to attempt to quantify the downside risks around the structural deficit forecast.

John McFall, Chairman of the Committee, said:

"The Governor of the Bank of England encapsulated the problem of when to withdraw fiscal stimulus, when he told us ‘we should do it at the right time.’

"Unfortunately, there is no common definition of the ‘right time’ for fiscal consolidation. What witnesses to our inquiry did agree on however, was the need for a fiscal consolidation plan to be credible.

"We consider clarity, even if it is clarity about the degree of uncertainty surrounding the forecasts, as essential to strengthening this crucial credibility. That is what our Report calls for today."

In particular, the Committee sees no good reason for the Treasury failing to produce more detailed illustrative figures for future expenditure, at least the projected split between DEL and AME.

The Report recognises that there will be uncertainty in these figures, but they are produced as part of the Spending Review process so there appears to be no argument of principle against their publication, it says. Similarly, debt interest forecasts depend on a number of assumptions, and are necessarily an estimate.

However, the Bank of England publishes forecasts showing the possible range of inflation rates and today’s Report recommends that the Treasury consider whether publishing information about debt interest on a similar basis would be useful.

Unemployment and repossessions

The Committee notes that the recession appears to have had substantially less impact on the labour market than might have been feared, though it remains concerned about the level of youth unemployment.

The Report also cautions Government to remain vigilant to the potential that there may be further weakening in the labour market above that which it has forecast, which would of course impact on the public finances.

The Committee welcomes the fact that repossessions have been far lower than expected. However, the Report recommends that the Treasury proceeds cautiously over the timing and removal of Government support in this area.

John McFall commented:

"We remain particularly concerned over the levels of youth unemployment. While the story for the overall labour market has been more positive than might have been initially hoped at the start of recession, the young have, as we feared, been badly hit.

"We appreciate that the Government has made efforts in this area such as increasing training opportunities, but we will continue to monitor their effect. We will also be keeping a keen eye on policy on repossessions."

Bank lending and the bank payroll tax

The Report notes that the picture on bank lending remains uncertain, to say the least. While the Committee does not want to see a return to the times of easy credit, it urges the Government to remain aware of the risk that lending will not support renewed private sector growth as the public sector retrenches.

The Government considers that the purpose of the tax on bank bonuses is to change behaviour so that banks increase their capital, rather than providing large discretionary payments to employees.

The Report urges the Treasury Committee in the next Parliament to assess how effective the tax has been in this aim, and to examine the effectiveness of any regime introduced by the Financial Services Bill, in terms both of its success in altering bank behaviour, and of its effect on the competitiveness of the UK financial sector.

John McFall said:

"Following the unprecedented taxpayer support received by the banking industry it is right that banks should be encouraged to focus on building up their balance sheets. Indeed, we emphasised the need for this in our work on the Banking Crisis.

"We therefore very much hope the payroll tax will be successful. However, there is skepticism about its effectiveness and we therefore urge the Committee to examine its success in the next Parliament."

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