Treasury Committee
Oral evidence: Comprehensive Spending Review and Autumn Statement 2015, HC 638
Tuesday 1 December 2015
Ordered by the House of Commons to be published on 1 December 2015
Members present: Andrew Tyrie (Chair); Mr Steve Baker, Mark Garnier, Helen Goodman, Stephen Hammond, George Kerevan, John Mann, Chris Philp, Mr Jacob Rees-Mogg, Wes Streeting
Questions 1-104
Witnesses: Rt Hon George Osborne MP, Chancellor of the Exchequer, Rt Hon Greg Hands MP, Chief Secretary to the Treasury, Julian Kelly, Director General, Public Spending and Finance, HM Treasury, and Clare Lombardelli, Director of Strategy, Planning and Budget, HM Treasury, gave evidence.
Q1 Chair: Chancellor, do you think that overseas students are an export? Can they be thought of as an export?
Mr Osborne: I am not sure I have ever thought of it like that. We export educational services. British universities run very successful collaborations and projects abroad.
Q2 Chair: I am talking about overseas students in the UK spending here, just like tourists do. We consider tourism as an export, and I am just checking that you consider overseas students as an export.
Mr Osborne: I have never really considered it, but I will happily get back to you with a correct answer.
Chair: Once you have consulted the Chief Economist—okay. I think he will come round to the view that it is an export.
Mr Osborne: The answer from my extremely able Director General for Public Spending is it is treated as an export.
Q3 Chair: Good, I am glad we have got to first base on that. I just wanted clarity on that single point, before we go any further. The autumn statement says, “The Government is committed to strong growth in students from outside the EU.” Are you aware that the Immigration Minister, in setting out the new immigration rules for overseas students, said that he wanted to reduce net migration?
Mr Osborne: The Government’s objective is to promote legitimate study by overseas students in the UK and to support those universities wishing to increase their international student numbers. At the same time, and the Immigration Minister and the Home Office rightly have this concern, we want to shut down so‑called bogus colleges and tighten up on abuses of our immigration system through the student visa route.
Chair: I would be wrong to suppose that there was a cigarette paper between the Home Office and the Treasury on this subject.
Mr Osborne: The Home Secretary and I work together on everything.
Q4 Chair: I see. We are pleased to hear that. The Home Secretary has been planning to impose tougher English language requirements on applicants for student visas and ban dependants of postgraduates from working here, but the autumn statement appears to have said—I am pretty sure that this is right—that these plans will not go ahead. I assume therefore that you have been active in quashing these proposals of the Home Secretary.
Mr Osborne: Lots of proposals have been put forward, but those are not Government policy.
Q5 Chair: Was that a yes or a no again? I have had a lot of trouble today getting answers.
Mr Osborne: Tightening up the English language requirements and the postgraduate dependants rules are not Government policy.
Chair: When the Home Secretary had been planning these things, she was not planning Government policy.
Mr Osborne: I am not aware, as I say, that there has been any agreement in the Government or indeed any hard and fast proposals that have been discussed like that.
Q6 Chair: Were they discussed at the Cabinet Committee on Immigration?
Mr Osborne: I do not attend the Cabinet Committee on Immigration, so I do not know.
Chair: One of your Ministers will have done.
Mr Osborne: As I say, these are not Government policy. We are not advancing them.
Q7 Chair: Do you think that it is prudent to include, as is the case at the moment, students in the tens of thousands migration ambition, if you want strong growth of exports and you are agreeing that exports include students?
Mr Osborne: The public’s concern about immigration is about permanent migration. It is about people permanently, or for many, many years, coming to live in the country. Of course, students come and go, and I think that is a good thing for the UK.
Chair: The answer to my question is perhaps it might not be a good idea.
Mr Osborne: In the current way the UK calculates its migration numbers, they are included but, if you talk about the Government’s commitment on reducing immigration, where that strikes a public chord and has public sympathy is when we are trying to reduce permanent migration to the country.
Q8 Chair: Is that not suggesting that these students should be excluded from the tens of thousands target?
Mr Osborne: The Office for National Statistics determines the exact statistics, but I am telling you that the Government’s ambition is to reduce permanent migration into this country to a more manageable level and, at the same time, have a successful university sector where people come and study, and then leave.
Q9 Chair: In the definition of the tens of thousands, are you going along with whatever the ONS says?
Mr Osborne: That is the current definition available to us.
Chair: That is the one you are using in defining tens of thousands.
Mr Osborne: It is the one we currently use to define it.
Q10 Chair: Have you considered asking the ONS whether they should adopt the OECD practice of excluding them?
Mr Osborne: The ONS is an independent organisation, but there is a lively debate in all circles about how this number is best calculated in the UK.
Q11 Chair: You have made clear that you want these numbers to grow and that you want growth in this form of export. You know that there has been a very large rise in most of the first decade of this century, about 6.5% since 2003. Do you know what the rise has been since 2011?
Mr Osborne: Is that the rise in international students?
Chair: Yes, the growth in enrolments of overseas students, to be precise.
Mr Osborne: I do not have the number since 2011, but I know that we are projecting a 65,000 increase over these coming four or five years.
Q12 Chair: The average rate since then has been 0.5%, so it has been a collapse in growth from very high levels to virtually zero. Is that consistent with your export aspirations, Chancellor?
Mr Osborne: You have seen quite a healthy growth in international students at bona fide institutions in what everyone would regard as proper degrees, but a very tough and correct clamp‑down on essentially bogus routes into the country via the student visa system. That is the correct balance. Actually, you have not had institutions like those in the Russell Group seeing particular problems in getting visas for those students, but you have had a number of colleges being closed down by the police and immigration authorities. That is the right approach.
We have taken a decision, which I absolutely support and endorse, which is that, having studied in this country, you can remain in this country, but only if you are doing graduate‑level employment. We do not want people just coming to this country, studying in the universities and then, frankly, doing work in this country for which they are essentially over‑qualified and, therefore, adding to the overall net migration into this country on a more permanent basis.
Q13 Chair: It is that which I thought we perhaps ought to move on to taking a look at. The Home Secretary recently claimed that 96,000 more students were arriving in the country than were leaving. In other words, two thirds were staying. Is that a figure you recognise?
Mr Osborne: It is a figure produced by the Home Office.
Q14 Chair: Is it a figure that you think carries much credibility? I was very impressed by your detailed knowledge of the compilation of the 40% figure we discussed in an earlier session and I just wonder whether you also know how this one is compiled.
Mr Osborne: This one is based on a survey as well, and the problem with surveys is that not everyone who leaves the country bothers to tell the person from the statistics office that they have left. The introduction of exit checks will produce a potentially more accurate number than that one.
Q15 Chair: It is a survey, you are quite right, and not a very reliable one, but a figure that has nonetheless been put in circulation. This area, if I may suggest, is bedevilled by lies, damned lies and statistics, is it not? It is a very difficult area.
Mr Osborne: I deal in the statistics, rather than the first two.
Q16 Chair: I am pleased to hear that too. Would you consider asking the Migration Advisory Committee to do a full economic impact assessment of the Government’s immigration rules on overseas students, just so we can get clarity on which of these numbers we should be paying a lot of attention to and which we should be ignoring?
Mr Osborne: I am happy to consider the proposal from the Committee and indeed any other recommendations you might want to make about how we count net migration numbers, but the Migration Advisory Committee is looking at the moment at the work route visa, so it has its hands full with that at the moment.
Q17 Mr Baker: Chancellor, interest rates have been on the floor since the crisis. Are you concerned, as I am, that interest rates are going to be lower for longer on the latest projections?
Mr Osborne: As you might expect me to answer, this is obviously a decision for the independent Monetary Policy Committee. There is an interesting debate, not just in this country but in other countries, about what a more permanently lower interest rate world than the one that we inhabited a couple of decades ago looks like. That does give rise to questions of public policy, like how you support savings.
Q18 Mr Baker: Two Republican senators and presidential candidates have attacked the Federal Reserve, Ted Cruz and Rand Paul. Indeed, Ron Paul often attacked the Fed. Several Republican‑backed measures have been brought forward, including an audit for the Fed and Taylor rules to try to deal with the discretionary nature of monetary policy. With these things going on, particularly in the US, do you think that central bank independence might come increasingly under threat?
Mr Osborne: I hope not. Some of the proposals from the Labour Front Bench are a little bit alarming in this space, but they seem quite remote from power at the moment. We have a good arrangement, introduced by the Labour Government in 1997 and put into legislation in 1998‑99, which we have strengthened. An independent central bank is set a monetary policy target, an inflation target, by the Chancellor, accountable to Parliament.
