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Economics Affairs Committee

Corrected oral evidence: Chancellor of the Exchequer

Tuesday 21 March 2023

3 pm


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Members present: Lord Bridges of Headley (The Chair); Lord Blackwell; Lord Davies of Brixton; Lord Griffiths of Fforestfach; Baroness Kramer; Lord Layard; Baroness Liddell of Coatdyke; Lord Londesborough; Baroness Noakes; Lord Rooker; Lord Turnbull; Lord Verjee.

Evidence Session No. 1              Heard in Public              Questions 1 - 20



I: The Rt Hon Jeremy Hunt MP, Chancellor of the Exchequer; Cat Little, Second Permanent Secretary, HM Treasury; Dan York-Smith, Director-General, Tax and Welfare, HM Treasury.



  1. This is an uncorrected transcript of evidence taken in public and webcast on
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Examination of witnesses

Jeremy Hunt, Cat Little and Dan York-Smith.

Q1                The Chair: Good afternoon and welcome, Chancellor. We are delighted to see you here for this annual session in front of the Economic Affairs Committee. We have a large amount to cover and we very much look forward to hearing your answers. A bit of housekeeping first: Baroness Kramer and Baroness Noakes may need to slip away to go to a subject dear to your heart, the Financial Services and Markets Bill, just to make you aware of that. I should declare my interest as an adviser to and shareholder in Santander.

Chancellor, I am going to kick off by not going into the Budget but by asking you about the current situation in the markets, given the events of the last few weeks. Last week Larry Fink in his annual letter wrote about the risk of us seeing a slow-rolling financial crisis. Do you share that sense of concern and how worried are you that we are potentially entering into a vicious circle in which credit tightens, the economy deteriorates and default rates start to rise?

Jeremy Hunt MP: Good afternoon, Chair. Thank you very much for having me. It is a pleasure to be here. I should introduce Cat Little, Permanent Secretary with responsibility for spending, who is with me, and Dan York-Smith, director-general for tax and welfare. They will come to my aid if you ask any questions that are too difficult.

I will answer that question as well as I am able. I am sure that you are aware that there is a golden rule that Finance Ministers never comment on market movements or speculate on what they might be. That is a sensible rule to have, so I might be a little bit circumspect in what I say. I think it is easiest for me to talk about events of just over a week ago, when we had the rescue of Silicon Valley Bank UK, because that happened in the past. I can tell you that I asked questions about the financial stability of the UK banking and financial system and was reassured by the Bank of England and the PRA’s assurance that there was no systemic risk to UK financial stability that they detected. Of course, there is volatility in the market. We recognise that. However, we also believe that we are in an immensely stronger position than we were pre-2008, with core capital ratios around three times higher than they were then. We believe that there is resilience now in the system that there was not then.

The Chair: Thanks very much. I am going to bring in Baroness Kramer on some of the specifics that you just mentioned.

Q2                Baroness Kramer: I wonder if this is a way to ask the question that makes it a little easier for you to address, Chancellor. Are you satisfied with the current framework for dealing with banks in trouble, given that three authorities over the past week changed the rules? The US bailed out the uninsured depositors of Silicon Valley Bank, the UK relaxed the ring-fencing requirements for HSBC in return for agreeing to buy the UK subsidiary of SVB, and the Swiss reversed the priority of creditors in allowing shareholders to receive value while the bondholders were wiped out. There was a potential issue with all bail-in bonds. If the rules of the game can be changed when a crisis is being resolved, does this create uncertainty about how to handle future crises?

Jeremy Hunt MP: It is a fair question to ask, but I would say that the two European examples that you talked about were, in the broader scheme of things, adjustments that were made in order to make a sale possible. Therefore, I would not characterise them as quite such a momentous change as you have said. In the circumstances in both cases, a sale was the optimal outcome. It meant that alternative outcomes that would have created a much bigger shock in the international financial system were not necessary, so I think that they were the right ones. But I accept that they do in themselves represent changes to what was originally envisaged.

Baroness Kramer: I do not want to spend too much time because I know that others want to come in on this, but to clarify, do you see these as one-off changes or how should the structure now be viewed?

Jeremy Hunt MP: Let me talk about the one that I am more familiar with, which is what happened to the UK subsidiary of Silicon Valley Bank. In that situation, in order to make the purchase by HSBC possible, there was a small change in the ring-fencing requirements, which I do not believe had any systematic implications.

Baroness Kramer: I would like to pick that up a little bit later, if I may.

The Chair: To be clear, and I know that you need to tread with care, Chancellor, there is obviously a lot of concern about the reversal in the normal hierarchy of claims. Are you concerned about that perception taking root?

Jeremy Hunt MP: It is a situation in which there is no obvious solution which does not involve some compromises, and I wholly support the decisions made by the Swiss authorities that made the purchase by UBS possible. In the circumstances, I think they took the right decision and we had the best possible outcome.

Baroness Noakes: Chancellor, you said that you saw the financial system as being more resilient than it was in the last financial crisis. People commonly refer to the higher capital ratios and the higher liquidity ratios that now exist. However, what became evident in the incidents over the last couple of weeks is that the magnitude of flows can be very, very large and can therefore cause the problem. Those magnitudes are likely to be greater than those that have been embedded in stress tests. Are you comfortable that the UK financial system is resilient enough in the light of recent events?

Jeremy Hunt MP: The Bank of England’s view is that the answer to that question is yes. It thinks that the stress test that it did, notwithstanding your question, shows that the system is resilient. We have to recognise that we are undergoing a period of change as we move from a period of extremely low interest rates to a period of higher interest rates. That is causing, globally, adjustments to be made and we have to remain vigilant. I said in my Budget speech that the Government stand ready to take whatever measures might become necessary to maintain stability because we consider that that is one of the most important things that we have to do.

Lord Griffiths of Fforestfach: Chancellor, the banking system has had such regulation put around it since 2008 that it clearly is in a very strong position. What about the neobank system or the financial system more generally? We saw it with pension funds and LDCs, basically areas where credit has been extended and so on. Those institutions do not have to mark to market, they do not have the same sorts of controls that were introduced following 2008. That is the place that makes me more nervous. You feel that there are little pockets of it around and that is the sort of thing that could lead people to say that they have to be extra careful and take money even out of banks.

Jeremy Hunt MP: That point demonstrates how important it is that we continue to monitor carefully all aspects of the financial system, including newly emerging areas such as crypto, and make sure that whatever changes happen we do not do anything that undermines stability or in any way unlearn the lessons of the financial crisis.

Dan York-Smith: Could I add something on that? The Financial Policy Committee is due to publish its next financial stability report by the end of the month. One of the things that it did in its last report following the LDI and the events on LDI was to begin conducting stress tests for the non-bank sector, which was last done in 2018, to look at some of these issues and to assure itself.

Baroness Kramer: I want to follow up because we are entering, are we not, a period in which the Government are pressing forward on a fairly aggressive programme of regulatory rollback? We are not looking at a continuation of the status quo. There are so many areas for that rollback by the time you look at the Financial Services and Markets Bill, at Solvency UK, at the Edinburgh reforms that were announced. Are you now going to sit back and reconsider some of those changes? Other people have a range of questions but I would like to know whether you are going to have any reconsideration of ring-fencing that was so critical—I was on the Parliamentary Commission on Banking Standards—to bring in stability after the last crisis, and also the issue of individual responsibility under the Senior Managers Regime, which I understand is also to be watered down along within ring-fencing. Then we have all the changes in Solvency UK to be able to hold illiquid, high-risk assets and so on, and a drop in capital buffers generally across the piste. Could you comment on whether or not you are now considering reconsidering some of that programme of regulatory rollback?

Jeremy Hunt MP: The first thing that I would say is that sticking with the status quo is not necessarily the best thing to do to ensure financial stability. If we want stability we should always be prepared to look at policy and make sure that it is fit for purpose given changing global circumstances. That also means that we should make sure that we get the right balance between stability and growth potential. We will publish a consultation mid this year on a package of near-term reforms to ring-fencing in line with the recommendations from the Skeoch review, but we would not do anything that would undermine financial stability. I made it very clear when we announced the Edinburgh reforms that we would not unlearn the lessons of the financial crisis.

