Fraser Nelson

What the Treasury told lobby journalists

What the Treasury told lobby journalists
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Earlier, I referred to a Treasury briefing for journalists. This is an event which takes place straight after the Budget for lobby journalists. As it is on the record, we at Coffee House figured we'd release a transcript. It's an historic Budget, this is your money they're talking about and the the Treasury's thinking is crucial. This is from a senior Treasury civil servant, taking questions from about four dozen lobby journalists after he had gone through the main points of the Budget:

There is no change in the projection of public spending growth from next year onwards?

No, there is, there is.  He announced in his speech that it would now be running at 0.7%

As opposed to?

It was previously 1.1%

What is the Chancellor doing about the unemployment forecast?

We don’t do an unemployment forecast but we have an audited assumption on unemployment which will be set out in a table page 221, we make an assumption for the claimant count which is based on the average of independent forecasters. That is the claimant count will rise from recent levels of 1.39 million to 2.09 million by the end of 2009 and 2.44 by the end of 2010.

Can I just check growth figures?  Your forecast is that you will pick up 3.5% in 2011, after that the Chancellor talked about returning to the trend rate of growth of 2.75%, when does that trend rate of growth begin?

It kicks in ... It’s just there.  What is happening within our forecast is that we are deviating considerably from trend growth so because of the very significant negative number and quite a small positive number next year, there is a lot of spare capacity in the economy so you can continue to grow into the medium term above trend levels, before the economy gets back to trend hopefully.

But are you saying that’s from 2012, the 2.75?  In other words 2011, +3.5 and then next year 2.75?

No, it’s 3,5%, it continues at 3.5% because of the size of the downturn. There is significant spare capacity in the economy, and that slack will be taken up as the economy recovers.

You just said “thereafter” didn’t you?

Our forecast goes until 2013/14.

Is that in line with anyone else’s forecast?  It sounds very optimistic.

The short term forecast is exactly in line with the independent average, if you look at next year we are certainly within the range of independent forecasters because the range is about 4% from sort of minus one and a half to two and a half, if you look at the range of forecasts that are out there.  Not that many forecasters provide lots of long term forecasts, most of the City forecasts are interested in the next two years.  It is only us that gets hung for doing five year forecasts.

The Bank of England is forecasting 2.5% and yet you are forecasting 3.5%.

Which forecast from the Bank of England is this?  I don't know if they have updated their forecasts recently but our forecast is based on a central view, there are risks on either side of this forecast.  Clearly it is contingent on what happens in the world economy and probably the major risk around this forecast is what happens in the world economy next year. There are currently, broadly speaking, two sets of forecasters around.  There are those that see recovery in the world economy next year and those that don’t. The IMF, the OECD are in the former category, the Bank of England I think are in the latter category as are many City forecasters and this is essentially to do with your judgement as to what do you think will be the impact of the policy action.  There is huge stimulus in the system, we have had interest rate cuts of nearly 5%, there is QE, there has been fiscal stimulus around the world, there has been a depreciation of sterling of about a quarter since the middle of 2007 so there are quite a lot of reasons why you would think there is quite  a lot of policy stimulus in the system and it is obviously a judgement and there are uncertainties about when that policy stimulus comes through.

But the whole correction of the public finances is predicated on that very, what appears to be a very large increase in economic growth.

Well, for a start, it is predicated on forecast for growth which is lower than that because we knock a quarter of a percent off through the forecast period. We use a more cautious view as to what we think growth will be - and also there are these cautious audited assumptions.  If you look at that on page 33 and the effect of forecasting revisions - so panel two, Pre-Budget Report Effects and Revisions to Forecasting Changes, and you can see there have been some significant forecasting changes to our numbers.  There is a line there of £65-odd billion each year but as you note, we are not forecasting that, that comes back and that number falls away and that is certainly in part a product of the fact that we’ve got these cautious assumptions. We are assuming that there will be a recovery in the world but that oil prices will stay at $47, that is not necessarily what people would expect to happen if there was a significant recovery in the world economy.

But the Treasury does publish five year independent forecasts, you do it every few months, and what you have got on this budget is way out of kilter of your own...

Actually there aren’t that many people that produce five year independent forecasts.

Come off it. Yes there are. You list them and produce them and they are on your website.