There is more political oversight in this country than there is in the United States, without intruding into the debate about their Federal Reserve. To be honest, if you look at American politics, a lot of the controversy surrounding the Federal Reserve stems from the fact that, because of the essentially gridlocked nature of the American Government at the moment, they are the most powerful economic agency, whereas in this country, yes, we have the Bank of England, but we also have the Treasury able to promote its budgets and get support for them in Parliament.
Q19 Mr Baker: You remain committed to the current framework of central bank independence.
Mr Osborne: Yes, although the Bank of England Bill that is going to come into the House of Commons and is currently in the House of Lords will strengthen it in certain respects, for example giving the National Audit Office, for the first time, oversight over some of the way it delivers value for money.
Q20 Mr Baker: Mark Carney, who I am sure we are all agreed is the central banker of his generation, has been accused of overreach according to the FT for his speeches on sensitive topics, such as climate change and Britain’s membership of the EU, among other things. As monetary policy is increasingly acknowledged to be redistributive—and indeed this Committee heard from Dr Vlieghe that monetary policy is always redistributive—are you concerned, as I am, with central bankers making wide‑ranging speeches on public policy and being drawn into debates about inequality, that it will be increasingly difficult to maintain the idea that their actions are quite separate from politics?
Mr Osborne: Of course, the central bank governor in our country is a very powerful post. Now, it is checked a little by the fact that they are just one of a number of votes on the Monetary Policy Committee. The reason why a great deal of trouble is gone to to try and find the right person and the reason why the Bank of England Governor appears before your Committee to answer questions on a regular basis is precisely so that person, with that power, is held accountable.
Do I want to make that Bank Governor less independent? No, I do not. It is something that Parliament could undo, and indeed there is a reserve power in the Bank of England Act to allow the Chancellor to override the Bank Governor on monetary policy. But the reason why Parliament does not want to do that, and the reason why past Chancellors and certainly I do not want to use that power, is that we respect the fact that we have given this person independence, under the rule of law, to make difficult decisions that have redistributive impacts. Of course, when rates go up, savers do better and borrowers do not do so well. That is a classic example.
Q21 Mr Baker: Last time Andy Haldane was before the Committee, I took him to task about a speech he had made, in which he started to work towards the idea of negative interest rates. Have you and the Treasury started to think about how you might respond, if the Bank of England suggested even more unorthodox policies than those that have been adopted?
Mr Osborne: The Treasury has worked well with the Bank of England, not just during the time that I have been Chancellor but under my predecessor, to enable innovative and unorthodox monetary policy to be deployed, like quantitative easing. At the moment, the Governor of the Bank of England and others are indicating that the next likely direction of monetary policy is a tightening, so the question does not immediately arise. If the central bank came to us and said, “Would you consider these particular unorthodox arrangements?”, we would give it very serious consideration, but they have not done so.
Q22 Mr Baker: You have referred obliquely to Labour’s policy of people’s QE. Are you ruling out people’s QE and, by extension, what Ben Bernanke might have called “helicopter money”?
Mr Osborne: The short answer is yes, because the Labour Party is now proposing funding public expenditure by printing money. Where that has been tried in the world, it has led to disaster.
Q23 Mr Baker: One of the notable features about Mark Carney’s tenure at the Bank has been that monetary policy has not changed. The foot has stayed firmly to the floor, through monetary policy. Are you concerned, as I am, that at the moment it looks like there is no prospect of interest rates coming off the floor, and that this might have long‑term distorting effects on our economy and its structure, in particular in relation to asset prices and house prices spiralling out of ordinary people’s reach?
Mr Osborne: It is true, as I said in answer to your first question, that a world in which interest rates are, on average over a period, considerably lower than they were in previous generations does give rise to public policy questions around both supporting savings and, at the same time, preventing asset bubbles. The Financial Policy Committee was created in the Bank of England to give it the flexibility and give us the flexibility, as a body politic, to try to tighten policy in certain asset classes. They have done that on mortgage standards. They say that they are looking at it in buy‑to‑let mortgages, for example. We are already adjusting to the world that you are describing.
Chair: I think we are going to have a division any moment now. There it is. I do not know how many votes there are—I presume only one—but we will need to resume as soon as we can.
Sitting suspended for a Division in the House.
On resuming—
Q24 Mr Baker: Chancellor, would you agree with Charles Bean and others who have said that it would be desirable to get back to higher interest rates?
Mr Osborne: This has to be a matter for the independent Monetary Policy Committee. I am making a broader observation about how public policy reflects, over the long period, a lower interest rate environment.
Q25 Mr Baker: I would just observe that, over the years, monetary activism and credit easing have been key pillars of your budgets. Have they not been?
Mr Osborne: We set out, first in Opposition, in speeches by myself and by the Prime Minister, that our policy was fiscal conservatism or fiscal responsibility and monetary activism. That is where we have been different from, for example, the Republican Party of the United States.
Q26 Mr Baker: Surely it is the case, therefore, that the public finances are critically dependent upon the independent Bank of England being willing to conduct those activist monetary policies.
Mr Osborne: I am sure that the Bank of England looks at the Government’s fiscal stance. Indeed, you have confirmed that. I do think this is the proper role for monetary policy and fiscal policy. If you go back to Nigel Lawson’s Mais lecture, fiscal policy and tax policy were designed to make the economy more productive and competitive, and monetary policy would manage demand. That is not a bad rule of thumb.
Q27 Mr Baker: Would you accept, therefore, that our recovery is currently predicated on demand propped up by interest rates on the floor?
Mr Osborne: Our recovery is born from the fact that we have a credible fiscal policy, credible monetary policy arrangements and have made important supply‑side reforms that have made our economy more competitive.
Q28 George Kerevan: Chancellor, I have some questions on public finances. I see within the autumn statement that the nirvana of the fiscal mandate being met by 2019 is still there. Can I be clear? When we start to run a public sector net surplus, does the fiscal mandate in that circumstance include the borrowing of the devolved Administrations?
Mr Osborne: Yes, it does.
Q29 George Kerevan: Therefore, there would have to be some negotiation between the Treasury and the devolved Administrations in their budgeting to ensure that they stayed within the cap.
Mr Osborne: The arrangement that we currently have and indeed the arrangement that I would like to reach in the discussions with John Swinney in the Scottish nationalist Government is that—
George Kerevan: National.
Mr Osborne: National or nationalist?
George Kerevan: National. Forgive me, I was being cheeky, but it is one thing that bridles. It is actually national, not nationalist.
Mr Osborne: Surely we are all national champions, but you are a nationalist. Anyway, we would like to agree, and indeed we have agreed previously, borrowing limits—in the case of the current arrangements, capital borrowing limits. They fit within our broad fiscal rules. Obviously the level of the capital limit under a new fiscal arrangement is now up for discussion, and indeed we agree some current borrowing as well, which would be available to smooth the cycle, with tax revenues.
Q30 George Kerevan: The notional borrowing powers of the devolved Administrations are still subject to fitting within the fiscal mandate.
Mr Osborne: The overall borrowing undertaken by the Scottish Government is counted towards the UK’s overall fiscal position, overall borrowing or surplus, and that is what the fiscal rules target.
Q31 George Kerevan: What would be the process if it appeared that one of the devolved Administration’s capital plan was likely to breach the fiscal mandate?
Mr Osborne: If you take the current arrangements, the Scottish Government are able to borrow up to a certain capital limit. If they borrowed up to their capital limit, that would be consistent with our plans for meeting our targets. In any future discussion about the fiscal arrangements underpinning new devolved powers, part of the discussion and part of the negotiation would be making sure that the borrowing limits agreed with the Scottish Government were consistent with our overall fiscal rules. I think they can be and I do not think this should be a major obstacle. We have other challenges in reaching an agreement, but hopefully we can overcome those.
George Kerevan: I was not seeking to find division; I was just trying to understand the process.
Mr Osborne: The Chief Secretary has been leading for the UK Government in the discussions, so I do not know if he wants to add anything.
Greg Hands: Thank you, Chancellor. I was just going to add that, according to the Smith Commission agreement, the Scottish Government fiscal mandate must align with the UK fiscal mandate. On that basis, as I am sure Mr Kerevan will know, we are currently talking about the fiscal framework and how that goes forward but, overall, the Scottish fiscal framework must agree with the UK fiscal framework as regards borrowing.
Q32 George Kerevan: That would be a matter of consensus between the two Administrations. The Chancellor is nodding.