Baroness Kramer: I find it quite hard to unwrap the actual protection and say that it is meaningless and was not providing protection at all. Surely what we have seen over the last few weeks is that that protection has been absolutely vital.

Jeremy Hunt MP: You will see when we publish our recommendations as to which reforms we want to proceed with that we recognise the importance of the protections that have been put in place and we do not want to undermine them.

Q3                Lord Blackwell: The recent issues and the previous issues with pension funds are partly a consequence of the speed at which interest rates have been raised here and elsewhere. In your discussions with the Bank of England, is there any reflection on the appropriateness of that speed?

Jeremy Hunt MP: I have regular discussions with the Governor of the Bank of England and we talk about all these things, to answer you very directly. However, we also talk a lot about the fact that we need to bring inflation down. It is over 10% at the moment and that is dangerously high and we need to do everything we can to maintain our focus on bringing it down. I only ever say to him, "Please do what you think is necessary, as indeed you are legally bound to do under the Bank of England Act”. Yes, we have all these discussions and you are absolutely right to say that the speed of interest rate rises is the root cause of the volatility that we have seen in recent months.

Q4                Lord Verjee: We have seen that the solutions to the latest crises are basically takeover by other banks, which is creating larger and larger banks, particularly with the Credit Suisse situation. Do you think that it is a danger now that we are going to get into the territory of moral hazard, of too big to fail?

Jeremy Hunt MP: We have a very robust plan to deal with the globally significant banks that would cause a danger to stability if they were allowed to fail, and procedures are being put in place. We have not yet had to test those procedures, even though one of those banks has now been bought by another. However, if it is any reassurance to you, you are asking the right question. When we had extensive discussions over a very long weekend with the Prime Minister, the Governor of the Bank of England and the head of the PRA as to the right way forward for Silicon Valley Bank UK, we looked at all the options on the table because we did not know that the sale to HSBC would definitely go through so we had to be ready with other options as well. We discussed moral hazard extensively because it is very important that we do not lose that principle in the system.

The Chair: One question before I come back to Lord Verjee on the Budget: taking a few steps back, you mentioned in one of your earlier answers that bringing inflation down is your number one priority. Is that still the case in light of the events of the last few weeks? Is that still the case for you and the Bank?

Jeremy Hunt MP: Yes, it is. The Prime Minister’s first priority is to halve inflation. Of course, we will do that in a way that maintains, as best we are able, stability in financial markets, but we should remember that inflation itself is destabilising, so it is not an answer to say that we are going to suddenly change our minds and say that it is acceptable to have a rate of inflation that is as destabilisingly high as over 10%.

The Chair: Thank you. Very good. Let us turn to the Budget.

Q5                Lord Verjee: Chancellor, given the weak and uncertain outlook for growth, what plans do you have to mitigate the tax burden on households and businesses?

Jeremy Hunt MP: Thank you, that is a very important question. I do believe that a dynamic, successful economy needs to be lightly taxed. My Conservative principles also say that we should bring down the burden of personal taxation as much as we can because that is consistent with a free society. That is my intellectual starting point.

From the point of view of growing the economy and getting out of the low-growth, low-productivity paradox that we have been wrestling with in the UK, it is very important that we have competitive levels of business taxation. That was why in the Budget, from a business point of view, one of the most important measures was the full expensing of corporation tax. It amounts to a £9 billion cut in corporation tax. Even though the headline rate is going up, it is still a lower headline rate than any other G7 country. By introducing full expensing, we have the most competitive tax regime of any OECD country, top equal when it comes to investment incentives. That is why the CBI said in its reaction to the budget that that decision keeps us at the top table when it comes to the attractiveness of investment from an international standpoint.

The Chair: In terms of looking out, given that today’s borrowing figures are slightly better than expected and given that there is talk of you getting some headroom, do you think that there is a prospect of you being able to look to lower taxes on families, who are very hard-pressed at the moment, sometime between now and the next election? How are the chances of this going? Can I tempt you into saying something to us about this?

Jeremy Hunt MP: Chair, I have been Chancellor for only a few months. What I have learned over that period is that, as night follows day, there will always be articles saying that the Chancellor has unexpectedly more headroom than anticipated. I have learned always to take those stories in the press with a large pinch of salt because it has never yet happened to me. However, I would say that of course it is a priority for any Conservative Chancellor to bring down the burden of tax on families but there are things that are even more important than that. One of them is stability, because, as we have just been talking about, there is a lot of volatility in the world at the moment. The second is the competitiveness of the UK economy, from which comes the growth that means that we can afford to bring down taxes. Therefore, we are not in a position to make any assessment as to how soon we can bring down the tax burden on families but it would always be a priority for me.

Lord Blackwell: A lot of your measures are aimed, rightly, at longer-term growth in the economy by improving productivity on the supply side, but in the short term the Bank of England’s clear view is that any higher growth rate would be inconsistent with maintaining inflation targets. Do you agree with that, and does that not mean that you cannot use any headroom to reduce taxes because they would simply try to offset that?

Jeremy Hunt MP: I agree with it to a point. It is very important that monetary and fiscal policy point in the same direction rather than tug against each other. However, there are short-term things that you can do that increase growth in a non-inflationary way. The main area—and this is one of the main reasons why I focused on this area—is labour supply. If you can reduce the difficulty that businesses have in filling their 1.1 million vacancies, then it is possible to grow sustainably in a non-inflationary way. A lot of the measures that I introduced in the Budget will take effect quite quickly and I hope that that will be their impact.

Q6                Lord Griffiths of Fforestfach: Chancellor, you set out in the Budget, very clearly, targets for both inflation and fiscal rules. The inflation target is clearly something that is strongly predicted by all forecasters to come down, and people feel that that can easily be met. The fiscal target—debt to GDP—is a little more challenging. It has gone up this year over last year and next year it is going up again. Then after five years, it is coming down. The margin is fairly small. If you ever wake at night and have some anxiety, what are your anxieties as to what could knock this off course?

Jeremy Hunt MP: I am not sure that I have been asked that question in that way before. The first thing I would say is that it is important, even though all the forecasters say that we are going to hit the Prime Minister’s inflation target, that we do not take that for granted. The reason that we cannot take it for granted is that just under 5% of the fall in inflation will fall out automatically because of changes in fuel and food prices. However, there is still nearly 6.5% of what economists call core inflation, which is driven by, among other things, pay pressures, which remain relatively strong. I do not think that we can take for granted that we can bring down those inflationary pressures and we need to keep our foot on the accelerator.

You are absolutely right that debt is broadly 100% of GDP, with debt interest payments of £115 billion a year. That is very, very high. That is money that we cannot spend on public services. It is less within our control because of international movements in interest rates but it is something that we need to continue to focus on. It is very, very important in terms of being able to send a signal that the UK will always be good for our debt.

The Chair: To what extent do you think that the Government should be focusing on getting the debt ratio down by a specific year, rather than moving the five-year goalposts further each year in advance?

Jeremy Hunt MP: I understand why one might ask that question, but doing it in that way replaces one challenge with a different one and it is not necessarily the right way to do it. There is not necessarily a fiscal target or a fiscal rule that could encapsulate this, but I think that the right answer to that question is whether Chancellors in every Budget are doing things that improve the long-term growth potential and productivity potential of the British economy that will put us in a position where we can bring down debt sustainably. That is the way that you avoid getting trapped in a vice of lower growth and lower ability to repay debt.

The Chair: Paul Johnson from the IFS was quite critical and he said that you were meeting the fiscal rules “by a combination of tight spending plans, imaginary future increases in fuel duties, and a fiscal gain from unwillingly undoing his corporation tax change”. What do you say to that?

Jeremy Hunt MP: Paul Johnson comments extensively on the Budget. I was very pleased that he said that he could identify a growth plan inside the Budget, he could identify a plan to tackle our long-term productivity challenges, and although there were lots of interesting cartoons concerning my recitation of the four Es, our approach to tackling those issues, they do form the bones of a plan that most economists, including Paul Johnson, would recognise is the long-term way that we will increase our growth potential.