We produced one about two weeks ago I but if you look at that, you will find that the vast majority of forecasts which are updated very regularly are for two years.

Yes, but you produce several for five years, it is not true to say that nobody has five year forecasts, they do.

I didn’t say nobody has.

But the Treasury is pretty much alone in forecasting this trampoline recovery.

Trampoline recovery!  Look, if you have a significant fall in output below trend, it is a perfectly reasonable thing to expect  the economy to return to trend, trend levels, in the medium term.  We are also in this forecast taking a hit to the level of output that’s permanent so in the PBR we said there would be a permanent hit to the level of output as a result of the shocks that have hit the economy of 4%, we have increased that now in the light of recent evidence to 5%, so the economy will be 5% lower forever in this forecast but it is perfectly reasonable in the economic forecast to assume that the spare capacity in the economy gets used up.

It’s just that nobody else agrees with you.

Well I don’t actually know of any of what you are talking about.

Can I take you back to more mundane things.  It looks to me in the book as if petrol taxes are going up, obviously cigarettes, food, bingo and fruit machines.

The bingo stuff is actually off setting, so if you look at the lines from 47 to 50 and add them up you more or less get a zero and what we are doing is removing VAT on bingo fees, participation fees and in order to regain the revenue that we lose from making that change, we make the changes below but it is essentially a revenue neutral package for those people and it is a simplification of the package.

What about petrol?

Fuel is going up by 2p in September, if I can get my notes ... It is going up by 2p in September and I think by 1p above inflation in April 2010 and the same in April 2011 and April 2012.  

What was the thinking behind the withdrawal of the personal tax allowance?  Originally you were going to phase it out, phase it over levels of income but  now you are just [botching?] it, presumably that then provides a very high marginal rate of income tax.

Well the thinking is clearly we are taking action to ensure the sustainability of the public finances in the  medium term.  Hang on, just to go through the context, a third of it as I said is coming from tax, a third is coming from spending and a third is coming from capital investment.  Within that, on the tax side, we have constructed a package that we believe to be fair and that includes more tax being paid by people on higher incomes and that is essentially the thinking behind it.

But £100,000, there were already going to be some hefty marginal rates of tax but now you have got rid of this phasing mechanism … why did you abolish the phasing that was announced in November and instead …

The reason why we are increasing tax is because it is increasing revenue.

I know but why move from the phasing?  The phasing presumably had a point behind it and now you have decided you don’t need it..

We have announced changes to income tax today and the reason we are doing that is to increase revenue and as you can see, if you look at those two lines which both have ... I can see you might look at that and say well it’s not actually raising a significant amount of money necessarily but if you look at the footnote it is 1.5 billion so it is not an inconsiderable amount of money.  

Could you tell me how many people earn over £150,000 and how many earn over £100,000?

I think it is about 300,000 and 600,000.  So 300,000 above 150 and 600,000 above...

The new top rate, the new 50%, is coming in a year earlier, right?  

Yes.  

A year earlier than planned just a few months ago.  Is that the same also for the reduction in the allowance?  Is that a year earlier than planned only a few months ago?

Yes, I think that is correct.  

And the 45p goes flop?

The 45p is gone and has become 50.

Why so many changes?

Well, quite a lot has happened since PBR and in particular the world economy has gone into significant recession and as a result of that we are raising less tax revenue.  As I said at the start, the tax burden at 33% of GDP is the lowest since 1994/95.

If the principle that is driving all this is fairness and as the Chancellor and you have said, there has been a disproportionate benefit on pension relief by higher earners, if it is principle why has it taken till now to change the high pension rate and get it down to the same as everyone else?

I’ll just repeat what I said, we are taking certain decisions today and clearly we need to take decisions to ensure that the public finances are on a sustainable path and we need to do that in a way that ensures fairness and is principled.

Have you noted that recent studies have shown that a lot of increased revenues will be offset by increased tax avoidance by more sophisticated schemes?

Yes, I’ve seen those.  All the costings that are set out in our book are based on cautious assumptions and they are based on detailed analysis of the tax data held by HMRT.  I am not sure that all those other concerns are necessarily based on that kind of data because people don’t have that.

You use the static scoring, the IFS use dynamic scoring...

What do you mean by dynamic scoring, sorry?

The IFS have obviously got different assumptions which will...