Greg Hands: We are in the process of talking about that so, yes, we will come to an agreement that benefits both UK taxpayers and Scottish taxpayers.
Mr Osborne: We absolutely would like an agreement. Actually, I do not think it is going to be possible to proceed without some kind of consensus. Of course, we completely respect that the SNP would ultimately like Scotland to leave the UK but, while Scotland is in the UK, in your terms—hopefully it is permanent membership of the UK, in my terms—we want to make devolved powers work. Devolved powers are included in the Scotland Bill, but they can only be effective in the fiscal space with underpinning agreements on how resources are allocated and the like.
We have made pretty good progress in these discussions, which Greg has led, but they have rather ground to a halt in the last couple of weeks. Maybe that was because the spending review was coming and the Scottish Government wanted to wait for the outcome of that, but I very much hope that they can start again and we can get agreement as quickly as possible. I do not think we are ultimately miles apart and, with a bit of compromise and agreement, we can get a deal.
Q33 George Kerevan: On a broader issue, the autumn statement kept to the 2019‑20 target for running a surplus, largely as a result of an improved forecast from OBR. Would the markets not be right to conclude, therefore, that, to stay within the fiscal mandate, if there was any deterioration in forecasts in order to hit the 2019‑20 target, you would have to raise taxes or cut spending?
Mr Osborne: The target is to achieve a surplus and, of course, we are achieving a surplus now with a relatively comfortable margin of over £10 billion. Maybe we are going to get more questions about the forecast. Take a step back. It is not particularly surprising that a country that is growing more quickly than most Western economies at the moment, with unemployment very low and with its debt to GDP falling, is seeing an improvement in its public finances. A lot has been read into the independent OBR’s judgments on this but, if you actually take a step back, it would be somewhat surprising if the alternative was happening: that our public finances were getting worse, as our economy was strengthening and more and more people were coming into work.
Q34 George Kerevan: I accept that. That was less the issue than the potential inflexibility that is built into your budgeting process once you have a fiscal mandate. Therefore, it is just to tease out, given that you have broken the welfare cap, how dedicated you are to the fiscal mandate, if we get a deterioration in finances.
Mr Osborne: Look, we are determined to achieve that surplus. I have set a hard target for achieving that surplus. It is also what we set out to achieve in the general election. Looking at the last Parliament and looking at the Labour period in office, the truth is that cyclical targets or targets that try to have a structural element to them are fundamentally open to quite a lot of interpretation, even if you have an independent fiscal body like the OBR acting as the judge and jury.
In the last Parliament, I found the biggest constraint on me, in a good sense of the word, was the debt target. Now, I made a commitment back in 2010 that I would get debt falling by 2015‑16. When forecasts started to be produced that showed I was missing that, I was quite rightly under lots of pressure, asked to explain myself and questioned by this Committee. In other words, there was proper transparency about what I was trying to achieve and whether I was being seen to succeed in achieving that or failing to achieve that. Then, towards the end of the Parliament, we were able to hit the debt target, improve things and come back within the target I had set out originally in 2010. It acted as quite a constraint whereas, to be honest, the moving‑forward current mandate proved to be not such a constraint.
Q35 George Kerevan: Do we see that the old division between structural and cyclical deficits is no longer a part of the planning process?
Mr Osborne: Once we achieve a surplus, the requirement to maintain it is to do so in “normal times”. That accepts there may be recessions or periods of stagnation when you cannot achieve it and you have to come and explain what your plan is to repair the public finances. It has a structural or cyclical element to it, if you like, but it does not require a cyclical or structural calculation.
Q36 George Kerevan: Have we given up calculating?
Mr Osborne: There are plenty of calculations that go on. If you look at the last Parliament, we now know that the UK economy grew as fast as the US economy and was one of the strongest recoveries in the Western world. That is not what we were being told in 2012‑13. We just have to accept that it is an imperfect world and our economic calculations, done by reputable people and independent bodies, are not always accurate. It is not a bad rule that, as I was told by the Permanent Secretary when I got this job five years ago, there are only two numbers that you can really calculate. They are how much tax is coming in every week, because that is cash coming in through the door, and how much unemployment benefit you are paying every week. Everything else is a survey or a forecast.
Q37 George Kerevan: That is noted. I have one final question. I know Helen will come back to this, but where has the £1 billion that has been saved by cancelling the carbon capture and storage project gone?
Mr Osborne: We have set out our capital budget. That includes spending on roads, schools, prisons and whatnot. In Scotland, there has been a Barnett consequence, which has been the increase in the capital budget available to the Scottish Government.
George Kerevan: Where has the £1 billion gone? It is still there; it is being spent on something else.
Mr Osborne: In a sense, you are assuming that we have taken it away. We have set out new capital plans, and those capital plans and what we choose to spend it on are there for all to see, including investment in energy research. Where there are Barnett consequentials, they are applied.
Q38 Mr Rees-Mogg: Chancellor, thank you for a marathon session with us this afternoon.
Mr Osborne: I have been looking forward to it.
Chair: You did volunteer for it.
Mr Osborne: I did.
Q39 Mr Rees-Mogg: Following on from Mr Kerevan and what you have been saying about expenditure, the autumn statement saw tax increases of £28.5 billion and tax cuts of just £1.7 billion. The budget saw tax rises of £47.2 billion and tax cuts of £24.6 billion, and yet you are meant to be creating a lower‑tax society. How do these two square?
Mr Osborne: First of all, some of those tax increases were set out very clearly in the election manifesto. We said we would try to achieve £5 billion a year of tackling tax avoidance, evasion and imbalances. We achieved that in the summer budget and indeed have gone beyond that in this autumn statement, with around £2 billion of further measures to clamp down on tax avoidance and evasion, and the like. Those are all perfectly consistent with having a low‑tax economy. Indeed, I think they are essential for maintaining public support for that low‑tax economy.
The two other things that are classified as taxes are, first of all, the apprenticeship levy and, secondly, the ability for councils to levy a council tax charge. In the case of the apprenticeship levy, as I was explaining in the Chamber of the House of Commons this morning, the companies that pay this are able to get back more than they put in if they have a sufficient number of apprentices. Yes, it is classified as a tax in the way we do our public finances, but it is not a normal or usual tax in that sense. The funds are administered by the collective of the people who are being taxed and you can receive the money back.
On council tax, we are creating the flexibility for a new social care precept. It is, of course, up to councils whether they want to make use of it. I suspect many will, but what we are doing is essentially changing an administrative bar on the council tax that currently exists and raising the cap, creating certain conditions around that about how the money is spent.
Q40 Mr Rees-Mogg: It is quite a Gordon Brown approach, is it not? Essentially it is stealth taxes. It is taxes that get called slightly different things. In the end, on the OBR forecast, tax as a percentage of GDP is going to rise every year until 2020‑21, and will reach 36.8% of GDP, which is higher than it ever reached under Gordon Brown. It is becoming quite a high‑tax and stealth‑tax approach.
Mr Osborne: It is lower than it was under Margaret Thatcher.
Mr Rees-Mogg: In one or two years.
Mr Osborne: Tax as a percentage of GDP is fundamentally improving because tax receipts are rising, because the economy is stronger.
Q41 Mr Rees-Mogg: The economy is growing and that ought to balance out.
Mr Osborne: Unfortunately for Chancellors, the gearing means that your receipts fall more quickly than your GDP and your receipts can increase more quickly than your GDP.
Q42 Mr Rees-Mogg: The highest year for Gordon Brown was 2008‑09, and that was because the economy was shrinking but the tax receipts were coming in from previous economic activity, so it is geared for a downturn, rather than an upturn. To come back to the question, this is a high‑tax approach.
Mr Osborne: I do not accept that. I am trying to bring public expenditure in line with taxation. While, on these forecasts, tax as a percentage of GDP goes up by about 1% or 2%, driven by a stronger economy, public expenditure falls from 45% to 36% of GDP. That is very much not Gordon Brown.
Q43 Mr Rees-Mogg: What about the stealth tax issue?
Mr Osborne: I do not see how you could describe council tax and an apprenticeship levy as a stealth tax, as they are pretty transparent and straightforward. Everyone understands what they are.
Q44 Mr Rees-Mogg: I think you did call increases in council tax a stealth tax when they were being done by the last Labour Government. It was one of the narratives of the Conservative Opposition.
Mr Osborne: When I was there as a junior member of the shadow Treasury team, the stealth tax was finding things that people did not realise were even taxes they had to pay and then not announcing them in budget speeches. That is very different from what I have done, which is to say, “We are going to introduce an apprenticeship levy. This is it. We are going to consult on it. You are going to have to pay for it if you are large company.” Equally on council tax, I am giving councils more freedom. I am not requiring them to increase their council tax, but giving them more freedom to do so than they have had previously.