The Chair: What about how you met the fiscal rule in the point that he is making about “imaginaryincreases in fuel duty and a fiscal gain from unwillingly undoing your corporation tax change? Is that not how you made the figures add up?

Jeremy Hunt MP: I think that Paul Johnson would also say, but it is not for me to put words into his mouth, that some of these fiscal rules are themselves necessarily a little bit arbitrary. However, in the circumstances, the question that I would like him and other commentators to answer positively is whether we are tackling the long-term challenges to our productivity that will make us prosperous in the long run. That is the key answer.

Q7                Lord Rooker: Good afternoon, Chancellor. I want to ask you about spending plans, but before I do, can I give you the chance to explain how the NHS pay deal is going to be funded? We need to know whether any of the new increase that was agreed is coming from existing NHS budgets or if it is going to be new money. Employees are voting and there is no clarity from the Department of Health about the funding of this deal that was agreed. Are you able to give us any explanation for that?

Jeremy Hunt MP: I will make a brief comment and then hand over to my colleague, Cat Little. The answer is that we are spending record amounts this year and next. Public spending is continuing to increase in cash terms. We have made a commitment that there will not be a reduction in front-line public services to fund these deals. We will have discussions with departments about the best way to fund them. However, our approach in these negotiations was not driven primarily by affordability, although that was an important factor, but by not being prepared to do a pay settlement that would itself be inflationary. That was why it was so difficult because it took us time to get to that point. Cat, do you want to add to that?

Cat Little: Of course, thank you. Good afternoon. First, it might be useful to explain a bit about how we deal with spending pressures generally. I am sad to say that it is not just about pay pressures; there are significant inflationary pressures across the whole of public spending that we are grappling with. You may recall that last year we launched the efficiency and savings review specifically to make sure that we were working with departments to find efficiencies, create contingency and make sure that they had the reserves available to deal with some of the headwinds of inflation and pay that we were expecting. We work every single day with all departments, and with the Department of Health probably more than others, to find efficiencies, to prioritise spend and to make sure that between us we can fund the pressures that they experience.

In terms of the numbers, next year’s pay settlement is likely to cost about £1.3 billion above the budgeted amount that the department has available£1.3 billion in a budget of £160 billion. Obviously, these are large numbers but that is a fairly normal amount of money for us to be reprioritising without impacting on front-line services.

The other thing that I would say is that you can compare it with what we did last year. The headline pay settlement for Agenda for Change last year was 4.75%, compared to a 3% budget. Through our normal processes, we found the money and made sure that the department was able to fund those pay settlements and live within its budget. It is very much a partnership and we are starting that process now to make sure that we can sustainably fund the pressures that the Department of Health has.

Q8                Lord Rooker: Thanks very much. I fully accept the difficulties but the need for clarity is pretty urgent because people are still voting and it has not all been settled. The more clarity, the easier it is to get a settlement.

On the spending plans, Chancellor, in your Statement of November last year—which I fully accept was delivered in exceptional circumstances—you said that for the remaining two years of the spending review: “We will protect the increases in departmental budgets that we have already set out in cash terms". Therefore, this is a cash freeze for two years, which is a  real-terms cut in public expenditure. That is what it amounts to. Do you still stand by this and, if so, how will the health and social care and the schools budgets be dealt with in those two years? You have 24,000 schools and you have 7 million people on the waiting list. We need to know this if we are going to have cuts in public expenditure. Is that going to happen or not, for those particular departments?

Jeremy Hunt MP: No, because what we said in the Autumn Statement was that unprotected departments would have to make efficiency savings to deal with their inflation pressures. They all had very generous increases in their budgetincreases that were greater than inflation was predicted to be at the timein their spending review settlement. We said that we would honour those settlements in cash terms. What happened in the meantime was that inflation ended up being much higher than planned, so they would have to use some of the increases in their budget to deal with inflationary pressures by finding as many efficiencies as possible. However, we made an exception for schools and for the NHS and care. For the NHS and care system, we increased the annual budget by £8 billion a year and for schools, we increased their budget by £2.3 billion a year, so they both got very generous settlements, in the circumstances, to make sure that they were able to protect front-line services.

Lord Rooker: You announced increases in childcare as well, so I presume that that is still secure.

Jeremy Hunt MP: Yes, that does not affect those settlements.

Q9                Lord Turnbull: Chancellor, do you ever in your private moments wonder whether you are setting yourself an objectivea low-tax economythat is condemning you to failure? You have an ageing population, a dependency ratio that is getting worse, you have a strong appetite for goods and services that are provided collectively as opposed to goods and services that are provided from privately financed post-tax income, and a population that is getting older and more interested in protecting the wealth that they have rather than getting more wealth. Are you pushing against a tide that you are not going to be able to resist?

Jeremy Hunt MP: That is the kind of question that a wise former Cabinet Secretary would ask and it is a perfectly reasonable question to ask. I fully accept that with an ageing population, as a civilised society, we would want to support people in their old age. Given that we have a well-established taxpayer-funded system for health, and to some extent care, which I support, taxes will be higher than might otherwise have been envisaged.

However, I do not think we need to say that that means we will inevitably become a high-tax society if we are smart in how we approach economic growth. What that means is that we need to take a strategic approach to economic growth that is not just looking at how you grow the economy over the next two years but thinking about how you are going to grow the economy over the next 20 years. I would say, if you asked me how we were going to fund the NHS and stop taxes getting unbearably high, or uncompetitively high, that our big opportunity over the next 20 years is to become Europe’s Silicon Valleyto be the cradle of life sciences, technology, clean energy, creative industries and advanced manufacturing. The strength of our university sector and our financial services, combined with our already proven business success in those areas, gives us that opportunity. I do not say that we have achieved it; it is not going to be achieved before the next election. This is a long-term vision for the country.

If I look at what Nigel Lawson did with the big bang in 1986, you have a set of reforms that meant that long after Lord Lawson had departed from being Chancellor of the Exchequer, he put in place plans that made the City of London one of the world’s two great financial centres. That is what we need to be thinking about. That would be my answer in the longer term as to how we get ourselves out of that paradox.

The Chair: Politics being the language of priorities, is your priority, coming back to what we were discussing earlier, to relieve the tax burden on families and small businesses in particular or would it be to protect the services that Lord Rooker was referring to in terms of spending?

Jeremy Hunt MP: I would like to do both. It is possible to do both. The priority at the moment is to put in place a plan for growth that means that we have competitive levels of business taxation. We made a choice in the Budget last week to reduce corporation tax by £9 billion a year to make the UK an attractive place to invest in.

I ought to add to my answer to Lord Turnbull that I am not hanging my hat entirely on being Europe’s Silicon Valley. That is part of the answer but part of the answer is other long-term changes such as transforming our skills, dealing with economic inactivity and making sure that we spread growth more evenly across the country, things that have also bedevilled our productivity over very many years. The reason I talk about all those things together is that you talked about a longer-term challenge of an ageing population and gradually increasing pressure on public resources. These are longer-term solutions but they are in the important but not urgent category and it is very important that we set about doing them with vigour.

Lord Blackwell: Part of the role of your wonderful Treasury officials is to prevent profligate Chancellors spending too much or cutting taxes too much and to produce forecasts and so on that discourage that. Is there a danger that that underestimates the potential benefit of reduced taxation? If you want entrepreneurial growth of the sort you described, it seems to me that that is much more likely to come about with low taxes and buoyant demand. We may not all believe in the Laffer curve but the potential for that to then end up with more growth and more taxes rather than simply adding a deficit to a static modelis that underestimated in the way that the Treasury thinks about taxation?

Jeremy Hunt MP: My experience is that it is not underestimated by the Treasury at all. I would say that if you look at the choices I made in the Budget, I said that having the most competitive capital investment regime in the OECD is a priority. Even though it does not necessarily show through very strongly in the five-year growth forecast that we published, it is an important thing to do and I want to get there over time. I can afford to do it for three years; I could not afford to do it permanently. I am prepared to do that because I think that it is an important thing to do. It is very important that I as Chancellor am prepared to embrace policies that may not show through in the near to medium term but are very important for the long term. That for me is the definition of the success of a Budget. It is a Budget that people look back on in five or 10 years’ time and say, "You were trying to answer the right questions and you took the right decisions, even if it did not necessarily mean there was a two-year impact”.