They have got a different number, I can’t explain the IFS costing.  There certainly will be behavioural changes underlying our costings as there will be for all our costings.

Can we see those assumptions, do you publish them?

We publish these numbers you see here.

But we don’t see how you arrive at this rather suspicious figure of all this extra money from the new 50p tax.

Well I don't think it is a suspicious figure.

The IFS disagree.

You are talking about something the IFS said two days ago before they saw this.

No, it’s your 45p tax.  It becomes a point on the curve where you start to lose revenue, they would argue that this will result in a net loss to the Exchequer.

On the basis of what?

On the basis that if you tax the rich too much they won’t declare tax, it will go somewhere else, they will hire better accountants, this is why there are only three countries on the planet that have got a higher rate of tax than 50%. It doesn’t work.  

Well we are incredibly committed to raising the money that is due to the Exchequer which is why year on year we’ve had measures to improve compliance and tackle to avoidance and we will continue to do that.  But just to reiterate, there are behavioural assumptions underlying all of these forecasts.

Will you allocate anything in reserve for military operations?

That is basically Afghanistan and you know we pay for military operations in this way from the reserve as and when.

But it is not normal to allocate something for 2010?

There is a general reserve.

Is it right to say the biggest revenue weights and measure is in fact the pension changes because although you have got 200 million over 2011/12, your very interesting footnote on all this stuff...

Says 3.1.  I think that is probably...

...shows it is 3.1 billion when you get to 2012/13.  That is actually the thing that will raise the most money.  

Well it raises 3.1 billion.  

What about the IMF forecasts out today?

The IMF have a pessimistic view of the world and you’ll note that their forecasts across the board are lower and you will also note within that, that we are certainly not the lowest.

Can I ask for clarity on the time line on the UK [inaudible] ... destabilising by 2015/16 ... what do you mean by the come back by 2017/18?

2017/18 when the cyclically adjusted budget deficit is zero.

What are the exceptional factors that allows you that optimism for 2015 for it to be stabilised?  What are the conditional factors?

I think the 17/18 was actually about the deficit and not about the debt.  I think actually he said that the debt stabilises before that.  

And the deficit comes back into balance two years later.  

Exactly, comes back two years later, yes.  Because  over time obviously as the economy recovers you get more tax revenues, we will be spending less money on things like unemployment benefit and that figure will go.  

But over a six or seven year period is just optimism.

It’s not optimism.  I just refer you back to that figure, that line of figures and what’s happening to forecasting changes which is –65, –65, that is not optimism.

Can you explain how you get from the 1.1% expense of growth to 0.7%? is that efficiency savings, capital expenditure savings?  

That is current, that’s not capital, capital is separate and there is an assumption that capital will move to one and a quarter percent of GDP by 2013/14.  As you know we published...

This is from 2.5?

It is currently at just over three this year but one and a quarter is still certainly higher than it was in 1997, three is an unusually large year partly due to the fact that we have brought forward capital spending and so on.  The 0.7 actually results in a, as I said when I was pointing to page 33, it results in a 9 billion, 17 and a half on the current side.  As you know we published the efficiency programme report yesterday which suggested that over and above the five billion of efficiency savings already delivered we should be able to deliver a further nine.

So it is all efficiency savings?

Obviously there are assumptions here and there are plans on efficiency.  We have not yet set out spending plans for those years, we  have set out spending plans till 2010/2011.  

Is it now clear that you won't have those spending reviews?

Well we will have to have one before the end of 2010/2011 I would have thought.   We have not made any announcement on when it is going to be and clearly it has to be before the end of that year.  

Why are you cutting spending by more?

By more?

Well not reducing the rate of growth by more than you are.  It is not that big a reduction given the scale of the problems you are facing.

We have taken on board the efficiency reports that were published yesterday which set out the scales of efficiencies that should be deliverable and we’ve made and assessed a judgement on the growth of spending in the light of that report and clearly we want to maintain real growth in public spending, which this does, 0.7 a year and no doubt when it comes to providing detailed plans for the next spending review period the government will need to demonstrate that it is still allocating resources to its priorities.

Written byFraser Nelson

Fraser Nelson is the editor of The Spectator. He is also a columnist with The Daily Telegraph, a member of the advisory board of the Centre for Social Justice and the Centre for Policy Studies.

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