Q45 Mr Rees-Mogg: Perhaps I can move on to the Chief Secretary on the issue of cuts against tax rises. The balance has changed quite a bit from March and July of 2015 between the two. Are you comfortable with this shift or would you have preferred to carry on cutting more waste out of Government expenditure?
Greg Hands: Yes, I am comfortable, and the change in the profile now, compared to what we went into just before the general election, is more achievable. Most importantly, we are still committed and on track, according to the OBR, to achieve that surplus of £10.1 billion in the financial year 2019‑20.
Q46 Mr Rees-Mogg: Does it concern you or did it concern you during the expenditure round that so much of Government expenditure is now ring‑fenced and, therefore, it is harder to persuade those budgets to reduce waste?
Greg Hands: No, I do not think so. Ring‑fencing in that sense reflects Government priorities that we set out going into the general election, particularly on things like aid, schools and the NHS. They were very clear Government priorities. Not having had those ring‑fences or protections would have been contrary to what we went into the general election with. To take up your point, I look at ring‑fenced or protected budgets as carefully, sometimes more carefully, to check that we get value for money out of all those budgets. Simply because something is a protected budget does not mean that it is in any way let off the hook in terms of me, the Chancellor and other Treasury Ministers and officials probing it.
Q47 Chair: Can you provide evidence to support that?
Greg Hands: I am not going to provide a specific thing. For example, I personally think it is really important that we make sure our overseas development assistance budgets are spent well and spent properly. I am not going to give a specific budget.
Mr Rees-Mogg: No more Ethiopian Spice Girls or whatever it was.
Greg Hands: I did not see that specific example.
Q48 Mr Rees-Mogg: Can I ask one more question to the Chancellor? This is changing the subject, but it is a very important one, in some sense. This is this issue of metro mayors. Most people in Somerset would prefer the money to be spent from Whitehall rather than from Bristol. There is no wish to be ruled from Bristol. It has been tried before and it was a very expensive failure that put costs on the rural areas. It was spent badly by Bristol; it was not even as if the money was spent well. We have heard mixed messages but, on the Floor of the House, we were been told that councils would not be punished if they did not sign up to this. I hope that still remains the case that money will be available from central Government; it is merely a matter of who distributes it, rather than of the money overall.
Mr Osborne: With my colleague Greg Clark, I am trying to achieve something that is pretty unique, which is local government reorganisation by consent, rather than imposition. Only where areas have agreed, and across the council leaders and the parties there has been agreement, to form combined authorities and to have elected mayors have we gone ahead. In areas where there has not been agreement, we have not gone ahead and we have not tried to impose anything, threaten anyone, withhold money or anything like that, so this is entirely by mutual consent and it is entirely done with the carrot, not the stick.
Q49 Mr Rees-Mogg: My council felt very threatened by a meeting they had with one of your junior Ministers. Will you tell your junior Ministers not to bully councils?
Mr Osborne: My junior Ministers are sweetness and light.
Q50 Mr Rees-Mogg: I hope that is true, but it is not the story we get back. That was my concern. What you say is absolutely fine. If what you said is what is being implemented by your junior Ministers, there is no question that Bath and North East Somerset, and North Somerset particularly, would have anything to do with the idea of a metro mayor. They are thoroughly opposed to it, as are the people of Somerset, and this bullying approach that has been reported to me is your Ministers contradicting you, so I hope you might bully them a bit to follow what you are saying, rather than doing something different.
Mr Osborne: As I say, we will only proceed in the Bristol area and in the West Country with any kind of arrangement if the local councils consented to it. We are not going to impose this. When Somerset speaks, Government Ministers do well to listen.
Mr Rees-Mogg: You will not bring undue pressure on them either.
Mr Osborne: There is absolutely no pressure at all. What is true is that certain powers that are currently held in Whitehall will only be devolved to areas that are sufficiently large for those powers to be exercised in a coherent way and where there is the accountability of an elected mayor. If the councils in and around Bristol, Somerset and so on, do not want to do that and do not want to head in that direction, of course they do not have to.
Q51 John Mann: I trust that sports, arts and schools, following Ofsted’s report yesterday, will also go to those combined authorities, should they wish them. Can I welcome you, Mr Hands? We never saw your predecessor at these particular gatherings, from my memory.
Greg Hands: Could I correct you, Mr Mann? I have not myself been to a Select Committee meeting for five years but, as part of my preparation, I watched my predecessor Danny Alexander’s appearance before you in the autumn of 2010.
John Mann: Sir Danny.
Greg Hands: Sir Danny Alexander appeared before you. In fact, you even asked him a question.
Q52 John Mann: Sir Danny often came on his own. I wanted to congratulate you for your input early on, in particular the brilliant decision that you and the Chancellor have made in relation to Hull City Council and the attempt to attract in tourists with their culture year in 2017. In 2020, it is the 400th anniversary of the Pilgrim Fathers and, as two historians in the two key positions for the first time, you will know well that the whole ethos of western democracy comes from the Mayflower Compact and the origins of the Pilgrim Fathers, who happen to come from Bassetlaw. I do trust in the preparations that any proposal to attract in huge numbers of American tourists to celebrate our joint ethos of democracy will have that joint historical eye scanned over it and be received favourably.
Mr Osborne: It will now. Can I make a more serious point? We are very open to proposals that are made where towns or cities have particular one‑off events. In the case of Plymouth, the MPs of Plymouth wrote to me; in the case of Hull, Alan Johnson wrote to me. We are absolutely open to individual projects that are put to us on an ad hoc basis. We can put Bassetlaw on the map even more than it is already.
Q53 John Mann: That is good to hear. It is good to see Mr Hands there to assist in the process. I would like to ask Ms Lombardelli a question, if I may, on the surplus that is anticipated at the end of this financial four‑year cycle. If new employment levels go down significantly from the 1.5 million jobs that are predicted, is that surplus achievable?
Clare Lombardelli: The surplus is planned on the basis of the latest forecasts from the OBR. That is the central forecast for the UK economy. Should that forecast change at future fiscal events, it will be for the Government to respond to that and make a decision then as to what policies to undertake.
Q54 John Mann: I appreciate that. I am looking at your position and your title. Obviously the OBR can explain the accuracy of their projections. The figures are based on 1.5 million new jobs and a significant surplus at the end of the cycle. I am asking, if the number of new jobs is significantly below the 1.5 million that is built into these figures, will that surplus be achievable?
Clare Lombardelli: As I say, the surplus is projected on the forecast that we have now. Should that forecast change, then the Government will make decisions about whether or not it needs to change policy in response to that.
John Mann: I will take that as a yes then, because there are clearly figures on employment.
Mr Osborne: You should take it as an exceptionally able answer from Ms Lombardelli.
Q55 John Mann: There are 1.5 million new jobs projected, but the claimant count only goes down by 160,000. In the other 1.34 million new jobs, who are these people?
Mr Osborne: You should not assume that the number of jobs are static in an economy and that the country cannot create an increased number of jobs in it.
John Mann: Your figures are net.
Mr Osborne: Yes, but what I am saying is that it is not just that you reduce the number of people who are unemployed. You create new jobs for people entering the labour force.
Q56 John Mann: We are talking about net new jobs. Obviously the number of new jobs is much bigger than that; this is the net increase. We have a 1.5 million net increase in employment, but only a small amount coming off the claimant count. There is no criticism there; it is difficult to do. If that is reached, it would be very worthy and good. That leaves 1.34 million additional jobs in the economy. I am just asking who these people are.
Mr Osborne: They can be anyone from people leaving school or college to other people who are currently economically inactive, but not in receipt of benefits.
Q57 John Mann: They can indeed, but the demographic trends are fairly flat at that age group. We have the OBR in here to question even more than Sir Danny Alexander. The OBR says that the vast majority of new jobs—every year I ask them and every year they confirm—are from inward migration so, on the figures to reach the surplus, there are going to be over 1 million net new migrants into the country. Am I right or am I wrong that the surplus can only be met if we have a million net new migrants entering the country in this cycle?
Mr Osborne: I am not sure I entirely follow the logic.
John Mann: I think you do, Chancellor.
Mr Osborne: Unfortunately I do not. The health of the public finances is fundamentally about getting public expenditure in line with the resources of the country and the taxes of the country, as we were discussing earlier. When it comes to migration, we are not trying to stop all migration. We are just trying to get it down to manageable levels. The OBR uses the current ONS projections, but of course that does not take into account future Government policies or indeed successful outcomes from the European negotiations.