Lord Davies of Brixton: I am going to ask about pension tax allowances, but first, I was struck, Chancellor, by you referring to Lawson’s reforms that turned the City into a powerhouse. We seem to be going in the opposite direction at the moment, with the City Minister expressing concern about the way things are developing and the loss of investments from the Stock Exchange and so on. Are you going to come up with a comprehensive plan to address that? At the moment you are undertaking a whole series of different measures but do you want to adopt a comprehensive plan to follow in the footsteps of Lord Lawson?

Jeremy Hunt MP: They are very hallowed footsteps and I would not overflatter myself, but I would say that the package of Edinburgh reforms that we announced were partly intended to do that. What I announced in the Budget last week was that there are some very specific issues relating to the availability of scale-up capital for our entrepreneurial companies, which is partly linked to why some of them are choosing to list overseas, because there is not as much capital or choice available here as we would like. There are some pension industry reforms that are very important and I promised that I would come back by the Autumn Statement—although I am sure that we will say a lot more before the Autumn Statement—on the reforms that I intend to bring forward in that area.

However, I do not think that my perspective or the City Minister’s perspective is quite as downbeat as you suggested, if I may say. My overall perspective on the City is that at the time of the Brexit vote, there was a view that it would suffer much worse than it actually has do. The City has shown itself to be extremely resilient, and the fact that we are prepared to adapt and change and rethink through the regulatory changes that are necessary to keep the City competitive is a sign of just how strong it is.

Q10            Lord Davies of Brixton: Other Members will be coming back on that issue. One of your Es was employment. You have measures to address labour supply shortages. The most contentious one of those was the changes to pension tax allowances. In introducing them in the Budget, in a speech and in your interview on the “Today” programme, if I can mention that, you placed considerable emphasis on medical practitioners, even though the measures affect everybody. Certain changes would be the new flexibilities in the NHS scheme, the change to the annual allowance and the aggregation of pension input amount all passed through without much comment and with much support.

An issue has appeared about the lifetime allowance. What impact do you think that the lifetime allowance abolition, as compared to these other measures, will have on employment? What evidence do you have that this will address labour supply shortages? If there is evidence, are you prepared to share that evidence so that we can judge it for ourselves? A considerable amount of money, the additional expenditure in this Budget, is under this head and I am not sure that we have seen any real evidence that that in itself will achieve the objectives that you have set.

Jeremy Hunt MP: The first thing that I would say is that the cost of this particular measure is massively dwarfed by, for example, the cost of the childcare measures, which are estimated to be more than seven times higher. It is very important for the NHS. The BMA, which has not always been my biggest fan, said that doctors would no longer be forced to retire early. It said that doctors were already contacting the BMA the morning after the Budget saying that they wanted to come back out of retirement.

Lord Davies of Brixton: I hate to interrupt, but that is in response to the package as a whole. I am asking you specifically about the lifetime allowance.

Jeremy Hunt MP: The lifetime allowance was the biggest single element of that package.

Lord Davies of Brixton: Yes, I know that.

Jeremy Hunt MP: Therefore, it is a combination of the lifetime allowance and the change in the annual allowance. However, to answer your question, it is not just doctors. We have the chair of the Association of Police and Crime Commissioners, who said it was a game-changer for keeping police fighting crime on the streets. The Association of School and College Leaders said that it was in the national interests in terms of head teachers.

The OECD rankings for participation rates for over-50s in the workforce have us at 22nd out of 38 OECD countries and we have been falling. That means that we have more people retiring early than in other OECD countries. If we had the same participation rates as Sweden, for example, we would have 1 million more over-50s in the workplace, which is about one for every vacancy in the economy at the moment.

This is not the only reason that people are retiring early, but among the levers under my control as Chancellor, it is one of the only things that I could do. I wanted to present the most comprehensive possible package of reforms across parents, long-term sick and disabled, jobseekers and over-50s. Why? Because one of the fundamental debates that we have been having, although the economy has been growing respectably compared to other countries since the financial crisisabout the same growth as Germany since 2010living standards on an individual basis have not been growing as fast as we would like. One of the ways that you grow GDP per head is by reducing inactivity. There are 7 million adults of working age who are not engaged in the workforce and we want to remove the barriers that stop them from being engaged.

Lord Davies of Brixton: I understand all that. My question is more specific. From what you said, the evidence you have is that some people have said that they will be staying in or returning to work, given your package of measures. My question is: what extent does the lifetime allowance abolition play in that overall effect? As a supplementary, there is a figure of an increase in the workforce of 15,000 people, presumably made up of people who do not leave and people who return. This is a comprehensive figure: 15,000. It would be interesting to know what the source of that figure is and how many of those are medical practitioners.

I still have not had an answer to the question of how significant the lifetime allowance is in getting people back. To be entirely open, I do not think that it is very important in the package, even though it is expensive. You have sort of admitted that you do not know specifically what proportion is due to the change in the lifetime allowance. Also, as a subsidiary question, to what extent is this going to get doctors? You have placed the emphasis on medical practitioners in this policy change. How many extra doctors are there going to be in the workforce because of the changes as a whole? Of that number, how many are there because of the lifetime allowance?

Jeremy Hunt MP: I will try to answer the question as comprehensively as I can. Obviously, I believe that the lifetime allowance will have a significant impact because that is why I included it in the Budget. When it comes to doctors, I can tell you only what the doctors themselves are saying. They think that it will have a significant impact. This has never happened before. We have never had a situation where you have a lifetime allowance and then it is abolished. Therefore, it is not possible, by definition, to point to proof as to what the impact will be. We will have to wait and see in a year or two years’ time.

The Office for Budget Responsibility predicted that overall the package of labour supply measures, including for the over-50s, would lead to 110,000 more people, but that was its central case. It said it could be up to 240,000. I am hopeful that it will be considerably more than the 110,000 that it predicted, but none of us knows because this is a new measure. We have never had a Budget that has focused primarily on increasing labour supply. However, I would point out that there are 3.3 million over-50s who have retired early. About 150,000 people choose to retire early every year. I am not particularly planning on these measures bringing people back who have already decided to retire, although there is some evidence anecdotally that doctors are willing to come back as a result of this change. It is more about stemming the flow and reducing that 150,000 down over the next few years. I am very hopeful that that is what will happen.

Lord Davies of Brixton: You said when you were chair of the Health Select Committee—I know that that was then and this is now—that you suggested at that stage an arrangement much more targeted specifically at doctors. To what extent had consideration been given to that and why that was rejected? There was the example of the special scheme for judges because they were seen as a priority. Given the crisis in the NHS, it would be possible to easily make a case that doctors are a priority and they deserve a special scheme. Was that given detailed consideration?

Jeremy Hunt MP: Yes, and when we looked at it, by the time you have done a scheme for doctorsand, by the way, a scheme for senior police officers and head teachers and other very important public servicesit could end up being nearly as expensive as what we did on the lifetime allowance, and also more regressive because what we announced in the Budget does not help the 20% wealthiest of doctors; it helps about 80% of doctors. If we had done a doctors-only scheme it would have helped the very wealthiest of doctors. Therefore, on balance—and this was something that I was not aware of when I was chair of the Health and Social Care Select Committee—we do also have an issue of increasing numbers of people choosing to retire early and I want to change that culture.

I think we need to move away from a society where retirement is seen as a cliff-edge decision that is going to come up at you at some stage after you have turned 50, to something much more in tune with what most people would want, which is a gradual changemaybe more flexible working, maybe more working from home—but a society in which we are able to tap into the talents of some of our most experienced, able and capable people for a very long time. That is why I think that the change in the lifetime allowance is important because hitting your pension pot cap is one of the things that creates a mentality of a cliff edge and that is a mentality that I hope to change.

Lord Davies of Brixton: To follow up finally, if I may

The Chair: This must be final, and briefly.

Lord Davies of Brixton: It is as much the psychological effect of the pension cap as the financial.

Jeremy Hunt MP: It is a psychological effect that I hope will have a real-world impact in making it easier for people to continue to participate in the workforce, especially if they are doctors.