Q58 John Mann: No, but the surplus is linked to migration. You told us earlier that you want to see under 100,000 a year, so under 400,000 net migration in this period, but the statistics on which you base your surplus in four years’ time are based on over 1 million net migration. I am just asking you to confirm that your growth predictors and your surplus at the end of the cycle are based on and predicated on—and there is nothing to be ashamed about, Chancellor—over 1 million new net migrants entering the country.
Mr Osborne: I am afraid I just do not agree with the logic there. People can enter the labour force for a number of reasons. They can leave school or leave college. They can have been economically inactive, but ineligible for out‑of‑work benefits and now in work. There will be migrants. We are not saying there should not be any migration, but it can be managed migration. As I say, I think you do our country a disservice to suggest we cannot live within our means without very high levels of migration. It is perfectly possible with fiscal discipline.
Q59 John Mann: I am merely pointing out what your projections result in. It is simply not the case that you can find 1.34 million jobs through the economically inactive who are not on the claimant count and school leavers. As the OBR has repeatedly said, that would be a tiny percentage of them. What I am not understanding is why you are not simply saying that, actually, our forecast is based on over 1 million new people, net, coming into the country and, in addition, we are stimulating the economy by building houses for all these people, because obviously people coming in need houses. That is the basis of how we are going to get our surplus by 2020.
Mr Osborne: First of all, we are building houses because there are plenty of people born in this country who cannot get on the ladder and we want to help them do so. We are encouraging and providing extra help to people with disabilities who want to work to be able to work. The employment of disabled people is going up at the moment. We are providing support, so that people who leave school at 16, or college or school at 18, do not go straight on to the unemployment rolls, by for example requiring them to sign on every week. That is a new proposal in this autumn statement. All of these things lead to more people in the workforce and more jobs. They depend on high levels of migration.
Q60 John Mann: Why not spell it out? Last year, there was 336,000 net migration and yet you are suggesting to us today that it could get under 100,000. It is 336,000 today. You are saying that, to reach the growth and surplus that you want to see, using the OBR basis, it has to be over 1 million net new migrants. Why not just say, “We are open for business. Come in here and take the jobs; that is how we are going to generate growth”?
Mr Osborne: For example, because of the action that we are taking to make sure that young people have the skills they need to get the jobs that are being created by our competitive economy, unemployment is very low. The number of people in this country on out‑of‑work benefits has fallen to the lowest rate since 1975 and the employment rate has gone up to a record high. This all shows us that we are not only accepting some migrants to the country, but we want to control that; we are also getting jobs for the people who are born here.
Q61 John Mann: One final time I will put the question: as Chancellor, you have seen £741 billion added to the national debt, which we have to service. I put it to you that your economic policy is fundamentally predicated on bringing in a significant number, net, of migrant workers into the country, them paying taxes and building houses that do not literally go to them, but to create the stock for them to live, because they have to live somewhere. In this four‑year period, your surplus is based on over 1 million net new migrants coming into the country. Is that wrong? Will the statistics prove, year by year, that I am right or are you actually just reluctant to tell us the truth?
Mr Osborne: As I say, we are creating jobs for people born in this country. If you look at periods of the last Parliament, we had the vast majority of jobs going to people born in this country, rather than migrants. It is always good to have these discussions. I remember you always used to ask me, Mr Mann, about the petrol prices. I would not want to let one of these appearances go past without reminding you that, when I became Chancellor, petrol was £1.20 a litre and now it is £1.07.
John Mann: Thanks to your VAT increase.
Q62 Helen Goodman: Chancellor, in response to Jacob Rees‑Mogg, you said how undesirable it was to have stealth taxes and not make major announcements in statements. Why did you not announce the cut to carbon capture and storage in your speech last week? Why was it announced to the Stock Exchange an hour and a half after you sat down?
Mr Osborne: It was not a cut, because there was not a project that we cut. We were setting our capital budget for the coming five years and we were setting out what we are going to spend the money on. We are increasing investment in energy research, but we are not funding one of the carbon capture and storage projects. Of course, we are quite rightly making sure we get value for money for the taxpayer.
Q63 Helen Goodman: Chancellor, it was a Government competition that Shell had got through, applying for this money that you say was not a cut. How can you possibly say it was not a cut, when you were running the competition that they were entering in order to go ahead with this project?
Mr Osborne: First of all, the commitment to having pilots was always subject to affordability and, secondly, no one had won this competition, so no one had something cut from them. I agree with you we are not proceeding with a carbon capture and storage project, because I am not convinced it offers value for money. Many times these things have been proposed over many years, including under the Labour Government, and no one has yet been able to come forward with what I would regard as an affordable project or indeed what my predecessors would have regarded as an affordable project.
Q64 Helen Goodman: I do not know how you could be in a position to make a value for money judgment before the deadline for them to submit the work on this project, which they had been preparing for four years. How can you make that judgment at this moment in time?
Mr Osborne: I am making a judgment on what I think are the value for money propositions that the country should invest in and, as always when it comes to public expenditure, there are vastly more projects that you could fund than you are able to fund as a country, and so you have to make an assessment as to whether the money is set aside for some future carbon capture and storage project that is not yet there on the table or if you would rather spend the money on rebuilding a school in your constituency, building a road in your constituency or putting it into a science project.
Helen Goodman: It would be a fantastic school if it cost £1 billion.
Mr Osborne: We are putting over £20 billion into school repairs and new schools, as it happens, in this coming period.
Q65 Helen Goodman: The Government’s own Committee on Climate Change said that going ahead with carbon capture and storage would halve the costs of gas, oil or coal‑fired power stations. If they can take that view, why is your picture of the arithmetic so very different?
Mr Osborne: We are investing a lot in renewable energy. We are doubling our investment in renewable energy. Everyone is paying for that through their electricity bills. We are also putting money into energy research. We are doubling the amount of money we spend on energy research in this Parliament. We are absolutely investing in energy research, and I am sure you would welcome the fact that carbon emissions are down 8% in the last year in the UK, even though we are growing strongly and even though we have people in work. I would say that our green policies are delivering the goods, in terms of falling carbon emissions, which after all is what matters most.
Q66 Helen Goodman: Last time you came to the Committee, you said that you were totally committed to the legal framework and the targets on renewables and on carbon reduction, but that turned out not to be the case, because the renewables target we now know will undershoot by 25% in 2020. Yesterday in Paris, the Prime Minister said that the carbon reduction targets were doable and therefore we should do it. Could you explain why every single measure you have taken in this area, whether we are talking about wind, solar, this measure or the feed‑in tariffs, all appear not to be doing it, but rather to be undoing it?
Mr Osborne: I do not accept that. First of all, we have met our carbon emissions. Carbon emissions are down since we came to office.
Helen Goodman: The forecast for where we will be in 2020 is also down, unfortunately.
Mr Osborne: In the five years I have been Chancellor, carbon emissions have fallen, even though the economy has improved. The only way the Labour Government met carbon emissions was by having the worst recession for 100 years. Second, we have doubled investment in renewable energy. There has been a massive expansion in wind generation. You will also see us in this budget increasing the renewable heat incentive to over £1 billion, and you have as a country Britain making a huge commitment to help deal with climate change in developing countries, by increasing its commitment to climate finance by 50%. We are meeting our targets on carbon, and we are investing in energy and meeting all our international obligations in this space.
The big difference is that we are trying to do all this in a way that is affordable to customers. I seem to remember our Labour Opposition tearing strips out of us because we were not freezing energy bills, and that made absolutely no sense a couple of years ago. Thankfully, that opposition collapsed. We have actually proceeded with a much more sensible policy, which is sustainable energy bills and a sustainable energy policy.
Q67 Helen Goodman: Chancellor, it is true that, up to now, the targets have been met. It is also the case that, because of all the policy changes that you made in May, despite the fact that, in the Conservative Party election manifesto you committed to spending £1 billion on carbon capture and storage, the forecast is that you will not hit these targets by 2020. Mr Hands, if you know the answer and the Chancellor does not, please respond. You do not need to tell him the answer.
Mr Osborne: We both say the same thing, which is that we will do what is affordable for the country, consistent with our international carbon commitments, which we are meeting. There was no forecast that I saw that said that carbon emissions will fall by 8% this year, but they have, because we have a sensible mix of an increasing renewable energy sector, which by the way has, through the levy control framework, a sustainable long‑term future, and we are making investment into low‑carbon electricity generation, like nuclear power, which provides a stable base to sit alongside that renewable energy.
Q68 Helen Goodman: If the targets are not met in 2020, do you not think it might be rather embarrassing for the Prime Minister of the day to go to the review, which is going to be incorporated into the Paris agreement, and explain why Britain has not missed its targets?
Mr Osborne: First of all, you are talking about a renewable energy target, which of course is not the same as the carbon target. They are different targets.
Helen Goodman: They are going to review carbon objectives as well in the Paris agreement.
Mr Osborne: We are meeting our carbon budgets. Carbon emissions are falling and, frankly, we inherited absolutely zilch in this space and I think we have put in place quite a strong and sustainable framework for renewable energy as well.
Q69 Helen Goodman: Chancellor, you may not want to defend your policy, but to say that “we inherited zilch in this space” is an absurd statement. Can you admit that that is just an absurd thing to say?
Mr Osborne: Compare things like offshore wind generation in 2010 to now. Compare the complex and sustainable levy control framework we now have in place compared to what we inherited in 2010. You asked me about carbon capture and storage; if it was such a great idea, I do not remember the last Labour Government coming forward with affordable projects. In fact, I remember lots of discussion at the time about the Peterhead project, which is what you are asking me about now. That did not go ahead when Ed Miliband was Climate Secretary. I am just pointing out that we have made lots of progress and it was not as if we inherited a stellar record.
Q70 Helen Goodman: Chancellor, you have now embarked on a dash for gas. If we are going to have more gas‑fired power stations, carbon capture and storage would be more useful than it would be if we had a larger proportion of our electricity and heat generated through normal sources.
Mr Osborne: We are, through our capacity mechanism, supporting the building of gas‑fired power stations. We are phasing out coal and we have given a date when that happens even though, by the way, tonnes of Labour MPs endlessly write to me about why we are doing that. You also have a situation where we are investing in next‑generation nuclear power stations. Why are we doing so many of these things to try to increase the generation of electricity in our country? It is because no one built power stations for two decades in our country and we are having to pick up the pieces.
Helen Goodman: I do not think it is true that no power stations have been built for the last 20 years. You just keep exaggerating your case quite unnecessarily.
Mr Osborne: Can you point to a significant increase in electricity generation in the period of the late 1990s to 2010, apart from the tail end of the so‑called dash for gas that was initiated under the John Major Government in the deregulation of the energy market that happened at the beginning of that decade?
Q71 Helen Goodman: Chancellor, now I want to ask you a question about the apprenticeship levy. Why have you gone down this path rather than having a higher level of corporation tax?
Mr Osborne: First of all, a lower corporation tax makes the UK internationally competitive. Countries have used their headline corporation taxes to make themselves more competitive. I think you see the benefits of what we are doing in the flow of inward investment into this country and the relocation of company headquarters. You will remember, back in 2010, that corporate headquarters were leaving the UK, rather than flocking to the UK.
As I say, the apprenticeship levy is designed as a payroll charge, but it will be administered by an industry‑led body. If you have a sufficient apprentices or sufficient apprentices of a high enough quality, in terms of their skill, you will get the money back. That is something that I think is deliverable. It has been broadly welcomed by businesses, which will pay it, which is not always to be expected. I think it is a very welcome addition. I would have hoped that Labour MPs would support it.
Q72 Helen Goodman: Turning to the first part of your answer, you are saying that the benefit is largely a presentational benefit, since it has been criticised by the CBI and the EEF. Everybody is in favour of spending more on apprenticeships. We are at one on that, but the OBR says that, by having a payroll tax to fund the apprenticeships, it will be paid for primarily by a reduction in wages, rather than a tax on profits.
Mr Osborne: Of course, 98% of employers are not going to pay this, which is worth thinking about. We are only talking about 2% of employers in the country. If a large employer is able to have a sufficiently large or high quality apprenticeship scheme, they will get the money back. Actually, in the last couple of days, I was at one of our country’s largest manufacturers, which was telling me how they could actually make the apprenticeship levy work for them.
Helen Goodman: That would be so if it was paid for through a higher rate of corporation tax as well. They would get it back.
Mr Osborne: It is to do with company training. In the end, we disagree. It is perfectly true that Labour politicians want to put up corporation tax. I think that would be a mistake for our country. Mr Streeting, you stood on a manifesto to get yourself elected to this place on a higher rate of corporation tax.
Wes Streeting: The lowest in the G7 was our manifesto commitment.
Mr Osborne: No, it was an increase in corporation tax.
Q73 Chair: We are not going to replay the last election, interesting though it might be. I am going to ask the Chancellor on apprenticeships, as I asked him on the Floor of the House, whether he knew what this would cost the public sector. You said you would get back to me in a letter. I do not suppose you have had a chance in between the two events.
Mr Osborne: If Government Departments do not increase their apprenticeship programmes, and of course many of them are looking at doing so, just like private sector employers, we think it will be around £700 million. That is taken into account in the settlements we reach with Government Departments.
Q74 Chair: What proportion of that will be paid by the NHS?
Mr Osborne: I can get back to you on that one.
Chair: The reason I ask that question is the NHS is the largest employer in the UK, but it would want to train a very small number of apprentices, because it does not want, for example, to put doctors and nurses into an apprenticeship scheme, so it will be a big net contributor.
Mr Osborne: I do not accept that premise. Actually, the NHS is considering a substantial expansion of its apprenticeship programmes.
Chair: It may be an expansion, but it would be an expansion from a relatively small base. The point that I am getting at is it is likely to be a net contributor. Therefore, this financial impact on the NHS is something that would be of considerable public interest.
Mr Osborne: As I say, the apprenticeship levy was something that was announced at the budget and, therefore, is something we have consulted upon.
Q75 Chair: Mr Kelly, at the time of the preparation of the budget, did you discuss this with NHS officials?
Julian Kelly: Yes, among many other things.
Q76 Chair: Did you get as far as a number that the NHS was likely to find itself liable for?
Julian Kelly: Sir, I apologise that I cannot remember the precise number, but we discussed this along with a whole host of other issues.
Q77 Chair: I will not ask you for the number, because the number is one that was put together on a policy‑confidential basis. We expect the Chancellor to come forward now with what he wants to publish, not what you were doing privately. The only question I am asking you is if, in those discussions, you got as far as a number.
Julian Kelly: We talked about this and the implications for the NHS, along with a whole bunch of other issues we discussed.
Chair: Did you get as far as a number for the NHS in those discussions? That is all I am asking.
Julian Kelly: We would have talked about internal modelling with them.
Mr Osborne: They have some quite exciting ideas about apprenticeships, which apply to the purpose of the apprenticeship levy to encourage more apprenticeships.
Q78 Chair: I would also like to pick up on another aspect of the questions on climate change, with respect to infrastructure more widely. We now have an Infrastructure Commission, which you have set up. It is important we establish, since it is a commission that in parliamentary terms will ultimately be accountable here, to this Committee, what it is about and what it is not about. I hope we can clear away a few questions. Is it advisory or does it have any decision‑making power?
Mr Osborne: It is advisory in the sense that it cannot commit the Government to build something that the Government do not want to build. This will require legislation Parliament will want to consider. We are hoping that, if Government accepts one of its proposals, the planning for that becomes easier.
Chair: The answer to my question is that it is advisory.
Mr Osborne: Yes.
Q79 Chair: Is it intended that the commission should take some of the party politics out of infrastructure decisions?
Mr Osborne: Yes.
Q80 Chair: That is its intention so, if a relevant Minister were to disagree with a recommendation, where will the final say go?
Mr Osborne: Ultimately it rests with the Government. The Government are responsible to Parliament and to the public for how it spends their money.
Chair: It is the same decision‑making tree as before. It does not, for example, rest with you.
Mr Osborne: You are talking about an individual Minister. It is a collective decision of the Government. If it were the case that an individual Minister disagreed with the Infrastructure Commission, I would expect that to be elevated to me and then to the Prime Minister.
Q81 Chair: I am asking you a straightforward procedural question. At the moment, when a decision comes forward in a particular Department, it comes forward in the normal way. You may challenge that. Chancellors can be very powerful when challenging these things but, nonetheless, we all understand the process. I am asking whether that process is being altered or whether what we have is the creation of an advisory body, which is operating within the context of an existing process.
Mr Osborne: The purpose of the Infrastructure Commission is to provide us, provide Parliament and provide the country with good advice on the long‑term infrastructure needs of the country, frankly to make it difficult for the Government to depart from them and, when it has departed from them, to be rightly subject to scrutiny. In terms of the processes within the Government, infrastructure projects of the kind of size that the Infrastructure Commission will be examining will come anyway to the Treasury and the Chancellor, at least for a second opinion. I would certainly expect, and it would be more than an expectation, that a junior Minister could not disagree with the Infrastructure Commission without it being elevated to the most senior members of the Government.