Lord Turnbull: I am delighted you are resisting the pressure that you will come under for a bespoke deal for doctors. It would be ridiculous to have a scheme for the consultant at University College Hospital but not for the professor at University College London, so stick to your guns on that, please.

Can I come back to the basic logic of taxation of savings? In Paul Johnson’s, book, which I recommend all staff and Ministers in the department should read, he says, “Eminent economists have been arguing for years that the principle of saving being free of tax and then paying tax at the end when money is taken out of savings is a good one”. There were two areas in which that principle was being violated. One was the pension allowancein other words, the lifetime allowancein that when people took money out of a fund, they did not get the tax relief when it went in. The second is the taxation of a lump sum; in other words, people could be taking money out tax-free, when they got tax relief going in. Would it have been more logical, symmetrical, and also help with the arithmetic, to have looked at what a lot of economists think is the excessively generous treatment of the lump sum?

Jeremy Hunt MP: We looked at all options. Our priority in this Budget was removing the barriers to participation in the workforce. If you are asking me whether we should keep under review reforms to broader savings policy, I would agree with that. There are lots of things that you could look at. That is important because if we want to become better at investing for the future as a society, with increased rates of business investment and increased rates of personal investment, we need to become better at saving as well. We need to look at all those things to make sure that the right incentives are in place. I fully accept that there is more to be done in that area.

Dan York-Smith: Sorry to interrupt but could I just add that we did take a step to freeze at the current level the pension commencement lump sum? It will be a quarter of the lifetime allowance that exists this year, even once the lifetime allowance is abolished. The tax-free lump sum will be capped at its current value and will not become a quarter of whatever you have saved when there is no lifetime allowance.

Lord Rooker: I am with you on stemming the flow. It is a lot easier to do that than trying to get people back. We did a short report before Christmas about the missing workers. Our greatest asset is the capacity and willingness of people to work. One way to stem the flow, which we did not look at when we did our short inquiry, is to change the age. Why on earth have we stuck it at 55? Why has that not gone up to, say, 57 before you can get access to the pension? We almost joke and laugh about what is happening in France at the moment and wonder how it can be at 62, yet we have millions of people who have access to their pensions at 55. One way to stem the flow is to change that date. I agree it could be a cliff edge and it would have to be done carefully, but it would be one way to stem the flow in a way that I think is wholly productive and sensible.

Dan York-Smith: I am pleased to report that the normal minimum pension age is rising to 57 in 2028. That is in the system and will be taking place. It was announced in 2014, I think, to give people more than a decade’s notice. From 2028 you will not be able to access your pension until 57.

Lord Rooker: I did not know that. That is very good information.

Jeremy Hunt MP: I am 56, so I am just going to get in under the wire.

Q11            The Chair: Can we move on to something else that our report touched on, which is changes in immigration? I was very interested, as were others, in the OBR’s estimate that net migration is now likely to settle at 245,000 a year. Is it not the case, given what you are saying about trying to stem the flow, that when you look at this big picture that growth in the labour supply is being powered by immigration?

Jeremy Hunt MP: At the moment that is what the ONS is saying and the OBR takes its numbers from the Office for National Statistics. If you want to change our economic model, which is what the country decided when we voted collectively for Brexit, to a model that is not dependent on unlimited migration, which we had access to as part of the single market, then you have to have another plan. Our plan is what I announced in the Budget, which is to say that we should look at the 7 million adults who are not in the workforce. When we have 1.1 million vacancies in the economy, as I mentioned, this is a solvable problem, but we have to systematically remove the barriers. We have talked about older people and a bit about parents, but we have 2.5 million long-term sick and disabled. Surely, in a world where there is Zoom and Teams and working from home, we should not write someone off as incapable of work because they have mobility issues or perhaps are wheelchair-bound, in a way that might have happened five or 10 years ago, because there are so many jobs that people can do from home with a computer. There is a huge revolution there in what is possible for people who have an enormous contribution to make.

The Chair: As things stand, coming back to the figures, it does suggest that the growth in labour supply is being driven by immigration, correct?

Jeremy Hunt MP: That is before we have seen any impact from what I announced in the Budget. I am hoping that in future forecasts of migration, we will see an economy that is less dependent on migration.

The Chair: Are you concerned about what we found in our reportthe growing mismatch in that the migration system is geared towards high-skilled migrants, whereas we have lesser-skilled vacancies within the workforce?

Jeremy Hunt MP: We have structures in place that are intended to deal with that. The Migration Advisory Committee looks at where shortages are, irrespective of skill level. If it does not judge that the economy can fill those shortagesfor example, in the care sectorit puts sectors on the shortage occupation list.

The broader answer to your question is that we need to transform our skills. Our education system does a brilliant for the 50% of school leavers who go to university but I think that we can do better with the 50% who do not go to university. There have been some big improvements. The apprenticeship programme has been transformative for many people, but we can still do better. However, these things take time and there is going to be an element of migration as we start to make these changes.

Q12            The Chair: It is quite a big element of migration. I take your point entirely that it takes time to do those things, but in the shorter term are you, therefore, keeping the door ajar to relaxing immigration for lower- and lesser-skilled roles?

Jeremy Hunt MP: Outside the EU we have a controlled migration system, so when we make those relaxations, if we make them, it is based on a decision by an independent committee that says, "There is a shortage in this sector or that sector". I think that is the right system to have, but do I want over the medium term to have an economy that is dependent on ever-increasing levels of migration, whether skilled or unskilled? No, I want to move to a high-wage, high-skill economy.

The Chair: Sorry to press you, but just one final question: therefore, do you feel that the 245,000 figure in the forecast is too high for your liking? It sounds to me that you do.

Jeremy Hunt MP: It is a statement of what the ONS considers to be a reality. It is my job as Chancellor to put in place policies that make it possible to see a world in which we can reduce that over time.

The Chair: Is that a yes or a no?

Jeremy Hunt MP: I think it is a straight answer to the question. I am putting in place a plan that means that we can reduce that, but I am recognising that it takes time for that plan to take effect.

The Chair: Moving on then: business investment. Lord Londesborough.

Q13            Lord Londesborough: Good afternoon, Chancellor. Yes, I would like to focus on business investment, and productivity in particular. Perhaps I should declare my interest as chairman, adviser and active investor in a range of SMEs.

I was interested in your earlier comment about having a competitive level of business taxation, particularly by international standards. I would like to focus on corporation tax. As we all know, it is set to increase from 19% to 25% next month. That is a sudden, eye-watering 32% leap in that tax rate. It is forecast to raise an annual £18 billion in tax—as you pointed out earlier—softened to some degree over the next three years by the 100% capital allowances, although I think it is worth pointing out that a large swathe of businesses will marginally benefit from the capital allowances and many will not now qualify for R&D tax credits, which we will come on to later.

In the second paragraph of your strategy for sustained economic growth, you acknowledge, "Weaker growth in business investment has been one of the reasons for slower productivity growth in the UK since 2008". Now, given our workforce capacity constraints, that is even more relevant. Therefore, my question is this: what impact do you think this hike in corporation tax will have on one of your four “Es”that of enterprise, specifically business investmentand how will this impact productivity and growth?

Jeremy Hunt MP: It is important to say that, even though the headline rate of corporation tax has gone up, it is still lower than anywhere in the G7. America is about to put its corporation tax up to 28%, for example.[1] We have combined that change with a new capital allowances regime for three years—but I hope the change will be permanent—which means that across 38 OECD countries, there is not one that has a more competitive regime for capital investment. Why does that matter? Since 2010, although we have grown faster than France and at about the same rate as Germany, both those countries have higher productivity than us. That means that they have more capital invested per worker per working hour, and we have to address that, so we need to be investing more capital per person employed, per hour employed, than we have currently been doing.

The approach that we had previously, which was focusing on bringing down the headline rate of corporation tax, which I subscribed to when I was on the Back Benches, I have realised, since becoming Chancellor, is not wholly the right approach. It is the right thing to say we want to have the most competitive levels of business taxation anywhere. That is important. However, within the mix, you need to make sure that you have sufficient incentives for investing in capital. That is why I think full expensing, which no other large European country offers, is the right way forward.