Q82 Chair: The existing structure is also being retained. That is important to clarify. Why were airports excluded?
Mr Osborne: When you say airports, the south‑east airport capacity was excluded because Howard Davies had done his report and there was no need to repeat that work.
Q83 Chair: You felt that the job was done. When are you going to report on that?
Mr Osborne: Shortly.
Chair: You said before Christmas. There is not long left, particularly since you say you are so busy between now and Christmas.
Mr Osborne: That is why I said shortly.
Chair: Very shortly indeed, in fact.
Mr Osborne: I have said shortly, and shortly is shortly.
Q84 Chair: You will see that I have tabled quite a large number of questions on the economic analysis lying behind the Davies report. I would be very grateful, on behalf of the Committee, if we could have an answer to those before you make the announcement, by which I mean not moments before but with an interval. Can you give us that assurance?
Mr Osborne: I was not aware you had tabled all the questions. I am happy to look at what you have tabled. I think the Secretary of State for Transport will make the announcement, but I am happy to talk to him about it.
Q85 Chair: I am sure you are aware that some of the decisions are very much your responsibility, as well as his, bearing in mind the scale of the responsibility. Therefore, the PQs are really your responsibility too.
Mr Osborne: It is fair to say that all members of the sovereign Government are aware that this is an important decision.
Q86 Wes Streeting: I have a very quick factual follow‑up from the Chairman’s questions earlier about student migration. Chancellor, I think you said in response that you are not a member of the Cabinet Committee on Immigration. According to the Cabinet Office website and the latest update in June, you are a member of the Cabinet Committee on Immigration.
Mr Osborne: I knew I was a member of the Home Affairs Committee.
Wes Streeting: I think you might need to put along to a few more meetings and your answers to Mr Mann might be up to scratch a bit more.
Mr Osborne: I do not always make it to the Cabinet Committee meetings.
Q87 Wes Streeting: We will move on, because I do not want to start digging a hole for you. I am more kind. I will move on to local government and will try to cover some ground with the time left. I should declare that I am an unpaid member of the London Borough of Redbridge. On social care, you have introduced a new 2% social precept, accepting that there are massive pressures on local government budgets. That is very welcome. It seems to me from the autumn statement that the Government are running on the assumption that authorities, because of those pressures, will want to charge the 2%. Is that your expectation?
Mr Osborne: From memory, the OBR forecast is that around 80% of authorities will want to levy it.
Q88 Wes Streeting: What concerns me about that is that, assuming that councils do charge the full 2%, and many will be under pressure to because of social care budgets, it would raise about £2 billion for local authorities, of which £1.4 billion would be needed to fund the national living wage increase alone. Can you be confident that the measures outlined in the autumn statement genuinely allow local government to meet the social care pressures that they are facing?
Mr Osborne: The social care precept is just one of the proposals we had in the autumn statement, and the other one was an increase in the Better Care Fund, but ring‑fenced.
Q89 Wes Streeting: That is back‑loaded. That is a separate concern that I was not going to delve into, but the Better Care Fund increase is back‑loaded towards the end of the Parliament. The social care pressures are now. I am concerned.
Mr Osborne: While the living wage is introduced next April, it steps up through the Parliament. If you are particularly concerned about the wage pressures, they grow through the Parliament.
Q90 Wes Streeting: There is an expectation that, to meet the wage costs and to meet the demographic pressures and other pressures, councils ought to be looking at this 2% precept favourably.
Mr Osborne: I would expect the majority of councils to make use of it, but I am not going to tell them they have to. That is their decision.
Q91 Wes Streeting: No one would expect you to. Do you have a similar expectation around council tax that it would increase by 2%?
Mr Osborne: That is again a decision for local councils, but well run councils can and have demonstrated that they can provide good council services without necessarily increasing council tax. I would draw a distinction between the two.
Q92 Wes Streeting: Labour‑run Redbridge is a good example of that. There are lots of councils of all shades that have managed to innovate and change, and keep taxes low. My concern is that, actually, because of the social care pressures, in effect, your precept and the possibility left open for an increase of up to 2% or thereabouts inadvertently punishes councils that have maintained a low council tax base for all these years. Let us assume that they do it by 2% with a precept. If they have real pressures, they might need to go an additional 2% on the council tax. These are percentage‑term increases. Those councils that may be have a low council tax base, but have demographic pressure, and therefore would face higher social care costs, are inadvertently going to be penalised for having kept their council tax base pretty low, are they not? That is the unintended consequence.
Mr Osborne: If they have kept their council tax low because they have run efficient services, I do not think you can describe that as being penalised. The marginal increase in the social care pressures that they face, understandably, can be accommodated by a combination of the council tax and the ring‑fenced local government element of the Better Care Fund.
Q93 Wes Streeting: Let us take into account the 2% council tax increase, the 2% precept and the business rate retention, and compare two live examples, the City of Durham Council and City of Westminster Council. The cumulative impact of those measures would leave Durham with something like a £42 million hole and Westminster with a £190 million surplus. That is not fair, is it?
Mr Osborne: First of all, we have not set out the local government settlement. You have to distinguish and separate out some of these things. The devolution of business rates is happening through this Parliament. Alongside it, additional responsibilities would be devolved to local government. Separate to that and at the same time, the local government grant is being phased out. That takes into account rising council incomes from things like council tax, where they are able to retain some of those receipts, and also the fact that they can currently retain 50% of their business rate receipts. We have not set out the local government settlement, but we have indicated that we want to make sure that the impact on all councils from the public expenditure decisions is balanced and has the same impact on their spending power. I do not have it in front of me today; that is because it is coming in the next few weeks from the local government settlement.
Wes Streeting: We will wait for the detail on that.
Mr Osborne: That is different from the last Parliament.
Q94 Wes Streeting: I know it is a policy change. How does your advice to local authorities to draw on their reserves square with your rhetoric around fixing the roof while the sun is shining?
Mr Osborne: Councils have built up their reserves to the tune of an extra £10 billion, over the last five years. They have taken those reserves to £22.5 billion. I am all for running a surplus and having some reserves, but I do not think that that just needs to increase. During this period, if you look at what is going to happen to local government funding, in cash terms, it is going to be the same at the end as the beginning or indeed marginally higher at the end. To help with the transformation of local government services, to help with the efficiencies and the reforms that different councils are undertaking, I am saying that they can draw on their reserves. Of course, it is their decision, but I do not feel that they should feel inhibited from drawing on their reserves by the Treasury.
Equally and perhaps as significantly, we are also saying that, if they sell land, they should be able to spend those receipts. That is a big change as well. It is all part of a big shift. I know people will want to see the proof in the pudding and they do not just want to hear it from the Chancellor, but it is all part of a big shift in this Parliament to say that you in local government have real responsibilities, but also real powers, and you can now use them.
Q95 Wes Streeting: Lots of councils, and again of all political shades, have taken your advice and they have been spending the reserves, in line with the signals we have received from HMT and DCLG, during the last Parliament. Looking at some of the NAO figures—and this dates back to 2013‑14 single‑tier accounting of unallocated reserves, so probably would have gone down further since—they were 6.43% of net revenue expenditure. Now, a 6.34% unallocated reserve as a proportion of net revenue expenditure would be the equivalent of 23 days’ expenditure for the local authority. Even just a few years ago, let us assume that there is a catastrophic year and a council really begins to hit the wall, they have 23 days. By most standards, a reserves policy that leaves you 23 days of operation would be seen as pretty risky.
That was a few years ago. We are now in the position where you are devolving business rates and making all sorts of other changes to the way that local government spends money, and there is a huge element of risk. What would happen in a Redcar situation, when the steelworks goes down the pan, a big part of your business rate base is gone overnight and you have spent your reserves?
Mr Osborne: In that specific situation, we have anticipated that and there would be a fund available to help, where you have the closure of a very large business rate payer. That currently exists in our system today and would be maintained in that system. That would be a centrally held reserve that you would be able to draw on in the case of Redcar.
Wes Streeting: Redcar was an example.
Mr Osborne: Through the top‑up and tariff allocations currently, when it comes to business rates, I do not want to prejudge anything, but I am sure that Redcar will be compensated for or helped with the fact that a major employer has suddenly stopped paying business rates. That exists in the current system, although that is somewhat circular to local government. We are saying, to deal with that situation where you have the failure of a big employer or the closure of a big government office, which was paying rates, then we would have a centrally held reserve. That is our thinking, so that they could apply in that specific case for support.