Lord Londesborough: I think that is helpful but, in overall terms, with 25% corporation tax, if we are looking at what I think is the most important statistic for the business environmentthat is, the effective overall taxation on business, which obviously includes such taxes as employers’ national insurance and business rates as well as corporation tax and others—and I am quoting the Centre for Policy Studies here, we will now have one of the highest rates in the developed world and the highest rate that has ever been, overall taxation of business, in the history of the UK.

That does not seem to square with a plan for growth, particularly addressing this productivity issue, which I think is a recurring theme, both in the OBR and in the Spring Budget Statement, that low levels of business investment have been partly—not wholly—responsible for low productivity. It is very difficult to see how we break out of this productivity constraint with such low levels of investment, which you can see from the OBR are forecast to continue to remain very low.

Jeremy Hunt MP: The OBR actually forecast an increase in business investment of 3% a year as a result of the decision to introduce full expensing. I do not know whether the CPS figures you quote are post Budget and the £9 million cut in corporation tax or pre that, but all I would say is that if they are post the Budget I do not recognise those. I do agree that, because different countries have different ways of taxing, if you want to look at the overall burden of business taxation, the best way of doing it is to try to look at business tax as a proportion of GDP. We have lower business tax. If you look at the other G7 countries, we have lower business tax as a proportion of GDP than France, Germany, Italy or Japan and, although America has a lower business tax rate than us, it is about to increase its corporation tax, as I just mentioned, and it is phasing out full expensing, so they are going in the opposite direction to us.

I agree with your general point that we need to have the most competitive levels of business taxation, and I would argue that in the Budget we took a very decisive step towards that.

The Chair: Sorry, Chancellor, to deliver on your objective, though, we are going to need to see the full expensing continuing beyond the period that you have just set; otherwise, we are going backwards. That statement is blindingly obvious.

Jeremy Hunt MP: That is what I have said I would like to do, as soon as it is affordable. I was not able to afford to get there in one go, but if you look at other big changes that we have had since the Conservatives have been in power—for example, the increase in tax and NI thresholds that mean for the first time you can earn £1,000 a month without paying any tax or national insurance—that was not something that happened in one Budget. That happened because of decisions by successive Chancellors. In fact, we only got there last year, so I think this will be one of those decisions where we set an aspiration and we get there gradually.

Lord Londesborough: Just a final pointthis is from a business perspective—I think I am right in saying that corporation tax has been chopped and changed and has changed 10 times in the last 13 years. As you know—and I know your background is entrepreneurial—most business plans have a minimum timespan of five years, and more in the case of infrastructure and energy. This constant tweaking, chopping and changing of corporation tax and capital allowances, which I appreciate pre-dates you becoming Chancellor, I certainly think it does not lead to stability. It is uncertainty and it diminishes business owners and entrepreneurs appetite for long-term investment plans.

Jeremy Hunt MP: If I may say, I think that is actually an unfair characterisation of what happened. What you had was George Osborne as Chancellor saying that he wanted to reduce the headline rate of our corporation tax progressively, and he delivered on that in Budget after Budget. I do not think anyone thought that was destabilising. They could see that he had a direction of travel, and in each Budget, he went further towards that. That is quite a large proportion of those corporation tax changes, and then what you had when the current Prime Minister was Chancellor was one change in strategyI fully accept that—to address our productivity paradox, which recognised that capital allowances are a very important part. It is your effective corporation tax net of capital allowances that really matters, and that is the change that I have continued to implement because I think it is the right approach.

I think the proof of the pudding is the reaction of organisations such as the CBI and the Institute of Directors. They did not say, “This is yet another change. This is very confusing”. They said, actually, “This is hugely encouraging”—I think the IoD used that phrase. The CBI was also very welcoming because it understands and agrees with the direction of travel.

The Chair: Lord Davies has a quick question.

Lord Davies of Brixton: I have to apologise to the committee, I should have said, when addressing the lifetime allowance, that I have a financial interest in the treatment of the lifetime allowance.

The Chair: Duly noted. Thank you very much. Lady Liddell.

Q14            Baroness Liddell of Coatdyke: Thank you. Chancellor, you talk about getting the European Silicon Valley up and running, and you have mentioned the most competitive investment regime. Alongside that, the measures announced in the Spring Budget support technology business investment for three years. Now, three years, particularly with cutting-edge technology, is quite a short period. Why did you choose three years? You could find yourself in a situation where you have these potentially high-growth businesses coming into the market, and predatory investors around from the Middle East, the Far East, and the United States, so how can you create an environment where it is just based on that three years and then anything can happen after that?

Jeremy Hunt MP: I think the measure you are talking about is the full expensing of capital, which is the £9 billion cut in corporation tax. I have tried to set expectations by saying I hope it is a change that becomes permanent and, as soon as it is affordable to do so, that is what I wish to do.

The other big measure that is perhaps more directly related to the technology and life science sector is the new R&D tax credit, which has been introduced for research-intensive businesses. That is actually a permanent change. That is not a temporary change and that is a more generous incentive than the one that currently exists, and so I hope that will affect about 20,000 of our most high-growth and innovative companies in the life science sector predominantly, which spend a lot of money on research and development. It is a permanent change and I hope that it will give them a lot of encouragement.

Baroness Liddell of Coatdyke: The idea of a permanent change is actually very important because lots of these companies—you talk about the life sciences—particularly in the science around, for example, net zero, which is very high-cost and has a long lead time. You need to give people reassurance, basically, so I hope that the assurance is there.

Jeremy Hunt MP: Yes. I should say, by the way, that when it comes to green industries, the clean energy sector, there are also a large number of subsidy support mechanisms—things such as carbon pricing, contracts for difference—which also give that long-term assurance of income that companies will receive on the basis of investments they make, but I accept your broader point that, wherever possible, you should seek to make permanent changes.

Q15            Lord Turnbull: I turn to R&D relief, potentially, for SMEs. A sub-committee of this committee, which I was on, looked with a certain degree of alarm at the absolutely explosive growth in the cost of this scheme. Your predecessor, or predecessor but one, came up with some mitigation of that by requiring people to register in advance. As a committee, we did not really think much of that.

The next thing was that the rates were made less generous and we were getting complaints from people that, I have not been gaming the system but I am getting the rate cut just as much as the person who has been gaming the system. The next stage is that you announced that those SMEs which are really in the business of scientific advance, concentrating 40% of their expenditure or whatever on it, will be getting an extra allowance. Perhaps you are correcting that fault that simply cutting the rates was not going to do the job.

However, I think that there is still quite a lot of scope for people to put in thin applicationsones that are poorly justified or even completely bogusand it is not helped by the fact that, to get the money to the companies, you tend to pay when you get the form in digitally and then ask questions afterwards. I would hope that HMRC is going to increase the degree of vigilance and not just “Give them the money, Mabel, and ask questions afterwards” because I think you will need that degree of defence against the kind of trivialisation of the scheme that is going on.

Jeremy Hunt MP: Can I bring in my colleague, Dan York-Smith, for those details, Lord Turnbull?

Dan York-Smith: Yes, I think that is exactly right. That is something that HMRC has been looking at and has been looking at further ways it can ensure that all of the claims are legitimate. You are right, though, that expenditure—particularly on the SME scheme—has increased very substantially. That was what drove the decision in the autumn.

I think, from a value-for-money perspective, that was one of the other concerns: we estimated that we were getting only £0.6 to £1.28 per £1 of tax foregone from the SME scheme, as opposed to the large company scheme, the research and development expenditure credit that was getting £2.40 to £2.70 per £1 of tax foregone. The reforms in the autumn were also about boosting the more effective R&D expenditure credit, so we took £3 billion out of the SME scheme in order to put £1.5 billion back into the large company scheme.[2] One of the things that we said in the Budget we would do was to consult on potentially merging the schemes, which would be a simplification but also the evidence is that the large company scheme is a more effective one in terms of value for money.

Definitely, HMRC is continuing to look at ways where it can balance the long-standing pressure. Certainly, in the early part of the last decade, the pressure was on the pace at which HMRC could pay out to legitimate claimants versus the checks and balances in the system, and balancing that out where a lot of these companies are pre-revenue and use the R&D tax credit to provide cash flow in order for them to continue to do the research.