Q96 Wes Streeting: Where has that been announced previously and provided for in the Red Book or the autumn statement? Is that a decision or is this thinking?
Julian Kelly: Within the current business rate system, there is a levy system, which effectively charges local authorities such that, if any local authority sees a material drop in their business rates, effectively that is levied off all other councils to pay it. The point that the Chancellor announced about the business rate move at about the time of the conference is part of the detail that we gave out. At that point, we said we would take the levy off other local authorities. We would keep a central Government reserve, not funded from business rates, to continue the safety net mechanism.
Mr Osborne: In my conference speech, I alluded to this. You were not in the audience, but may be one day.
Q97 Wes Streeting: I was watching, actually. I have one final question, if I may, Chairman. Can you also confirm that local authorities will continue to have the ability to raise council tax by at least 2% a year, before a referendum is triggered? On top of which, there can be a social care precept applied, again of 2%, for all four years of the spending review period or are we just talking this year at the moment?
Mr Osborne: That is certainly the assumption upon which we have based our public finance projections in this Parliament for the four‑year spending review period.
Q98 Mark Garnier: Chancellor, can I talk to you about financial asset sales, namely RBS and NRAM’s Cerberus sale? Starting off on the P&L of the transactions, I do not necessarily want to get too much into the rights and wrongs of whether we should be making money on them or not. I will in due course. The autumn statement predicted that the Government will raise over £25 billion from the sales of RBS shares over this Parliament, and a further £5.8 billion in 2020‑21. Just looking at the share prices and how that adds up, the previous sale was at 330 pence. Our team did some numbers and worked out that, in order to achieve that total £30 billion or so sales, we would need to have an average sale price of somewhere in the region of between 390 and 400 pence. Currently, they are 311 pence.
Mr Osborne: They are up 3% since yesterday.
Q99 Mark Garnier: That is fantastic. Very good, but it has to go up a lot more to get to 390 pence obviously. One of the questions that I am slightly perplexed about that is that you make the point that, without the dead hand of the Government shareholding, the company should be able to run freely but, actually, it is the stated intention of RBS to shrink its balance sheet and to reduce its footprint on the world. On that basis, it is going to be quite a struggle, do you not agree, for it to get to around 400 pence a share at any sustainable level, given the fact that it is shrinking its business and has quite a long way to go. How confident are you of achieving that £30 billion odd by 2020‑21?
Mr Osborne: The number that the OBR uses is one that comes from an assessment from what used to be called UK Financial Investments about what they think is a sustainable rate of sale of shares, consistent with their mandate of getting value for money for the taxpayer and so on. The number is obviously based on a Government intention to sell shares. Obviously, the Government could take a decision and decide not to sell shares. Given that we want to sell shares and we want UKFI to do that in a way that is consistent with their value for money remit and their obligations as the accounting officer, that is their forecast of what they can achieve.
Q100 Mark Garnier: That is fair enough. On the sale of Northern Rock Asset Management, and Bradford & Bingley, to Cerberus, I think it was £7.5 billion, but have you been given any confidence by UKFI that they will break even on those sales or even make money on that bad loan book?
Mr Osborne: Yes. They recommended it to us. The ministerial team has a value for money proposition. They made an assessment that, overall, we might make money out of the entire bailout and sale of Northern Rock. There were a number of bidders and this was the value for money bid.
Q101 Mark Garnier: I will come back to that in a minute, if I may. I just want to ask you about the philosophical point and the debate that keeps going on about whether or not the taxpayers should make money from the sales, as the argument seems to be going, of individual holdings within this portfolio. Should we make money on RBS? Should we make money on NRAM? Should we make money on Lloyds? I do not want to lead the question too much, but is this not just a load of old rubbish when it comes to what the intention was in the first place?
There are a number of things that strike me as coming into this. The first is that, of course, this is a portfolio of assets that have been bought. Any asset manager would look at the portfolio, rather than just individual assets within it, so of course you need to take into account the RBS sale, but also the Lloyds sale, the loans repaid and all this kind of stuff. If actually you want to do a proper full account of this, you need to take into account things like the bonus tax, which was brought in, as was said at the time, to help pay back the taxpayers and a bank levy that followed on from that. There are a number of these different things and against that you have the cost and carry costs as well, potentially. Even then, is it not slightly fatuous trying to work out the P&L, because it assumes that, right at the very beginning, these stakes were bought to make money? They were not surely; they were bought to bail out the banking system that had collapsed and, therefore, P&L is slightly irrelevant.
Mr Osborne: I basically agree with you in this sense. I did not buy these bank shares, but they were not bought by Alistair Darling to make money. That was not the purpose. They were bought because the banking system was collapsing and he judged that this was the best way to try to stabilise it. It was only at the time, and partly because the then Government was trying to explain to the British taxpayer why it was spending all of this money, that a narrative developed that somehow this was also a fantastic investment and the country could not help but make money. Indeed, I remember the commentary around the purchase of RBS that this was the best bargain going. It turned out not to be.
My overriding objective is to have a strong economy and a healthy banking system, which is in the private sector and lending to businesses. If, on top of that, we can make some money on these transactions, that is great and you are right to say we should continue to consider them in the round.
I faced this decision when I authorised the first sale of the RBS shares, clearly at well below the purchase price that Alistair Darling and Gordon Brown made. That is because I took the view, supported by advice from the Governor of the Bank of England and others, that the overall benefit for the UK economy was clear. I am not held to a requirement just to sell it at above the in price. By the way, there are all sorts of calculations of what exactly the in price should be. My overriding objective is what is in the interests of the British economy, the British banking system, British businesses and so on. I draw on the advice of UKFI, the Bank and so on in making those decisions, but you are right that I am not simply trying to make money. If we can make money as well, it is all well and good.
Q102 Mark Garnier: I am very reassured to hear those comments, Chancellor. There are just a couple of things that I want to pick up on, if I may. In your Mansion House speech, you made a comment that some critics would have picked up as encouraging banks to be reckless. You said businesses are “freer to take risks with their resources” when they operate within the private sector. I am assuming that you did not necessarily mean that the banks, once they have been sold back into the private sector, should go off and go gung‑ho gangbusters into running up their balance sheets.
Mr Osborne: Banks in the private sector are properly regulated. Indeed, we have much stronger regulation than used to exist. I was making an observation. People have often said in recent years that RBS is not lending into the real economy. That is because in part it was a wounded institution, trying to repair its balance sheet. It is now largely owned by the private sector. All its incentives were not to say to the person coming along with an interesting business proposition, “Okay, we will fund that.” Risk taking, in the best sense of the word, is the central ingredient of an enterprise economy, where not every proposition that is funded pays a dividend. RBS is now in much better shape. It is much better run and it is heading in the right direction but, ultimately, it would be much better off in the private sector. You can see the improvement in Lloyds, as it has largely returned to the private sector.
Q103 Mark Garnier: Absolutely, I agree with that. I have just one final question, if I may. There are a few concerns from mortgage holders in that portfolio that has been sold to Cerberus. For example, before it was sold—and I appreciate that a very small number of mortgage holders default—they might have cut a bit more slack, whereas Cerberus might be a little bit more stringent when it comes to treating people who are in default, of one form or another. Have you had any reassurances from Cerberus that they are going to be humane and charitable with people, if you like?
Mr Osborne: We have had assurances that the terms and conditions of the mortgages will apply.
Q104 Mark Garnier: It is more the interpretation. I know this is a little bit more esoteric, but a forgiving bank manager might overlook some infringements, whereas somebody trying to squeeze the maximum return out of something might stick absolutely rigidly to the letter of the agreement. That is where people are slightly worried.
Mr Osborne: I do not think that Northern Rock Asset Management was a particularly forgiving institution, correctly so, because they were focused on getting the taxpayers’ money back. What is interesting about Cerberus is that they have arranged for £3 billion worth of their mortgages to be transferred to the TSB, which is a big new challenger bank seeking to establish a reputation as a good bank for its customers. They clearly want to develop these assets in a positive way.
Chair: Thank you very much indeed, Chancellor, for two sessions or one marathon one. We appreciate it very much. I do not know what it is that you have to go to.
Wes Streeting: The Immigration Committee of the Cabinet.
Chair: I hope you get there. We will ignore that very last remark and end on a friendly note. Thank you very much indeed, Chancellor.
Oral evidence: Comprehensive Spending Review and Autumn Statement 2015, HC 638 4