Q16            The Chair: While we are on specific measures, can I quickly pick you up on one other point that has been a matter of interest to the Finance Bill Sub-Committee, which is off-payroll working in IR35? I see that paragraph 3.22 of the OBR report says, “The latest estimate is that these measures yield an average of £1.5 billion a year over the forecast period, around double our previous estimate”. Can you explain to the committee what is going on here within this sector? Why has it been double the estimate?

Dan York-Smith: I can cover the reforms. I may have to come back to you on precisely what our understanding is of what is driving the increases. To clarify, the reforms that were introduced were about changing the burden of proof for whether or not someone was caught by the IR35 rules, which are whether you are actually in an employment relationship rather than a self-employment or contractor relationship.

Therefore, it did not change the underlying substance of whether or not you were judged to be a contractor. What it did was it put the onus on the engager to determine whether you were, because the evidence was that there was widespread non-compliance, both because it is complicated for an individual to determine whether they are self-employed or substantively employed, so this has not changed the underlying rules. It has just changed where the burden of proof is.

We started that in the public sector and there was evidence that it was working. We have made various changes to try to reduce the burdens on the people applying the rules, but I think this demonstrates that the non-compliance with the rules was possibly even greater than anticipated when the measure was introduced in, I think, 2020 when we extended it to the private sector.[3]

The Chair: It would be very good if you could provide any further details you have in writing in answer to that specific question.

Q17            Lord Layard: Can we go back to your remark about skills and that we do so well for the academic 50% and so bad for the other 50%? Is this basically due to different funding regimes affecting these two groups? If you take the academic group, they have had applied to them the Robbins principle that if you are qualified to go on to the next step you should expect to be able to find a place. That has been ensured essentially by demand-led funding, which is also very good from the providers point of view because the provider knows that if they can put on a course and get students it will be automatically funded; whereas if you take the regime facing the other 50%, they are not at all in a position where they know that they can proceed and what the paths are because of the funding system. The FE funding is set by the Treasury and micromanaged by the department. A college cannot say, “We really think this course is needed. We are going to put it on and we will get funded for it. This is a tremendous dampener on the whole operation of the FE system.

Then, if you look at apprenticeships—which are incredibly important, especially for young people—young people’s apprenticeships have actually been falling over the last several years and there is a huge excess demand. I think UCAS has reported on this. There are just not enough apprenticeships for the people wanting them. These young people cannot see their way to what they want through FE or through apprenticeship, and I wonder whether it is time to try to review that whole section in the light of the Robbins principle. Why can the Robbins principle that if you qualify for the next level you can expect to go on not be applied to that group of people? It is a big issue, this, but is it something that could be covered in the next spending review?

Jeremy Hunt MP: It is a very interesting issue. Funding structures may be a reason why we have not made as much progress as we would like, but I also think that regulatory structures have an impact. The fact that universities have a high degree of autonomy and are able to invest in being centres of excellence without being micromanaged, has made our higher education institutions rated second only to the United States, globally, which is very important.

I would also say, historically, a lack of rigour—or perceived lack of rigour—in our skills qualifications compared with our higher education qualifications has also meant that they have not been valued as highly. What I have learned as Chancellor is that over the last four or five years—I will look out the exact numbers in terms of the take-up of apprenticeships. I must admit I am surprised to hear your view that—

Lord Layard: Youth apprenticeships.

Jeremy Hunt MP: Right. I will write to you, if I may, with the exact numbers on that. Because I thought there was an issue here I asked Sir Michael Barber to do a proper review of the progress we are making, and I think his view and my view—but I do not want to pre-empt what he finally says—is that there has been enormous progress. The apprenticeship programme is one of the great successes. I met a young apprentice helping to construct HS2, just outside Birmingham, and she told me with enormous pride how proud she was to be doing an apprenticeship because she would get a degree at the end of it without having tens of thousands of pounds of debt. She was able to work throughout, and it was incredibly rewarding and she was learning very valuable engineering skills. So I think it has been a great success.

However, the exam question I would like to answer is: at the end of this process, will our skills be as good as they are in Germany, Switzerland or Singapore? It is great that we are improving them, but are we improving them to the very best internationally? Because that is what we need to do and that is what Sir Michael is working on.

Lord Griffiths of Fforestfach: Could I follow that up? I feel very reluctant to criticise the Treasury or its officials because it is the only department in government that speaks for the taxpayer and for really low inflation. I really believe in apprenticeships, like Lord Layard does. I am dismayed that all the time I read in the press businesspeople are saying, “We have given up on starting apprenticeships because the Government do not understand what we are doing”.

It seems to me that in an apprenticeship learning by doing is almost more important than the piece of paper you have at the end of a course, and I just wonder whether Treasury officials, when they are allocating funding and so on to this area, are focusing too much on the indicator of success being the certificates handed out, rather than looking, particularly in small businesses, at the day-to-day advice that is given between people. That cannot easily be captured, as you would for higher education, where it is more appropriate, so perhaps this does need to be changed to unlock it. I am an optimist and I think apprenticeships have a tremendous future, but I hate criticising Treasury officials.

Jeremy Hunt MP: That is extremely welcome, that last bit. To go back to my response to Lord Layard, if you look at the classic German apprenticeship, which is immensely respected, they manage to combine all that verbal communication, which is so important in learning, with a qualification at the end of the process that is completely transferrable and totally rigorous.

It is true that lots of employers resent paying the apprenticeship levy because we are very strict about how it is spent, and we say that it has to be a rigorous course that gives you transferrable skills and, of course, understandably, lots of employers would like just to spend it on their in-house training, which they were going to have to do anyway. If we were to do that, we would not have made the progress we have made in setting up a rigorous programme, which is giving people transferable skills.

That is not to say it is perfect, and I think we should listen to employers. There may well be aspects of the way the current scheme works that are too rigid, and we can always benefit from listening more closely to employers, but I would not want to throw the baby out with the bath water.

Cat Little: If I could perhaps personally reassure you, as the official responsible for this area in the Treasury, as the Chancellor said, we are putting in a huge amount of work, both with the Department for Education and with Sir Michael Barber, exactly because of the reasons you set out. We care deeply about making sure that the demand and supply equation is as balanced as it can be in the market. We certainly want to make sure that we are valuing all aspects of skills training, on the job as well as the outcomes that individual learners achieve. That has to be a comprehensive approach. We are not just looking at apprenticeships. We are also looking at T-levels. We are also working with the Department for Education on the lifelong entitlement and how we can bring that to life as well. Just to personally reassure you, it is not a simplistic approach and we have a dedicated team in the Treasury whoall they do is look at this question.

The Chair: Great, thank you very much indeed. Can I bring in Baroness Liddell and move on to the Bank of England, which is the subject of our ongoing inquiry at the moment?

Q18            Baroness Liddell of Coatdyke: Chancellor, this is a growth question: due to the growing complexity and length of the annual monetary policy and financial policy remit letters—which used to be about four or five paragraphs and now they are about six or seven pages—is there a risk that the Bank of England is being asked to do too much?

Jeremy Hunt MP: It is a very good question to ask but it is also important that I, as Chancellor, have a very simple expectation of the Bank of England’s responsibility when it comes to monetary policy, which is to return us to our 2% target for inflation. I recognise that what it is doing is immensely complicated and the regulation and stability of financial markets need very careful oversight. However, I hope, if you asked the Governor, as part of your inquiry, he would say that he has never been in any doubt about the clarity of what it is that we are expecting from him, which indeed is laid down in the legislation.

Baroness Liddell of Coatdyke: What is the decision-making process within the Treasury about constructing these letters, and is there not a case for a bit more transparency? It would be very helpful for us to grasp what the priorities are because everything is in it now—net zero has turned up in it now. It looks as if it is becoming just a catch-all. Three of our witnesses last week described it as “flab”.

Jeremy Hunt MP: I think that is unfair, if I may say.

Baroness Liddell of Coatdyke: I did not say it. It was the—

Jeremy Hunt MP: No, I appreciate that. It was very unfair of your witness, Lady Liddell, to say that because we have a primary objective for the Monetary Policy Committee, which is inflation, and we are very clear that is a primary objective. The secondary objective is to support the Government’s economic policy. That includes, for example, the things that I was setting out in the Budgetthe four Es: reducing economic inactivity, strengthening our education system, and so on.

Of course, as we develop that economic policy, it changes in response to a changing global situation, changing the understanding of what we need to do to deal with our productivity issues. That is reflected in the letters, but I think it is important that they are always clear about what their primary objective is and I hope they always will be.

Cat Little: If I could comment on that point and the process, our teams between the Treasury and the Bank of England spend quite a lot of time working closely on the content of the draft letters. There is full transparency with the Bank about how we are thinking about taking economic priorities into the remit itself. That happens over quite a considerable period of time but, as the Chancellor said, ultimately, our job is to set out the priorities in that letter and to make sure that the remit is full but that the process itself is transparent and collaborative.

The Chair: I want to pick up on Baroness Liddell’s point. I hear what you are saying. It was a witness who was saying that it was flab, but I want to pick you up, Chancellor, if I may. The letter you sent to the FPC covers openness, competitiveness, competition, innovation, climate change and energy security, home ownership, venture and growth equity, and so on. It is a lot of points.

In it, though, there is a reference to what we were discussing earlier, which is that appropriate risk and oversight and mitigation systems must be in place for non-bank financial institutions. Therefore, do you feel that within this thicket of perfectly understandable objectives and secondary objectives you are setting, it would be possible for the committee to get a bit lost in terms of what is and is not important?

Jeremy Hunt MP: I understand why you asked the question and it is absolutely right that you should scrutinise us on the processes by which these letters are written, but there are inevitably a lot of considerations where we have to work with the independent Bank of England and the independent regulators to ensure that all the different elements of government economic policy are understood and agreed to. I shall read your report with great interest. The way we try to square that circle is by being very clear about what are primary objectives and what are secondary objectives.

The Chair: I am going to channel my inner Mervyn King—Lord King—were he to be here. He has often picked up on this point and I think he said that he questions whether when you are looking at elevating climate change risk as a systemic risk—perfectly arguable—there is, for example, no mention of other risks that are equally systemic, such as pandemic risk and other things. How are these risks chosen, that one is seen as systemic and the other one is not? You know more than anyone about pandemic risk.

Jeremy Hunt MP: Yes, indeed, and when we respond to your report we will no doubt make important improvements to the way these letters are considered, drafted and agreed to.

The Chair: Thank you very much. We may return to that point. Lord Blackwell.

Q19            Lord Blackwell: I come to the question about pension funds and equity investment. As you know, pension fund investment in real assets has shrunk dramatically over the last 20 years, particularly equity investments. That has been a response to the Solvency II regulations around discounting liabilities and requiring pensions to be solvent, as if they were going to go bankrupt. It has also been to do with the accounting rules and the way pension funds have ended up on corporate balance sheets. You mentioned in your Edinburgh reforms that this was an issue. Do you think it is possible to get to a situation where pension funds can be contributing much more to enterprise and the real economy in their investments?

Jeremy Hunt MP: Yes I do and I think it is essential they do. It is a project where we will be saying more in the months ahead. I set myself a deadline in the Budget of the Autumn Statement as the time by when I want to conclude all of the work that we are going to do, but I am not going to wait until November before making progress on this issue.

It is very important for a number of reasons. As you rightly say, there are £5 trillion of pension fund assets. I think that less than 1% are invested in unlisted businesses and that is a big opportunity missed. At the same time, we have a large number of really promising companies in the technology, life science and green industry sectors that sometimes say that they cannot easily access the capital they need. We then have companies such as Arm that decide to list abroad—again, part of not having the choice of capital that it might otherwise have had.

Then I think there is a question of value for money for pensioners if their pension funds are avoiding some of the highest-growth opportunities. Based on that, there is always risk, fiduciary responsibility, taking a responsible attitude, and looking forward to your responsibilities as a trustee of a pension fund, which we fully respect. I think it is a very important issue and I would say the other international factor in this is the Inflation Reduction Act in the United States, which is providing big subsidies. We need to look at the availability of capital for our most promising industries and that is a very high priority.

The Chair: Thank you very much. Lord Davies, did you want to come in?

Lord Davies of Brixton: Yes. Just to follow that up, Chancellor, the idea that pension funds should invest in the long-term growth of the economy sounds like a marriage made in heaven. In practice, it has proved very difficult to achieve. Your predecessors have talked about this often, so I am pleased that you promise something in the months ahead.

Are you seized of the fact that, concurrently, the Department for Work and Pensions is consulting on a set of regulations that will determine the funding approach in pension funds, which—to put it crudely—is adopting a completely contrary approach? There is this contradiction here and I am just asking: are you aware of this and is something going to be sorted out to balance these competing demands?

Jeremy Hunt MP: I am aware of that and I am actually aware that there are a lot of consultations going on in this area in different ways, and so I want to bring them all together and come to a conclusion as to how we are going to address the issue raised by Lord Blackwell. We have been doing a lot of thinking about it in different places by different people. It is time we brought it all together and solved the problem.

The Chair: Thank you very much. I want to turn to Lord Turnbull briefly on another topic.

Q20            Lord Turnbull: The last report this committee produced was on central bank digital currency, and there was a debate in which Lord Bridges spoke very eloquently, although somewhat sceptical in tone. The question is: if this central bank digital currency had been in existence in the last two weeks, would that have made the management of this financial crisis easier or more difficult?

Jeremy Hunt MP: It is a difficult question to answer because it depends on what the rules under which it operated would have been and what the regulatory constraints would have been. I fully accept that there are risks that have to be managed, were we to decide to go for a central bank digital currency. There is a consultation happening at the moment that will conclude on 7 June, where we will listen to the advice that you and many other people give.

The only thing I would say is that I do not think that doing nothingnot having a digital currencyis itself a risk-free option because in the end cash and the ability to convert currency to cash is one of the foundational aspects of our financial system, which means that all forms of money are equal because any can be converted to cash.

As we move to a digital world, which is becoming increasingly cashless, I think it is a legitimate question to ask, as to whether you need to have a central bank-backed digital currency to create the same stability in the system. If you do that, it needs to be done with guardrails and so, at the moment, I think the plan is to limit the amounts that people can hold to between £10,000 and £20,000 and to have sensible guardrails. None of this has been decided. We have not decided whether or not we are going to have one. If we do have one it will not be put in place until the second half of this decade and there will be a lot of work to do to get there, and that is why we are having the consultation.

The Chair: Given the importance of some of the issues you have just touched on, will Parliament have a vote on whether to introduce it?

Jeremy Hunt MP: We have not yet decided what it is that we want to do, so it is difficult to know. Obviously, if there are any legislative changes that are needed, Parliament will have full opportunity to comment and decide on that, but because we have not decided what we are going to do it is not possible to answer that question.

The Chair: In principle, would it not be easier just to say of course Parliament will vote yes or no to introduce one?

Jeremy Hunt MP: It would be easy to say if we knew what it is we wanted to do, but it would be wrong to say that ahead of a consultation which is still hanging in the air.

The Chair: That is very useful. Do colleagues have any further questions? No. Chancellor, thank you very much. We have covered an enormous number of issues, from micro to macro, and you have handled our questions incredibly courteously and eloquently. Thank you very much indeed, and thank you very much to your officials as well for coming. Thank you, all three.

[1] The administration in the United States has proposed increasing the corporation tax rate to 28%.

[2] At Autumn Statement 2022, the OBR scored the forecast receipt cost of the small and medium-sized enterprise (SME) scheme to be £3 billion lower and the R&D expenditure credit (RDEC) Scheme £2 billion higher in 2025/26 than was previously forecast before rate reforms. Whilst the RDEC scheme is predominately for large companies it is also for SMEs who cannot claim R&D tax relief for small and medium-sized enterprise.


[3] The reforms to the off-payroll working rules came into effect in the private and voluntary sectors on 6 April 2021. In March 2020, the Government made the decision to delay the implementation of the reforms from April 2020 until April 2021 in response to the immediate COVID-19 pandemic, as this was not the right time to ask businesses to implement these changes.